201Lec01.PPTX Introduction to Financial Accounting BUS ADM-201 1
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201Lec01.PPTX
Introduction to Financial Accounting BUS ADM-201
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INTRODUCTIONTEXTBOOK: Financial Accounting – Tools for Business Decision Making
Seventh Edition Sixth Edition Fifth Edition
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DEFINITION OF ACCOUNTING
Accounting is a process used to
record economic (business)
activities of an organization in
order to generate reports for use
by decision makers.
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- System to accomplish a specific task
- Method provides uniform results
- Goal is to assemble, aggregate, organize and analyze huge volumes of data
Related disciplines: -Information Technology (IT)
- Industrial Engineering - Corporate/securities Law- Actuarial Science
Process
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Process
- Objective. Many rules.
• US rules are created by the FinancialAccounting Standards Board (FASB).
• US rules are called GAAP.(Generally Accepted Accounting Principles)
• Companies whose stock is publically traded also must follow laws enforced by a US agencynamed the Securities andExchangeCommission (SEC).
• Note: International Financial Reporting Standards (IFRS) and GAAP are close but not exactly the same (yet).
1- Financing Activities Borrowing creates liabilities
(debts) owed to creditors. Notes or Bonds payable(Another liability created in operating
businesses is accounts payable.)
Issuing or Selling stockcreates stockholders’ equity Dividends are distributions of
profit to owners of stock.
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Business Activities 3 types
2 - Investing Activities
Note: There are other types of assets needed in operating the business (see next slide)
Cash
Inventory
Supplies not used up
Accounts receivable
Prepaid Insurance
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Business Activities 3 types
Obtaining resources or assets needed to run the business Buildings
Equipment, etc
Day to day running the business
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3 - Operating Activities
Revenues are the increases in assets resulting from the sale of a product or service
Expenses are the cost of assets consumed or services used in generating revenue.
Advertising
Cost of goods (inventory) sold to customers
Paying employees, utilities, etc
Other collect cash on accounts receivable, buy and sell inventory, buy expenses with cash or on accounts payable
Business Activities 3 types
Proprietorship Partnership Corporation
Owned by two or more persons.
Same legal liability to all partners as proprietorship. (joint and several)
Separate legal entity owned by stockholders
Ownership divided in shares of stock.
Stockholder’s risk limited to their investment in shares of stock
Income tax paid by company
Owned/controlled by one person. (sole proprietorship)
Easy to start
Considered a legal extension of owner
Owner personally liable for debts of the business
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Forms of Business Organization
Balance Sheet
Income Statement
Statement of Cash Flows
Retained Earnings
Statement
FOUR Reports required by GAAP (called the Financial Statements)
* Detailed footnotes also required.
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SEC requires audited 10 K annual report & 10 Q quarterly reports be made available to the public.
Includes the above plus management comments.
Reports operating success or failure for a time period.
Net income (profit) if revenues > expenses.
Net loss if expenses > revenues.
Prepare this statement first.
Illustration 1-4
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First report required by GAAP
Income Statement (or Profit & Loss)
Retained Earnings StatementIllustration 1-5
Second report required by GAAP
From income statement
Shows what a company did with net profit earned in prior periods (reinvest in business or pay
out to owners)
Also see Stockholders’ equity on Balance Sheet discussed next
Prepare this statement second
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Balance SheetIllustration 1-7
Third report required by GAAP
Specific date – one point in time!
Reports assets owned and claims against assets by:
Creditors (liabilities)
Owners (stock
investment + retained
earnings = stockholders’
equity)
Ending Retained earnings
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More on the Balance SheetFormula of Balance sheet:
Assets = Liabilities + Stockholders’ Equity
Known as the “Accounting Equation”
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An equivalent common view is “Net Worth”
Net worth = Assets – Liabilities
Net worth + Liabilities = Assets
Assets = Liabilities + Net Worth
Statement of Cash FlowsIllustration 1-8
Fourth report required by GAAP
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Provides information where a company gets cash and spends cash
Summarizes for a time period like an income statement.
3 groups: Cash from operating, investing, and financingactivities.
Common Questions
Users and Uses of Financial Information
Management
Individuals (you and I)
Marketing
Finance
Internal UsersIRS
Bankers
SEC
Investors
Creditors
Customers External Users
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Critical Factor: Users must have TRUST in information and need trustworthy help analyzing it
INTERNAL Users need: EXTERNAL Users require:
Help to evaluate past decisions. Learn from successes and failures. Make better decisions in the future.
Analyze and evaluate current options. Assist in choosing best option.
Discover new courses of action. Assurance that important options aren’t missed.
Help to plan ahead. Set and achieve goals. Anticipate potential problems in the future.
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Accurate unbiased data about success or failure of past operations.
Provide reasonable basis for believing claims about the future.
Disclosure of current financial condition. Is it healthy or in distress?
Defense of positions taken. Prove it!
Reports as required by law.
Accounts receivable 1,800
Accounts payable 2,000
Rent expense 9,000
Notes payable 5,000
Common stock 10,000
Retained earnings-Beginning ????
Equipment 16,000
Insurance expense 1,000
Service revenue 17,000
Supplies 4,000
Supplies expense 200
Cash 1,400
Dividends 600
CSU begins on Jan. 1, 2014
For year ended Dec. 31, 2014,prepare
Income statement
Retained earnings statement
Balance sheet
Do It Problem: CSU Corporation In text, page 18
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Step 1: Prepare the Income Statement
Accounts receivable 1,800
Accounts payable 2,000
Rent expense 9,000
Notes payable 5,000
Common stock 10,000
Retained earnings-Beginning
Equipment 16,000
Insurance expense 1,000
Service revenue 17,000
Supplies 4,000
Supplies expense 200
Cash 1,400
Dividends 60019
Do It
CSU Corporation
Income Statement
For the Year Ended December 31, 2014Revenues
Service revenue $17,000Expenses
Rent expense $9,000Insurance expense 1,000Supplies expense 200
Total expenses 10,200Net Income $ 6,800
________
________
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Do It
________________
Step 2: Prepare the Retained Earnings Statement
Need net income from previous statement.
Accounts receivable 1,800
Accounts payable 2,000
Rent expense 9,000
Notes payable 5,000
Common stock 10,000
Retained earnings-Beginning 0
Equipment 16,000
Insurance expense 1,000
Service revenue 17,000
Supplies 4,000
Supplies expense 200
Cash 1,400
Dividends 600
Do It
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CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2014
Retained earnings, January 1 $ 0Add: Net income 6,800
6,800Less: Dividends 600Retained earnings, Dec. 31 $ 6,200
Do It
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________
________________
________
Step 3: Prepare the Balance Sheet
Need ENDINGRetained earnings from previous statement!
Accounts receivable 1,800
Accounts payable 2,000
Rent expense 9,000
Notes payable 5,000
Common stock 10,000
Retained earnings-Beginning 0
Equipment 16,000
Insurance expense 1,000
Service revenue 17,000
Supplies 4,000
Supplies expense 200
Cash 1,400
Dividends 600
Do It
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CSU Corporation
Balance Sheet
December 31, 2014
AssetsCash $ 1,400Accounts receivable 1,800Supplies 4,000Equipment 16,000Total Assets $23,200
Liabilities and Stockholders’ EquityLiabilities
Notes payable $5,000Accounts payable 2,000
Total liabilities $7,000Stockholders’ equity
Common stock $10,000Retained earnings 6,200
Total stockholders’ equity 16,200
Total liabilities and stockholders’ equity $23,200
Do It
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