Wall Street Prep - Accounting Crash
Course - Introduction & The Income
Statement
What is accounting? - correct answer • Accounting is the language of business. It is a standard
set of rules for measuring a firm's financial performance. Assessing a company's financial
performance is important for many groups, including:
• The firm's officers (managers and employees)
• Investors (current and potential shareholders) • Lenders (banks)
• General public • Standard financial statements serve as a "yardstick" of communicating
financial performance to the general public.
• For example, monthly sales released by McDonald's Corp. provide both its managers and the
general public with an opportunity to assess the company's financial performance across major
geographic segments (U.S., Europe, Asia Pacific, Middle East, and Africa).
Why is accounting important? - correct answer Making corporate decisions • Suppose a
telecom company is looking to acquire a regional company to boost its presence in that region.
There are several potential targets that fit the bill. How does this company determine which of
these, if any, companies would make a good acquisition candidate?
Making investment decisions
• A mutual fund is looking to invest in several diverse technology companies - Microsoft,
Oracle, and Intel. How does this mutual fund determine in which of these, if any, companies it
should make an investment?
• A major part of corporate and investment decisions relies on analyzing each of the
companies' financial information in the above-mentioned cases
.• Accounting, the standard language by which such financial information can be assessed and
compared, is fundamental to making these decisions.
Who uses accounting? - correct answer • Accounting is used by a variety of organizations -
from the federal government to non-profit organizations to small businesses to corporations.
• We will be discussing accounting rules as they pertain to publicly-traded companies.
,Wall Street Prep - Accounting Crash
Course - Introduction & The Income
Statement
Generally Accepted Accounting Principles (GAAP) - correct answer • In the Unites States, a
governmental agency called the Securities and Exchange Commission (SEC) authorizes the
Financial Accounting Standards Board (FASB) to determine U.S. accounting rules.
• FASB communicates these rules through the issuance of Statements of Financial Accounting
Standards (SFAS). These statements make up the body of accounting rules known as the
Generally Accepted Accounting Principles (GAAP).
• These rules have been developed to provide guidelines for financial accounting in order to
ensure that businesses present their financial information in a fair, consistent, and
straightforward basis. Financial statements must be prepared according to GAAP.
An overview of the SEC - correct answer • The Securities and Exchange Commission is a U.S.
federal agency, which was established by the U.S. Congress in 1934.
• The agency's primary mission is "to protect investors and maintain the integrity of the
securities markets," which includes the establishment and maintenance of accounting
principles and regulations.
An overview of FASB - correct answer • The SEC largely relies on the input of the private sector
to establish and maintaining financial accounting and reporting standards
• The FASB was established in 1973 as an independent body to carry out the function of
codifying these standards on the behalf of the SEC.
• FASB is composed of seven full-time members appointed for five years by the Financial
Accounting Foundation (FAF), a "parent" organization.
• FASB formulates accounting standards through the issuance of Statements of Financial
Accounting Standards (SFAS). These statements make up the body of accounting rules known as
the Generally Accepted Accounting Principles (GAAP).
• The FASB is independent, with close relations with the SEC, its decisions are influenced by a
variety of entities: Corporatio
International Financial Reporting Standards (IFRS) - correct answer While this course focuses on
the US standards, over 100 countries, including the EU, UK, Canada, Australia, Russia (see map)
have adopted a unified set of international accounting standards (IFRS).
• Many other countries like China, India, Brazil, are either actively pursuing convergence with
IFRS or have incorporated IFRS standards into their national accounting standards.
, Wall Street Prep - Accounting Crash
Course - Introduction & The Income
Statement
• In 2014, the SEC backed away from the promise of complete convergence with IFRS, but the
last decade of cooperation has already led to significant convergence of US GAAP and IFRS,
meaning that in practice, global accounting standards are far more standardized than they have
ever been.
Introduction Summary - correct answer • Accounting is a standard language of measuring
financial performance by a variety of organizations.
• Accounting follows Generally Accepted Accounting Principles (GAAP), which are guidelines for
measuring and presenting financial information in a fair, consistent, and straight-forward basis.
• U.S. GAAP are developed by FASB on the behalf of the SEC, with input from a variety of
interest groups.
• Over 100 countries, including the EU, UK, Canada, Australia, Russia (see map) have adopted a
unified set of international accounting standards (IFRS).
• Although we have seen unprecedented convergence over the last few years between US
GAAP and IFRS, some differences remain.
• This course focuses on the US standards, but where there are major differences, we will
identify them.
Summary of accounting assumptions, principles, constraints: Accounting Entity - correct answer
A corporation is considered a "living" enterprise i.e. a "fictional" being.
Summary of accounting assumptions, principles, constraints: Going Concern - correct answer A
corporation is assumed to remain in existence for the foreseeable future.
Summary of accounting assumptions, principles, constraints: Measurement & Units of Measure
- correct answer Financial statements show only measurable activities of a company. Financial
statements must be reported in the national monetary unit (U.S. $ for U.S. companies).
Summary of accounting assumptions, principles, constraints: Periodicity - correct answer A
company's continuous life can be divided into measured periods of time for which financial
statements are prepared. U.S. companies are required to file quarterly (10-Q) and annual (10-K)
reports.
Summary of accounting assumptions, principles, constraints: Historical Cost - correct answer
Financial statements report companies' resources and obligations at an initial historical cost.
This conservative measure precludes constant appraisal and revaluation.
