Introduction, Review of Accounting Process and Financial Statements Essay

This paper explains different types of accounting phrases and how they directly affect the accounting field. Phrases which are included and defined in the paper are Generally Accepted Accounting Principles, Contra-Asset Accounts, Historical Cost, Accrual Basis vs. Cash Basis Accounting, and Accounting Standards Codification. Definitions and examples of these terms are included as well as explanations of how they are important to financial statements. The financial statements of Samsung, Lockheed Martin and RTL Group will also be examined.

Their financial data will be dissected in order to understand their success and highlight their operating activities. Important facts about each organization will be displayed and details on researching information on each company’s many locations will be revealed. Introduction, Review of Accounting Process and Financial Statements There are many different terms that are important to the field of accounting. Some of the terms are used to understand financial statements, while others are used to define different types of financial standings and explain accounting principles.

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All of the terms are important to the field and offer support to investors and organizations alike in understanding financial concepts and practices. These practices are put to use and are frequently evaluated by financial specialists and the Financial Accounting Standards Board (FASB). Investopedia. com explains Generally Accepted Accounting Principles as “The common set of accounting principles, standards and procedures that companies use to compile their financial statements. They are a combination of authoritative standards and the commonly accepted ways of recording and reporting accounting information. Essentially, they are a set of procedures and guidelines developed to ensure everyone prepares and interprets accounting reports and financial statements the same way.

These practices are important because they give a sense of normalcy to all organizations and set an even standard to which they must all comply. They define standards and principles that many organizations would have difficulty orchestrating on their own. Investopedia. com continues, “GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes.

GAAP cover such things as revenue recognition, balance sheet item classification and outstanding share measurements. ” GAAP is important to financial statements because the statements easier to understand if the same or similar formats are used in all organizations. For investors, creditors, and accountants dealing with multiple accounts daily, having a consistent format allows fluency and consistency in daily tasks. Investorwords. com defines contra-asset accounts as accounts which offset other accounts. For example, a contra-asset account has a credit balance and offsets the debit balance of the corresponding asset.

It is also defined as a balance sheet account in the financial statements that offsets a related asset account. For instance, the contra asset account “Allowance for Doubtful Accounts” is deducted from the asset “Accounts Receivable” to arrive at a net amount which is referred to as net or book value. Contra asset accounts can also be explained as accounts that accumulate a balance that is subtracted from another account, or a negative asset account. One example of a non-current asset would be machinery that has depreciated. The depreciated amount is represented in the accounts as a contra asset (hypernews. org).

Contra asset accounts are important to financial statements because they justify all expenses and allow them to be deducted from various accounts. Accountingcoach. com defines historical cost as the original cost of an item at the time of a transaction. The term historical cost helps to distinguish an asset’s original cost from its replacement cost, current cost, or inflation-adjusted cost. For example, if a house was purchased in 1980 for $50,000 it would be worth much more in 2011 because of the increase in value. Therefore, the historical cost of the house, in 1980, would be much lower than the current value it would hold if it was sold.

Historical cost is important to financial statements because it indicates the actual worth of an item while taking into account the depreciation or the growth of the value of the asset. The value of items increase and decrease over time and these changes in value should be recorded to determine their true worth. Accrual based accounting refers to the method used to report earnings and income over the fiscal accounting reporting period (moneyinstructor. com). Accountinginfo. com describes accrual based accounting vs. cash based accounting, “Under accrual basis accounting, revenue is recognized when it is earned and realized.

Revenue is earned when products are delivered or services are provided. Realized means cash is received while realizable means it is reasonable to expect that cash will be received in the future. Under the cash basis accounting, revenue is recognized when cash is received and expense is recognized when cash is paid. ” Because of stocks, and many other monetary factors, many companies use the accrual based accounting system because it includes payment accounts and monies which are payable to them, even if they have not been received.

The money which is owed the company is included in the net income of at the time financial statements are released. On the other hand, the method of cash basis accounting only allows for the actual cash paid to the organization to be added into their financial statements. Accrual basis and cash basis accounting are important for financial statements because they are necessary methods of recording and documenting all income and expenses over a certain period of time. If this information was not recorded, companies would not have accurate financial information and would not be successful.

Accounting Standards Codification is a major restructuring of accounting and reporting standards designed to simplify user access to all authoritative U. S. generally accepted accounting principles (GAAP) by providing the authoritative literature in a topically organized structure (www. aicpa. com). This compilation of important information allows easier access to basic guidelines and principles of accounting standards. Samsung is a company specializing in a large array of up to date technological electronics.

Upon reviewing their financial statements in their 2009 Annual Report, it is evident that the organization of the balance sheet focuses on the assets, liabilities and the shareholder’s equity. The organization of the income statement highlights sales, operating profit and net income. The organization of the statement of cash flows includes operating activities, investing activities and financial activities. The balance sheet statement is more useful for Samsung because it combines all of the important factors of the business into one statement. Samsung received cash flows from operating activities.

Samsung’s future trends using net cash flows could include providing consumers with incentives to use cash instead of credit when making purchased. One important fact about Samsung is that they are a leader in the manufacturing and mass production of many different styles of electronics. It would be safe to say that just about every household has at least one item that is the Samsung brand because of their diverse assortment of manufactured electronics. Since Samsung is a large company, relevant information about individual locations can be found by going to Samsung. om, clicking contact us, corporate and affiliates, view contact information. On the left side of the screen there will be a list of 6 Samsung location entities and 11 affiliates. The company’s website provides the best resources to their information. Lockheed Martin is a company specializing in Aeronautics, Electronic Systems, Information systems and Global Services, and Space systems. Upon reviewing their financial statements, it is evident that the organization of the balance sheet is much more detailed than that of Samsung.

Because of the different sub-categories within the company, there are many more factors to include in the compilation of financial statements. Their balance sheet focuses on current assets, liabilities and total stockholder’s equity. The organization of the income statement is an in depth overview of all of the income received in the fiscal year. They call their income statement the Consolidated Statement of Earnings and highlight key topics such as net sales with sub-categories of products and services. Cost of sales is highlighted with sub categories of products, services, unallocated corporate costs, and other income.

Operating profit is shown with the subcategories of interest income, non operating income, earnings before income tax expense and the total of the income tax expense. Net earnings is the last topic on this statement with subcategories of earnings per common share with basic and diluted included. The organization of the statement of cash flows includes operating, investing and financing activities. The balance sheet statements are more useful for Lockheed Martin because it combines all of the important factors of the business while including the very important sub categories.

They received net cash from operating activities. Lockheed Martin’s future trends using net income/cash flows could include the expansion of categories and more in depth explanation of where their assets are being used. One important fact about Lockheed Martin is that it is an exceptional multi-billion dollar organization with very reliable clients such as the US government. Since Lockheed Martin is such a large company, with many different locations all over the world, relevant information about individual locations can be found by looking on their web page.

RTL Group is a company specializing in the production and broadcasting of television and radio shows. Upon reviewing their financial statements, it is evident that the organization of the balance sheet is broken down into many more categories than the previous companies. Categories include non-current assets, current assets, current liabilities, and net current assets. Under each of these categories are subcategories such as program rights, goodwill, income tax receivable and accounts payable.

The statement is very clear to read and it covers all of the locations throughout Europe, the USA, and Australia. The organization of the income statement focuses on revenue, operating income, profit from operating activities, and earnings before interest and taxes. This statement also includes all regional locations. The organization of the statement of cash flows is similar to that of Samsung and Lockheed Martin. Their main focuses are cash flows from operating activities and the explanations of where this money went.

They also display the net cash from operating activities, cash flows from investing activities and net cash used in investing activities, financial activities information and cash and cash equivalent and the beginning and end of the year. The cash flow statement is more useful for RTL Group because they have locations on multiple continents and can better understand where their money is going by using the cash flow statement. They received net cash from operating activities. RTL Group future trends using net income/cash flows could include tracking the amounts from each location on a more detailed scale.

One important fact about RTL Group is they have many different entities within the company. They are located in many countries and within each one, there is a different set of executives that manage it. It is a very successful global company with an array of expertise in the television and radio production world. Since RTL Group is such a large company, with many different locations all over the world, relevant information about individual locations can be found by researching their website and downloading their annual report.

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