Touro University International Essays (2077 words) - Economy

Touro University International James L. White ACC 501 Module 1, Case Assignment Dr. Paul R. Watkins INTRODUCTION The purpose of this report is to search the course background information, the Internet and/or the Cyber Library and to discuss each of the following terms; Generally Accepted Accounting Principles, Historical Cost, Accrual Basis vs. Cash Basis Accounting, Current Assets and Liabilities vs. Non-Current Items. My discussion will expand on the definition as given in the course terms and explain why this concept is important to financial statements. I will then describe the general organization of Ford Motor Company, Microsoft, and ExxonMobil by looking at three sets of their financial statements (Balance Sheet, Income Statement, and Statement of Cash Flows). I will make one prediction about each company from that company's financial statements and Reach one additional conclusion about each company from the information I find in the annual report. By discussing these topics, I hope to offer some knowledge on these accounting terms and the three companies listed above. I will conclude this report with a brief summary of the entire analysis, highlighting some of the more significant parts that the report contains. GAAP Wikipedia defines Generally Accepted Accounting Principles (GAAP) as, "the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions and in the preparation of financial statements" (Wikipedia, 2006). Every country has their own version of GAAP with the standards being set by their national governing body. Wikipedia defines the United States version as, "the accounting rules used to prepare financial statements for publicly traded companies and many private companies in the United States" (Wikipedia, 2006). GAAP is not an unchanging set of rules. It is a guideline of objectives and conventions that have evolved over time to oversee how financial statements are arranged and presented. Qualified public accountants customarily audit companies to determine if their financial statements are in compliance with GAAP. GAAP has four basic assumptions (Economic Entity Assumption, Going Concern Assumption, Monetary Unit Assumption, and Periodic Reporting Assumption), four basic principles (historical cost principle, revenue recognition principle, matching principle and full disclosure principle) and four basic constraints (Cost-benefit relationship, Materiality, Industry practices and Conservatism). Organizations such as the United States Securities and Exchange Commission, the American Institute of Certified Public Accountants, the Financial Accounting Standards Board, the Government Accounting Standards Board, the American Accounting Association, the Institute of Management Accountants, and the Financial Executives Institute, all influence the development of GAAP in the United States. HISTORICAL COST Historical Cost is described by Wikipedia as, "Historical Cost describes the original cost of an asset at the time of purchase or payment as opposed to its market value" (Wikipedia, 2006). "Historical cost is one of the main principles in the U.S. general accepted accounting principles." (Wikipedia, 2006) For example, if I purchased my business building 20 years ago for $50,000.00 but today it is worth $200,000.000 I would still record it on my balance sheet as its historical cost of $50,000.00. In an article entitled Historical Costs vs. Deferred Costs as Basic Concepts for Financial Statement Valuations by Abe L. Shugerman (Associate Professor, Western Reserve University) explained, "Someone pursuing a Balance Sheet would be apprised of how much an asset actually costs, but he would not necessarily know whether such an outlay was truly representative of the assets value at current price levels" (Shugerman, 2006). Since depreciation is one of the elements of a Net Profit computation it is affected by historical cost because it affects the statement of profit and loss. ACCRURAL BASIS VS CASH BASIS ACCOUNTING Wikipedia defines Accrual basis as, "... accounting records financial events that change your net worth (the amount owed to you minus the amount you owe others)." (Wikipedia, 2006) Accrual basis is GAAP compliant, which makes accrual basis the methods to use by all publicly traded companies since the U.S. Securities and Exchange Commission requires all publicly traded companies to follow GAAP. Accrual accounting is based on matching an expense with revenue it helps generate. The advantage of accrual basis is that it measures current income more accurately than the cash method. However, the disadvantage of accrual basis is that it is difficult to understand. Cash basis is described by Wikipedia as, "a method of bookkeeping that records financial events based on cash flows and cash position. Revenue is recognized when cash is received and expense is recognized when cash is paid." (Wikipedia, 2006) This method does not recognize promises to pay or expectations to receive money or services in the future. There are two types of cash