There are three main parts to this case that requires you to prepare and submit
ID: 2350006 • Letter: T
Question
There are three main parts to this case that requires you to prepare and submit a three to five page paper. Please make sure this paper is well organized and covers all of the items below.Part I. Search the course background information, the Internet and/or the Cyber Library. Discuss the terms listed below. Your discussion should expand on the definition as given in the module background. Explain why these concepts are important to financial statements.
Generally Accepted Accounting Principles (US GAAP);
International Accounting Standards (IFRS);
Securities and Exchange Commission (SEC); and
Annual report
10-K
Part II: Explain the accounting equation and prepare a table showing the equation and show a list of accounts belonging to each category in the equation. You should include at least five accounts for each category.
Part III. Comment on the primary intended audience of the financial statements. What other groups that may be interested in the financial information released by the company? Discuss.
Explanation / Answer
In the U.S., Generally Accepted Accounting Principles are accounting rules used to prepare, present, and report financial statements for a wide variety of entities, including publicly traded and privately held companies, non-profit organizations, and governments. The term is usually confined to the United States; hence it is commonly abbreviated as US GAAP or simply GAAP. However, in the theoretical sense, Generally Accepted Accounting Principles encompass the entire industry of accounting, and not only the United States. Outside the academic context, GAAP means US GAAP. Basic Objectives: Financial reporting should provide information that is: 1.useful to present to potential investors and creditors and other users in making rational investment, credit, and other financial decisions. 2.helpful to present to potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts. 3.about economic resources, the claims to those resources, and the changes in them. 4.helpful for making financial decisions. 5.helpful in making long-term decisions. 6.helpful in improving the performance of the business. 7.useful in maintaining records. Assumptions Accounting Entity: assumes that the business is separate from its owners or other businesses. Revenue and expense should be kept separate from personal expenses. Going Concern: assumes that the business will be in operation indefinitely. This validates the methods of asset capitalization, depreciation, and amortization. Only when liquidation is certain this assumption is not applicable. The business will continue to exist in the unforeseeable future. Monetary Unit principle: assumes a stable currency is going to be the unit of record. The FASB accepts the nominal value of the US Dollar as the monetary unit of record unadjusted for inflation. The Time-period principle implies that the economic activities of an enterprise can be divided into artificial time periods. Principles Historical cost principle requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities. This principle provides information that is reliable (removing opportunity to provide subjective and potentially biased market values), but not very relevant. Thus there is a trend to use fair values. Most debts and securities are now reported at market values. Revenue recognition principle requires companies to record when revenue is realized or realizable and earned, not when cash is received. This way of accounting is called accrual basis accounting. Matching principle. Expenses have to be matched with revenues as long as it is reasonable to do so. Expenses are recognized not when the work is performed, or when a product is produced, but when the work or the product actually makes its contribution to revenue. Only if no connection with revenue can be established, cost may be charged as expenses to the current period (e.g. office salaries and other administrative expenses). This principle allows greater evaluation of actual profitability and performance (shows how much was spent to earn revenue). Depreciation and Cost of Goods Sold are good examples of application of this principle. Full Disclosure principle. Amount and kinds of information disclosed should be decided based on trade-off analysis as a larger amount of information costs more to prepare and use. Information disclosed should be enough to make a judgment while keeping costs reasonable. Information is presented in the main body of financial statements, in the notes or as supplementary information. Internationally known by the older name of International Accounting Standards (IAS). IAS were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On April 1, 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and Standing Interpretations Committee standards *Qualitative characteristics of financial statements include: Relevance (Materiality) Faithful representation *Enhancing qualitative characteristics include: Comparability Verifiability Timeliness Understandability IFRS are used in many parts of the world, including the European Union, India, Hong Kong, Australia, Malaysia, Pakistan, GCC countries, Russia, South Africa, Singapore and Turkey. As of August 2008, more than 113 countries around the world, including all of Europe, currently require or permit IFRS reporting and 85 require IFRS reporting for all domestic, listed companies, according to the U.S. Securities and Exchange Commission. It is generally expected that IFRS adoption worldwide will be beneficial to investors and other users of financial statements, by reducing the costs of comparing alternative investments and increasing the quality of information. Companies are also expected to benefit, as investors will be more willing to provide financing.Companies that have high levels of international activities are among the group that would benefit from a switch to IFRS. Companies that are involved in foreign activities and investing benefit from the switch due to the increased comparability of a set accounting standard. The U.S. Securities and Exchange Commission (frequently abbreviated SEC) is a federal agency[2] which holds primary responsibility for enforcing the federal securities laws and regulating the securities industry, the nation's stock and options exchanges, and other electronic securities markets in the United States. In addition to the Securities Exchange Act of 1934 that created it, the SEC enforces the Securities Act of 1933, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Sarbanes–Oxley Act of 2002 and other statutes. A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet must be registered with the SEC. The SEC has four major divisions. The Division of Corporation Finance ensures corporate disclosure of important information to the investing public. The Division of Trading and Markets ensures fairness, order and efficiency in market activities. The Division of Investment Management helps protect investors and encourages capital formation through oversight and regulation of the investment management industry. The Division of Enforcement investigates securities law violations and initiates civil and criminal actions. Offices of the SEC include: General Counsel Chief Accountant Economic Analysis Compliance International Affairs Investor Education Investor Advocacy Policy and Investor Outreach Public Documents Information Technology Executive Director Financial Management Human Resources Administrative Services Risk Assessment Legislative Affairs Public Affairs Secretary Equal Employment Opportunity Inspector General Administrative Law Judges. The SEC was created during the Great Depression with the passage of the Securities Exchange Act of 1934, which was designed to bolster confidence in capital markets by providing investors with reliable information and by requiring that individuals and corporations deal with each other honestly. A Form 10-K is an annual report required by the U.S. Securities and Exchange Commission (SEC), that gives a comprehensive summary of a public company's performance. Although similarly named, the annual report on Form 10-K is distinct from the often glossy "annual report to shareholders," which a company must send to its shareholders when it holds an annual meeting to elect directors (though some companies combine the annual report and the 10-K into one document). The 10-K includes information such as company history, organizational structure, executive compensation, equity, subsidiaries, and audited financial statements, among other information. Companies with more than $10 million in assets and a class of equity securities that is held by more than 500 owners must file annual and other periodic reports, regardless of whether the securities are publicly or privately traded. Up until March 16, 2009, smaller companies could use Form 10-KSB. If a shareholder requests a company’s Form 10-K, the company must provide a copy. In addition, most large companies must disclose on Form 10-K whether the company makes its periodic and current reports available, free of charge, on its website. Form 10-K, as well as other SEC filings may be searched at the EDGAR database on the SEC's website. The benefit of the 10K is that it allows you to find out additional information such as the amount of stock options awarded to executives at the company, as well as a more in-depth discussion of the nature of the business and marketplace. Sometimes you will find that a company has no financial statements in the 10K, but instead has written, "incorporated herein by reference" This means that the financial statements can be found elsewhere, such as in the annual report or another publication. Even if this is the case, it is still worth it to get a copy. You can find this by contacting the company, visiting their website, or going to FreeEdgar.