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Accounting Standards Inside the U.S.

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Financial Accounting Fundamentals

University of Virginia

4.8 (556 ratings) | 30K Students Enrolled

This course will teach you the tools you'll need to understand the fundamentals of financial accounting. Concise videos, the financial records of a small business, and "your turn" activities guide you through the three most commonly used financial statements: the Balance Sheet, the Income Statement, and the Statement of Cash Flows. Beyond recording transactions, you'll learn how to prepare these financial statements, and read and analyze them to draw basic conclusions about a company's financial health. By the end of this course, you will be able to: - Use journal entries to record transactions - Prepare and use t-accounts to summarize transactions recorded during an accounting period - Describe the three most commonly used financial statements and how they fit together - Prepare these financial statements based on transactions recorded during an accounting period - Draw basic conclusions about a company's financial health

Lehrplan anzeigen

Skills You'll Learn

Financial Accounting, Accounting, Financial Statement, Balance Sheet

Bewertungen

4.8 (556 ratings)

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YY

Jan 24, 2019

This course gives me a practical understanding of accounting principles and key financial statements, which is helpful for my work. Strongly recommend to my friends and colleagues

LM

Apr 13, 2018

Really enjoyed the course - was really dreading learning about accounting but the instructor was able to break it down and make it both fun and interesting for me to learn!

Aus der Unterrichtseinheit

Introduction to Financial Accounting, the Financial Statements, and the Balance Sheet

During this first week, we’ll learn about the context for financial accounting, including the informational role it plays for both internal and external audiences. We’ll explain accounting standards, which ensure financial information is conveyed clearly and effectively. Finally, we’ll describe the three primary financial statements as part of a recurring accounting process, called the accounting cycle, and then dive into one of those statements: the Balance Sheet (BS).

Accounting Standards Inside the U.S.11:48

Accounting Standards Outside the U.S.5:32

Unterrichtet von

Luann J. Lynch
Almand R. Coleman Professor of Business Administration

Skript

Let's talk now about accounting standards.

In the U.S., the set of standards is called U.S. GAAP.

GAAP, you might have heard that term.

What does that mean?

GAAP stands for Generally Accepted Accounting Principles.

And it's a set of standards based on some underlying principles, that guide

organizations in how to provide or how to prepare their financial statements.

U.S. GAAP uses accrual accounting as opposed to cash basis accounting.

Under accrual accounting, transactions are recorded in the books

when business activities occur regardless of when the cash effect takes place.

As an example, a company might sell some products to a customer and

the customer takes the product and promises to pay at a later day.

Well, that company can go ahead and record the sales as revenues in its books.

Even if it hasn't received the cash from the customer.

As long as the customer is expected to pay.

Accounting standards are intended to promote consistency and

comparability across companies.

But they also have to allow managers some discretion, because after all,

all organizations, all industries, all geographies are not alike.

So some discretion is allowed so that managers can communicate

their own particular circumstances through their financial statements.

So, ultimately for

the standards setters, it's somewhat of a balancing act when they set the standards.

They're trying to achieve as much consistency and

comparability across companies as possible.

But at the same time, allow an appropriate amount of discretion for managers to be

able to communicate through the financial statements in particular circumstances.

Who sets these standards?

In the U.S. the Securities & Exchange Commission, or the SEC for short bares

the ultimate responsibility of setting the accounting standards under U.S. GAAP.

After the stock market crash in 1929,

you can imagine that some action with the financial markets was needed.

And US Congress at that time enacted a couple of acts,

the Securities Act of 1933 and the Securities Exchanges Act of 1934.

The second of these, the 34 Act, was the one that created the SEC.

But in total, these two acts were intended to ensure that additional and

proper financial disclosure was made to the public,

that was related to any sale of securities to the public, in order to

reduce any misinformation that might be out in the market about these securities.

The SEC has delegated its responsibility for

the preparation of accounting standards to the Financial Accounting Standards Board.

We affectionately call that the FASB, or the F-A-S-B.

The FASB is a private organization, not-for-profit.

It's made up of a 7-member board that has five year renewable terms, and

they have an extensive staff support.

But importantly,

they have representatives on the 7-member board from a variety of background.

There's an academic on the board.

There's representatives from the financial analyst community.

They're representatives from industry.

All with the intention of getting a wide range of perspectives in

play when the accounting standards are set.

So what are the reporting requirements then for

the companies whose securities are publicly traded?

Well, these companies must file financial statements on a regular basis.

There's an annual filing that they have to make, a quarterly filing that they have to

make, and then there's an additional one that I'll talk about as well.

These are the three main filings I want to talk about.

There's several others that companies have to make on a periodic basis, but

we'll focus on these three.

The annual filing is called the 10- K.

And this is an extensive document that contains audited financial statements.

It contains footnotes to the financial statement.

So that if you get curious about anything on one of the financial statements and

want more detail, you can read in those footnotes and

learn a whole lot of stuff about what's going on.

It includes a lot of other information that's not financially related as well.

And again, the financial statements are audited by the independent auditor.

The quarterly filings are filed after every quarter.

They include financial statements, but they're not audited.

And they include substantially less information than you would see in the 10

-K report.

Because the 10 -K report is extremely costly to prepare and

the audit is extremely costly to undergo as well.

The 8- K is a document that must be filed with the SEC when a company encounters or

undergoes a material event.

It might decide to acquire another company,

it might decide to change auditors.

These big deal items that happen to a company need to be

disclosed by filing an 8- K with the SEC.

So you can envision sort of a timeline.

We'd have a quarterly filing after the end of the first quarter of the year,

a quarterly filing after the end of the second quarter of the year,

a quarterly filing after the end of the third quarter of the year.

And then at the end of the year, the big 10- K filing is made.

And then the 8- K just occurs throughout the year if needed.

All of these filings have to be prepared according to GAAP.

So, you're starting to realize this GAAP thing is quite important.

Now what about private companies?

Well, private companies don't have to comply with the U.S.

GAAP, but they often do.

Now why would they do that?

Well, they might want to go to the bank to get some funds, or

they might want to make a pitch to a new investor to try to get some investment.

And the banks, or these investors are probably

accustomed to seeing financial statements that are prepared according to GAAP.

And so they might ask that private company to prepare

financial statements in accordance with GAAP as well.

So private companies often do that.

We don't see them file the 10- K, the 10- Q and the 8- K with the FCC however,

because they're not publicly traded and are not required to do so.

So we have the rules, we know who sets the rules, but

who makes sure that they are followed?

We all know that just because there are rules,

that those rules are not always followed.

Well, there's several parties that have some responsibility for

making sure these are followed.

And we'll talk about, generally speaking, four parties.

Management, the independent auditor,

the audit committee of the board of directors and the board itself.

And then regulators, the legal systems and the securities market.

All right, what about management, what are they responsible for?

Well, they actually prepare the financial statements.

Isn't that interesting that management is responsible for

preparing it's own performance report or report card, we might say?

Why would the standard setters allow that to happen?

Well, nobody knows about what's happening in the company than management.

And so it's the perspective of the standard setters that management has

more information and more knowledge about what's going on,

so they're the appropriate party to prepare the financial statements.

But we don't have to worry too much because there are some checks and

balances in place to make sure that management has prepared financial

statements according to U.S. GAAP.

I'll briefly mention the Sarbanes-Oxley Act, or SOX of 2002.

Some of you may recall the scandals associated with several companies in

late 90's.

We'll throw out Enron as an example, Worldcom as another example,

but there were some financials reporting fraud that occurred.

Some pretty extensive financial reporting fraud.

And SOX was implemented in response to some of the fraud that

was taking place at the time.

But SOX communicated the reporting responsibilities and

clarified those responsibilities.

And then it stiffened or enhanced the penalties associated with misreporting.

And interestingly, it explicitly placed the responsibility for

financial reporting in the laps of the chief financial officer,

the CFO, and the chief executive officer, the CEO, of the organization.

And now both the CFO and

the CEO have to personally sign off on the financial statements.

And are subject to criminal penalties if misreporting is found to have occurred.

Then we have the independent audit firm.

The independent audit firm is one of the most important parties in insuring

that financial statements have been prepared properly.

Independent auditors express an opinion on a couple of things.

They're expressing an opinion about whether the financial statements

are prepared in accordance with GAAP.

And they're expressing an opinion about whether they present fairly, and in all

material respects, a company's financial condition and results of operations.

So it's important to know that they provide us reasonable assurance, but

they're certainly not foolproof.

How about the audit committee of the board?

Well, the role of the audit committee is quite extensive, but there's two

things they're responsible for that are important to us at this point in time.

The first thing is that they appoint and

hire the external audit firm to conduct the audit.

And then the second thing is they make sure the results of

that audit is adequately made available and the appropriate

details are made available to the board of directors and to shareholders.

So that the appropriate parties know the results of the audit and

what the controversies were, if any.

All right, finally we have regulators, the legal system and

the securities markets that can come into play to help monitor whether

financial statements are prepared appropriately.

Regulators, such as the SEC, will actually investigate

if there is some suspicion of fraudulent or misreporting.

So the SEC is in charge of doing those investigations.

Alternatively, shareholders might band together and

file a lawsuit against a company if they suspect that there's some misreporting.

And then finally, we have the securities markets.

Security prices, or stock prices for example, will no doubt move up and

down in response to investors' concerns about integrity in financial reporting.

Now, unfortunately, once the regulators, or

the shareholder lawsuits [COUGH] have come into play,

the stock prices or security prices have already, likely already suffered.

So investors and security holders probably have suffered some damage at that point.

So we hope that things don't get to this point.

We hope the other monitoring mechanisms ensure the integrity of the financial

reports so that we don't get to the point that we have to deal with regulators or

lawsuits or things like that.

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