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Basic accounting principles

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  • 1. Basic Accounting Principles The Financial Statements
  • 2. JOIN KHALID AZIZ
    • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
    • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
    • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
    • CONTACT:
    • 0322-3385752
    • 0312-2302870
    • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.
  • 3. JOIN KHALID AZIZ
    • FRESH CLASSES FOR ICAP
    • MODULE B…FINANCIAL ACCOUNTING.
    • MODULE D…COST ACCOUNTING.
    • REGISTER YOUR SELF NOW.
    • COMPLETION OF SYLLABUS WITH ACCENTUATE ON BASIC CONCEPTS
  • 4. Accounting Terms
    • Account
      • A group of items having common characteristics
    • Types of Accounts
      • Asset Liability
      • Income Expense
      • Equity
  • 5. Chart of Accounts
    • Listing of all of the accounts used by a business
  • 6. Asset Accounts
    • Items of Value
    • Characterized as current and non-current
  • 7. Liability Accounts
    • Claims that others have against the assets
    • Have a known:
      • Amount
      • Date to be paid
      • Person to whom payment owed
    • Also current and non current
  • 8. Equity Accounts
    • Claims that the owner has against the assets
    • Sometimes called net worth
    • Difference between value of assets and liabilities
  • 9. Income and Expense Accounts
    • Types of equity accounts
    • Simple accounting systems often only contain these accounts
  • 10. Double vs Single Entry Accounting
    • Single – One account entry for each transaction
    • Double – Two account entries for each transaction
      • One debit and one credit
    • Hybrid systems
      • May not match income with expenses
      • May not distinguish cash, check, or credit
  • 11. Basic Accounting Equation
    • Always maintained in double entry accounting
    • Assets will always equal liabilities plus equity
  • 12. Transactions
    • Will be equal and offsetting
    • Two types:
      • Income & Expenses
      • Transfers between accounts
  • 13. Cash and Accrual Accounting
    • Refers to the timing of entries into the accounting system
  • 14. Cash Based Records
    • Transactions are recorded when cash is received or paid out
  • 15. Accrual Based Records
    • Transactions are recorded when they take place
    • Regardless of whether cash is involved
  • 16. Accrual Adjusted Statements
    • Cash based records are kept throughout the year
    • Non-Cash adjustments are made to the cash based income statement at the end of the year
  • 17. Account Valuation
    • Income Accounts
      • Value received is recorded
    • Expense Accounts
      • Value paid is recorded
    • Liability Accounts
      • Value is dollar amount owed
  • 18. Account Valuation
    • Asset Accounts
      • More difficult because they may not be traded routinely
  • 19. Asset Valuation
    • Cost Basis
    • Market Value Basis
  • 20. Cost Basis Asset Valuation
    • Original cost minus depreciation
    • Must establish a depreciation method
  • 21. Market Basis Asset Valuation
    • Recorded as the price they could bring if sold, less selling expenses
    • Based on recent auctions, appraisals, etc.
  • 22. Depreciation
    • Section II page 29, (FFSTF Guidelines)
    • Allocation of the expense that reflects the “using up” of capital assets employed by the business
    • Conceptually, this is done over the useful life of the asset in a “systematic and rational” manner
  • 23. Depreciation
    • Allocation applied to original cost minus salvage value
    • Accelerated versus straight line methods
      • Example of difference between management records and tax records
    • Can overstate or understate true income
  • 24. Financial Reports
    • Balance Sheet
    • Income Statement
    • Statement of Cash Flows
    • Statement of Owner Equity
  • 25. Balance Sheet
    • Represents a financial situation at a single point in time
    • Has a date on it
    • Broken down by:
      • Type of Asset or liability
      • Time or life of the account type
  • 26. Balance Sheet
    • Current Assets
      • Cash and other assets that will be converted into cash during one operating cycle
    • Non-Current Assets
      • Those not expected to be converted into cash in one operating cycle
  • 27. JOIN KHALID AZIZ
    • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
    • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
    • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
    • CONTACT:
    • 0322-3385752
    • 0312-2302870
    • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.
  • 28. Balance Sheet
    • Current Liabilities
      • Debts that will come due within one year from the balance sheet date
    • Non-Current Liabilities
      • Those debts due more that one year from the balance sheet date
  • 29. Balance Sheet
    • Intermediate Assets and Liabilities
    • Long term Assets and Liabilities
    • Can use cost or market valuations or both
    • Supporting Schedules are very helpful
    • Will need a balance sheet for beginning and ending of accounting period
  • 30. Income Statement
    • Summary of income and expenses
    • Represents a period of time between two balance sheets
    • Explains the change in equity between two balance sheets
    • Can be divided into enterprise reports
    • Can be cash or accrual
  • 31. Assets Liabilities Equity Assets Liabilities Equity
    • +/- Net Income
    • +/- Valuation Changes
    • Family living withdrawals
    • + Capital contributions
    Beginning Balance Sheet Ending Balance Sheet
  • 32. Income Statement
    • Will have more than one profit line
    • Definition of Profit
      • Financial profit is the net return to business equity
  • 33. Accrual Adjusted Income Statement
    • Cash incomes and expenses must be adjusted by:
      • Changes in non-cash assets
        • Inventories
        • Pre paid expenses
        • Receivables
      • Changes in non-cash liabilities
        • Payables
        • Accrued interest
  • 34. Statement of Cash Flows
    • Not the same as a cash flow plan (Budget)
    • Is a historical record of sources and uses of funds
    • Divisions of Statement:
      • Cash from operating activities
      • Cash from investing activities
      • Cash from financing activities
  • 35. Statement of Owner Equity
    • Explains the change in owners equity between two balances sheets
    • Changes due to :
      • Net income
      • Change in inventory valuation
      • Family living withdrawals
      • Capital contributions
      • Capital distributions
  • 36. Financial Analysis
    • All business owners should have a basic set of financial statements at their disposal and they should know how to analyze and interpret them.
  • 37. Financial Analysis
    • Two Objectives
      • Measure financial condition of the business
      • Measure financial performance of the business
  • 38. Financial Analysis
    • Horizontal Analysis
    • Vertical Analysis
    • Ratio Analysis
  • 39. Horizontal Analysis
    • Looks at trends in performance and strength over time
      • For example, percent change in net income from year to year
  • 40. Vertical Analysis
    • Looks at within year events rather than over time
      • For example, interest expense as a percent of total expenses
  • 41. Ratio Analysis
    • Allows for consistent comparison of a single business over time as well as comparison between businesses
    • Converts nominal dollar amounts to a common basis
  • 42. Source of data for Ratio Analysis
    • Balance Sheet
    • Income Statement
  • 43. Farm Financial Standards Council (Five Criteria)
    • Liquidity
    • Solvency
    • Profitability
    • Financial Efficiency
    • Repayment Capacity
  • 44. Ratio Analysis
    • 16 different ratios commonly used
    • Each has limitations
    • Proper interpretation is critical
  • 45. Liquidity
    • Ability of a business to pay current liabilities as they come due
  • 46. Liquidity
    • Current Ratio
      • Current Assets/Current Liabilities
      • Less than one is bad
    • Working capital
      • Current assets minus current liabilities
      • Negative number is bad
  • 47. Solvency
    • Ability of the firm to repay all of its financial obligations
  • 48. Solvency
    • Debt to Asset Ratio
      • Total liabilities/total assets
      • Greater than one bad
    • Equity to Asset Ratio
      • Total equity/total assets
    • Debt to Equity Ratio
      • Leverage ratio
      • Less than one better
  • 49. Profitability
    • Rate of return on assets
    • Rate of return on equity
    • Operating profit margin ratio
  • 50. Financial Efficiency
    • Measures the intensity with which a business uses its assets to generate gross revenues and the effectiveness of production
  • 51. Financial Efficiency
    • Asset turnover ratio
    • Operating expense ratio
    • Depreciation ratio
    • Interest expense ratio
    • Net income from operations ratio
  • 52. Repayment Capacity
    • Measures the borrower’s ability to repay term debts and capital leases rather than financial position or performance
  • 53. Repayment Capacity
    • Term debt and capital lease coverage ratio
    • Capital replacement and term repayment margin
  • 54. Cautions
    • Measures are only as good as the data used
    • Methods must be consistent between years and between operations
      • Example – Asset valuation methods
    • Measures ask the right questions but do not provide the answers
  • 55. JOIN KHALID AZIZ
    • ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
    • FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
    • COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
    • CONTACT:
    • 0322-3385752
    • 0312-2302870
    • R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.