C1 HH.ppt

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INTRODUCTION TO
ACCOUNTING AND
FINANCIAL STATEMENTS
1

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Internal users
External users
Nature and
purposes of
accounting
Users and Uses
of Financial
Information
Forms of Business
Organization &
Business ativities
Communicating
with Users
Definition of
Accounting
Accounting
process
Fields of
Accounting
Forms of
Business
Organization
Business
Activities
Balance sheet
Income statement
Retained earnings
statement
Statement of cash
flows
Interrelationships
of statements
Introduction to Accounting & Financial Statements

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is an information system that...
measures business activities,
processes information, and...
communicates financial information.
ACCOUNTING …

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is called the language of business.
ACCOUNTING …

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Identification
Select economic events
(transactions)
Recording
Record, classify,
and summarize
Accounti
ng
Reports
SOFTBYTE
Annual Report
Prepare
accounting reports
Analyse and interpret
for users
Communication
THE ACCOUNTING PROCESS

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Accounting
1. Includes bookkeeping
2. Also includes much more
Bookkeeping
1. Involves only the recording of economic events
2. Is just one part of accounting
BOOKKEEPING DISTINGUISHED FROM
ACCOUNTING

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Management Accounting
Financial Accounting
Fields of Accounting

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The major distinction:
 Financial accounting serves external users
(investors, creditors, and suppliers).
 Management accounting serves internal
users (top executives, management, and
administrators within organizations,…).
Financial and Managerial Accounting

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Financial
accounting
Management
accounting
Report nature General purpose Special purpose
Level of detail Aggregated Dissected
Restrictions Standardised or
regulated
Minimum
restrictions
Reporting interval Less frequently More frequently
Time horizon Backward looking Forward looking
Range of
information
Primarily monetary
and objective
Often non-
monetary with less
objective
constraints
Financial and Managerial Accounting

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Management
Human
Resources
Taxing
Authorities
Labor
Unions
Regulatory
Agencies
Marketing
Finance
Investors
Creditors
Customers
Internal
Users
External
Users
Who Uses Accounting Data
Users and Uses of Financial Information
SO 2 Identify the users and uses of accounting information.

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Questions Asked by
Internal Users User
1. Can we afford to give our
employees a pay raise?
Human Resources
2. What price for our product
will maximize net income?
3. Which product line is most
profitable?
4. Is cash sufficient to pay
dividends to the stockholders?
Marketing
Management
Finance

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Questions Asked by
External Users User
1. Is the company earning
satisfactory income?
Investors
2. How does Disney compare in
size and profitability with Time
Warner?
3. Will United Airlines be able to
pay its debts as they come
due?
Investors
Creditors

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Proprietorship Partnership Corporation
 Simple to
establish
 Shared control
 Broader skills
and resources
 Tax advantages
 Easier to transfer
ownership
 Easier to raise
funds
 No personal
liability
Forms of Business Organization
 Generally owned
by one person
 Simple to
establish
 Owner
controlled
 Tax advantages
SO 1 Describe the primary forms of business organization.

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All businesses are involved in three types of activity —
 financing,
 investing,
 and operating.
Business Activities
SO 3 Explain the three principal types of business activity.
The accounting information system keeps track of
the results of each of these business activities.

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Two primary sources of outside funds are:
1. Borrowing money
 Amounts owed are called liabilities.
 Party to whom amounts are owed are creditors.
 Notes payable and bonds payable are different
type of liabilities.
2. Issuing shares of stock for cash.
 Payments to stockholders are called dividends.
Business Activities
Financing Activities

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Investing Activities
Purchase of resources a company needs to
operate.
 Computers, delivery trucks, furniture, buildings, etc.
 Resources owned by a business are called assets.
Business Activities

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Operating Activities
Once a business has the assets it needs,
it can begin its operations.
 Revenues - Amounts earned from the sale of products
(sales revenue, service revenue, and interest revenue).
 Inventory - Goods available for sale to customers.
 Accounts receivable - Right to receive money from a
customer,in the future, as the result of a sale.
Business Activities

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Operating Activities
 Expenses - cost of assets consumed or services used.
(cost of goods sold, selling, marketing, administrative,
interest, and income taxes expense).
 Liabilities arising from expenses include accounts
payable, interest payable, wages payable, sales taxes
payable, and income taxes payable.
 Net income – when revenues exceed expenses.
 Net loss – when expenses exceed revenues.
Business Activities

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 What is a transaction?
 It is any event that both affects the financial
position of the business and can be reliably
recorded.
ACCOUNTING FOR BUSINESS TRANSACTIONS

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Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
 Gillen purchases an office location, paying
$20,000 in cash.
 She buys office supplies, agreeing to pay
$500 in 30 days.
 She earns and collects $5,500 revenues.

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 Gillen performs services, and the client
agrees to pay $3,000 within one month.
 During the month, she pays $3,300 for
expenses incurred.
Gillen pays $300 to the store from which
she purchased $500 worth of supplies.
 What is the effect of these transactions on
the accounting equation?

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Owner’s
Assets = Liabilities + Equity
1) Cash + $30,000 + $30,000
2) Cash – 20,000
Land + 20,000
3) Supplies + 500 + 500
4) Cash + 5,500 + 5,500
5) Receivable + 3,000 + 3,000
6) Cash – 3,300 – 3,300
7) Cash – 300 – 300
Totals + $35,400 + 200 + $35,200

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 Notice that the equation always stays in
balance.
 Each transaction affects at least two
accounts, sometimes more.
 Some transactions affect only one side of
the equation; some affect both sides.

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 Other transactions that took place were as
follows:
 The business collected $1,000 from the
client.
 She sold some land at cost for $9,000.
 She withdrew $2,000 from the business.

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Companies prepare four financial statements from the
summarized accounting data:
Income
Statement
Balance
Sheet
Statement
of Cash
Flows
Retained
Earnings
Statement
Communicating with Users

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 Reports revenues and
expenses for a specific
period of time.
 Net income – revenues
exceed expenses.
 Net loss – expenses
exceed revenues.
 Past net income
provides information for
predicting future net
income.
Income Statement
Illustration 1-4

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Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Review Question

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 Statement shows amounts
and causes of changes in
retained earnings during the
period.
 Time period is the same as
that covered by the income
statement.
 Users can evaluate
dividend payment practices.
Retained Earnings
Statement Illustration 1-5

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Illustration 1-4
Retained Earnings
Statement
Net income is needed to
determine the ending balance in
retained earnings.
Illustration 1-5
Income Statement

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SO 4 Describe the content and purpose of each of the financial statements.
Retained Earnings
Statement
Illustration 1-5
Ending balance in retained
earnings is needed in preparing
the balance sheet.
Balance Sheet Illustration 1-7

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Balance Sheet
 Reports assets and
claims to assets at a
specific point in time.
 Assets = Liabilities +
Stockholders’ Equity.
 Lists assets first,
followed by liabilities and
stockholders’ equity.
Illustration 1-7

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Balance Sheet
SO 5 Explain the meaning of assets, liabilities, and stockholders’
equity, and state the basic accounting equation.
Illustration 1-7 Illustration 1-8
Statement of Cash Flows

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Answers:
 Where did cash
come from during
the period?
 How was cash used
during the period?
 What was the
change in the cash
balance during the
period?
Statement of Cash Flows
Illustration 1-8

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 Definition
 Future economic benefits
 Controlled by the entity
 As a result of past transactions or other past
events.
 Or Things of value to the business
Balance Sheet

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Non-current assets
• Factories
• Plant and machinery
• Office building
• Computer equipment
• Warehouse
• Office furniture
• Delivery vans
• Lorries
Current assets
• Cash
• Money owed by customers
• Raw materials
• Cash and bank accounts
• Finished goods held for sale
to customers
ASSETS

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State which of the following items could appear on the
balance sheet of business A as an asset.
$1,000 owing to business A by a customer who will
never be able to pay.
The purchase of a license from business B giving
business A the right to produce a product designed by
that business. Production of the new product under
license is expected to increase profits over the period in
which the license is held.
ASSETS

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The hiring by business A of a new marketing director
who is confidently expected to increase profits by at
least 30% over the next three years.
Purchase of a machine which will save business A
$10,000 per annum. It is currently being used by the
business but has been acquired on credit and is not
yet paid for.
ASSETS

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Definition
 Future sacrifices of economic benefits
 Presently obliged to make to other entities
 As a result of past transactions or past events
Or
What business owes to others (“outsider claims” or
“creditors’ claim”)
LIABILITIES

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State which of the following items could appear on the
balance sheet of business A as a liability. Explain your
reasoning in each case.
1. $2,000 owing to business B for the satisfactory
supply of goods during the past month.
2. The business has guaranteed a manager’s personal
loan of $100,000. The manager has maintained the
account in good order and $79,000 is currently owing.
3. Magazine subscriptions have been received in
advance by a publisher amounting to $27,400.
LIABILITIES

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 Definition
 The residual interest in the assets after deduction
of its liabilities.
 Or What the owner invests in the business (“insider
claims” or “owners’ claims)
OWNER’S EQUITY

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 Definition
 Inflows or other enhancements or savings in
outflows of future economic benefits
 Or Incomes of the business
REVENUE

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The following represent different form of business
enterprise:
Accountancy Practice
Finance Company
Bus company
Retailer
Newspaper
Can you identify the main source(s) of revenue for
each type of business enterprise?
REVENUE

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 Definition
 Consumptions or losses of future economic
benefits
 Or Costs to run business
 Expenses are the opposite of revenues (payments to
suppliers, employee wages, factory leases or
depreciation)
EXPENSE

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Assets = Liabilities + Owners’ equity
Economic Creditors’ claims Owners’ claim
resources to the assets to the assets
ACCOUNTING EQUATION

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Which of the following financial statements is prepared
as of a specific date?
a. Balance sheet.
b. Income statement.
c. Retained earnings statement.
d. Statement of cash flows.
Review Question

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BE 1_4; BE 1-6; BE 1-8, BE 1-9
P1-3A; P1-4A
P 1-3B; P1-4B
Homeworks

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