General Themes. - Consider other languages and how you would approach learning those languages. 2. Financial accounting information matters.

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1 General Themes 1. Accounting is a language. - Consider other languages and how you would approach learning those languages. 2. Financial accounting information matters. 3. There is a wealth of information in the footnotes to the financial statements. However, financial accounting information must be evaluated within the context of the particular firm. - Is a high debt to equity ratio good or bad?

2 My Teaching Philosophy Students are responsible for their own education. My role is to facilitate learning. The class sessions are designed to supplement the textbook, not replace the textbook. Although I will rely heavily on lectures, my classes are designed to be interactive.

3 Assignment for Thursday, September 28 Obtain a copy of your company s 1999 financial statements. You can download or print a copy from the company s 1999 annual report. Access the annual report through the company s web site. The financial statements include the basic financial statements along with the footnotes. Contact me if you have any problems or questions.

4 Basic Concepts 1. What is accrual accounting? How does it differ from cash basis accounting? 2. Who sets accounting standards? What is the difference between the role played by the SEC and the FASB?

5 Definitions Assets: Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. Liabilities: Probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions. Revenues: Inflows or other enhancements of assets or settlements of liabilities from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major, or central operations. Expenses: Outflows or other using up of assets or incurrences of liabilities during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major, or central operations.

6 Other Overriding Principles Realization: Revenues are recognized when the earnings process is judged to be complete or virtually complete and there is reasonable certainty as to the collectibility of the asset to be received. Matching: An expense can be recognized: Based on an exact cause-and-effect relationship between a revenue and expense event. By associating an expense with the revenues recognized in a specific time period. By a systematic and rational allocation to specific time periods. In the period incurred, without regard to related revenues.

7 Examples 1. A basketball team signs its new star player to a contract. The contract calls for a $20 million signing bonus. The signing bonus is paid immediately and nonrefundable. From the standpoint of the team, is it an asset or an expense? What would be the team's journal entry? From the standpoint of the player, is it revenue or a liability? What would be the player's journal entry? 2. A firm signs the CEO to a contract on 1/1/00. According to the contract, the firm will pay for the CEO's country club dues after the CEO retires. In order to qualify for the payment the CEO needs to work for the firm for a period of 5 years. At what time will the firm know the actual amount of the dues? When should the firm record the expense? When should the CEO record revenue?

8 A Finance View of Accounting from the Motley Fool Excerpt from; Forget AOL and ebay--let's Revel in Accounting By Selena Maranjian July 17, 2000 There are four things that hold back human progress. Ignorance, stupidity, committees, and accountants -- Charles J.C. Lyall Accounting gets so little respect in this world that when I searched for an uplifting quotation to start this column off, all I found was the negative one above. Sigh. It's easy for us Fools to look to great investors such as Warren Buffett or Peter Lynch or Anne Scheiber (scroll down for her story) as our heroes. But, we would be remiss if we ignored the world of accountants, for it's only through their work that we investors have much of a chance of building any wealth. Investing is all about evaluating companies according to whatever metrics you use, and deciding which firms are most worthy of your hard-earned dinero. Some investors

9 use Rule Breaker criteria, others use Rule Maker criteria. Many people use other systems and may do even better than Rule Breakers or Rule Makers. That's fine. Regardless though, just about any approach relies on numbers in financial statements that are organized and presented according to the rules of accounting. Without balance sheets, income statements, and statements of cash flows, it would be kind of hard to tell just how well or poorly various companies are doing. In many cases, it would also be hard to tell who the top dog really is or which industries are truly emerging. Good management and smart backing is the result of people poring over financial statements. Excellent past share appreciation is also tied to investors reviewing numbers. Accounting is a vital topic to master if you want to maximize your investing savvy. It's not easy and not always fun (until you get the hang of it), but you'll eventually understand how various entries are interrelated and what the rules are that public companies must play by. Get to that point and you'll find yourself glancing at financial statements and seeing all sorts of interesting things pop up. It's not unlike the Rosetta Stone for a certain breed of investor.