FINANCIAL ACCOUNTING

Chapter 1
Accounting Concepts Review
Accounting
A system of providing quantitative
financial information, about economic
entities intended to be useful in
making economic decisions.

Accounting
A system of providing quantitative
financial information, about economic
entities intended to be useful in
making economic decisions.

A distinct economic
unit whose
transactions are kept
separate from those of
its owners.

Accounting
Information

The
accounting
process
Decision
makers
Economic
activities
Actions
(decisions)
Accounting
links decision
makers with
economic
activities and
with the results of
their decisions.
The Nature of Accounting
A function of specific countrys economic,
political, and social systems.

Changes over time to adapt to changes in
environment.
Basic Functions of an Accounting
Summarize
into Financial
Statements
and
communicate
information to
decision
makers.
Classify
similar
transactions
Record
business
transactions.
1
Business transaction
is business events of
an Enterprise,
measured in money
Basic Functions of an Accounting
Summarize
into Financial
Statements
and
communicate
information to
decision
makers.
Classify
similar
transactions
Record
business
transactions.
2
use descriptive
names for accounts
to put things in
categories
Basic Functions of an Accounting
Summarize
into Financial
Statements
and
communicate
information to
decision
makers.
Classify
similar
transactions
Interpret and
record
business
transactions.
3
Basic Functions of an Accounting
Summarize
into Financial
Statements
and
communicate
information to
decision
makers.
Classify
similar
transactions
Interpret and
record
business
transactions.
Financial statements shows:

1. The financial position of a business
2. The results of its operations
3
Basic Functions of an Accounting
Summarize
into Financial
Statements
and
communicate
information to
decision
makers.
Classify
similar
transactions
Interpret and
record
business
transactions.
Four Primary Financial
Statements:
1. Balance Sheet 2. Income
Statement 3. Statement of
Stockholders Equity 4. Statement of
Cash Flows
3
The Preparation and Dissemination of
Accounting Information
The financial activities of a firm


Income Statement
Balance Sheet
Statement of Cash Flows
are recorded, classified and
summarized by accountants

in the form of financial statements

that are used by interested parties.
Accounting and Forms of Business
Enterprises
Sole Proprietorships


Partnerships


Corporations
Users of Accounting Information

Present and Prospective Investors and Creditors
Governmental Agencies like SECP and CBR
General Public like customers, employees etc


External Users
Information about economic
resources, claims to resources, and
changes in resources and claims.
Information useful in assessing
amount, timing and uncertainty of
future cash flows.
Information useful in making
investment and credit decisions.
(Specific)
(General)
Objectives
of
Financial
Reporting
The process of
supplying
financial
information to
decision makers
outside the
organization is
called Financial
Reporting
Financial
Statements
Financial Statements:
A Lens to View Business
Users of Accounting Information
The Firms management
Managerial Accounting
Provide information to
management in planning
and controlling the
business




Board of Directors
Chief Executive
Officer
Chief Financial
Officer
Vice Presidents
Business Unit
Managers
Plant Managers
Store Managers
Line Supervisors
Internal Users
Information about decision-making
authority, for decision-making support, and
for evaluating and rewarding decision-making
performance.
Information useful in assessing
both the past performance and future
directions of the enterprise and information
from external and internal sources.
Information useful to help the enterprise
achieve its goal, objectives and mission.
Objectives
of
Managerial
Reporting
Accountants
Public Accounting
Variety of accounting services to individuals and firms
Chartered Accountants of Pakistan----ICAP
Tasks:
Auditing and Accounting Services
Tax Preparation and Planning
Management Advisory Services
Private Accounting
Practice of accounting in a single firm
Cost Accounting, Budgetary Planning and Control, Internal
Auditing, Taxation, and Financial Reporting.
Governmental Accounting
Practice of accounting in Governmental Organizations

Accounting Concepts and Convections
Business Entity
Going Concern
Quantifiability
Relevance
Reliability
Comparability
Consistency
Materiality
Full Disclosure


Historical Cost
Time Period
Matching Principle
Revenue Recognition/ Realization Principle
Generally Accepted Convections
Balance Sheet
Presents Financial Position of a firm at a
particular point in time.
Assess financial strength of a firm
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500 $ Liabilities:
Notes receivable 10,000 Notes payable 41,000 $
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000 $
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000 $ Total 300,000 $
A Starting Point: Statement of
Financial Position

Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500 $ Liabilities:
Notes receivable 10,000 Notes payable 41,000 $
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000 $
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000 $ Total 300,000 $
Assets
Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500 $ Liabilities:
Notes receivable 10,000 Notes payable 41,000 $
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000 $
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000 $ Total 300,000 $
Liabilities
Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
Vagabond Travel Agency
Balance Sheet
December 31, 2002
Assets Liabilities & Owners' Equity
Cash 22,500 $ Liabilities:
Notes receivable 10,000 Notes payable 41,000 $
Accounts receivable 60,500 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Land 100,000 Total liabilities 80,000 $
Building 90,000 Owners' Equity:
Office equipment 15,000 Capital stock 150,000
Retained earnings 70,000
Total 300,000 $ Total 300,000 $
Owners Equity
Owners equity
represents the
owners claim
(residual interest)
to the assets of the
business.
Owners Equity
Changes in Owners Equity
Owners
Investments
Business
Earnings
Payments
to Owners
Business
Losses
Debit and Credit Rules
A = L + OE
ASSETS
Debit for
Increase
Credit for
Decrease
EQUITIES
Debit
for
Decrease
Credit for
Increase
LIABILITIES
Debit
for
Decrease
Credit for
Increase
Debits and credits affect accounts as follows:
The Accounting Equation
Historical Cost
Principle
Going-Concern
Assumption
Objectivity
Principle
Effect of
Inflation
These accounting
principles support
cost as the basis
for asset valuation.
Concepts and Convections related to
the Balance Sheet
Income Statement
Provides information regarding the firms
profitability for a period of time
Investments by and payments to the owners
are not included on the Income Statement.
Single Step Income Statement
JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2003
Sales revenue 750 $
Operating expenses:
Gasoline expense 50 $
Depr. exp.: tools & eq. 50
Depr. exp.: truck 250 350
Net income 400 $
Engro Corporation
Income Statement
For the Year December, 31 2013
Sales
Cost of Goods Sold
Gross Profit

Expenses
Selling, General and Administrative
Expenses
EBIT (Operating Expenses)
Interest Expense
EBT
Income Tax
Net Income
Multiple Step Income Statement
Revenue and Expenses
The price for goods
sold
and services rendered
during a given
accounting period.
Increases owners
equity.
The costs of goods and
services used up in the
process of earning
revenue.
Decreases owners
equity.
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.
Expenses of the period
are matched against the
revenue of the same
period
Net income is not an asset its an increase in
owners equity from profits of the business.
A = L + OE
Increase Decrease Increase
Either (or both) of these
effects occur as net income
is earned . . .
. . . but this is
what net income
really means.
Net Income
Accounting Periods
Time Period Principle
To provide users of financial
statements with timely
information, net income is
measured for relatively short
accounting periods of equal
length.
Debits and Credits for Revenue and
Expense
EQUITIES
Debit
for
Decrease
Credit
for
Increase
REVENUES
Debit
for
Decrease
Credit
for
Increase
EXPENSES
Credit
for
Decrease
Debit
for
Increase
Expenses
decrease
owners
equity.
Revenues
increase
owners
equity.
Cash Flow Statement/ SCFP
Describe changes in the financial resources of
an enterprise
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750 $
Cash paid for expenses (50)
Net cash provided by operating activities 700 $
Cash flows from investing activities:
Purchase of lawn mower (2,500) $
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month
Cash balance, May 1, 2003 4,125 $
Cash balance, May 31, 2003 4,125 $
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750 $
Cash paid for expenses (50)
Net cash provided by operating activities 700 $
Cash flows from investing activities:
Purchase of lawn mower (2,500) $
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125 $
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125 $
Operating activities include the cash
effects of revenue and expense
transactions.
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750 $
Cash paid for expenses (50)
Net cash provided by operating activities 700 $
Cash flows from investing activities:
Purchase of lawn mower (2,500) $
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125 $
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125 $
Investing activities include the cash
effects of purchasing and selling
assets.
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2003
Cash flows from operating activities:
Cash received from revenue transactions 750 $
Cash paid for expenses (50)
Net cash provided by operating activities 700 $
Cash flows from investing activities:
Purchase of lawn mower (2,500) $
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month 4,125 $
Cash balance, May 1, 2003 -
Cash balance, May 31, 2003 4,125 $
Financing activities include the cash
effects of transactions with the owners
and creditors.
Relationships Among Financial
Statements
Beginning of
period
End of
period
Balance
Sheet
Balance
Sheet
Time
Income Statement
Statement of Cash Flows
Retained Earnings Statement
Describe changes in the retained earnings
account of an enterprise for a certain period
of time.
JJ's Lawn Care Service
Statement of Retained Earnings
For the Month Ended May 31, 2003
Retained earnings, May 1, 2003 - $
Add: Net income for May 400
Subtotal 400 $
Less: Dividends 200
Retained earnings, May 31, 2003 200 $