2022 10 14 FIN ACC 1.pptx

N
Based on: Harrison, Horngren & Thomas: Financial Accounting, newest ed.
Financial Accounting
Prof. Dr. Marlies Brunner
The Financial Statements
Walt T. Harrison, Charles
T. Horngren, William
Thomas, Wendy M.
Tietz
Financial Accounting,
Global Edition
2022 10 14 FIN ACC 1.pptx
4
ACCOUNTING - THE BASIS OF DECISION MAKING
• Accounting is the “language of business”
• Accounting is the information system that
– Measures business activities
– Processes that information into reports
– Communicates the results to decision makers
5
THE ACCOUNTING SYSTEM:
THE FLOW OF INFORMATION
1. People make decisions
2. Business transactions occur
3. Businesses prepare reports to show the
results of their operations
6
ACCOUNTING VS. BOOKKEEPING
• Bookkeeping is the procedural element of
accounting that processes the accounting
data
7
• Individuals
• Businesses
• Investors and Creditors
• Government Regulatory Agencies
• Taxing Authorities
• Nonprofit Organizations
DECISION MAKERS WHO USE ACCOUNTING
INFORMATION
8
• Financial accounting provides information
to managers and people outside the firm
– Financial accounting information must meet
certain standards of relevance and reliability
• Management accounting generates
confidential information for internal
decision makers, e.g.,
– Top executives
– Department heads
FINANCIAL ACCOUNTING AND MANAGEMENT
ACCOUNTING
9
ETHICAL CONSIDERATIONS
• Ethical standards in accounting are designed
to produce accurate information for decision
making
• The result of ethical behavior by accountants
is information that people can rely on for
decision making
10
TYPES OF BUSINESS ORGANIZATIONS
• Proprietorships
– Have a single owner who is generally the manager
– Are business entities, but not legal entities
– Have debt for which the proprietor is personally
liable
11
TYPES OF BUSINESS ORGANIZATIONS
• Partnerships
– Join two or more persons together as co-owners
– Are business entities, but not legal entities
– Have debt for which each partner is personally
liable
12
TYPES OF BUSINESS ORGANIZATIONS
• Corporations
– Are owned by stockholders or shareholders
– Are business entities and legal entities
– Are liable for all debts
• Stockholders have no personal obligation for
corporation debts
International Financial Reporting
Standards (IFRS and IAS rules)
14
ACCOUNTING PRINCIPLES AND
CONCEPTS
• The entity concept
–States that an organization is an economic
entity that keeps its affairs separate from
those of the owner(s)
• The reliability (objective) principle
– States that accounting records and statements are
based on the most reliable data available and
documented by objective evidence
15
ACCOUNTING PRINCIPLES AND
CONCEPTS
• Understandability
• Relevance
• Materiality (if issues influence the economic
performance of the business in the future)
• Faithful representation
• Neutrality
• Prudence
• …
16
ACCOUNTING PRINCIPLES AND
CONCEPTS
• …
• Timeliness
• Balance between benefit and cost
• FAIR PRESENTATION
• (out of the IASB Framework for the preparation
and presentation of financial statements)
17
ACCOUNTING PRINCIPLES AND
CONCEPTS
• The cost principle versus fair value principle
– States that acquired assets and services should be
recorded at their actual (historical) cost and should
maintain that historical cost for as long as they are
owned (HGB – German Commercial Code) …. or
– Recorded at fair value (IFRS) if revaluation model is
chosen
• The going-concern concept
– States that the entity will remain in operation for the
foreseeable future
18
ACCOUNTING PRINCIPLES AND
CONCEPTS
• The stable-monetary-unit concept
– States that each dollar has the same purchasing
power as any other dollar at any other time
19
ACCOUNTING PRINCIPLES AND
CONCEPTS
• Accrual basis: transactions are recorded when
they occur and not when they are paid
20
THE ACCOUNTING EQUATION
• The accounting equation presents the
resources of the business and the claims to
those resources
Economic Resources = Claims to Economic Resources
Assets = Liabilities + Owners’ Equity
or
21
• Assets are the economic resources of a
business that are expected to be of benefit in
the future
• Claims to assets come from
– Liabilities
• Economic obligations - debts payable to outsiders,
called creditors
– Owners’ equity (capital)
• Assets held by the owners of the business
THE ACCOUNTING EQUATION
22
• For a corporation, stockholders’ (owners’)
equity consists of two main categories
– Paid-in capital
– Retained earnings
THE ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
Assets = Liabilities + Paid-in Capital + Retained Earnings
or
23
• Paid-in (contributed) capital is
– The amount invested in the corporation by its
owners
– Comprised basically of common stock
THE ACCOUNTING EQUATION
24
• Retained earnings
– Is the amount earned by income-producing
activities and kept for use in the business
– Is affected by
• Revenues - increases in retained earnings from
delivering goods or services
• Expenses - decreases in retained earnings that result
from operations
THE ACCOUNTING EQUATION
25
• Net income (net earnings)
– Total revenues exceed total expenses
• Net loss
– Total expenses exceed total revenues
• Dividends
– Distributions to stockholders (usually cash)
generated by net income
THE ACCOUNTING EQUATION
26
Beginning Balance
of Retained
Earnings
+
- - =
Net Income (Loss)
for the Period
Dividends for the
Period
Ending Balance of
Retained
Earnings
Revenues for the
Period
Expenses for the
Period
-
=
COMPONENTS OF RETAINED EARNINGS
Start of the
Period
End of the
Period
27
• The owners’ equity of proprietorships and
partnerships
– Makes no distinction between paid-in capital and
retained earnings
– Accounts for the equity of each owner under the
single heading of Capital
THE ACCOUNTING EQUATION
28
INFORMATION REPORTED ON THE
FINANCIAL STATEMENTS
Business Decision Making – 1/4
Question How well did the company perform in the
past?
Answer Revenues
- Expenses
=Net Profit/Net Loss
Financial Statement • Income Statement
• Statement of Earnings
• Comprehensive Statement of Income
• Statement of Profit and Loss
Business Decision Making – 2/4
Question Why did the company‘s equity change over
the year?
Answer Equity at the beginning of the period
+ Net Income for the period
- Dividends
- Other changes to equity
(capital contributions)
= Equity at the end of the period
Financial Statement • Statement of Changes in Equity
Business Decision Making – 3/4
Question What is the company‘s financial position at
the end of the period?
Answer Assets = Liabilities + Equity
Economic Resources = Claims to Economic
Resources
Financial Statement • Balance Sheet
• Statement of the Financial Position
Business Decision Making – 4/4
Question How much cash did the company generate
and spend during the period?
Answer Operating Cash Flow
+/- Investing Cash Flow
+/- Financing Cash Flow
= Change in Cash Flow during the period
Financial Statement • Cash Flow Statement
IAS 1.10 calls for …
A complete set of financial statements includes
(a)A statement of financial position as at the end of the period
(b)A statement of profit and loss and other comprehensive income
for the period
(c)A statement of changes in equity
(d)A statement of cash flows
(e)Notes, comprising significant accounting policies and other
explanatory information
34
INCOME STATEMENT
• The income statement (statement of
earnings) reports the company’s revenues,
expenses, and net income or net loss for the
period
INCOME STATEMENT
Air & Sea Travel Inc.,
Income Statement for the Month Ended April 30, 2022
Revenues
- Service
Revenues 8,500
Expenses
- Salary expense
- Rent expense
- Utitilies
1,200
1,100
400
Total Expenses 2,700
Net Income 5,800
36
• Revenues are
– Increases in retained earnings from delivering
goods or services to customers or clients
• Expenses are
– Decreases in retained earnings that result from
operations
INCOME STATEMENT
37
• Expenses include
– Cost of goods sold (cost of sales)
• The cost of the goods that a company sold to its
customers
– Operating expenses
• The costs of operating the business
INCOME STATEMENT
38
• Operating expenses
– Advertising
• The cost to promote the company’s products
– Depreciation
• The expense of using company-owned buildings,
equipment, and furniture
– Other operating expenses
• The costs of salaries, utilities, rent, and supplies
– Interest expense
• The cost of borrowed money
INCOME STATEMENT
39
STATEMENT OF
Changes in Equity
• The Statement of Changes in Equity reports
– that portion of net income the company has
retained, or kept for use in the business
– Dividends paid to stockholders
– Any other changes in the capital accounts
STATEMENT OF CHANGES IN EQUITY
Air & Sea Travel Inc.,
Statement of Changes in Equity for the Month Ended April 30, 2022
Beginning Equity,
April 1st 2022
50,000
Add:
Net Income for the Period
5,800
Less: Dividends (2,100)
Retained Earnings 3,700
Ending Equity, April 30, 2022 53,700
41
BALANCE SHEET
• The balance sheet (statement of financial
position) reports the company’s assets,
liabilities, and owners’ equity
BALANCE SHEET
Air & Sea Travel Inc.,
Balance Sheet as of April 30, 2022
Assets Liabilities
Cash
Accounts Receivable
Office Supplies
Land
33,300
2,000
500
18,000
Accounts Payable 100
Stockholders‘ Equity
Common Stock
Retained Earnings
50,000
3,700
Total Assets 53,800 Total Liabilities and
Stockholders‘ Equity
53,800
43
ASSETS
• Current assets are
– Those assets which the company expects to
convert to cash, sell, or consume during the next
12 months or within the business's normal
operating cycle if longer than a year
• Current assets include
– Cash
– Accounts receivable
– Merchandise inventory
– Prepaid expenses
44
ASSETS
• Long-term assets are
– Those assets which the company expects to
hold longer then the next 12 months or the
business’s normal operating cycle if longer
than one year
• Long-term assets include
– Property
– Equipment
45
ASSETS
• Intangible assets are
– Those with no physical form
• Trademarks
• Patents
• Other assets are
– Those with small values which do not fall within
any other standard asset category
46
LIABILITIES
• Current liabilities are
– Debts payable within one year or within the
business’s normal operating cycle if longer than a
year
• Current liabilities include
– Notes payable, short term
– Accounts payable
– Accrued expenses payable
– Income taxes payable
47
LIABILITIES
• Long-term liabilities are
– Debts not payable within one year or within the
business’s normal operating cycle if longer than a
year
• Long-term liabilities include
– Notes payable, long term
– Bonds payable
48
OWNERS’ EQUITY
• Owners’ equity
– Represents the shareholders’ ownership of the
assets of the business
• Owners’ equity of a corporation consists of
– Common stock
– Retained earnings
49
STATEMENT OF CASH FLOWS
• The Statement of cash flows reports the
company’s cash inflows and outflows from
operating, investing, and financing activities
for the period
STATEMENT OF CASH FLOWS
Air & Sea Travel Inc.,
Statement of Cash Flows for the Month Ended April 30, 2022
Cash flows from operating activities:
Collections from customers
Payments to suppliers and
employees
Net Cash inflow from operating activities
6,500
(-3,100)
3,400
Cash flows from investing activities
Acquisition of land
Sale of land
Net cash outflow from investing activities
(40,000)
22,000
(18,000)
Cash flows from financing activities
Issuance of stock
Payment of dividends
Net cash inflow from financing activities
50,000
(2,100)
47,900
Net Increase in Cash 33,300
Cash Balance, April 1, 2022 0
Cash Balance, April 30, 2022 33,300
51
• Operating activities
– Companies operate by buying goods and services,
which are sold to customers
• Investing Activities
– Companies invest in long-term assets that are used
to run the business
• Financing Activities
– Companies finance themselves by issuing stock
and borrowing money
STATEMENT OF CASH FLOWS
52
RELATIONSHIPS AMONG THE FINANCIAL
STATEMENTS
53
RELATIONSHIPS AMONG THE FINANCIAL
STATEMENTS
Take Income from Income Statement
Include figure for Income into Statement of Equity
Take final figure for Equity and insert into Balance Sheet
Relate the amount of Cash from Balance Sheet
to the Cash Flow Statement
54
END OF CHAPTER 1
1 sur 54

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2022 10 14 FIN ACC 1.pptx

  • 1. Based on: Harrison, Horngren & Thomas: Financial Accounting, newest ed. Financial Accounting Prof. Dr. Marlies Brunner The Financial Statements
  • 2. Walt T. Harrison, Charles T. Horngren, William Thomas, Wendy M. Tietz Financial Accounting, Global Edition
  • 4. 4 ACCOUNTING - THE BASIS OF DECISION MAKING • Accounting is the “language of business” • Accounting is the information system that – Measures business activities – Processes that information into reports – Communicates the results to decision makers
  • 5. 5 THE ACCOUNTING SYSTEM: THE FLOW OF INFORMATION 1. People make decisions 2. Business transactions occur 3. Businesses prepare reports to show the results of their operations
  • 6. 6 ACCOUNTING VS. BOOKKEEPING • Bookkeeping is the procedural element of accounting that processes the accounting data
  • 7. 7 • Individuals • Businesses • Investors and Creditors • Government Regulatory Agencies • Taxing Authorities • Nonprofit Organizations DECISION MAKERS WHO USE ACCOUNTING INFORMATION
  • 8. 8 • Financial accounting provides information to managers and people outside the firm – Financial accounting information must meet certain standards of relevance and reliability • Management accounting generates confidential information for internal decision makers, e.g., – Top executives – Department heads FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING
  • 9. 9 ETHICAL CONSIDERATIONS • Ethical standards in accounting are designed to produce accurate information for decision making • The result of ethical behavior by accountants is information that people can rely on for decision making
  • 10. 10 TYPES OF BUSINESS ORGANIZATIONS • Proprietorships – Have a single owner who is generally the manager – Are business entities, but not legal entities – Have debt for which the proprietor is personally liable
  • 11. 11 TYPES OF BUSINESS ORGANIZATIONS • Partnerships – Join two or more persons together as co-owners – Are business entities, but not legal entities – Have debt for which each partner is personally liable
  • 12. 12 TYPES OF BUSINESS ORGANIZATIONS • Corporations – Are owned by stockholders or shareholders – Are business entities and legal entities – Are liable for all debts • Stockholders have no personal obligation for corporation debts
  • 14. 14 ACCOUNTING PRINCIPLES AND CONCEPTS • The entity concept –States that an organization is an economic entity that keeps its affairs separate from those of the owner(s) • The reliability (objective) principle – States that accounting records and statements are based on the most reliable data available and documented by objective evidence
  • 15. 15 ACCOUNTING PRINCIPLES AND CONCEPTS • Understandability • Relevance • Materiality (if issues influence the economic performance of the business in the future) • Faithful representation • Neutrality • Prudence • …
  • 16. 16 ACCOUNTING PRINCIPLES AND CONCEPTS • … • Timeliness • Balance between benefit and cost • FAIR PRESENTATION • (out of the IASB Framework for the preparation and presentation of financial statements)
  • 17. 17 ACCOUNTING PRINCIPLES AND CONCEPTS • The cost principle versus fair value principle – States that acquired assets and services should be recorded at their actual (historical) cost and should maintain that historical cost for as long as they are owned (HGB – German Commercial Code) …. or – Recorded at fair value (IFRS) if revaluation model is chosen • The going-concern concept – States that the entity will remain in operation for the foreseeable future
  • 18. 18 ACCOUNTING PRINCIPLES AND CONCEPTS • The stable-monetary-unit concept – States that each dollar has the same purchasing power as any other dollar at any other time
  • 19. 19 ACCOUNTING PRINCIPLES AND CONCEPTS • Accrual basis: transactions are recorded when they occur and not when they are paid
  • 20. 20 THE ACCOUNTING EQUATION • The accounting equation presents the resources of the business and the claims to those resources Economic Resources = Claims to Economic Resources Assets = Liabilities + Owners’ Equity or
  • 21. 21 • Assets are the economic resources of a business that are expected to be of benefit in the future • Claims to assets come from – Liabilities • Economic obligations - debts payable to outsiders, called creditors – Owners’ equity (capital) • Assets held by the owners of the business THE ACCOUNTING EQUATION
  • 22. 22 • For a corporation, stockholders’ (owners’) equity consists of two main categories – Paid-in capital – Retained earnings THE ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity Assets = Liabilities + Paid-in Capital + Retained Earnings or
  • 23. 23 • Paid-in (contributed) capital is – The amount invested in the corporation by its owners – Comprised basically of common stock THE ACCOUNTING EQUATION
  • 24. 24 • Retained earnings – Is the amount earned by income-producing activities and kept for use in the business – Is affected by • Revenues - increases in retained earnings from delivering goods or services • Expenses - decreases in retained earnings that result from operations THE ACCOUNTING EQUATION
  • 25. 25 • Net income (net earnings) – Total revenues exceed total expenses • Net loss – Total expenses exceed total revenues • Dividends – Distributions to stockholders (usually cash) generated by net income THE ACCOUNTING EQUATION
  • 26. 26 Beginning Balance of Retained Earnings + - - = Net Income (Loss) for the Period Dividends for the Period Ending Balance of Retained Earnings Revenues for the Period Expenses for the Period - = COMPONENTS OF RETAINED EARNINGS Start of the Period End of the Period
  • 27. 27 • The owners’ equity of proprietorships and partnerships – Makes no distinction between paid-in capital and retained earnings – Accounts for the equity of each owner under the single heading of Capital THE ACCOUNTING EQUATION
  • 28. 28 INFORMATION REPORTED ON THE FINANCIAL STATEMENTS
  • 29. Business Decision Making – 1/4 Question How well did the company perform in the past? Answer Revenues - Expenses =Net Profit/Net Loss Financial Statement • Income Statement • Statement of Earnings • Comprehensive Statement of Income • Statement of Profit and Loss
  • 30. Business Decision Making – 2/4 Question Why did the company‘s equity change over the year? Answer Equity at the beginning of the period + Net Income for the period - Dividends - Other changes to equity (capital contributions) = Equity at the end of the period Financial Statement • Statement of Changes in Equity
  • 31. Business Decision Making – 3/4 Question What is the company‘s financial position at the end of the period? Answer Assets = Liabilities + Equity Economic Resources = Claims to Economic Resources Financial Statement • Balance Sheet • Statement of the Financial Position
  • 32. Business Decision Making – 4/4 Question How much cash did the company generate and spend during the period? Answer Operating Cash Flow +/- Investing Cash Flow +/- Financing Cash Flow = Change in Cash Flow during the period Financial Statement • Cash Flow Statement
  • 33. IAS 1.10 calls for … A complete set of financial statements includes (a)A statement of financial position as at the end of the period (b)A statement of profit and loss and other comprehensive income for the period (c)A statement of changes in equity (d)A statement of cash flows (e)Notes, comprising significant accounting policies and other explanatory information
  • 34. 34 INCOME STATEMENT • The income statement (statement of earnings) reports the company’s revenues, expenses, and net income or net loss for the period
  • 35. INCOME STATEMENT Air & Sea Travel Inc., Income Statement for the Month Ended April 30, 2022 Revenues - Service Revenues 8,500 Expenses - Salary expense - Rent expense - Utitilies 1,200 1,100 400 Total Expenses 2,700 Net Income 5,800
  • 36. 36 • Revenues are – Increases in retained earnings from delivering goods or services to customers or clients • Expenses are – Decreases in retained earnings that result from operations INCOME STATEMENT
  • 37. 37 • Expenses include – Cost of goods sold (cost of sales) • The cost of the goods that a company sold to its customers – Operating expenses • The costs of operating the business INCOME STATEMENT
  • 38. 38 • Operating expenses – Advertising • The cost to promote the company’s products – Depreciation • The expense of using company-owned buildings, equipment, and furniture – Other operating expenses • The costs of salaries, utilities, rent, and supplies – Interest expense • The cost of borrowed money INCOME STATEMENT
  • 39. 39 STATEMENT OF Changes in Equity • The Statement of Changes in Equity reports – that portion of net income the company has retained, or kept for use in the business – Dividends paid to stockholders – Any other changes in the capital accounts
  • 40. STATEMENT OF CHANGES IN EQUITY Air & Sea Travel Inc., Statement of Changes in Equity for the Month Ended April 30, 2022 Beginning Equity, April 1st 2022 50,000 Add: Net Income for the Period 5,800 Less: Dividends (2,100) Retained Earnings 3,700 Ending Equity, April 30, 2022 53,700
  • 41. 41 BALANCE SHEET • The balance sheet (statement of financial position) reports the company’s assets, liabilities, and owners’ equity
  • 42. BALANCE SHEET Air & Sea Travel Inc., Balance Sheet as of April 30, 2022 Assets Liabilities Cash Accounts Receivable Office Supplies Land 33,300 2,000 500 18,000 Accounts Payable 100 Stockholders‘ Equity Common Stock Retained Earnings 50,000 3,700 Total Assets 53,800 Total Liabilities and Stockholders‘ Equity 53,800
  • 43. 43 ASSETS • Current assets are – Those assets which the company expects to convert to cash, sell, or consume during the next 12 months or within the business's normal operating cycle if longer than a year • Current assets include – Cash – Accounts receivable – Merchandise inventory – Prepaid expenses
  • 44. 44 ASSETS • Long-term assets are – Those assets which the company expects to hold longer then the next 12 months or the business’s normal operating cycle if longer than one year • Long-term assets include – Property – Equipment
  • 45. 45 ASSETS • Intangible assets are – Those with no physical form • Trademarks • Patents • Other assets are – Those with small values which do not fall within any other standard asset category
  • 46. 46 LIABILITIES • Current liabilities are – Debts payable within one year or within the business’s normal operating cycle if longer than a year • Current liabilities include – Notes payable, short term – Accounts payable – Accrued expenses payable – Income taxes payable
  • 47. 47 LIABILITIES • Long-term liabilities are – Debts not payable within one year or within the business’s normal operating cycle if longer than a year • Long-term liabilities include – Notes payable, long term – Bonds payable
  • 48. 48 OWNERS’ EQUITY • Owners’ equity – Represents the shareholders’ ownership of the assets of the business • Owners’ equity of a corporation consists of – Common stock – Retained earnings
  • 49. 49 STATEMENT OF CASH FLOWS • The Statement of cash flows reports the company’s cash inflows and outflows from operating, investing, and financing activities for the period
  • 50. STATEMENT OF CASH FLOWS Air & Sea Travel Inc., Statement of Cash Flows for the Month Ended April 30, 2022 Cash flows from operating activities: Collections from customers Payments to suppliers and employees Net Cash inflow from operating activities 6,500 (-3,100) 3,400 Cash flows from investing activities Acquisition of land Sale of land Net cash outflow from investing activities (40,000) 22,000 (18,000) Cash flows from financing activities Issuance of stock Payment of dividends Net cash inflow from financing activities 50,000 (2,100) 47,900 Net Increase in Cash 33,300 Cash Balance, April 1, 2022 0 Cash Balance, April 30, 2022 33,300
  • 51. 51 • Operating activities – Companies operate by buying goods and services, which are sold to customers • Investing Activities – Companies invest in long-term assets that are used to run the business • Financing Activities – Companies finance themselves by issuing stock and borrowing money STATEMENT OF CASH FLOWS
  • 52. 52 RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS
  • 53. 53 RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS Take Income from Income Statement Include figure for Income into Statement of Equity Take final figure for Equity and insert into Balance Sheet Relate the amount of Cash from Balance Sheet to the Cash Flow Statement