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1、English in Accounting ProfessionSeptember,2009,Part 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 busin
2、ess.The use of accounting information is not limited to the business world.,Chapter Skeleton,Learning 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 assumption
3、s.Describe the accounting principles and measurement bases and qualitative characteristics of financial accounting information.,1.1 The purpose of Accounting and Financial Reporting,Accounting may be described as the process of identifying,measuring,recording,and communicating economic information t
4、o permit 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
5、 Accounting 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 r
6、esources.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 ad
7、dition,financial 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.,D
8、esign the accounting information system to meet stakeholders needs,Prepare accounting reports for stakeholders.,Record economic data about business activities and events,Illustration 1-1.Financial Accounting Information and the Stakeholders of a Business,Financial Reporting:supplying general-purpose
9、 financial information about a business to people outside the organization.Financial Statement:the 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 receivi
10、ng these reports.,A complete set of financial statements includes:A balance sheet,showing at a particular 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
11、.An income statement,including the profitability of the business over the preceding years(or a particular 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 repo
12、rts the cash effects of a companys perations during a period its investing transactions its financing transactions the net increase or decrease in cash during the period the cash amount at the end of the period,In addition,a complete set of financial statements usually includes several pages of note
13、s,containing additional information which accountants believe is useful in the interpretation of the financial 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
14、 the external users in financial reporting is based on standards that establish CAS(Chinese Accounting Standards).,Objectives of Financial reporting,The objectives are to provide information that:Is useful to those making investment and credit decisions;Is helpful in assessing future cash flowsInden
15、tifies the economic resources(assets),the claims to those resources(liabilities),and the changes in those resources and claims.,1.2 Accounting basis and Accounting Assumptions,Two types of accounting basisCash-basis accounting Accrual-basis accounting,Cash Basis,Is the method of bookkeeping that rec
16、ords financial events based on cash flow and cash position.Revenue is recognized when cash is received and expense is recognized when cash is paid.Two types of cash-basis accounting exist:Strict cash-basis modified cash-basis,Accrual-Basis,Records financial events based on economic activity rather t
17、han financial activity.Revenue is recorded when it is earned and realized,regardless of when actual payment is 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.,Comparison
18、A simple ExampleOther considerations,Accounting Assumptions,CAS treats the following as the fundamental accountingassumptions:EntityContinuityPeriod of TimeMonetary Unit,1.3 Financial Accounting Principles and Measurement Bases,Financial accounting principles,Cost PrincipleRevenue Recognition Princi
19、pleMatching PrincipleFull disclosure Principle,Cost Principle,The cost principle states that assets should be recorded 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 mea
20、sured and can be verified.,Revenues Recognition Principle,The revenue recognition principle dictates that revenue be recognized 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
21、 that will generate revenues obly in the current accounting period are expensed immediately.,Unexpired costs become expenses in two ways 1.Cost of goods soled.2.Operating expenses.,Revenues Recognition Principle,Cost Incurred,Asset,Expenses,Provides future benefits,Provides no apparent futureProvide
22、s future benefits,Unexpired Expired Cost Cost,Benefits Decrease,Illustration 1-2.Expense Recognition,Matching Principle,Once the economic 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 princ
23、iples thus provide guidelines as to when revenues and expenses should be reported.,Time Period Assumption,The economic life of any business can be divided into artificial time periods,Revenue Recognition Principle,Matching Principle,Revenue recognized in the accounting period in which it is earned.,
24、Expenses matched with revenues in the period when efforts are expensed.,Full disclosure Principle,This principle requires that circumstances and events that make a difference to financial statement users be disclosed.,Financial Accounting Measurement bases,Market Value(Fair Value)Historical CostNet
25、Realizable ValueCurrent Value(Present Value),Market Value,Market value is the estimated amount for which a property should exchange on the date of valuation between a willing buyer and a willing seller in an arms length transaction after proper marketing wherein the parties had each acted knowledgea
26、bly,prudently,and without compulsion.,Historical Cost,The economic activities and resourced of a company initially are measured by the exchange 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
27、 of an item until the item is consumed,sold,or liquidated and removed from the records.,Net Realizable Value,A method of determining the present value 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
28、.With regards to inventory,net realizable value(NRV)is the estimated selling price selling price in the ordinary course of business minus any cost 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
29、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.,1.4 Qualitative Characteristics of Accounting Information,PervasiveConstraintUser-SpecificQualityOverall qualityPrimaryDecision-SpecificQualitiesIngredients
30、of Primary QualitiesSecondary andInteractive QualityThreshold forRecognitionAdditional Consideration Illustration 1-4 Hierarchy of Qualitative Characteristics of Accounting Information,Accounting Information,Benefits Costs,PV,FV,T,V,RF,N,Comparability(Including Consistenc),Materiality,Understandabil
31、ity,Decision Usefulness,Relevance,Reliability,Conservatism,Illustration 1-4 presents a hierarchy of the qualititative characteristics of accounting information.This section presents an overview of the hierarchy,after which we define and discuss the components in detail.The hierarchy is bounded by th
32、ree constraints.To be useful,accounting information must have each of the qualitative characteristics,at least to a minimum degree.,Understandability,Accounting information should be understandable to users who have a reasonable knowledge of business and economic activities and who are willing to st
33、udy the information which reasonable diligence.,Decision Usefulness,Is the overall qualitative characteristic to be used in judging the quality of accounting information.,Relevance,Accounting information is relevant if it can make a difference in a decision by helping users predict the outcomes of p
34、ast,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.,Reliability,Accounting information is most useful when it is reliable as well as relevant.Reliable inf
35、ormation 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 or bias.,Reliability,Accounting information has representational faithf
36、ulness 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 Consistency,A secondary qualitative characteristic of accounting information i
37、s 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 Consistency,Constraints to the Hierarchy,Benefit/Cost ConstraintMateriality ConstraintConservatism,
