Use of financial statements, and Introduction to Business Ethics Lecture 2. Companies prepare 4 financial statements from the summarized accounting data. Financial statements tell how the business is performing and where it stands.
Use of financial statements, and Introduction to Business Ethics Lecture 2. Companies prepare 4 financial statements from the summarized accounting data. Financial statements tell how the business is performing and where it stands.
Use of financial statements, and Introduction to Business Ethics Lecture 2. Companies prepare 4 financial statements from the summarized accounting data. Financial statements tell how the business is performing and where it stands.
2-1 Use of Financial Statements Statement of Financial Position - Classification Ethics in Business and Accounting Solving Business Ethics Dilemma Study Objectives Study Objectives
2-2 Use of Financial Statements Use of Financial Statements
2-3 Companies prepare 4 financial statements from the summarized accounting data: Financial Statements Financial Statements Tell how the business is performing and where it stands. 1. Heading: Name of the entity Title Date or period covered 2. Body Statement of Financial Position (or Balance Sheet) Income Statement (or Statement of Profit or Loss) Statement of Cash Flows
Retained Earnings Statement (Owners Eqit! Statement for "ro"rietorshi" # "artnershi")
2-5 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. Re$iew %estion Financial Statements Financial Statements Revenues Expenses - = Net Income
2-6 Income Statement reports the revenues and expenses for a specific period of time. Revenues > Expenses = == = Net income Revenues < Expenses = == = Net Loss Financial Statements Financial Statements Income Statement Re$enes& Service revenue 4,700 $ E'"enses& Salary expense 00 !ent expense "00 #dvertising expense $%0 &tilities expense $00 'otal expenses (,%0 (et income )*+,- . SOF/B0/E I(C1 Income Statement For the 2onth Ended Se"t1 3-* )-45
2-7 Financial Statements Financial Statements Net income is needed to determine the ending balance in equity. Re$enes& Service revenue 4,700 $ E'"enses& Salary expense 00 !ent expense "00 #dvertising expense $%0 &tilities expense $00 'otal expenses (,%0 (et income )*+,- . SOF/B0/E I(C1 Income Statement For the 2onth Ended Se"t1 3-* )-45 Retained earnings* 5 Se"t1 6 . #dd: Net income )*+,- )ess: *ividends (,+00 Retained earnings* 3- Se"t1 (,4%0 $ SOF/B0/E I(C1 Retained Earnings Statement For the 2onth Ended Se"t1 3-* )-45
2-8 Retained Earnings Statement indicates the reasons why retained earnings have q qq q or + ++ + during the period, i.e. for the month ended Sept 30, 20X1. The retained earnings of Softbyte have q qq q from $0 to $1,450 in September 20X1. Financial Statements Financial Statements Retained Earnings Statement Retained earnings* Se"t1 5 6 . #dd: Net income )*+,- )ess: *ividends (,+00 Retained earnings* Se"t1 3- 5*7,- . SOF/B0/E I(C1 Retained Earnings Statement For the 2onth Ended Se"t1 3-* )-45
2-9 The ending balance in the retained earnings is needed in preparing the Statement of Financial Position. Financial Statements Financial Statements ,-uipment 7,000 $ Supplies (,"00 #ccounts receivable (,400 .ash 8*-,- 'otal assets (/,0%0 $ Eqit! Share capital0ordinary (%,000 $ !etained earnings 5*7,- (",4%0 $ Lia9ilities #ccounts payable (,"00 'otal e-uity and liabilities (/,0%0 $ Statement of Financial Position SOF/B0/E I(C1 Se"tm9er 3-* )-45 Eqit! and Lia9ilities :ssets Retained earnings* Se"t1 5 6 . #dd: Net income )*+,- )ess: *ividends (,+00 Retained earnings* Se"t1 3- (,4%0 $ SOF/B0/E I(C1 Retained Earnings Statement For the 2onth Ended Se"t1 3-* )-45
2-10 Statement of Financial Position shows assets, liabilities & equity (the accounting equation) at a specific date, i.e. on 30 Sept., 20X1. Financial Statements Financial Statements Statement of Financial Position ,-uipment 7,000 $ Supplies (,"00 #ccounts receivable (,400 .ash 8*-,- 'otal assets (/,0%0 $ Eqit! Share capital0ordinary (%,000 $ !etained earnings 5*7,- (",4%0 $ Lia9ilities #ccounts payable (,"00 'otal e-uity and liabilities (/,0%0 $ Statement of Financial Position SOF/B0/E I(C1 Se"tm9er 3-* )-45 Eqit! and Lia9ilities :ssets
2-11 Companys Statement of Financial Position Assets Intangible assets Property, plant, and equipment Long-term investments Current assets Liabilities Long-term liabilities Current liabilities Equity Or Share capital Retained earnings Personal Statement of Financial Position Assets A property, Laptop, iPhone HSBC shares RW CDs, Ink boxes Cash Liabilities Mortgage with bank Government loan Credit card debt Net Worth Or
2-12 The Statement of Cash Flows is then prepared. Cash flow from O"erations .ash receipts 1rom customers +,+00 $ .ash paid 1or expenses 2(,%03 .ash provided by operations (,+%0 Cash flow from In$esting 4urchase o1 e-uipment 27,0003 Cash flow from Financing 5nvestment by owners (%,000 $ 4ayment o1 cash dividend 2(,+003 (+,700 (et increase in cash /,0%0 Cash 9alance* Se"t 5 0 Cash 9alance* Se"t 3- 8*-,- . Statement of Cash Flows SOF/B0/E I(C1 For the 2onth Ended Se"t1 3-* )-45 Financial Statements Financial Statements ,-uipment 7,000 $ Supplies (,"00 #ccounts receivable (,400 .ash 8*-,- 'otal assets (/,0%0 $ Eqit! Share capital0ordinary (%,000 $ !etained earnings (,4%0 (",4%0 $ Lia9ilities #ccounts payable (,"00 'otal e-uity and liabilities (/,0%0 $ Statement of Financial Position SOF/B0/E I(C1 Se"tm9er 3-* )-45 Eqit! and Lia9ilities :ssets
2-13 Statement of Cash Flows (Lecture 12) Cash receipts and payments of operating, investing and financing activities for a specific period of time. Financial Statements Financial Statements Cash flow from o"erating acti$ities .ash receipts 1rom customers +,+00 $ .ash payment 1or expenses 2(,%03 .ash provided by operating activities (,+%0 Cash flow from in$esting acti$ities 4urchase o1 e-uipment 27,0003 Cash flow from financing acti$ities Sale o1 ordinary shares (%,000 $ 4ayment o1 cash dividends 2(,+003 (+,700 (et increase in cash /,0%0 Cash 9alance* Se"t 5 0 Cash 9alance* Se"t 3- 8*-,- . Statement of Cash Flows SOF/B0/E I(C1 For the 2onth Ended Se"t 3-* )-45
2-14 Financial Statements Financial Statements Re$enes& Service revenue 4,700 $ E'"enses& Salary expense 00 !ent expense "00 #dvertising expense $%0 &tilities expense $00 'otal expenses (,%0 (et income )*+,- . SOF/B0/E I(C1 Income Statement For the 2onth Ended Se"t1 3-* )-45 Retained earnings* Se"t1 5 6 . #dd: Net income )*+,- )ess: *ividends (,+00 Retained earnings* Se"t1 3- (,4%0 $ SOF/B0/E I(C1 Retained Earnings Statement For the 2onth Ended Se"t1 3-* )-45 O OO O O OO O O OO O O OO O Cash flow from o"erating acti$ities .ash receipts 1rom customers +,+00 $ .ash payment 1or expenses 2(,%03 .ash provided by operating activities (,+%0 Cash flow from in$esting acti$ities 4urchase o1 e-uipment 27,0003 Cash flow from financing acti$ities Sale o1 ordinary shares (%,000 $ 4ayment o1 cash dividends 2(,+003 (+,700 (et increase in cash /,0%0 Cash 9alance* Se"t 5 0 Cash 9alance* Se"t 3- 8*-,- . Statement of Cash Flows SOF/B0/E I(C1 For the 2onth Ended Se"t 3-* )-45 ,-uipment 7,000 $ Supplies (,"00 #ccounts receivable (,400 .ash 8*-,- 'otal assets (/,0%0 $ Eqit! Share capital0ordinary (%,000 $ !etained earnings 5*7,- (",4%0 $ Lia9ilities #ccounts payable (,"00 'otal e-uity and liabilities (/,0%0 $ Statement of Financial Position SOF/B0/E I(C1 Se"tm9er 3-* )-45 Eqit! and Lia9ilities :ssets
2-15 Income Statement Retained Earnings Statement Statement of Cash Flows Snapshot Statement of Financial Position Flow of Events Flow of Events Income Statement Retained Earnings Statement Statement of Cash Flows The events never stop. But accountants prepare financial statements periodically, at the end of a month, a quarter or a year. Financial Statements Financial Statements Snapshot Statement of Financial Position Snapshot Statement of Financial Position
2-16 Financial Statement Info Calculation Statement of Financial Position (B;S) 6hat do we own 2#ssets37 8ow are we 1inancing what we own 2)iabilities or ,-uity37 #ssets 9 )iabilities : ,-uity Retained Earnings Statement 6hy did the balance in retained earnings change7 ;eginning !<, : Net 5ncome = *ividends 9 ,nding !<, Income Statement (I;S) 8ow did the company per1orm this period7 !evenue = ,xpenses 9 Net 5ncome Statement of Cash Flows 6here did the cash come 1rom7 6here did it go to7 ;eginning .ash : >perating : 5nvesting : ?inancing 9 ,nding .ash Financial Statements Financial Statements
2-17 Describe accounting rules applied. Present additional details about items on financial statements. Provide additional information about items not on the statements. Notes Notes
2-18 6hich o1 the 1ollowing 1inancial statements are prepared as o1 a speci1ic date7 a. Statement o1 1inancial position. b. 5ncome statement. c. Statement o1 retained earnings d. Statement o1 cash 1lows. Re$iew %estion Financial Statements Financial Statements
2-19 Statement of Financial Position Statement of Financial Position
2-20 Current Liabilities (Lecture 9) Long-term Liabilities Equity (Lecture 10) Current Assets (Lecture 6, 8, 9) Non-current Assets Intangible Assets Property, Plant & Equipment (Lecture 9) Long-term Investments EQUITY & LIABILITIES ASSETS Financial statements become more useful when the elements are classified into significant subgroups. A statement of financial position generally has the following standard classifications: Standard Statement of Financial Position Classification Standard Statement of Financial Position Classification
2-21 Long-lived resources that do not have physical substance Examples: patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time Intangible Assets Intangible Assets
2-22 iPhone Tangible resources of a relatively permanent nature that are used in the business and not intended for sale Examples : land, buildings and machinery. Property, Plant and Equipment Property, Plant and Equipment
2-23 Resources that can be realized in cash The conversion into cash is NOT expected within (1) one year, or (2) an operating cycle*, whichever is longer. Examples: investments in bonds of another company, investment in land held for resale Long-Term Investments Long-Term Investments
2-24 Cash and other resources that are expected to be converted or to be realized in cash or consumed in the business within (1) one year, or (2) an operating cycle*, whichever is longer. Listed in the reverse order in which they are expected to be converted into cash (liquidity). The most liquid assets, cash & cash equivalents (Lecture 7), are listed last in statement of financial position. Examples: cash, accounts receivables, notes receivables, inventory Current Assets Current Assets
2-25 The average time that a company takes from the purchase of inventory to the collection of cash from customers. Cash C r e d i t
S a l e s
Accounts Receivable Receive Cash Buy Inventory Merchandising Company Merchandise Inventory Cash C r e d i t
S a l e s
Accounts Receivable Receive Cash Perform Services Service Company Cash Sales do not have this part.
Operating Cycle Operating Cycle
Start with Purchase
2-26 The content of the owners equity section varies with the form of business organization. Capital Capital- Partner 2 Capital- Partner 1 Share Capital Retained Earnings Corporation Partnership Equity Equity Proprietorship
2-27 Obligations expected to be paid after one year Examples: long-term notes payable, bonds payable, mortgages payable, and lease liabilities. Long-term Liabilities Long-term Liabilities
2-28 Obligations that are reasonably expected to be paid within one year or the operating cycle, whichever is longer. Usually list notes payable first, followed by accounts payable. Examples: accounts payable, wages payable, interest payable, and current maturities of long-term debt (Lecture 9) Current Liabilities Current Liabilities
2-29 Introduction to Business Ethics Introduction to Business Ethics
2-30 A set of standards by which ones actions are deemed right or wrong, honest or dishonest, e.g. moral principles and norms. Every society must operate according to some ethical guidelines, without such guidelines the society would eventually collapse. In the absence of ethics, business information would have no credibility! Ethics: A Fundamental Business Concept Ethics: A Fundamental Business Concept
2-31 However, there is not always complete agreement as to what constitutes ethical conduct. There are grey areas and misconception (legal may not be ethical!), e.g. Misleading customers into thinking they are getting a bargain Using high pressure tactics to persuade naive customers to buy Ethics: A Fundamental Business Concept Ethics: A Fundamental Business Concept
2-32 In general, ethics of each individual in an organization can be summarized as follows. Explicitly documented in laws, staff handbooks, student handbook and corporate codes of conduct(e.g. dont steal, plagiarism etc) Unwritten but generally accepted (e.g. be punctual to work/lecture, do not use mobile phone in the class) Ethics: A Fundamental Business Concept Ethics: A Fundamental Business Concept
2-33 The HKICPA in Hong Kong and most large companies have codes of ethics that bind their members to a certain level of ethical conduct. However, no ethics code or set of written rules can apply to all situations in business world today! Ethics: A Fundamental Business Concept Ethics: A Fundamental Business Concept
2-34 A situation an individual faces in which a decision must be made about the appropriate behavior. A prescriptive approach, derived from philosophy, offers decision-making tools to help individuals make the best possible ethical decision in response to ethical dilemmas. This approach is focused on the results or consequences of the decision or action i.e. an ethical decision should maximize benefits and minimize harms to society Ethical Dilemma Ethical Dilemma
2-35 O Recognize the ethical situation and identify the ethical issues involved.
O Identify & analyze all the stakeholders (the principal person(s) or group(s) being affected) O Identify alternatives: weigh the impact of each alternative on stakeholders, consider all the consequences. O Decide the best action that maximize benefits and minimize harms! Solving An Ethical Dilemma Solving An Ethical Dilemma
2-36 This framework is used throughout the course to tackle ethical questions!! There are many ethical scandals in the real life. The Octopus Data-privacy issue is an example. The Enron scandal is one of the most influential real life ethical case. Newspaper cutting about Octopus case and a summary of the Enron scandal have been posted onto the Bb if you are interested. We will now use a simple mini case to illustrate how to tackle an ethical dilemma. Real Life Ethical Cases Real Life Ethical Cases
2-37
2A-38 Mini Case Solving an Ethical Dilemma Mini Case Solving an Ethical Dilemma After numerous campus interviews, Jeff Ho, a graduate at Great Northern College, received two office interview invitations from the Macau offices of two large firms. Both firms offered to cover his out-of-pocket expenses (travel, hotel, and meals). He scheduled the interviews for both firms on the same day, one in the morning and one in the afternoon. At the conclusion of each interview, he submitted to both firms his total out-of-pocket expenses, i.e. $282, for the trip to Macau. Jeff believes this approach is appropriate. If he had made two trips, his cost would have been $282 x 2. He is also certain that neither firm knew he had visited the other on that same trip. Within ten days Jeff received two checks in the mail, each in the amount of $282. Mini Case Mini Case
2A-39 Required (1): Identify the ethical issues to the situation described in the case. Is it proper that Jeff charged both firms for the total travel costs rather than split the actual amount of $282 between the two firms? Is collecting $564 as reimbursement for total costs of $282 ethical behavior? Did Jeff deceive both firms or neither firm?
How to Approach the Mini Case How to Approach the Mini Case
2A-40 Required (2): Identify all of the stakeholders (parties that would be affected by Jeffs decision) in the case:
Jeff Ho, interviewee Both Macau firms Great Northern College How to Approach the Mini Case How to Approach the Mini Case
2A-41 Required (3): Alternatives (Different ways to handle this situation). 1. Submitted to both firms for the total out-of- pocket expenses, i.e. $282, for the trip to Macau. 2. Split the actual amount of $282 between the two firms. 3. Submit all the claim to either one of the two firms. 4. Do not go to Macau at all. 5. Do not ask for reimbursement from any firm.
How to Approach the Mini Case How to Approach the Mini Case
2A-42 Best action: What would you do? Write down your decision in the space below You may choose any option from (2) to (5) but do not choose Option (1): Submitted to both firms for the total out-of- pocket expenses, i.e. $282, for the trip to Macau because you dont want to start your first job having deceived your employer before your first day of work. you dont want to be embarrassed if either firm found out that you double-charged. Your school would be embarrassed if your act was uncovered. you wont be proud to tell your professor that you collected your expenses twice. How to Approach the Mini Case How to Approach the Mini Case
2A-43 The prescriptive approach serves as a tool to solve ethical dilemma but people do not always recognize the ethical dimensions of the issue or situation they face. Even if they do, they do not always make the best decision! Even when they identify the best decision, they may not have the will to follow through! Why? According to the psychological approach: Psychological Approach Psychological Approach
2-44 Moral Awareness: recognize an ethical dilemma. Moral Judgment: Decide what is right. Ethical Behaviour: Do the right thing. Moral awareness is not automatic! This is why you need to study ethics! Once moral awareness is there, individual can engage in moral judgment processes that can contribute to ethical conduct. However, all three steps are influenced by two factors: 1. Characteristics of individuals, e.g. individual differences and moral development 2. Characteristics of organizations, e.g. group and organizational pressures and organizational culture You may make the world a better place someday! Psychological Approach Psychological Approach
2-45 Fundamental business concept Ethical Dilemma Psychological Approach Financial Statements Business Ethics Income statement Statement of retained earnings Statement of financial position Statement of cash flows Use of Financial Statements & Business Ethics Use of Financial Statements & Business Ethics Statement of Financial Position Intangible assets Property, Plant, and Equipment Long-term Investments Current assets Equity Long-term liabilities Current liabilities
2-46 Lecture 2 Use of Financial Statements and Introduction to Business Ethics Use of Financial Statements and Introduction to Business Ethics