1、English in Accounting ProfessionSeptember,2009Part Financial Accounting Chapter 1.Financial Accounting Conceptual Framework What is Accounting?Accounting is the art of interpreting,measuring and communicating the results of economic activities.Accounting has often been called the language of busines
2、s.The use of accounting information is not limited to the business world.Chapter SkeletonLearning Objectives:Define accounting,financial accounting,and financial statement.Describe and prepare a balance sheet;define assets,liabilities,and owners equity.Explain the accounting bases and assumptions.De
3、scribe the accounting principles and measurement bases and qualitative characteristics of financial accounting information.1.1 The purpose of Accounting and Financial ReportingAccounting may be described as the process of identifying,measuring,recording,and communicating economic information to perm
4、it informed judgments and decisions by users of that information.The origins of accounting are generally attributed to the work of Luca Pacioli,an Italian Renaissance mathematician.There are many types of accounting information:Financial AccountingManagerial AccountingTax Accounting Financial Accoun
5、ting refers to information describing the financial resources,obligations,and activities of an economic entity(either an organization or an individual).Financial Accounting information is designed primarily to assist investors and creditors in deciding where to place their scarce investment resource
6、s.A business is an organzation in which basic resources(inputs).The objective of most business is to maximize profits.What is the role of financial accounting in business?The simplest answer is that financial accounting provides information for managers to use in operating the business.In addition,f
7、inancial accounting provides information to other stakeholders to use in assessing the economic performance and the condition of the business.Identify stakeholders(Internal:Owners,managers,employees,etc.External:Customers,creditors,government,etc.)Assess stakeholders informational needs.Design the a
8、ccounting information system to meet stakeholders needsPrepare accounting reports for stakeholders.Record economic data about business activities and eventsFinancial Reporting:supplying general-purpose financial information about a business to people outside the organization.Financial Statement:the
9、principal means of reporting general-purpose financial information to the persons outside a business organization is a set of accounting reports.The users of the Financial Statement:the persons receiving these reports.A complete set of financial statements includes:A balance sheet,showing at a parti
10、cular point of time(a specific date)the financial position of the company by indicating the resources that it owns,the debts that it owes,and the amount of the owners equity(investment)in the business.An income statement,including the profitability of the business over the preceding years(or a parti
11、cular time period).A statement of cash flows,summarizing the cash receipts and cash payments of the business over the same time period covered by the income statements.The statement of cash flow reports the cash effects of a companys perations during a period its investing transactions its financing
12、 transactions the net increase or decrease in cash during the period the cash amount at the end of the periodIn addition,a complete set of financial statements usually includes several pages of notes,containing additional information which accountants believe is useful in the interpretation of the f
13、inancial statements.The basic purpose of financial statements is to assist users in evaluating the financial position,profitability,and future prospects of a business.The information communicated to the external users in financial reporting is based on standards that establish CAS(Chinese Accounting
14、 Standards).Objectives of Financial reportingThe objectives are to provide information that:Is useful to those making investment and credit decisions;Is helpful in assessing future cash flowsIndentifies the economic resources(assets),the claims to those resources(liabilities),and the changes in thos
15、e resources and claims.1.2 Accounting basis and Accounting AssumptionsTwo types of accounting basisCash-basis accounting Accrual-basis accountingCash BasisIs the method of bookkeeping that records financial events based on cash flow and cash position.Revenue is recognized when cash is received and e
16、xpense is recognized when cash is paid.Two types of cash-basis accounting exist:Strict cash-basis modified cash-basisAccrual-BasisRecords financial events based on economic activity rather than financial activity.Revenue is recorded when it is earned and realized,regardless of when actual payment is
17、 received.Expenses are“matched”revenue regardless of when they are actually paid.Accrual accounting is required by CAS and other financial accounting standards like GAAP,IFRS,etc.ComparisonA simple ExampleOther considerationsAccounting AssumptionsCAS treats the following as the fundamental accountin
18、gassumptions:EntityContinuityPeriod of TimeMonetary Unit1.3 Financial Accounting Principles and Measurement BasesFinancial accounting principles Cost PrincipleRevenue Recognition PrincipleMatching PrincipleFull disclosure PrincipleCost PrincipleThe cost principle states that assets should be recorde
19、d at their cost.Cost is the values exchanged at the time something is acquired.Cost is reliable.The values exchanged at the time something is acquired generally can be objectively measured and can be verified.Revenues Recognition PrincipleThe revenue recognition principle dictates that revenue be re
20、cognized in the accounting period in which it is earned.Accountants follow the approach of“let expenses follow revenue”.The nature of expenses:costs are the source of expenses.Costs that will generate revenues obly in the current accounting period are expensed immediately.Unexpired costs become expe
21、nses in two ways 1.Cost of goods soled.2.Operating expenses.Revenues Recognition PrincipleCost IncurredAssetExpensesProvides future benefitsProvides no apparent futureProvides future benefits Unexpired Expired Cost CostBenefits DecreaseIllustration 1-2.Expense RecognitionMatching PrincipleOnce the e
22、conomic life of a business has been divided into artificial time periods,the revenues recognition and matching principles can be applied.This one assumption and two principles thus provide guidelines as to when revenues and expenses should be reported.Time Period AssumptionThe economic life of any b
23、usiness can be divided into artificial time periodsRevenue Recognition PrincipleMatching PrincipleRevenue recognized in the accounting period in which it is earned.Expenses matched with revenues in the period when efforts are expensed.Full disclosure PrincipleThis principle requires that circumstanc
24、es and events that make a difference to financial statement users be disclosed.Financial Accounting Measurement basesMarket Value(Fair Value)Historical CostNet Realizable ValueCurrent Value(Present Value)Market ValueMarket value is the estimated amount for which a property should exchange on the dat
25、e of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgeably,prudently,and without compulsion.Historical CostThe economic activities and resourced of a company initially are measured by the exchange
26、price of a ttransaction at the time the transaction occurs.Usually the exchange price(the historical cost)is retained in the accounting records as the value of an item until the item is consumed,sold,or liquidated and removed from the records.Net Realizable ValueA method of determining the present v
27、alue of a troubled asset to its present owner may be based on the assumption that the asset will be held for a period of time and sold at some future date.With regards to inventory,net realizable value(NRV)is the estimated selling price selling price in the ordinary course of business minus any cost
28、 to complete and to sell the goods.Net realizable value is also associated with accounts receivable.Current Value(Present Value)Is the value on a given date of a future payment or series of future payments,discounted to reflect the time value of money and other factors such as investment risk.Pervas
29、iveConstraintUser-SpecificQualityOverall qualityPrimaryDecision-SpecificQualitiesIngredients of Primary QualitiesSecondary andInteractive QualityThreshold forRecognitionAdditional Consideration Illustration 1-4 Hierarchy of Qualitative Characteristics of Accounting InformationAccounting InformationB
30、enefits CostsPVFVTVRFN Comparability (Including Consistenc)MaterialityUnderstandabilityDecision UsefulnessRelevanceReliabilityConservatismIllustration 1-4 presents a hierarchy of the qualititative characteristics of accounting information.This section presents an overview of the hierarchy,after whic
31、h we define and discuss the components in detail.The hierarchy is bounded by three constraints.To be useful,accounting information must have each of the qualitative characteristics,at least to a minimum degree.UnderstandabilityAccounting information should be understandable to users who have a reaso
32、nable knowledge of business and economic activities and who are willing to study the information which reasonable diligence.Decision UsefulnessIs the overall qualitative characteristic to be used in judging the quality of accounting information.RelevanceAccounting information is relevant if it can m
33、ake a difference in a decision by helping users predict the outcomes of past,present,and future events or confirm or correct prior expectations.To be relevant,accounting information should have either predictive or feedback value,or both.In addition,it should be timely.ReliabilityAccounting informat
34、ion is most useful when it is reliable as well as relevant.Reliable information is reasonably free from error and bias,and faithfully represents what is inteded to represent.Accounting information is verifiable when measurers can form a consensus that the selected method has been used without error
35、or bias.ReliabilityAccounting information has representational faithfulness when there is a relationship between the reported accounting measurements or descriptions and the economic resources,the obligations and the transactions and events causing changes in these items.Comparability and Consistenc
36、yA secondary qualitative characteristic of accounting information is comparability,and including consistency.Comparability is not considered a primary quality of useful information,like relevance and reliability,because it must evolve more than one item of information and is the interactive quality of the relationship between two or more items of information.Consistency means conformity from period to period,with accounting policies and procedures remaining unchanged.Comparability and ConsistencyConstraints to the HierarchyBenefit/Cost ConstraintMateriality ConstraintConservatism
