You are on page 1of 6

Use of Financial Statements,

and Introduction to Business


Ethics

Lecture 2



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")

2-4
Assets = Liabilities + Equity
Retained Earning
Cash +
Accounts
Receivable + Supplies + Equipment =
A/C
Payable +
Share
Capital + Rev. - Exp. - Div.
(1) +15,000 = +15,000
(2) -7,000 +7,000 =
(3) +1,600 = +1,600
(4) +1,200 = +1,200
(5) = +250 - 250
(6) +1,500 +2,000 = +3,500
(7) -1,700 = - 600
= - 900
= - 200
(8) -250 = -250
(9) +600 -600 =
(10) -1,300 = - 1,300
Bal $8,050 + $1,400 + $1,600 + $7,000 = $1,600 + 15,000 + $4,700 - $1,950 - $1,300
Income Statement data
Statement of Cash Flows data
Retained Earnings Statement data
Statement of Financial Position data

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

2-47

You might also like