Accounting is the system that records and reports financial information about a business. It identifies, records, and communicates economic events to users. The chapter outlines key accounting concepts like the accounting equation, direct and indirect costs, fixed and variable costs, and the difference between inventoriable and period costs. It explains the four main financial statements - income statement, balance sheet, statement of owner's equity, and statement of cash flows - and how they are used to report on a business's financial performance and position.

1. Chapter V:
Fundamentals of Accounting
Learning Objectives
After studying this chapter, you should be able to:
*Explain the nature of accounting and its main functions.
*Identify the users and uses of accounting.
*Explain generally accepted accounting principles.
*Explain the main assumptions of accounting.
*State the accounting equation and define its
components.
*Analyze the effects of business transactions on the
accounting equation.
*Understand the four financial statements and how they
are prepared.

2. • Accounting is the financial information
system that provides these insights .
• will help you to control your project and
make effective decisions. You need
accounting because you want to
understand what is happening financially
to your project (organizations).

3. • Accounting consists of three basic
activities—
• it identifies,
• records,
• and communicates
the economic events of an organization to
interested users.

4. The users of accounting information
• Internal Users
• who plan, organize, These include marketing
managers, production supervisors, finance directors,
and company officers.
• the business entity need answers to such questions
,mention these questions .
• External Users
• creditors and investors recipients of goods and
services (customers) and reviewers and overseers of
business entities (employers, unions, government
agencies) need accounting information for making
decisions concerning granting credit, investing.
• Many Questions raised by external users , mention

5. The financial position or
Balance sheet statement
• ------------------------------------------------------------
• Assets Liabilities
• Current assets short term liabilities
Noncurrent assets Long term liabilities
Owner’s equity
Capital
Total = Total

6. Income statement
• -----------------------------------------------------------
• Purchase Sales
• Sales return Purchase return
• Goods at 01-01 goods at 31-12
• Expenses Revenues
• ----- -------
• ----- -------

7. Summary Of The Accounting Cycle
.

8. Financial Statements
• Companies prepare four financial statements from the summarized
accounting data:
1. An income statement presents the revenues and expenses and
resulting net income or net loss for a specific period of time.
2. An owner’s equity statement summarizes the changes in owner’s
equity for a specific period of time.
3. A balance sheet reports the assets, liabilities, and owner’s equity at
a specific date.
4. A statement of cash flows summarizes information about the cash
inflows (receipts) and outflows (payments) for a specific period of
time.
• These statements provide relevant financial data for internal and external
users

9. DATA CARE
Income Statement
For the Month Ended September 30, 2020
Revenues
Service revenue $4,700
Expenses
Salaries expense $900
Rent expense 600
Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income $2,750

10. Owner’s Equity
Statement
For the Month
Ended September
30, 2020
R. Neal, Capital September 1 $-0-
Add: Investments $15,000
Net income 2,750 17,750
17,750
Less: Drawings 1,300
R. Neal, Capital, September
30
$16,450

11. DATA CARE
Balance Sheet September 30, 2020
2
Assets
Cash $8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets $18,050
Liabilities and Owner’s Equity
Liabilities
Accounts payable $1,600
Owner’s equity
R. Neal, Capital 16,450
Total liabilities and owner’s equity $18,050

12. DATA CARE
Statement of Cash Flows
For the Month Ended September 30,
2020
• Page 99 , 100

13. The accounting
equation
• Main accounting equation
• Asset=Liabilities +Owner’s Equity
• The complete accounting equation
• Assets = Liabilities + Owner’s Equity –
Owner’s Drawing + ( Revenues –
Expenses ) .
•
Assets = Liabilities + Owner’s
Equity
R. Neal,
Cash = Capital
(1) $15,000 $15,000

14. EXAMPLES • Page 89 to 95
Assets = Liabilities +
Owner’s
Equity
R. Neal,
Cash + Equipment = Capital
Old Bal. $15,000 $15,000
(2) -7,000 +$7,000
New Bal. $ 8,000 + $7,000 = $15,000
$15,000

15. The Accounting Assumption
• Monetary Unit Assumption :requires that companies
include in the accounting records only transaction data
that can be expressed in money terms.
• The accrual basis assumption :Under the accrual basis
the effects of all transactions and events are recognized
in accounting records when they occur
• The going concern assumption :financial reports are
prepared normally on the assumption that the existing
entity will continue to operate in the future.
• The period assumption :All entities need to report their
results in the form of either profit or operating surplus ,
and the period under IFRS is one year .

16. • Accrual-basis accounting: Accounting basis in which
companies record transactions that change a company’s
financial statements in the periods in which the events
occur.
• Accruals: Adjusting entries for either accrued revenues or
accrued expenses. Accrued expenses: Expenses incurred
but not yet paid in cash or recorded. Accrued revenues:
Revenues earned but not yet received in cash or recorded.
Book value: The difference between the cost of a
depreciable asset and the salvage value .

17. • ACalendar year: An accounting period that extends from January 1 to
December 31.
• Cash-basis accounting: Accounting basis in which companies record
revenue when they receive cash and an expense when they pay cash.
• Contra asset account: An account offset against an asset account on
the balance sheet.
Deferrals: Adjusting entries for either prepaid expenses or unearned
revenues. Depreciation: The allocation of the cost of an asset to
expense over its useful life in a rational and systematic manner.
• Fiscal year: An accounting period that is one year in length.
• Interim periods: Monthly or quarterly accounting time periods.

18. • Matching principle: The principle that companies match efforts
(expenses) with accomplishments (revenues).
• Prepaid expenses: Expenses paid in cash that benefit more than one
accounting period and that are recorded as assets.
• Revenue recognition principle: The principle that companies recognize
revenue in the accounting period in which it is earned.
• Time period assumption: An assumption that accountants can divide the
economic life of a business into artificial time periods.
• Unearned revenues: Cash received and recorded as liabilities before
revenue is earned.
• Useful life: The length of service of a long-lived asset.

19. Chapter VI:
An Introduction to Cost Terms and Purposes
• Learning Objectives
1. Define and illustrate a cost object
2. Distinguish between direct costs and indirect costs
3. Explain variable costs and fixed costs
4. Distinguish inventoriable costs from period costs
5. Illustrate the flow of inventoriable and period costs
6. Explain why product costs are computed in
different ways for different purposes

20. Costs and Cost Terminology
• A cost is a resource sacrificed or forgone to achieve a
specific objective. A cost (such as the cost of labor or
advertising) is usually measured as the monetary
amount that must be paid to acquire goods or services .
An actual cost is the cost incurred (a historical or past
cost), as distinguished from a budgeted cost, which is
a predicted, or forecasted, cost (a future cost).
• Cost accumulation is the collection of cost data in
some organized way by means of an accounting
system.

21. Direct Costs and Indirect Costs
• Direct costs of a cost object are related to the
particular cost object and can be traced to it in an
economically feasible (cost-effective) way
• Indirect costs of a cost object are related to the
particular cost object, but cannot be traced to it in
an economically feasible (cost-effective) way .
• Cost assignment is a general term that
encompasses both (1) tracing direct costs to a
cost object and (2) allocating indirect costs to a
cost object.

23. Factors Affecting Direct/Indirect Cost Classifications
■ The materiality of the cost in question. The smaller the amount
of a cost— that is, the more immaterial the cost is—the less likely
it is economically feasible to trace it to a particular cost object.
■ Available information-gathering technology. Improvements in
information- gathering technology make it possible to consider
more and more costs as direct costs.
■ Design of operations. Classifying a cost as direct is easier if a
company’s facility (or some part of it) is used exclusively for a
specific cost object, such as a specific product or a particular
customer. For example, General Chemicals classifies the cost of its
facility dedicated to manufacturing soda ash (sodium carbonate) as
a direct cost of soda ash.

24. Cost-Behavior
Patterns:
Variable Costs
and Fixed Costs
• . A variable cost changes in total in proportion
to changes in the related level of total activity or
volume of output produced.
• A fixed cost remains unchanged in total for a
given time period
Number of X6s
Produced
(1)
Variable Cost per
Steering Wheel
(2)
Total Variable Cost of
Steering Wheels (3)
= (1) × (2)
1 $600 $600
1.000 600 600.000
3.000 600 1.800.000

25. PANELA: Variable Cost
of Steering Wheels at
$600 per BMW X6
Assembled
PANEL B:
Supervision Costs
for the BMW X6
assembly line (in
millions)

26. PANEL A: Variable
Cost of Steering
Wheels at $600
per BMW X6
Assembled

27. PANEL B: Supervision
Costs for the BMW X6
assembly line (in
millions)

28. Annual Total Fixed
Supervision Costs for BMW
X6 Assembly Line
(1)
Number of
X6s Produced
(2)
Fixed
Supervision Cost
per X6
(3) = (1) ÷ (2)
$200.000 10.000 $200
$200.000 25.000 $80
$200.000 50.000 $40

29. Relationships
Between Types
of Costs
■ Direct and variable
■ Direct and fixed
■ Indirect and variable
■ Indirect and fixed
• Total Costs and Unit Costs
• Unit cost = total cost / no. of unit
Units
Produced
(1)
Variable
Cost
per Unit (2)
Total
Variable Costs
(3) = (1) * (2)
Total
Fixed Costs
(4)
Total Costs
(5) = (3) +
(4)
Unit
Cost (6)
= (5) ,
(1)
100,000
200,000
500,000
800,000
1,000,000
$60
$60
$60
$60
$60
$ 6,000,000
$12,000,000
$30,000,000
$48,000,000
$60,000,000
$10,000,000
$10,000,000
$10,000,000
$10,000,000
$10,000,000
$16,000,000
$22,000,000
$40,000,000
$58,000,000
$70,000,000
$160.00
$110.00
$ 80.00
$ 72.50
$ 70.00

30. Inventoriable Costs, and Period Costs
Manufacturing-, Merchandising-, and Service-
Sector Companies
• We define three sectors of the economy and
provide examples of companies in each sector.
1. Manufacturing-sector companies.
2. Merchandising-sector companies
• 3. Service-sector companies

31. Types of Inventory
• Direct materials inventory
• Work-in-process inventory
• Finished-goods inventory

32. 8 Income
Statement and
Schedule of
Cost of Goods
Manufactured
of a
Manufacturing-
Sector
Company,
Cellular
Products

33. : Cost of goods manufactured in 2017. Cost
of goods manufactured
page 141 , 142
Beginning work-in-process inventory,
January 1, 2017
+ Total manufacturing costs incurred in
2017
$ 6,000
105,000
= Total manufacturing costs to account for
- Ending work-in-process inventory, December
31, 2017
111,000
7,000
= Cost of goods manufactured in 2017 $104,000

34. Prime Costs and Conversion Cost
• Prime Costs and Conversion Costs
• Two terms used to describe cost classifications in manufacturing
costing systems are prime costs and conversion costs. Prime costs are
all direct manufacturing costs. For Cellular Products,
• Prime costs = Direct material costs + Direct manufacturing labor costs

35. • Conversion costs = Direct manufacturing labor costs
+ Manufacturing overhead costs =

36. • Total Cost Statement