This document outlines the chapters and key concepts covered in a financial and management accounting course. The course covers 6 chapters, including an introduction to accounting and business, the accounting cycle, financial statement analysis, and an introduction to managerial accounting. Chapter 1 discusses the nature of business, types of businesses and forms of business organizations. It also defines accounting, identifies accounting users and uses, and distinguishes between financial and managerial accounting. The document outlines the key concepts in the conceptual framework for financial reporting, including qualitative characteristics such as relevance and faithful representation.

1. Financial and
Management Accounting
Course Instructor : Sitina Akmel (Asst. prof.)

2. Chapter 1: Introduction to accounting and business
Chapter 2: The accounting cycle
Chapter 3: Financial statement analysis
Chapter 4: Introduction to managerial accounting
Chapter 5: Cost behavior
Chapter 6: Relevant cost for decision making

3. Chapter 1: Introduction
to Accounting & Business

4. Learning Objectives
After studying this chapter, you should be able to:
1. Explain business and distinguish its types.
2. Explain the concept of accounting.
3. Identify the users and uses of accounting.
4. Identify the different characteristic of Financial and Managerial
Accounting
5. Explain the about the IFRS setting Body.
6. Explain accounting standards and the measurement principles
(IFRS).

5. 1.1. The nature of a business
What is a business?
• A business is the activity of making one’s living or
making money by producing or buying and selling
products (goods and services).
• The objective of most businesses is to maximize
profits.
• But some organization operate with an objective
other than to maximize profit.
E.g. governmental units

6. Types of Business
• Manufacturing businesses: change basic inputs into
products that are sold to individual customers.
E.g. Coca-cola, Sony, Nike, General Motors

7. Cont…
• Merchandising businesses: also sell products to
customers. However, rather than making the products,
they purchase them from other businesses.
E.g. Wal-Mart, Amazon.com

8. Cont…
• Service businesses: provide services rather than products
to customers.
E.g. Air Lines, Hospitals, Bus

9. Forms of Business Organizations
•There are three
forms of business
organizations
 Proprietorship
 Partnership
 Corporation

10. Cont…
Proprietorship is owned by
one individual and usually
managed by the owner
Advantage
ease in organizing
low cost of organizing
Disadvantage
limited source of financial
resources
unlimited liability
Abebe’s

11. Cont…
Partnership is owned by two
or more individuals.
Advantage
More financial resources
than a proprietorship.
Additional management
skills.
Disadvantage
Unlimited liability.
Abebe & Marta’s

12. Cont…
Corporation is organized
under state or federal
statutes as a separate legal
entity.
Advantage
The ability to obtain large
amounts of resources by
issuing stocks.
Limited liability
Disadvantage
Double taxation.
A & M, Inc.

13. Accounting consists of three basic activities - it
 Identifies,
 Records, and
 Communicates
the economic events of an organization to interested users.
What is Accounting?

14. Three Activities
The accounting process includes
the bookkeeping function.
What is Accounting?

15. Cost Accounting Horngreen, Datar, Foster

16. Management
Human
Resources
Taxing
Authorities
Labor
Unions
Regulatory
Agencies
Marketing
Finance
Investors
Creditors
Customers
Internal
Users
External
Users
Who Uses Accounting Data

17. 1.4. The profession of Accounting
• Accountants engage in either:
• Private Accounting: Accountants employed by a
business firm or NFP organization.
• They are frequently called management accountants or may be
referred to as industrial or cost accountants.
• Public accounting: Accountants and their staff who
provide services on a fee basis.
• A major portion of public accounting practice is involved with
Auditing.

18.  It’s primarily
concerned with the
recording & reporting
of economic data and
activities for a
business to external
parties.
 Helps to know how
well the business is
running.
Financial Accounting Managerial Accounting
Different types of Accounting
 It uses both financial
accounting and
estimated data to aid
management in
running day-to-day
operations and in
planning future
operations.
 Helps to know how to
run business

19. Distinction between financial and management accounting
Different types of Accounting stream

20. Financial Statements and Financial Reporting
Essential characteristics of accounting are:
 the identification, measurement, and
communication of financial information about
 economic entities to
 interested parties.

21. Objective: Provide financial information about the reporting
entity that is useful to
► present and potential equity investors,
► lenders, and
► other creditors
in making decisions about providing resources to the entity.
Objective of Financial Reporting

22. Equity Investors and Creditors
► Investors and creditors are the primary user group.
General-Purpose Financial Statements
► Provide financial reporting information to a wide variety
of users.
► Provide the most useful information possible at the
least cost.
Objective of Financial Reporting

23. Decision-Usefulness
► Investors are interested in assessing
1. the company’s ability to generate net cash inflows and
2. management’s ability to protect and enhance the
capital providers’ investments.
Entity Perspective
► Companies viewed as separate and distinct from their
owners (shareholders).
Objective of Financial Reporting

24. Main international standard-setting organization:
► International Accounting Standards Board (IASB)
● Issues International Financial Reporting Standards
(IFRS).
● Standards used on most foreign exchanges.
● IFRS used in over 149 countries.
● Two organizations that have a role in international
standard-setting are the International Organization of
Securities Commissions (IOSCO) and the IASB.
Standard-Setting Organizations

25. Need for a Conceptual Framework
► Rule-making should build on and relate to an established
body of concepts.
► Enables IASB to issue more useful and consistent
pronouncements over time.
Conceptual Framework establishes the concepts that
underlie financial reporting.
Conceptual Framework

26. Development of a Conceptual Framework
Presently, the Conceptual Framework is comprises of the following.
• Chapter 1: The Objective of General Purpose Financial Reporting
• Chapter 2: The Reporting Entity (not yet issued)
• Chapter 3: Qualitative Characteristics of Useful Financial Information
• Chapter 4: The Framework, comprised of the following:
1. Underlying assumption—the going concern assumption;
2. The elements of financial statements;
3. Recognition of the elements of financial statements;
4. Measurement of the elements of financial statements; and
5. Concepts of capital and capital maintenance.
Conceptual Framework

27. Three levels:
Overview of the Conceptual Framework
 First Level = Objectives of Financial Reporting
 Second Level = Qualitative Characteristics and
Elements of Financial Statements
 Third Level = Recognition, Measurement, and
Disclosure Concepts.
Conceptual Framework

28. ASSUMPTIONS
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity
5. Accrual
PRINCIPLES
1. Measurement
2. Revenue recognition
3. Expense recognition
4. Full disclosure
CONSTRAINTS
1. Cost
OBJECTIVE
Provide information
about the reporting
entity that is useful
to present and potential
equity investors,
lenders, and other
creditors in their
capacity as capital
providers.
ELEMENTS
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses
First level
The "why"—purpose
of accounting
Second level
Bridge between
levels 1 and 3
Third level
The "how"—
implementation
QUALITATIVE
CHARACTERISTICS
1. Fundamental
qualities
2. Enhancing
qualities

29. To provide financial information about the reporting entity that
is useful to present and potential equity investors, lenders, and
other creditors in making decisions about providing resources to
the entity.
 Provided for issuing general-purpose financial statements.
 Assumption is that users need reasonable knowledge of
business and financial accounting matters to understand the
information.
Basic Objective

30. IASB identified the Qualitative Characteristics of
accounting information that distinguish better (more useful)
information from inferior (less useful) information for
decision-making purposes.
Qualitative Characteristics of Accounting
Information
Fundamental Concepts

31. Hierarchy of Accounting
Qualities
Qualitative Characteristics

32. LO 2
Relevance

33. Fundamental Quality—Relevance
To be relevant, accounting information must be capable of making
a difference in a decision.
Qualitative Characteristics

34. Financial information has predictive value if it has value as an input to
predictive processes used by investors to form their own expectations
about the future.
Fundamental Quality—Relevance
Qualitative Characteristics

35. Relevant information also helps users confirm or correct prior
expectations.
Fundamental Quality—Relevance
Qualitative Characteristics

36. Information is material if omitting it or misstating it could influence
decisions that users make on the basis of the reported financial
information.
Fundamental Quality—Relevance
Qualitative Characteristics

37. LO 2
Faithful Representation

38. Fundamental Quality—Faithful Representation
Faithful representation means that the numbers and descriptions
match what really existed or happened.
Qualitative Characteristics

39. Completeness means that all the information that is necessary for
faithful representation is provided.
Fundamental Quality—Faithful Representation
Qualitative Characteristics

40. Neutrality means that a company cannot select information to favor
one set of interested parties over another.
Fundamental Quality—Faithful Representation
Qualitative Characteristics

41. An information item that is free from error will be a more accurate
(faithful) representation of a financial item.
Fundamental Quality—Faithful Representation
Qualitative Characteristics

42. Enhancing Qualities
Information that is measured and reported in a similar manner for
different companies is considered comparable.
Qualitative Characteristics

43. Enhancing Qualities
Verifiability occurs when independent measurers, using the same
methods, obtain similar results.
Qualitative Characteristics

44. Enhancing Qualities
Timeliness means having information available to decision-makers
before it loses its capacity to influence decisions.
Qualitative Characteristics

45. Enhancing Qualities
Understandability is the quality of information that lets reasonably
informed users see its significance.
Qualitative Characteristics

46. LO 2
Basic Elements

47. A resource controlled by the entity as a
result of past events and from which
future economic benefits are expected to
flow to the entity.
Elements of Financial Statements
Asset
Liability
Equity
Income
Expenses
Basic Elements

48. A present obligation of the entity arising
from past events, the settlement of which
is expected to result in an outflow from the
entity of resources embodying economic
benefits.
Elements of Financial Statements
Asset
Liability
Equity
Income
Expenses
Basic Elements

49. The residual interest in the assets of the
entity after deducting all its liabilities.
Elements of Financial Statements
Asset
Liability
Equity
Income
Expenses
Basic Elements

50. Increases in economic benefits during the
accounting period in the form of inflows or
enhancements of assets or decreases of
liabilities that result in increases in equity,
other than those relating to contributions
from equity participants.
Elements of Financial Statements
Asset
Liability
Equity
Income
Expenses
Basic Elements

51. Decreases in economic benefits during the
accounting period in the form of outflows
or depletions of assets or incurrences of
liabilities that result in decreases in equity,
other than those relating to distributions to
equity participants.
Elements of Financial Statements
Asset
Liability
Equity
Income
Expenses
Basic Elements

52. These concepts explain how companies should recognize,
measure, and report financial elements and events.
ASSUMPTIONS
1. Economic entity
2. Going concern
3. Monetary unit
4. Periodicity
5. Accrual
PRINCIPLES
1. Measurement
2. Revenue recognition
3. Expense recognition
4. Full disclosure
CONSTRAINTS
1. Cost
Recognition, Measurement, and Disclosure Concepts
Recognition, Measurement, and
Disclosure Concepts

53. Economic Entity – company keeps its activity separate from
its owners and other business unit.
Going Concern - company to last long enough to fulfill
objectives and commitments.
Monetary Unit - money is the common denominator.
Periodicity - company can divide its economic activities into
time periods.
Accrual Basis of Accounting – transactions are recorded
in the periods in which the events occur.
Assumptions

54. Measurement Principles
 Historical Cost is generally thought to be a faithful
representation of the amount paid for a given item.
 Fair value is defined as “the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.”
IASB has given companies the option to use fair value as the
basis for measurement of financial assets and financial liabilities.
Basic Principles of Accounting

55. Assets Liabilities Equity
= +
Provides the underlying framework for recording and
summarizing economic events.
Applies to all economic entities regardless of size.
The Basic Accounting Equation

56. Assets
Provides the underlying framework for recording and
summarizing economic events.
 Resources a business owns.
 Provide future services or benefits.
 Cash, Inventory, Equipment, etc.
Assets
Liabilities Equity
= +
The Basic Accounting Equation

57. Provides the underlying framework for recording and
summarizing economic events.
Liabilities
Assets Liabilities
= + Equity
The Basic Accounting Equation
 Claims against assets (debts and obligations).
 Creditors - party to whom money is owed.
 Accounts payable, Notes payable, etc.

58. Provides the underlying framework for recording and
summarizing economic events.
 Ownership claim on total assets.
 Referred to as residual equity.
 Share capital-ordinary and retained earnings.
Equity
Assets Liabilities Equity
= +
The Basic Accounting Equation

59. Revenues result from business activities entered into for the purpose
of earning income.
Generally results from selling merchandise, performing services,
renting property, and lending money.
The Basic Accounting Equation

60. Expenses are the cost of assets consumed or services used in the
process of earning revenue.
Common expenses are salaries expense, rent expense, interest
expense, property tax expense, etc.
The Basic Accounting Equation

61. Dividends are the distribution of cash or other assets to shareholders.
 Reduce retained earnings
 Not an expense
The Basic Accounting Equation

62. Transactions are a business’s economic events recorded
by accountants.
 May be external or internal.
 Not all activities represent transactions.
 Each transaction has a dual effect on the accounting
equation.
Using the Accounting Equation

63. Illustration: Are the following events recorded in the accounting
records?
Event
Purchase
computer.
Criterion Is the financial position (assets, liabilities, or equity)
of the company changed?
Discuss
product
design with
customer.
Pay rent.
Record/
Don’t Record
Using the Accounting Equation

64. Using the Accounting Equation
Transaction Analysis

65. Transaction Analysis
Transaction (1). Investment by Shareholders. Alex and Bely decides to
open a computer programming service which they names Softbyte. On
September 1, 2019, they invest €15,000 cash in exchange for €15,000 of
ordinary shares.

66. Transaction Analysis
Transaction (2). Purchase of Equipment for Cash. Softbyte purchases
computer equipment for €7,000 cash.

67. Transaction Analysis
Transaction (3). Purchase of Supplies on Credit. Softbyte purchases
for €1,600 from Acme Supply Company computer paper and other supplies
expected to last several months. The purchase is on account.

68. Transaction Analysis
Transaction (4). Services Provided for Cash. Softbyte receives €1,200
cash from customers for programming services it has provided.

69. Transaction Analysis
Transaction (5). Purchase of Advertising on Credit. Softbyte receives a
bill for €250 from the Daily News for advertising but postpones payment
until a later date.

70. Transaction Analysis
Transaction (6). Services Provided for Cash and Credit. Softbyte
provides €3,500 of programming services for customers. The company
receives cash of €1,500 from customers, and it bills the balance of €2,000
on account.

71. Transaction Analysis
Transaction (7). Payment of Expenses. Softbyte pays the following
expenses in cash for September: store rent €600, salaries and wages of
employees €900, and utilities €200.

72. Transaction Analysis
Transaction (8). Payment of Accounts Payable. Softbyte pays its €250
Daily News bill in cash.

73. Transaction Analysis
Transaction (9). Receipt of Cash on Account. Softbyte receives €600 in
cash from customers who had been billed for services [in Transaction (6)].

74. Transaction Analysis
Transaction (10). Dividends. The corporation pays a dividend of €1,300
in cash.

75. Companies prepare four financial statements :
Statement
of Financial
Position
Income
Statement
Statement
of Cash
Flows
Retained
Earnings
Statement
Financial Statements

76. Net income is needed to determine the
ending balance in retained earnings.
Financial Statements

77. The ending balance in retained earnings is
needed in preparing the balance sheet
Financial Statements

78. The balance sheet and income statement are
needed to prepare statement of cash flows.
Financial Statements

79. Transaction Analysis
Assume that on November 1, 2010 Ato Aymen and his collegues
begin a business that will be known as Net Solutions. The first phase
of their business plan is to operate Net-Solutions as a service
business that provides assistance to individuals and small businesses
in developing Web pages and in configuring and installing
application software. They expect this initial phase of the business to
last one to two years. During this period, they will gather
information on the software and hardware needs of customers.
During the second phase of the business plan, they plan to expand
Net Solutions into a personalized retailer of software and hardware
for individuals and small businesses.
Each transaction during Net Solutions’ first month of operations is
described in the following paragraphs. Show the effect of each
transaction on the accounting equation:

80. Cont…
Transaction a Aymen deposits $25,000 in a bank
account in the name of Net Solutions.
Transaction b Net Solutions exchanged $20,000 cash
for land.
Transaction c During the month, Net Solutions buying
supplies for $1,350 and agreeing to pay the supplier
in the near future.
Transaction d During its first month of operations,
Net Solutions provided services to customers,
earning fees of $7,500 and receiving the amount in
cash. This amount is called revenue.

81. Cont…
Transaction e Spent cash or used up other assets are
called expenses. The expenses paid during the month
were as follows: wages, $2,125; rent, $800; utilities,
$450; and miscellaneous, $275.
Transaction f Net Solutions pays $950 to creditors
during the month.
Transaction g At the end of the month, the cost of the
supplies on hand (not yet used) is $550.
Transaction h At the end of the month, paid dividend
of $2,000 for share holders.

82. End of Chapter One