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Accounting lec 1-fa 1
- 1. Lecture-1 INTRODUCTION TO FINANCIAL ACCOUNTING By: Shahid Akbar shahidakbar32@yahoo.com
- 2. All you got to do is Listen, use Common Sense and Grab the Concepts Step by Step
- 3. IdentifiesIdentifies RecordsRecords CommunicatesCommunicatesRelevantRelevant ReliableReliable ComparableComparable AccountingAccounting is a system that information that is to help users make better decisions. to help users make better decisions.
- 5. Accounting Financial Accounting Management Accounting External Users Internal Users Reporting to Reporting to For reporting financial position and financial performance to external users. Balance Sheet, Income Statement, etc. For planning, control and decision making by Internal Users. Monthly sales report, Production analysis report , Internal memos etc. Shareholders External auditor Suppliers Lenders Labors unions Governments & agencies Board of Directors Managers External Users Internal Users
- 6. Information Needs and Costs Benefits Costs Information Requirements Internal requirements by Management for better decision making, planning and control External requirements by Regulatory authorities, International frameworks, Government agencies etc. Administrative costs Fees for Expert opinions Additional burden on employees Surveys and Researches etc Type of Costs incurred > Benefits drawn from information should be greater than the cost incurred to produce that information.
- 7. Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information Relevant Information Affects the decision of its users. Affects the decision of its users. Reliable InformationReliable Information Is trusted by users. Is trusted by users. Comparable Information Comparable Information Is helpful in contrasting organizations. Is helpful in contrasting organizations.
- 8. Accounting Principles Matching Principle Company records the expenses it incurred to generate the revenue reported. Revenue Recognization Principle Cost Principle Full Disclosure Principle Company reports the details behind financial statements that would impact users decisions. Accounting information is based on actual cost •Cost is measured on a cash or equal to cash basis 1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received.
- 9. Accounting Assumptions Monetary Unit assumption Express transactions and events in monetary, or money, units. Business Entity assumption A business is accounted for separately from other business entities, including its owner. Time period Assumption Life of a company can be divided into time periods . Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold.
- 10. Types of businesses Advantages: - Owner’s total control - Least regulated - Minimal accounting and reporting requirements Disadvantages: - Limited Resources - Unlimited Liability - Management problems - Owner dies, Business Advantages: - Larger resources - Risk sharing - Experience pool - Minimal accounting and reporting requirements Disadvantages: - Unlimited liability - Limited resources - Conflicts & disputes - Existence uncertainty - Non-transferability Advantages: - Can raise capital - Limited risk - Ownership transferability - Perpetual existence - Board experience Disadvantages: - Registrations - Administrative and regulatory costs - Excessive accounting and reporting requirements - Organizational issues - Complex structure - Double Taxation Sole Proprietorship Partnership Corporation
- 11. Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock).
- 12. Characteristics Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no no yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes **
- 13. Board of Directors Share holder (s) Managers Business appoint hire manage & run audit Financial Auditors produce External Users distributed to Financial Reports
- 14. 1. Balance Sheet 2. Income Statement 3. Statement of Cash Flows 4. Statement of Stockholders’ Equity A Balance Sheet is a quantitative summary of the financial position of a business at any point in time. Income statement shows the performance of a company, how did the company made net income out of revenues. Cash flow statement is concerned with the cash inflows and outflows of the company This statement shows the changes in owners’ interest and application of retained earning between two accounting periods
- 15. Statement of Cash flows The movement of money into or out of a business, is called JeansCo Employees Creditors Purchase of assets Investments Dividends Customers Loans Share issue Cash Inflow Cash Inflow Cash Outflo w Cash Outflo w Overview: What is Cash flow
- 16. Statement of Cash flows 11 Overview: Types of Cash flows Operational Cash flows: received or spent as a result of company’s business activities Selling clothing Purchasing merchandize Paying salaries
- 17. Statement of Cash flows 22 Overview: Types of Cash flows Investment Cash flows: spent or received through company’s investing activities Loan repayments Fixed assets Investing in Stocks & bonds
- 18. Statement of Cash flows 33 Overview: Types of Cash flows Financing Cash flows: cash received through debt or paid out as debt repayments Issuance of stocks Repaying loans Bank loan
- 19. Statement of Cash flows Managers affect cash by three types of decisions: 1. Operating decisions 2. Financing decisions 3. Investing decisions Typical Activities Affecting Cash
- 20. Statement of Cash flows Typical Activities Affecting Cash Operating activities are transactions that affect the purchase, processing, and selling of a company’s products and services Making sales Collecting accounts receivable Purchasing inventory Paying accounts payable The first major section of the statement of cash flows is labeled cash flows from operating activities
- 21. Statement of Cash flows Typical Activities Affecting Cash Financing decisions are concerned with how to obtain or repay cash Financing activities are a company’s transactions that obtain resources from debt and equity transactions Issuance of additional stock Borrowing money from the bank Repaying previous loans The financing section on the statement is labeled cash flows from financing activities
- 22. Statement of Cash flows Typical Activities Affecting Cash Investing decisions include the choices to acquire or dispose of long-term productive assets or long-term investments Investing activities are transactions that acquire or dispose of assets that are expected to provide services for more than one year - Purchasing or disposing of equipment The investing section on the statement is labeled cash flows from investing activities
- 23. Statement of Cash flows Typical Activities Affecting Cash Cash Inflows Cash Outflows Operating Activities: Collections from customers Cash payments to suppliers Interest and dividends collected Cash payments to employees Other operating receipts Interest and taxes paid Other operating cash payments Investing Activities: Sale of property, plant, and equipment Purchase of property, plant, and equipment Sale of securities that are not Purchase of securities that are not cash equivalents cash equivalents Receipt of loan repayments Making loans Financing: Borrowing cash from creditors Repayment of amounts borrowed Issuing equity securities Repurchase of equity shares (including the Issuing debt securities purchase of treasury stock) Payment of dividends
- 24. Balance Sheet A Balance Sheet is a quantitative summary of the financial position of a business at any point in time. It summarizes the assets, liabilities and the shareholders’ equity of a company. Assets Liabilities Owner’s Equity+= Assets Liabilities An asset is 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 e.g, land & building, plant & machinery, fixtures, delivery vans etc. A present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from enterprise of resources embodying economic benefits e.g., loan, bonds, creditors/account payables etc. Owners’ Equity This is the amount by which a company is financed through common and preferred shares. This is residual claim of common stockholders in assets after all the liabilities are paid
- 25. LandLand EquipmentEquipment BuildingsBuildings CashCash VehiclesVehicles Store Supplies Store Supplies Notes Receivable Notes Receivable Accounts Receivable Accounts Receivable Resources owned or controlled by a company Resources owned or controlled by a company
- 26. Taxes Payable Taxes Payable Wages Payable Wages Payable Notes PayableNotes PayableAccounts Payable Accounts Payable Creditors’ claims on assets Creditors’ claims on assets
- 28. LiabilitiesLiabilities EquityEquityAssetsAssets = + RevenuesRevenues ExpensesExpenses Owner CapitalOwner Capital Owner Withdrawals Owner Withdrawals _ + _
- 29. Let’s start a business! J. Scott, forms a consulting business, named Fast forward and accessories J.Scott owns and manage the business mjb@hotinarea.com
- 30. The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) J. Scott, the owner, contributed $20,000 cash to start the business.
- 31. J. Scott, the owner, contributed $20,000 cash to start the business.
- 32. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Purchased supplies paying $1,000 cash.
- 33. Purchased supplies paying $1,000 cash.
- 34. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Purchased equipment for $15,000 cash.
- 35. Purchased equipment for $15,000 cash.
- 36. Transaction Analysis The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Purchased Supplies of $200 and Equipment of $1,000 on account.
- 37. Purchased Supplies of $200 and Equipment of $1,000 on account.
- 38. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Borrowed $4,000 from 1st American Bank.
- 39. Borrowed $4,000 from 1st American Bank.
- 40. The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals.
- 41. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Rendered consulting services receiving $3,000 cash.
- 42. Rendered consulting services receiving $3,000 cash.
- 43. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.
- 44. Remember that expenses decrease equity. Paid salaries of $800 to employees.
- 45. Transaction Analysis The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) J. Scott withdrew $500 from the business for personal use. Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.
- 46. Remember that withdrawals decrease equity. J. Scott withdrew $500 from the business for personal use.
- 47. Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1. Income Statement 2. Statement of Owner’s Equity 3. Balance Sheet 4. Statement of Cash Flows
- 48. Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.
- 49. The net income of $2,200 increases Scott’s capital by $2,200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.
- 50. The Balance Sheet describes a company’s financial position at a point in time. The Balance Sheet describes a company’s financial position at a point in time.
- 51. The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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