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EnglishinAccountingProfessionSeptember,2009,PartFinancialAccounting,Chapter1.FinancialAccountingConceptualFramework,WhatisAccounting?,Accountingistheartofinterpreting,measuringandcommunicatingtheresultsofeconomicactivities.Accountinghasoftenbeencalledthelanguageofbusiness.Theuseofaccountinginformationisnotlimitedtothebusinessworld.,ChapterSkeleton,LearningObjectives:Defineaccounting,financialaccounting,andfinancialstatement.Describeandprepareabalancesheet;defineassets,liabilities,andownersequity.Explaintheaccountingbasesandassumptions.Describetheaccountingprinciplesandmeasurementbasesandqualitativecharacteristicsoffinancialaccountinginformation.,1.1ThepurposeofAccountingandFinancialReporting,Accountingmaybedescribedastheprocessofidentifying,measuring,recording,andcommunicatingeconomicinformationtopermitinformedjudgmentsanddecisionsbyusersofthatinformation.TheoriginsofaccountingaregenerallyattributedtotheworkofLucaPacioli,anItalianRenaissancemathematician.,Therearemanytypesofaccountinginformation:FinancialAccountingManagerialAccountingTaxAccounting,FinancialAccountingreferstoinformationdescribingthefinancialresources,obligations,andactivitiesofaneconomicentity(eitheranorganizationoranindividual).FinancialAccountinginformationisdesignedprimarilytoassistinvestorsandcreditorsindecidingwheretoplacetheirscarceinvestmentresources.Abusinessisanorganzationinwhichbasicresources(inputs).Theobjectiveofmostbusinessistomaximizeprofits.,Whatistheroleoffinancialaccountinginbusiness?Thesimplestansweristhatfinancialaccountingprovidesinformationformanagerstouseinoperatingthebusiness.Inaddition,financialaccountingprovidesinformationtootherstakeholderstouseinassessingtheeconomicperformanceandtheconditionofthebusiness.,Identifystakeholders(Internal:Owners,managers,employees,etc.External:Customers,creditors,government,etc.),Assessstakeholdersinformationalneeds.,Designtheaccountinginformationsystemtomeetstakeholdersneeds,Prepareaccountingreportsforstakeholders.,Recordeconomicdataaboutbusinessactivitiesandevents,Illustration1-1.FinancialAccountingInformationandtheStakeholdersofaBusiness,FinancialReporting:supplyinggeneral-purposefinancialinformationaboutabusinesstopeopleoutsidetheorganization.FinancialStatement:theprincipalmeansofreportinggeneral-purposefinancialinformationtothepersonsoutsideabusinessorganizationisasetofaccountingreports.TheusersoftheFinancialStatement:thepersonsreceivingthesereports.,Acompletesetoffinancialstatementsincludes:Abalancesheet,showingataparticularpointoftime(aspecificdate)thefinancialpositionofthecompanybyindicatingtheresourcesthatitowns,thedebtsthatitowes,andtheamountoftheownersequity(investment)inthebusiness.Anincomestatement,includingtheprofitabilityofthebusinessovertheprecedingyears(oraparticulartimeperiod).Astatementofcashflows,summarizingthecashreceiptsandcashpaymentsofthebusinessoverthesametimeperiodcoveredbytheincomestatements.,Thestatementofcashflowreportsthecasheffectsofacompanysperationsduringaperioditsinvestingtransactionsitsfinancingtransactionsthenetincreaseordecreaseincashduringtheperiodthecashamountattheendoftheperiod,Inaddition,acompletesetoffinancialstatementsusuallyincludesseveralpagesofnotes,containingadditionalinformationwhichaccountantsbelieveisusefulintheinterpretationofthefinancialstatements.Thebasicpurposeoffinancialstatementsistoassistusersinevaluatingthefinancialposition,profitability,andfutureprospectsofabusiness.TheinformationcommunicatedtotheexternalusersinfinancialreportingisbasedonstandardsthatestablishCAS(ChineseAccountingStandards).,ObjectivesofFinancialreporting,Theobjectivesaretoprovideinformationthat:Isusefultothosemakinginvestmentandcreditdecisions;IshelpfulinassessingfuturecashflowsIndentifiestheeconomicresources(assets),theclaimstothoseresources(liabilities),andthechangesinthoseresourcesandclaims.,1.2AccountingbasisandAccountingAssumptions,TwotypesofaccountingbasisCash-basisaccountingAccrual-basisaccounting,CashBasis,Isthemethodofbookkeepingthatrecordsfinancialeventsbasedoncashflowandcashposition.Revenueisrecognizedwhencashisreceivedandexpenseisrecognizedwhencashispaid.Twotypesofcash-basisaccountingexist:Strictcash-basismodifiedcash-basis,Accrual-Basis,Recordsfinancialeventsbasedoneconomicactivityratherthanfinancialactivity.Revenueisrecordedwhenitisearnedandrealized,regardlessofwhenactualpaymentisreceived.Expensesare“matched”revenueregardlessofwhentheyareactuallypaid.AccrualaccountingisrequiredbyCASandotherfinancialaccountingstandardslikeGAAP,IFRS,etc.,ComparisonAsimpleExampleOtherconsiderations,AccountingAssumptions,CAStreatsthefollowingasthefundamentalaccountingassumptions:EntityContinuityPeriodofTimeMonetaryUnit,1.3FinancialAccountingPrinciplesandMeasurementBases,Financialaccountingprinciples,CostPrincipleRevenueRecognitionPrincipleMatchingPrincipleFulldisclosurePrinciple,CostPrinciple,Thecostprinciplestatesthatassetsshouldberecordedattheircost.Costisthevaluesexchangedatthetimesomethingisacquired.Costisreliable.Thevaluesexchangedatthetimesomethingisacquiredgenerallycanbeobjectivelymeasuredandcanbeverified.,RevenuesRecognitionPrinciple,Therevenuerecognitionprincipledictatesthatrevenueberecognizedintheaccountingperiodinwhichitisearned.Accountantsfollowtheapproachof“letexpensesfollowrevenue”.Thenatureofexpenses:costsarethesourceofexpenses.Coststhatwillgeneraterevenuesoblyinthecurrentaccountingperiodareexpensedimmediately.,Unexpiredcostsbecomeexpensesintwoways1.Costofgoodssoled.2.Operatingexpenses.,RevenuesRecognitionPrinciple,CostIncurred,Asset,Expenses,Providesfuturebenefits,ProvidesnoapparentfutureProvidesfuturebenefits,UnexpiredExpiredCostCost,BenefitsDecrease,Illustration1-2.ExpenseRecognition,MatchingPrinciple,Oncetheeconomiclifeofabusinesshasbeendividedintoartificialtimeperiods,therevenuesrecognitionandmatchingprinciplescanbeapplied.Thisoneassumptionandtwoprinciplesthusprovideguidelinesastowhenrevenuesandexpensesshouldbereported.,TimePeriodAssumption,Theeconomiclifeofanybusinesscanbedividedintoartificialtimeperiods,RevenueRecognitionPrinciple,MatchingPrinciple,Revenuerecognizedintheaccountingperiodinwhichitisearned.,Expensesmatchedwithrevenuesintheperiodwheneffortsareexpensed.,FulldisclosurePrinciple,Thisprinciplerequiresthatcircumstancesandeventsthatmakeadifferencetofinancialstatementusersbedisclosed.,FinancialAccountingMeasurementbases,MarketValue(FairValue)HistoricalCostNetRealizableValueCurrentValue(PresentValue),MarketValue,Marketvalueistheestimatedamountforwhichapropertyshouldexchangeonthedateofvaluationbetweenawillingbuyerandawillingsellerinanarmslengthtransactionafterpropermarketingwhereinthepartieshadeachactedknowledgeably,prudently,andwithoutcompulsion.,HistoricalCost,Theeconomicactivitiesandresourcedofacompanyinitiallyaremeasuredbytheexchangepriceofattransactionatthetimethetransactionoccurs.Usuallytheexchangeprice(thehistoricalcost)isretainedintheaccountingrecordsasthevalueofanitemuntiltheitemisconsumed,sold,orliquidatedandremovedfromtherecords.,NetRealizableValue,Amethodofdeterminingthepresentvalueofatroubledassettoitspresentownermaybebasedontheassumptionthattheassetwillbeheldforaperiodoftimeandsoldatsomefuturedate.Withregardstoinventory,netrealizablevalue(NRV)istheestimatedsellingpricesellingpriceintheordinarycourseofbusinessminusanycosttocompleteandtosellthegoods.Netrealizablevalueisalsoassociatedwithaccountsreceivable.,CurrentValue(PresentValue),Isthevalueonagivendateofafuturepaymentorseriesoffuturepayments,discountedtoreflectthetimevalueofmoneyandotherfactorssuchasinvestmentrisk.,1.4QualitativeCharacteristicsofAccountingInformation,PervasiveConstraintUser-SpecificQualityOverallqualityPrimaryDecision-SpecificQualitiesIngredientsofPrimaryQualitiesSecondaryandInteractiveQualityThresholdforRecognitionAdditionalConsiderationIllustration1-4HierarchyofQualitativeCharacteristicsofAccountingInformation,AccountingInformation,BenefitsCosts,PV,FV,T,V,RF,N,Comparability(IncludingConsistenc),Materiality,Understandability,DecisionUsefulness,Relevance,Reliability,Conservatism,Illustration1-4presentsahierarchyofthequalititativecharacteristicsofaccountinginformation.Thissectionpresentsanoverviewofthehierarchy,afterwhichwedefineanddiscussthecomponentsindetail.Thehierarchyisboundedbythreeconstraints.Tobeuseful,accountinginformationmusthaveeachofthequalitativecharacteristics,atleasttoaminimumdegree.,Understandability,Accountinginformationshouldbeunderstandabletouserswhohaveareasonableknowledgeofbusinessandeconomicactivitiesandwhoarewillingtostudytheinformationwhichreasonablediligence.,DecisionUsefulness,Istheoverallqualitativecharacteristictobeusedinjudgingthequalityofaccountinginformation.,Relevance,Accountinginformationisrelevantifitcanmakeadifferenceinadecisionbyhelpinguserspredicttheoutcomesofpast,present,andfutureeventsorconfirmorcorrectpriorexpectations.Toberelevant,accountinginformationshouldhaveeitherpredictiveorfeedbackvalue,orboth.Inaddition,itshouldbetimely.,Reliability,Accountinginformationismostusefulwhenitisreliableaswellasrelevant.Reliableinformationisreasonablyfreefromerrorandbias,andfaithfullyrepresentswhatisintededtorepresent.Accountinginformationisverifiablewhenmeasurerscanformaconsensusthattheselectedmethodhasbeenusedwithouterrororbias.,Reliability,Accountinginformationhasrepresentationalfaithfulnesswhenthereisarelationshipbetweenthereportedaccountingmeasurementsordescriptionsandtheeconomicresources,theobligationsandthetransactionsandeventscausingchangesintheseitems.,ComparabilityandConsistency,Asecondaryqualitativecharacteristicofaccountinginformationiscomparability,andincludingconsistency.Comparabilityisnotconsideredaprimaryqualityofusefulinformation,likerelevanceandreliability,becauseitmustevolvemorethanoneitemofinformationandistheinteractivequalityoftherelationshipbetweentwoormoreitemsofinformation.,Consistencymeansconformityfromperiodtoperiod,withaccountingpoliciesandproceduresremainingunchanged.,ComparabilityandConsistency,ConstraintstotheHierarchy,Benefit/CostConstraintMaterialityConstraintConservatism,
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