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Accounting for Monetary Value

What is Accounting?

 

Accounting standardizes financial information.

 

When thinking about tracking accounts, we can think in terms of an absolute number reported, a roll forward schedule that tracks a change, a driver that creates the change and a % that represents the change. Accounting logic does this for us.

 

Understanding the accounting logic of each line item on the financial statements along with its roll forward schedule and driver that drives the change in the roll forward

 

The accounting logic of each financial statement including IS, BS and SCF and the accounting logic that integrates the three financial statements.

 

Accounting & financial statements go hand in hand. The accounts and their roll forwards create financial statements that tell the story of how new science becomes a benefit stream and then how this benefit stream gets turned into a perpetuity

 

Financial statements drive sources and uses decisions inside and outside the firm

 

Accounting is financial figures in a standardized way allowing for comparisons across companies

 

Accounting is a language which was written by FASB and the rules of the language is called GAAP. Presentation of financial information. SEC monitors FASB

 

Accounting rules are always changing consistent with new business models. IFRS is international. US GAAP and IFRS are almost identical

Accounting assumptions, 1. Entity separate from owners 2. Entity is a going concern and will continue to exist 3. Can only show measurable phenomena with cash 4. Annual and quarterly filed, calender and fiscal year may be different

 

 

Accounting Principles:

 

  1. Company’s resources are reported at initial historical cost (book value). This undervalues certain assets. Is more conservative. IFRS allows for fair market value (barely any companies do this).

 

2&3. Accrual accounting driven by revenue recognition and accrual accounting. Dictates when you recognize revenues and expenses. Gaap is accrual. Rev rec not when cash, but when earned and measureable. Matching is for costs, costs associated with making product recorded during same period as revenue generated from product

 

Revenue earned when product is shipped, matching cost when revenues earned (same period)

 

GAAP wants to give investors a picture of profitable the business is (core profitability).

 

USGAAP has industry specific issues.

 

SCF reconciles accrual accounting to cash accounting

 

  1. Must disclose relevant economic information that is material. FSs, notes and supplementary information

 

Constraints:

 

Assumptions are made

Materiality is different across companies (subjectivity)

Prepare FSs that are consistent (ex. valuing inventory as LIFO vs. FIFO)

Always want companies to operate with conservative bias (ex. historical cost principle)

 

 

 

Accounts and Accounting

In order to track valuation performance of the perpetuity (i..e business), companies create accounts for each item of it’s financial existence. These accounts are the basis of valuation. Valuation is the basis of actions taken in a capitalist economy.

 

Accounts, Accounting & Excel

Excel is the software used to model the accounts of the enterprise and determine the valuation of the perpetuity (i.e. business).

 

Accounting:

Accounting is about tracking the changes in the sources & uses of funds hence the double entry system used in accounting where each transaction increases/decreases a source & use.

 

Determining the monetary value of accounts that make up the sources & uses of corporation. Each account has its own roll forward schedule detailing beginning of period, change and end of period.

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