Accounting As A Form of Communication

What is Accounting?
Accounting as a Form of
Communication
Accounting is the process of identifying, measuring,

and communicating economic information to various
users.
Its purpose is to provide economic information about
an organization that will be useful to those who
need to make decisions regarding that entity.
Chapter 1
For example, information provided by an accountant about an

entity is useful to a banker in reaching a decision about whether
to loan money to a business.
ACCOUNTING IS TELLING THE STORY:
WHAT HAPPENED AND WHERE DOES A COMPANY STAND AS A RESULT
Slide
1-1
ECON 3A UCSB-- ANDERSON
Slide
1-2
BALANCE SHEET
The accounting equation- ALGEBRA
BALANCE SHEET/ STATEMENT OF FINANCIAL

POSITION
ASSET: Probable future economic benefit as a result
of a past transaction, examples: Cash, accounts
receivable
LIABILITY: Probable future economic sacrifice as a
result of a past transaction, examples: accounts
payable, accrued expenses
EQUITY: Residual interest of owners, examples
retained earnings, common stock
If A=L+E, then:
E= A- L
. EQUITY = ASSETS - LIABILITIES
THEREFORE THE EQUITY IS WHAT IS

LEFTOVER FROM THE ASSETS AFTER
PAYING ALL LIABILITIES.
MAY BE EASIER TO REMEMBER THIS WAY.
A =L+E
Slide
1-3
Slide
1-4
FOUR BASIC FINANCIAL STATEMENTS

BALANCE SHEET: Think of it as a statement of financial position:
Summarizes the accounting equation, A=L+E;
As of a certain date;
Accrual basis;
INCOME STATEMENT: How did we do:
For a stated period;
Accrual basis;
STATEMENT OF STOCKHOLDERS EQUITY: Rolls forward
retained earnings and other EQUITY activity:
For a stated period.
STATEMENT OF CASH FLOWS: Where did the cash come from
and where did it go:
Activities impacting cash; broken into activitiesthe three
buckets (1) operating (2) investing (3) financing
Its like a cash basis income statement
Slide
1-5
INCOME STATEMENT
REVENUE: Reported when it is earned
EXPENSE: Reported when the benefit is
derived. Leads to the concept of MATCHING
(now called the Expense Recognition
Principle), which means we match the
expense to the period in which the
associated revenue is recorded.
Slide
1-6
Communicate with Financial Statements

Balance Sheet
Income Statement
2004
Assets:
Revenues:
2004
Expenses:
A word about International Accounting

These fundamentals that you are about to learn
in this class will be applicable whenever the
IFRS convergence takes place!!
Total assets
Net income (loss)
Liabilities:
Statement of Retained Earnings
Equity:
Beginning balance
Total liabilities & equity
Ending balance
Slide
1-7
LO 2
Explain the purpose of each of the financial statements.

Slide
1-8
Why is Accounting Important?
Users of Financial Information
Accounting is important for markets, free enterprise,

and competition because it assists in providing
information that leads to capital allocation.
The better the information, the more effective the
process of capital allocation and then the healthier
the economy.
Bankers
Current and
Potential
Stockholders
Slide
1-10
LO 1
Characteristics of Financial Accounting

Economic Entity
Management
2. The prospects for future dividend

payments
Financial
Information
Stockholder
LO 1
Creditors
User Group
Slide
1-11
Government
Agencies
Identify the primary users of accounting information and their needs.
1. The profitability of each division in

the company
3. The financial status of a company

issuing securities to the public for
the first time
4. The prospects that the company
will be able to pay its interest
payments on time
5. The prospects that the company
will be able to pay for its purchases
on time
Financial
Analyst
Common Decisions?
Employees
Users of Financial Information

Needs Information About
Bondholders
Supplier
ACCOUNTING IS A CRITICAL COMPONENT OF THE

FUNCTIONING OF THE CAPITAL MARKETS!
Slide
1-9
Management
Securities and Exchange

Commission (SEC)
Banker
Supplier
Accounting?
Identifies
and
Measures
and
Communicates
LO 2
Identify the primary users of accounting information and their needs.

Slide
1-12
Explain the
purpose of each
of the financial
statements.
Financial Statements
Additional Information
Balance Sheet
Presidents letter
Income Statement
MD&A
Statement of Cash
Flows
SEC Reporting
Statement of
Retained Earnings
or Stockholders
Equity
Footnotes
GAAP
http://www.winnebagoind.com/
News releases
Forecasts
Environmental
Reports
Etc.
Not GAAP
IMPORTANCE OF FINANCIAL REPORTING: ETHICS
The accountants job is NOT to decide what is

best for the user of the financial statements,
Me andbut
your to
momprovide
have been noticing
thatthe
you've
been having a lot of problems,
the lately
user
information
You've been going off for no reason and we're afraid you're gonna hurt somebody,
necessaryWe're
to afraid
make
informed
decisions.
you're gonna hurt yourself.
So we decided that it would be in your interest if we put you somewhere
Where you could get the help that you need.
And I go:
Is it a critical
function?
Wait, what are you talking about, we decided!?
My best
How can you
know what's
my best interestetc
is?
Cost
of interest?!
scandals:
Enron,
Worldcom,
How can you say what my best interest is? What are you trying to say, I'm crazy?
Implementation of the Sarbanes-Oxley Act of

2002.
Sound ethical behavior is absolutely critical.
Slide
1-13
Revenue recognition
Materiality
Monetary unit
Matching
Industry practice
Periodicity
Full disclosure
Conservatism
Reliability
Consistency
Conceptual
Framework for
Financial
Reporting
ELEMENTS
Assets, Liabilities, and
Equity
Investments by owners
Distribution to owners
Comprehensive income
Revenues and
Expenses
Gains and Losses
OBJECTIVES
1. Useful in investment
and credit decisions
2. Useful in assessing
future cash flows
3. About enterprise
resources, claims to
resources, and
changes in them
Slide
1-14
INTERRELATIONSHIP OF STATEMENTS- BASIC
BALANCE SHEET
Income Statement
Revenues
Assets
Record expenses when incurred but DONT use the websters definition
of incurred- under GAAP, incurred means: when the associated benefit
has been realized
Liabilities
LESS: Expenses
Other gains & losses
Equity
HOW MUCH? HISTORICAL COST

Assumes the Company is a going concern, otherwise consider
utilizing liquidation values
Contributions
= NET INCOME
Dividends
Retained Earnings
BUT: THIS HISTORICAL COST PRINCIPLE IS CHANGING, FAIR VALUE

ARE POPPING UP MORE AND MORE AS IS ACCOUNTING GUIDANCE
HELPING US TO MEASURE FAIR VALUE MORE ON THAT LATER!
Cost-benefit
Going concern
Comparability
The balance sheet is a parking lot. Everything on the balance sheet

eventually finds its way to the income and equity statements.
Slide
1-15
CONSTRAINTS
Historical cost
Relevance
WHEN?-- ACCRUAL ACCOUNTING:

That is the big question in accounting. Things happen, but you need to
present it in a way which is meaningful to users of the financial
statements.
Record revenue when earned;
Match expenses to period when revenue is recorded;
PRINCIPLES
Economic entity
QUALITATIVE
CHARACTERISTICS
MORE ABOUT THE STATEMENTSINTERRELATIONSHIPS
ASSUMPTIONS
Owners
Slide
1-16
STATEMENT OF CASH FLOWS
Ownership structures
Solves the problem of paper income.

Presents cash flows from three principal
cash activities:
Operating
Investing
Financing
More on the statement of cash flows in Chapter
12 at end of the quarter!
Slide
1-17
Corporate form of ownership provides additional legal protection loss exposure

should be limited to your investment.
Sole Proprietorship:
Simple, easily established;
Easily controlled, but lack of diversified experience
Partnerships:
Fairly simple/ easily established
Control begins to be shared, more diversified experience
Corporations: (Inc.)
Complex to establish, but then easier to transfer ownership.
Can make raising equity capital easier
Personal liability limited to investment- corporate veil
BAD: Dual taxation
Corporate income taxed, then dividends are taxed also
Therefore you see many companies NOT paying dividends
Limited Liability Corporations/ S corps/ Limited Liability Partnerships

Like a hybrid of Partnerships and corps
Intended to provide the legal protection of a corp without the dual taxation
issues.
Slide
1-18
Financial Statements Exercise
Financial Statements
Balance Sheet
Various Accounts:
Assets:
Accounts payable
5,000
Equipment
7,500
6,500
Accounts receivable
4,000
Rent expense
Capital stock
8,000
Retained earnings,
Cash
Dividends paid
Landscaping revenues
13,000
beg. of year
8,500
3,000
Salary expense
12,000
25,000
Supplies on hand
Accounts receivable
Cash
Equipment
Supplies
Total assets
Accounts payable
Capital stock
Retained earnings
LO 2

Slide
1-20
LO 2
Revenues:
Landscape revenue
Expenses:
Rent
Salary and wages
Net income
Equity:
Slide
1-19
4,000
13,000
7,500
500
25,000
Liabilities:
500
Income Statement
2004
5,000
8,000
12,000
25,000
2004
25,000
6,500
12,000
6,500

Retained earnings, beg.
8,500
+ Net income
- Dividends
6,500
3,000
Ending balance
12,000

Net income (loss)?

Balance Sheet
Accounts receivable
Cash
Equipment
Supplies
Total assets
Revenues:
Landscape revenue
Expenses:
Rent
Salary and wages
Net income
Accounts payable
Equity:
Capital stock
Retained earnings
LO 2
4,000
13,000
7,500
500
25,000
Liabilities:
Slide
1-21
Income Statement
2004
Assets:
What is Retained Earnings Balance?
5,000
2004
25,000
6,500
12,000
Assets:
Accounts receivable
Cash
Equipment
Supplies
Total assets
12,000
6,500
3,000
25,000
Ending balance
12,000

Equity:
Capital stock
Retained earnings
Slide
1-22
How much are Total Assets?

Assets:
Accounts receivable
Cash
Equipment
Supplies
Total assets
25,000
Accounts payable
Equity:
Capital stock
Retained earnings
LO 2
Landscape revenue
Expenses:
Rent
Salary and wages
Net income
Liabilities:
Slide
1-23
Revenues:
5,000
2004
25,000
6,500
12,000
5,000
Expenses:
Rent
Salary and wages
2004
25,000
6,500
12,000
6,500

8,500
12,000
+ Net income
- Dividends
6,500
3,000
25,000
Ending balance
12,000
8,000

Balance Sheet
Income Statement
2004
Assets:
Accounts receivable
Cash
Equipment
Supplies
Total assets
4,000
13,000
7,500
500
25,000
Liabilities:
Accounts payable

8,500
12,000
+ Net income
- Dividends
6,500
3,000
25,000
Ending balance
12,000

Equity:
Capital stock
Retained earnings
Slide
1-24
LO 2
Revenues:
Landscape revenue
Expenses:
Rent
Salary and wages
Net income
6,500
8,000
Landscape revenue
How much are Total Liabilities?
Income Statement
4,000
13,000
7,500
500
LO 2
Revenues:
Net income
Accounts payable

+ Net income
- Dividends
2004
4,000
13,000
7,500
500
25,000
Liabilities:
8,500
Balance Sheet
Income Statement
2004
6,500
8,000
Balance Sheet
5,000
2004
25,000
6,500
12,000
6,500

8,500
12,000
+ Net income
- Dividends
6,500
3,000
25,000
Ending balance
12,000
8,000

How much is Stockholders Equity?

Balance Sheet
Accounts receivable
Cash
Equipment
Supplies
Total assets
Revenues:
Landscape revenue
Expenses:
Rent
Salary and wages
Net income
Accounts payable
Equity:
Capital stock
Retained earnings
LO 2
4,000
13,000
7,500
500
25,000
Liabilities:
Slide
1-25
Income Statement
2004
Assets:
YOUR RENT AS AN EXAMPLE
5,000
8,000
12,000
25,000
25,000
6,500
12,000
6,500

8,500
+ Net income
6,500
3,000
Ending balance
12,000
$20,000
- Dividends
RENT IS DUE ON THE?

1ST
2004

HAVE YOU RECEIVED THE BENEFIT WHEN YOU PAY IT?

NO
USING THE DEFINITION OF AN EXPENSE, IS IT AN EXPENSE WHEN YOU
PAY IT?
NO
DOES IT HAVE FUTURE ECONOMIC BENEFIT TO YOU WHEN YOU PAY
IT?
YES
WHAT DO WE CALL SOMETHING THAT HAS FUTURE ECONOMIC
BENEFIT?
ASSET!!!
Slide
1-26
RENT: HOW IT LOOKS, assume you start with $4k

in the bank
Balance Sheet
Assets:
Cash
Prepaid rent
Total assets
RENT CONTINUED
Income Statement
2004
3,300
4,000
700
Revenues:
2004
Assets:
Cash
Expenses:
Prepaid rent
4,000
Total assets
Net income
Liabilities:
Balance Sheet
Income Statement
2004
3,300
700
Rent expense
Net loss
Retained earnings
Slide
1-27
Retained earnings
4,000
Ending balance
PAY $700 FOR RENT ON THE 1ST
4,000
700
(700)
Equity:
4,000
Expenses:
2004
3,300
4,000
Liabilities:
Equity:
Revenues:
Slide
1-28
Net Loss
(700)
3,300
4,000
3,300
4,000
Ending balance
3,300
4,000
END OF MONTH- BECOMES EXPENSE!
HOW DOES GAAP COME TO BE?

Business Entities
CPAs and
Accounting Firms
AICPA (AcSEC)
Academicians
FASB
Auditing
Generally Accepted
Auditing Standards
Financial
Community
Advises
Professional
Organizations
Oversees independent
firms via Public
Company Accounting
Oversight Board
(PCAOB)
Generally Accepted
Accounting Standards
Government
Private Companies
Investing Public
Industry
Associations
Public Companies
Additional Public
Company Standards
Statement of Financial Accounting Standards (SFAS)

Slide
1-29
Slide
1-30
Accounting Standard Setting
IASB AND IFRS

International standard setting follows similar
pattern. In connection with the
Convergence, all new standards generally
involve collaboration between the FASB
(U.S. GAAP) and the IFRS standard setting
bodies.
The primary mission of the U.S. Securities and

Exchange Commission (SEC) is to protect
investors and maintain the integrity of the
securities markets.
Securities and Exchange Commission established in 1934
Securities Act of 1933 and 1934
Slide
1-31
Slide
1-32
To restore integrity in capital markets
Employment in a Private Business
Accounting Standard Setting

Act of 1933:
Requirement for Initial Public Offering
Act of 1934:
Reporting requirements for public companies
SEC is the Enforcement Authority:
Has legal authority to prescribe accounting Standards

applicable to public companies.
Delegated standard setting to AICPA, private sector
organization (1939). Current standard setting body is the
Financial Accounting Standards Board (FASB).
S
H
A
R
E
H
O
L
D
E
R
S
Elect by vote
Chief Financial Officer
Controller
Auditing Services
Tax Services
Management Consulting Services
Education
Non-Profit Entities
Governmental Entities
A Service Activity + An Analytical Discipline + An Information System

Slide
1-35
LO 4
LO 4
Treasurer
Tax Department
Cash Management
Describe the various roles of accountants in organizations.

We have audited the accompanying consolidated balance sheets of Winnebago Industries,

Inc. and subsidiaries (the Company) as of August 25, 2001 and August 26, 2000 and the
related consolidated statements of income, cash flows and changes in stockholders
equity for each of the three years in the period ended August 25, 2001. These
consolidated financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements. An
audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provides a reasonable basis for our opinion.
Other Employment:
Slide
1-34
Accounting
Budget
Financial Analysis
Payroll
Internal &
External
Audit
To the Board of Directors and Shareholders

Winnebago Industries, Inc.
Employment in a Public Business:
OVERSIGHT BY:
(CFO)
Report of Independent Auditors
A Service Activity
Auditor appointment approved by BOD/ then

report directly to the BOD. Preferrably
applies to internal audit too.
C-level Management
i. E CEO, CFO, etc.
Slide
1-33
BOARD OF
DIRECTORS

In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of August 25, 2001 and
August 26, 2000, and the results of their operations and their cash flows for the three
years in the period ended August 25, 2001 in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche
Slide
October 3, 2001
1-36
The Accounting Profession
FLOW TO FINANCIALS- FACTS

Controller
1. The chief accounting officer for a company

2. The department responsible in a company for the review
and appraisal of its accounting and administrative
controls.
Internal
Auditing
3. The officer responsible in an organization for the

safeguarding and efficient use of a companys liquid
assets.
4. The process of examining the financial statements and the
underlying records of a company in order to render an
opinion as to whether the statements are fairly presented.
Treasurer
5. The opinion rendered by a public accounting firm

concerning the fairness of the presentation of the financial
statements.
Auditors
Report
Slide
1-37
LO 4
OPEN A BUSINESS SERVICES CENTER:

NEED MONEY:
Me & My partner contribute $25,000 each
Borrow
Auditing
Assets:
10,000
2,000
EQUIPMENT
Buy a copy machine (36 month life)
36,000
Slide
1-38
Balance Sheet
Income Statement
Revenues:
N/A
Expenses:
Liabilities:
Income Statement
END OF MONTH
Assets:
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
Liabilities:
50,000
Revenues:
N/A
PO Box rent
Copy service
Expenses:
50,000
Space rent
Depreciation exp.
50,000
Net income (loss)
SBA Loan
Equity:
Equity:
Net income (loss)
Contributions
Retained earnings
Liab & Equity
Slide
1-39
5,000
1,250
1st MONTH
STARTING POINT
Balance Sheet
AS OF- START
RENT SPACE:
Pay deposit
Pay first month rent- AT END OF THE MONTH
SALES ACTIVITY
Rent post office boxes per month- bill at end of the month
Photocopy use- all cash
Exhibit 1-7
50,000
200,000
Slide
1-40
50,000
$50K CONTRIBUTION FROM PARTNERS

1st MONTH
1st MONTH
Balance Sheet
Assets:
250,000
50,000
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
Revenues:
N/A
PO Box rent
Copy service
250,000
50,000
Space rent
Depreciation exp.
Equity:
Contributions
Retained earnings
50,000
Net income (loss)
Balance Sheet
Assets:
Equity:
Contributions
Retained earnings
Liab & Equity
Slide
1-43
N/A
PO Box rent
Copy service
Expenses:
Space rent
Depreciation exp.
50,000
Net income (loss)
250,000
Rent Space: Pay $10K Deposit
Slide
1-42
1st MONTH
240,000
238,000
10,000
250,000
248,000
Revenues:
N/A
PO Box rent
Copy service
Expenses:
Space rent
Depreciation exp.
2,000
Assets:
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
SBA Loan
Equity:
Net income (loss)
(2,000)
250,000
248,000
Contributions
Retained earnings
Liab & Equity
Rent Space: Pay $2K Rent

Income Statement
END OF MONTH
Liabilities:
200,000
50,000
(2,000)
Balance Sheet
Income Statement
END OF MONTH
SBA Loan
Revenues:
200,000
Liab & Equity
1st MONTH
Liabilities:
250,000
Contributions
Retained earnings
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
10,000
Equity:
$200K SBA LOAN FUNDING
Slide
1-41
250,000
240,000
SBA Loan
250,000
50,000
Liab & Equity
Assets:
Liabilities:
200,000
SBA Loan
Income Statement
END OF MONTH
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
Expenses:
Liabilities:
Balance Sheet
Income Statement
END OF MONTH
Slide
1-44
202,000
238,000
10,000
36,000
248,000
Revenues:
N/A
PO Box rent
Copy service
Expenses:
Space rent
Depreciation exp.
2,000
200,000
50,000
(2,000)
Net income (loss)
(2,000)
248,000
Purchase Copy Machine $36,00036 month life

1st MONTH
1st MONTH
Balance Sheet
Assets:
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
Liabilities:
Equity:
Contributions
Retained earnings
Liab & Equity
Slide
1-45
202,000
5,000
10,000
36,000
253,000
248,000
Revenues:
PO Box rent
Copy service
Expenses:
Space rent
Depreciation exp.
N/A
5,000
2,000
50,000
(2,000)
3,000
Cash
Accounts receivable
Rent deposit
Equipt (copier)
Total Assets
Equity:
(2,000)
3,000
248,000
253,000
Contributions
Retained earnings
Liab & Equity
Rent from customers $5,000--- NOT Paid

PHILOSOPHY
What we learn to do, we

learn by doing
AUTHOR OF THIS QUOTE?
Slide
1-47
Assets:
SBA Loan
Net income (loss)
Income Statement
END OF MONTH
Liabilities:
200,000
SBA Loan
Balance Sheet
Income Statement
END OF MONTH
Slide
1-46
203,250
202,000
5,000
10,000
36,000
253,000
254,250
Revenues:
PO Box rent
Copy service
Expenses:
Space rent
Depreciation exp.
N/A
5,000
1,250
2,000
200,000
50,000
3,000
4,250
Net income (loss)
3,000
4,250
253,000
254,250
Photocopy use from customers $1,250--- CASH


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Accounting As A Form of Communication

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What is Accounting?

Accounting is the process of identifying, measuring,

For example, information provided by an accountant about an

ECON 3A UCSB-- ANDERSON

The accounting equation- ALGEBRA

BALANCE SHEET/ STATEMENT OF FINANCIAL

. EQUITY = ASSETS - LIABILITIES

THEREFORE THE EQUITY IS WHAT IS

ECON 3A UCSB-- ANDERSON

ECON 3A UCSB-- ANDERSON

ECON 3A UCSB-- ANDERSON

FOUR BASIC FINANCIAL STATEMENTS

ECON 3A UCSB-- ANDERSON

Communicate with Financial Statements

ECON 3A UCSB-- ANDERSON

A word about International Accounting

Total liabilities & equity

Explain the purpose of each of the financial statements.

ECON 3A UCSB-- ANDERSON

Why is Accounting Important?

Users of Financial Information

Accounting is important for markets, free enterprise,

ECON 3A UCSB-- ANDERSON

Characteristics of Financial Accounting

2. The prospects for future dividend

ECON 3A UCSB-- ANDERSON

Identify the primary users of accounting information and their needs.

1. The profitability of each division in

3. The financial status of a company

Users of Financial Information

ACCOUNTING IS A CRITICAL COMPONENT OF THE

Securities and Exchange

Identify the primary users of accounting information and their needs.

IMPORTANCE OF FINANCIAL REPORTING: ETHICS

The accountants job is NOT to decide what is

Implementation of the Sarbanes-Oxley Act of

ECON 3A UCSB-- ANDERSON

ECON 3A UCSB-- ANDERSON

INTERRELATIONSHIP OF STATEMENTS- BASIC

HOW MUCH? HISTORICAL COST

BUT: THIS HISTORICAL COST PRINCIPLE IS CHANGING, FAIR VALUE

ECON 3A UCSB-- ANDERSON

The balance sheet is a parking lot. Everything on the balance sheet

WHEN?-- ACCRUAL ACCOUNTING:

MORE ABOUT THE STATEMENTSINTERRELATIONSHIPS

ECON 3A UCSB-- ANDERSON

STATEMENT OF CASH FLOWS

Solves the problem of paper income.

ECON 3A UCSB-- ANDERSON

Corporate form of ownership provides additional legal protection loss exposure

Corporate income taxed, then dividends are taxed also

Therefore you see many companies NOT paying dividends

Limited Liability Corporations/ S corps/ Limited Liability Partnerships

Financial Statements Exercise

ECON 3A UCSB-- ANDERSON

Total liabilities & equity

Explain the purpose of each of the financial statements.

Statement of Retained Earnings

Explain the purpose of each of the financial statements.

Net income (loss)?

Total liabilities & equity

What is Retained Earnings Balance?

Explain the purpose of each of the financial statements.