Financial Accounting and Reporting

1. Financial Accounting and
Reporting

2. Chapter 1 : Introduction

3. What is Financial Accounting?
Financial Accounting is a system that collects and processes
(analyzes, measures and reports) financial information about an
organization and reports that information to interested users
(decision makers)
Sole proprietorship: A single owner
Partnership: Two or more partners
Corporation: Owned by shareholders (stakeholders)
Legal forms of business organizations:

4. • Provides service for a price
• Example:
• Airline Company
• Advertising Agency
• Accounting Firm
Service Business
• Buys merchandise for resale to customers.
• Example:
• Department Stores
• Wholesalers
• Retailers
Merchandising Business
• Acquires raw materials which are processed
into finished products, then sold to customers
Manufacturing Business
Major Types of Business Organizations

5. What is the purpose of
Financial Accounting?
The main purpose of Financial Accounting is to provide
useful information to investors, creditors and others to
help them in making rational investing and crediting
decisions.

6. What is the purpose of
Financial Accounting?
The main purpose of Financial Accounting is to provide
useful information to investors, creditors and others to
help them in making rational investing and crediting
decisions.

7. Users of Financial Accounting
Information
External Users
• Investors
• Creditors
• Suppliers
• Customers
• Governmental
Agencies
• Regulators
Internal Users
• Management of
a company
• Marketing
Manager
• Credit
Department
manager
• Finance
Manager
Investors and creditors are the primary users of Financial
Accounting information.

8. Financial Accounting as
Information System
Input
• Business
transactions
• Example:
• Buying goods
• Paying salaries
• Providing services
• Buying land
• Borrowing cash
Processing
• Recording
• Example:
• Entering business
transactions into a set
of accounting records
Output
• Set of reports
prepared at the end
of an accounting
period. This set of
reports is called the
Financial
Statement.
The accounting period is either a month, quarter or a
year.

9. Basic Financial Statements (FS)
For a corporation, Financial Statements represent
external reports that are published to the interested
users. FS for a corporation must be audited by an
independent (external) auditor.
The Basic FSs are:
1- Income Statement
2- Retained Earnings Statement
3- Statement of Financial Position Statement
( AKA Balance sheet)
4- Statement of Cash Flows

10. Basic Financial Statements (FS)
Reports revenues, expenses and the result of
operating and non- operating activities for an
accounting period
First: The Income Statement
Net income = Revenues – Expenses
(Net loss) and gains and losses
AKA: Statement of Earnings
Statement of Operations

11. Basic Financial Statements (FS)
Accrual Basis Accounting
First: The Income Statement
Accrual Basis vs. Cash Basis
Companies record transactions in the periods in which the events
occur regardless of when cash is received or paid.
Therefore, using the accrual basis to determine net income means
companies recognize (record) revenues when earned (rather
than when they received the cash).
It also means recognizing expenses when incurred (rather than
when they pay cash).

12. Basic Financial Statements (FS)
Cash Basis Accounting
First: The Income Statement
Accrual Basis vs. Cash Basis
Companies record revenue when they receive cash ( regardless
when the revenue is earned). They record an expense when they
pay out cash ( regardless when the expense is incurred)

13. Revenue Recognition Principle
Recognizing Revenues and Expenses under Accrual
Basis Accounting
The revenue recognition principle dictates that companies
recognize revenue in the accounting period in which it is earned.
Service Business revenue is earned when services are
performed (provided)
Merchandising Business
Manufacturing Business
revenue is earned when
goods are sold (delivered)

14. Basic Financial Statements (FS)
First: The Income Statement
Matching Principle
Accountants follow a simple rule in recognizing expenses which is
“Let expenses follow the revenues”
The matching principle dictates that efforts (expenses) should be
matched with accomplishments (revenues)