Professional Documents
Culture Documents
Accounting
“links” decision
makers with Accounting
Economic
economic
activities information
activities ⎯ and
with the results of
their decisions.
Actions
(decisions) Decision
makers
The Concept of the Business
Entity
A business
entity is
Vagabond separate from
Travel the personal
Agency
affairs of its
owner.
Basic Functions of an
Accounting System
● Interpret
and record
business
transactions.
Payment
Car
Basic Functions of an
Accounting System
● Interpret ❷ Classify
and record similar
business transactions
transactions. into useful ● Summarize
reports. and
communicate
information to
decision
makers.
Objectives of External Financial
Reporting
The primary external users of financial information are
investors and creditors.
Internal Users of Accounting
Information
● Board of Directors
● Chief Executive Officer
● Chief Financial Officer
● Vice Presidents
● Business Unit Managers
● Plant Managers
● Store Managers
● Line Supervisors
The Use of Financial
Statements by Outsiders
Two concerns:
Creditors Solvency
Profitability
Investors
Readers of Financial Analysis
Investment
Evaluate the company’s performance
Analysts
2007
X
Introduction to Financial
Statements
Balance Sheet or
Statement of Financial Position
Income Statement
The primary
Statement of Cash Flows
financial
statements.
The Annual Report
Statement of Financial Position or Balance
sheet
• Provides a snapshot of a firm’s financial
position at one point in time
• Assets, liabilities and equity at one point in
time
Income statement
• Summarizes a firm’s revenues and
expenses over a given period of time
The Annual Report
Statement of Retained Earnings
• Shows how much of the firm’s earnings were
retained, rather than paid out as dividends
• Changes in contributed and earned capital
Statement of Cash Flows
• Reports the impact of a firm’s activities on cash
flows over a given period of time
• Net cash inflows (outflows) form operating,
investing and financing activities
Introduction to Financial
Statements
Balance Sheet or Describes
Statement of Financial Position
where the
Income Statement enterprise
stands at a
Statement of Cash Flows
specific date.
Balance Sheet or Statement of
Financial Position
Current Assets Current Liabilities
Cash Accounts payable
Accounts Receivable Short-term debt
Inventories Other current liabilities
Other current assets
Total current assets Total current liabilities
19
• Assets
• Current
• - Easily converted into cash near future
• - cash, bank, inventory, account receivable, etc.
• Non-current assets
• - Use for long-term
• -not intended for resale
• - e.g. land, building, premises, furniture and fixtures,
motor vehicles, etc.
Non-current Assets
Long-lived assets acquired for use in
business operations.
Major Categories of Non-current
Assets
The Nature of Liabilities
Defined as debts or obligations
arising from past transactions or
events.
Current Noncurrent
Liabilities Liabilities
I.O.U.
• Liability
• Current
• -Repay within one year
• - e.g. bank overdraft, account payable, short-term bank loans, etc.
• Non-current
• -Repay more than one year
• - e.g. mortgage loans, long-term bank loans, bonds, etc.
Distinction Between
Debt and Equity
The acquisition of assets is financed
from two sources:
DEBT EQUITY
Each unit of
ownership is
called a share of
stock.
A stock
certificate serves
as proof that a
stockholder has
purchased
shares.
Rights of Stockholders
Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.
An Income Statement
❑ Sales
❑ Minus Cost of Goods Sold
❑ = Gross Profit
❑ Minus Operating Expenses
❑ Selling expenses
❑ General and Administrative expenses
❑ Depreciation and Amortization Expense
❑ = Operating income (EBIT)
❑ Minus Interest Expense
❑ = Earnings before taxes (EBT)
❑ Minus Income taxes
❑ = Net income (EAT)
30
Income Statement
Revenues
Less: Cost of goods sold
Equals Gross
profit
Less: Operating expenses
Equals: net
Operating income
Less: Interest expense
Equals: earnings
Before taxes
Less: Income taxes
Equals:
NET INCOME
31
Introduction to Financial
Statements
Revenues Expenses
result in result in
positive negative
cash flow. cash flow.
Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
Assets
Cost
Principle
Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
Owners’ Equity
Owners’ equity
represents the
owner’s claim to
the assets of the
business.
Owners’ Equity
Changes in Owners’
Equity
• Owners’ • Payments
Investments to Owners
• Business • Business
Earnings Losses
The Accounting Equation
Assets = Liabilities + Owners’ Equity
These transactions
impact the
Statement of Cash
Flows.
These transactions
impact the Income
Statement.
Investments by and payments to the owners
are not included on the Income Statement.
Revenue and Expenses
The price for
goods sold
and services Increases
rendered during a owner’s equity.
given accounting
period.
The costs of
goods and Decreases
services used up owner’s equity.
in the process of
earning revenue.
The Realization Principle:
When To Record Revenue
Realization Principle
Revenue should be
recognized at the
time goods are sold
and services are
rendered.
The Matching Principle: When
To Record Expenses
Matching Principle
Expenses should be
recorded in the
period in which they
are used up.
Purpose of the Statement of
Cash Flows
Provides information about the cash receipts
and cash payments of a business entity
during the accounting period.
Helps investors with questions about
the company’s:
● Ability to generate positive cash flows.
● Ability to meet its obligations and to
pay dividends.
● Need for external financing.
● Investing and financing transactions
for the period.
Classification of Cash Flows
Cash Cash
Equivalents Currency
Beginning End of
of period Time period
Balance Balance
Sheet Sheet
Income Statement
Statement of Cash Flows
Forms of Business
Organizations
Sole
Partnership Corporation
Proprietorship
Reporting Ownership Equity in
the Balance Sheet
Sole
Proprietorship
Partnership
Corporation
The Need for Adequate
Disclosure
Balance Sheet Notes to the
Income Statement
financial
statements often
Statement of Cash Flows
provide facts
necessary for the
proper
interpretation of
the statements.
Drafting Notes to the Financial
Statements
Examples of Items Disclosed
●Lawsuits pending
Notes to the
Financial Statements ●Scheduled plant closings
●Governmental investigations
●Significant events occurring
after the balance sheet date
●Specific customers that
account for a large portion of
revenue
●Unusual transactions and
related party transactions
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Balance Sheet
Cost of Assets:
plant Plant and
assets equipment
as the services
Income Statement
are received
Revenues:
Expenses:
Depreciation
Depreciation
Book Value
– Cost – Accumulated
Depreciation
Accumulated Depreciation
– Contra-asset
– Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
– Physical deterioration
– Obsolescence
Straight-Line Depreciation