Financial Accounting, Chapter 2.4

Hello. My name is Joe Hoyle and I’m
speaking to you from the University of Richmond, here in Richmond, Virginia, where
it’s an absolutely beautiful day today. It’s a great day to learn about
financial accounting, and today we’re going to look at Chapter 2. Now, by now
you should have read chapter 2 and what I hope you have done, as you’ve gone
through Chapter 2, is to look at the chapter and pick out the five things
that you found to be the most important. As I said in Chapter 1, I like the idea
that students evaluate what they’re reading, that they think about what’s
most important in the material they see. Now I went through and picked out seven
or eight things that I thought were extremely important and I’ve narrowed it
down to my top five. Now, as I said before, your list and my list can be different.
I’m simply interested in how you and I compare. When we went through the chapter
and looked at what we thought stood out among all that material. Here is number five, and that to me was
the fact that financial information is presented to outsiders in the form of
financial statements. We introduce those financial statements in much more detail
in Chapter 3. But in Chapter 2, we throw out the idea that there has to be
a form for the financial information and that form is financial statements.
Throughout the remainder of this book, when we talk about what you see, we will
often mention that we found this in financial statements. That is one of the
main coverages that we see in this textbook: the idea that information is
presented to outsiders in the form of financial statements. So although we did
not go into much detail here in Chapter 2, I thought that was the fifth most
important thing in the chapter. For me, the fourth most important thing
was the idea that uncertainty creates such a challenge for financial
accountants. Anyone can report if there’s no uncertainty, but in a major
organization uncertainty lies everywhere and the account is constantly having to
try to figure out how to report events, how to report things that happen when
there is uncertainty going on. We talked about selling on credit, we talked about
lawsuits. Those are very uncertain events. How do you paint a portrait if you have
uncertainty? That’s something that students don’t often recognize but it is
such a significant challenge, such a significant problem to the financial
accountant that I place that on my list at number four. To me, the third most important thing in
this chapter was the concept the financial information needed to be
presented fairly. We have said often that the information cannot possibly always
be exact. It cannot be correct, it cannot be down to the penny, so we have to have
a goal for it and that goal is that it should be a reasonable likeness of the
organization that it presents. We need a term for that and the term we use is
“presents fairly.” And as I mentioned in my opening video, we have come to mean that
that the information contains no material misstatements. In the statements,
of course, are errors and fraud material is something of a size or type that
would change a decision maker’s decision. The whole concept that the information
you’re presenting is presented fairly so that users can make use of it to make
their decisions in a good way, underlies the whole idea of financial reporting.
And I put the idea of present fairly as a third most important thing in this
chapter. Now we’re getting to the very most
important things. What was number two for me? To me, at the end of the chapter, I
presented four essential definitions: assets, liabilities, revenues, expenses.
Those are so central to the reporting of financial information that for me those
four definitions were the second most important thing in this chapter. If you
start out by understanding that an asset is something you own or control that has
probable future economic benefit. Then a liability is a debt. Something an
organization owes. That net assets are assets minus liabilities. That revenue is
the inflow, or the increase ,of net assets from selling a good or a service. And an
expense is an outflow, or a decrease, in that assets in hopes of generating
revenue. Then you have already gone a long way in coming to understand the
conveyance of financial information. We talked about understanding that
conveyance of information. Those four terms are more than likely the most
important terms that you’ll encounter in this book. We deal with them often, we
define them often, they clearly are very very important and I put them number two
on my list of the important things in Chapter 2. And, of course, finally, is number one. And
I thought a long time about what I thought was the most important thing in
Chapter 2 and I finally settled on the idea that to be able to communicate you
have to have a structure. That you simply cannot communicate without a structure
and in financial accounting, at least in the United States, that structure is
provided by U.S. Generally Accepted Accounting Principles—what are more
commonly called U.S. GAAP. Any time did you start talking about the conveyance of
financial information, using financial accounting, it is guided, it is ruled, it
is structured, by U.S. GAAP. And as I said in my opening video, you could easily say
that this entire book, this entire course is the study of U.S. Generally Accepted
Accounting Principles. If you make that statement it’s hard not to think that
that concept was the most important thing introduced to you in Chapter 2. Now,
that was my list. What did you think? Did you come up with different items? I argued
with myself but just by knowing what you and I think are the five most important
things, you’ve already made a great step forward in learning the material
presented in Chapter 2. Good luck, learn it all.

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