Financial Accounting

Belverd E. Needles, Jr. Marian Powers

----------Multimedia Slides by: Dr. Howard A. anter, !PA
DePaul "niversity

Milton M. Pressley
"niversity o# New $rleans

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LEARNING OBJECTIVES
%. De#ine accounting, identi#y business &oals and a'tivities, and des'ribe t(e role o# a''ountin& in ma)in& in#ormed de'isions. *. +denti#y t(e many users o# a''ountin& in#ormation in so'iety. ,. E-.lain t(e im.ortan'e o# business transa'tions, money measure, and se.arate entity to a''ountin& measurement. /. Des'ribe t(e 'or.orate #orm o# business or&ani0ation.

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LEARNING OBJECTIVES
(continued)
1. De#ine financial position, state t(e a''ountin& e2uation, and s(ow (ow t(ey are a##e'ted by sim.le transa'tions. 3. +denti#y t(e #our #inan'ial statements. 4. State t(e relations(i. o# &enerally a''e.ted a''ountin& .rin'i.les 56AAP7 to #inan'ial statements and t(e inde.endent !PA8s re.ort, and identi#y t(e or&ani0ations t(at in#luen'e 6AAP. 9. De#ine ethics and des'ribe t(e et(i'al res.onsibilities o# a''ountants.
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Accounting as an Info !ation S"ste!

$BJE!:+;E %
De#ine accounting, identi#y business &oals and a'tivities, and des'ribe t(e role o# a''ountin& in ma)in& in#ormed de'isions.

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N Accounting

.rovides a vital servi'e by su..lyin& t(e in#ormation de'ision ma)ers need to ma)e reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities.

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N A''ountin&

is a lin) between business a'tivities and de'ision ma)ers.

 A''ountin&

measures business a'tivities by re'ordin& data about t(em #or #uture use.  :(e data are stored until needed and t(en .ro'essed to be'ome use#ul in#ormation.

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Business Goals
%. Pro#itability. A business must ta)e in enou&( money to .ay all t(e 'osts o# doin& business, wit( enou&( le#t over as .ro#it #or t(e owners to want to stay in business. *. <i2uidity. A business must (ave enou&( 'as( available to .ay debts w(en t(ey are due.
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Business Goals and Acti#ities

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Business Acti#ities
%. =inan'in& A'tivities. $btainin& 'a.ital #rom owners and 'reditors. >e.ayin& 'reditors and a return to owners. *. +nvestin& A'tivities. S.endin& t(e 'a.ital it re'eives in ways t(at are .rodu'tive and will (el. t(e business a'(ieve its ob?e'tives. Buyin& and sellin& assets to be used in t(e business.
I I I I

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Business Acti#ities (continued)

,. $.eratin& A'tivities. Sellin& o# &oods and servi'es to 'ustomers. Em.loyin& mana&ers and wor)ers, buyin& and .rodu'in& &oods and servi'es, and .ayin& ta-es.
I I

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Financial and $anage!ent Accounting

N

A''ountin&8s role o# assistin& de'ision ma)ers by measurin&, .ro'essin&, and 'ommuni'atin& in#ormation is usually divided into two 'ate&ories: %. Mana&ement a''ountin&. *. =inan'ial a''ountin&. :(e two may be distin&uis(ed by t(e .rin'i.al users o# t(eir in#ormation.
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$anage!ent Accounting
+s oriented toward t(e needs o# internal de'ision ma)ers. N Provides mana&ers and em.loyees wit( in#ormation re&ardin& (ow t(ey (ave done in t(e .ast and w(at t(ey 'an e-.e't in t(e #uture.
N

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Financial Accounting
N

+s oriented toward t(e needs o# e-ternal de'ision ma)ers. Provides in#ormation in t(e #orm o# #inan'ial statements so t(at e-ternal de'ision ma)ers 'an evaluate (ow well t(e business (as a'(ieved its &oals. =inan'ial statements re.ort dire'tly on t(e &oals o# .ro#itability and li2uidity.


=inan'ial statements are used e-tensively bot( inside and outside a business to evaluate t(e business8s su''ess.
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% ocessing Accounting Info !ation

N


A''ountin& versus boo))ee.in&

 

Bookkeeping is t(e me'(ani'al and re.etitive .ro'ess o# re'ordin& #inan'ial transa'tions and )ee.in& #inan'ial re'ords. Bookkeeping is a small .art o# a''ountin&. Accounting in'ludes t(e desi&n o# an in#ormation system t(at meets user8s needs. Accounting &oals are t(e analysis, inter.retation, and use o# in#ormation.

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!om.uters are used e-tensively in a''ountin& as a tool #or t(e a''ountant. A business8s many in#ormation needs are or&ani0ed into a Management Information System 5M+S7.  An M+S 'onsists o# various inter'onne'ted subsystems.  :(e A''ountin& +n#ormation System 5A+S7 is t(e most im.ortant subsystem.

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&ecision $a'e s( T)e *se s of Accounting Info !ation

$BJE!:+;E *
+denti#y t(e many users o# a''ountin& in#ormation in so'iety.

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T)e *se s of Accounting Info !ation

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$anage!ent
N

>e2uires #inan'ial in#ormation to 'arry out its basi' #un'tions. %. =inan'in& t(e business. *. +nvestin& t(e resour'es o# t(e business. ,. Produ'in& &oods and servi'es. /. Mar)etin& &oods and servi'es. 1. Mana&in& em.loyees. 3. Providin& in#ormation to de'ision ma)ers.
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Outside *se s +it) a &i ect Financial Inte est

N +nvestors N !reditors

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%eo,le- O gani.ations- and Agencies +it) an Indi ect Financial Inte est
N :a-

Aut(orities. N >e&ulatory A&en'ies. N <abor "nions. N !ustomers. N E'onomi' Planners.

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Accounting $easu e!ent

$BJE!:+;E ,
E-.lain t(e im.ortan'e o# business transa'tions, money measure, and se.arate entity to a''ountin& measurement.

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/)at Is $easu ed0

N

Business transa'tions as t(e ob?e't o# measurement. Business transactions are e'onomi' events t(at e##e't t(e #inan'ial .osition o# a business entity.


:ransa'tions are t(e raw material o# a''ountin& re.orts. :ransa'tions must relate dire'tly to a business entity.

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Money Measure.


Money is t(e only #a'tor 'ommon to all business transa'tions. :(e monetary unit a business uses de.ends on t(e 'ountry in w(i'( t(e business resides. E-'(an&e rates translate one 'urren'y to anot(er. A business is a se.arate entity, distin't #rom its 'reditors and 'ustomers and #rom its owner or owners.

:(e !on'e.t o# Se.arate Entity.



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T)e Co ,o ation as a Se,a ate Entit"

$BJE!:+;E /
Des'ribe t(e 'or.orate #orm o# business or&ani0ation.

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T",es of Business O gani.ation

N Sole

Pro.rietors(i.. N Partners(i.. N !or.oration.

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T)e Co ,o ate Fo ! of Business

=ormation o# a !or.oration. N $r&ani0ation o# a !or.oration.
N
 Sto')(olders.  Board

o# Dire'tors.  Mana&ement.

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Nu!1e and Recei,ts of *2S2 % o, ieto s)i,s%a tne s)i,s- and Co ,o ations- 3445

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Financial %osition and t)e Accounting E6uation

$BJE!:+;E 1
De#ine financial position, state t(e a''ountin& e2uation, and s(ow (ow t(ey are a##e'ted by sim.le transa'tions.

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Assets
N

Assets are e'onomi' resour'es owned by a business t(at are e-.e'ted to bene#it #uture o.erations.  Monetary items.  Nonmonetary .(ysi'al t(in&s.

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Lia1ilities
N

<iabilities are t(e .resent obli&ations o# a business to .ay 'as(, trans#er assets, or .rovide servi'es to ot(er entities in t(e #uture.

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O+ne s7 E6uit"
N

N N N

$wners8 e2uity re.resents t(e 'laims by t(e owners o# a business to t(e assets o# t(e business. $wners8 e2uity is t(e residual e2uity t(at remains a#ter dedu'tin& liabilities #rom assets. $E @ Assets - <iabilities. Assets @ <iabilities A SE. SE @ !ontributed !a.ital A >etained Earnin&s.
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T) ee T",es of T ansactions T)at Affect Retained Ea nings

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So!e Illust ati#e T ansactions

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T32 O+ne s7 In#est!ents

ASSE:S !as( Be&. Bal. :%. End. Bal. C D 1D,DDD C1D,DDD SE !BS C D 1D,DDD C1D,DDD

Assets @ C1D,DDDE <ASE @ C1D,DDD

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T82 %u c)ase of Assets +it) Cas)

ASSE:S <and C D A%D,DDD C%D,DDD

Be&. Bal. :*. End. Bal.

!as( C1D,DDD -,1,DDD C%1,DDD

Bld&. C D A*1,DDD C*1,DDD

Assets @ C1D,DDDE <ASE @ C1D,DDD

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T92 %u c)ase of Assets 1" Incu ing a Lia1ilit"

Be&. Bal. :,. End. Bal.

ASSE:S Su..lies C D A1DD C1DD

<+AB+<+:+ES ABP C D A1DD C1DD

Assets @ C1D,1DDE <ASE@ C1D,1DD

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T52 %a"!ent of a Lia1ilit" +it) Cas)

ASSE:S !as( C%1,DDD - *DD C%/,9DD <+AB+<+:+ES ABP C1DD -*DD C,DD

Be&. Bal. :/. End. Bal.

Assets @ C1D,,DDE <ASE @ C1D,,DD

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T:2 Re#enues Ea ned Co!!ission T)at /as %aid in Cas)

Be&. Bal :1. End. Bal. ASSE:S !as( C%/,9DD A %,1DD C%3,,DD SE >BE C D A%,1DD C%,1DD

Assets @ C1%,9DDE <ASE @ C1%,9DD

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T;2 Re#enues Ea ned Co!!ission +it) &efe ed Recei,t

ASSE:S AB> C D A*,DDD C*,DDD SE >BE C%,1DD A*,DDD C,,1DD

Be&. Bal :3. End. Bal.

Assets @ C1,,9DDE <ASE @ C1,,9DD

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T<2 Collection of Accounts Recei#a1le

ASSE:S !as( AB> C%3,,DD C*,DDD A %,DDD - %,DDD C%4,,DD C%,DDD
Assets @ C1,,9DDE <ASE @ C1,,9DD

Be&. Bal. :4. End. Bal.

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T=2 %aid E6ui,!ent Rental E>,ense T42 %aid /ages E>,ense +it) Cas)
ASSE:S !as( C %4,,DD - %,DDD - /DD C%1,FDD
Assets @ C1*,/DDE <ASE @ C1*,/DD
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Be&. Bal :9. :F. End. Bal.

SE >BE C,,1DD -%,DDD - /DD C*,%DD

T3?2 %aid *tilit" E>,ense Incu ing a Cu ent Lia1ilit"

SE Be&. Bal. :%D. End. Bal. ABP C,DD A,DD C3DD

Assets @ C1*,/DDE <ASE @ C1*,/DD
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>BE C*,%DD - ,DD C%,9DD

T332 %aid &i#idends +it) Cas)

ASSE:S !as( C%1,FDD - 3DD C%1,,DD
Assets @ C1%,9DDE <ASE @ C1%,9DD
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Be&. Bal :%%. End. Bal.

SE >BE C%,9DD - 3DD C%,*DD

Co!!unication T) oug) Financial State!ents

$BJE!:+;E 3
+denti#y t(e #our #inan'ial statements.

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T)e I!,o tance of Financial State!ents

N

=inan'ial statements are t(e .rimary means o# 'ommuni'atin& im.ortant a''ountin& in#ormation to users. =inan'ial statements re.resent models o# t(e business enter.rise be'ause t(ey s(ow t(e business in #inan'ial terms. =inan'ial statements are not .er#e't .i'tures o# t(e real t(in&.
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T)e Inco!e State!ent

N

Summari0es revenues earned e-.enses in'urred over a period of time. +s 'onsidered by many to be t(e most im.ortant #inan'ial re.ort be'ause it s(ows w(et(er or not a business a'(ieved its .ro#itability &oal o# earnin& an a''e.table in'ome.

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@Entit"A S)annon Realt"- Inc2 @TitleA Inco!e State!ent @%e iodA Fo t)e $ont) Ended &ece!1e

93- 8?>>
>evenues !ommissions Earned E-.enses E2ui.ment >ental Ga&es "tilities :otal E-.enses Net +n'ome C%,DDD /DD ,DD C%,4DD C%,9DD C,,1DD

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:ra'e to Statement o# >etained Earnin&s

T)e State!ent of Retained Ea nings

N S(ows

t(e '(an&es in retained earnin&s over a .eriod o# time.

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S)annon Realt"- Inc2 State!ent of Retained Ea nings Fo t)e $ont) Ended &ece!1e 93- 8?>>

>etained Earnin&s, %*B%B-Net +n'ome #or t(e Mont( Subtotal <ess Dividends >etained Earnin&s, %*B,%B-:ra'e to $wners8 E2uity Se'tion o# Balan'e S(eet

D %,9DD C %,9DD 3DD C %,*DD

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T)e Balance S)eet

N

S(ows #inan'ial .osition at a .oint in time. +s o#ten 'alled t(e statement o# #inan'ial .osition. Presents a view o# t(e business as t(e (older o# resour'es, or assets, t(at are e2ual to t(e 'laims a&ainst t(ose assets.

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S)annon Realt"- Inc2 Balance S)eet As of &ece!1e 93- 8?>>

ASSE:S
!as( AB> Su..lies <and Buildin& C%1,,DD %,DDD 1DD %D,DDD *1,DDD

:otal Assets

C1%,9DD

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S)annon Realt"- Inc2 Balance S)eet As of &ece!1e 93- 8?>>

<+AB+<+:+ES
ABP C3DD S:$! H$<DE>S8 EH"+:I !ommon Sto') C1D,DDD >etained Earnin&s C%,*DD :otal SE C1%,*DD :otal <iabilities and SE C1%,9DD

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T)e State!ent of Cas) Flo+s

N N

=o'uses on a 'om.any8s li2uidity &oal. S(ows 'as( .rodu'ed by o.eratin& a business as well as im.ortant #inan'in& and investin& transa'tions t(at ta)e .la'e durin& an a''ountin& .eriod. +s derived #rom t(e in'ome statement and balan'e s(eet. +s dire'tly related to t(e ot(er t(ree statements.
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S)annon Realt"- Inc2 State!ent of Cas) Flo+s Fo t)e $ont) Ended &ece!1e 93- 8?>>
!as( =lows #rom $.eratin& A'tivities
Net +n'ome Non'as( E-.enses and >evenues +n'luded in +n'ome +n'rease in AB> C5%,DDD7 +n'rease in Su..lies 51DD7 +n'rease in ABP 3DD Net !as( =lows #rom $.eratin& A'tivities C%,9DD

5FDD7 CFDD

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S)annon Realt"- Inc2 State!ent of Cas) Flo+s Fo t)e $ont) Ended &ece!1e 938?>>
!as( =lows #rom +nvestin& A'tivities
Pur'(ase o# <and 5C%D,DDD7 Pur'(ase o# Buildin& 5*1,DDD7 Net !as( =lows #rom +nvestin& A'tivities 5,1,DDD7

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S)annon Realt"- Inc2 State!ent of Cas) Flo+s Fo t)e $ont) Ended &ece!1e 93- 8?>>
!as( =lows #rom =inan'in& A'tivities
+nvestments by Sto')(olders Dividends Net !as( =lows #rom =inan'in& A'tivities Net +n'rease 5De'rease7 in !as( !as( at Be&innin& o# Mont( !as( at End o# Mont( /F,/DD C%1,,DD D C%1,,DD C1D,DDD 53DD7

:ra'e to Balan'e S(eet

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Gene all" Acce,ted Accounting % inci,les

$BJE!:+;E 4
State t(e relations(i. o# &enerally a''e.ted a''ountin& .rin'i.les 56AAP7 to #inan'ial statements and t(e inde.endent !PA8s re.ort, and identi#y t(e or&ani0ations t(at in#luen'e 6AAP.

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Gene all" Acce,ted Accounting % inci,les (GAA%)

=o'us on understandability o# #inan'ial statements. N En'om.ass t(e 'onventions, rules, and .ro'edures ne'essary to de#ine a''e.ted a''ountin& .ra'ti'e at a .arti'ular time.
N

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Financial State!ents- GAA%- and t)e Inde,endent C%A7s Re,o t

N

=inan'ial statements are .re.ared by mana&ement and may be biased. =inan'ial statements are audited by inde.endent !PAs. An audit as'ertains t(at t(e #inan'ial statements (ave been .re.ared in a''ordan'e wit( 6AAP.

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&iscussion
H. G(y are 6AAP im.ortant to readers o#
#inan'ial statementsJ

A. 6AAP ensure t(at t(e #inan'ial

statements will be understandable to t(eir users.

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% ofessional Et)ics and t)e Accounting % ofession

$BJE!:+;E 9
De#ine ethics and des'ribe t(e et(i'al res.onsibilities o# a''ountants.

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/)at A e % ofessional Et)ics0

A 'ode o# 'ondu't t(at a..lies to t(e .ra'ti'e o# a .ro#ession. N !ode o# 'ondu't ado.ted by t(e A+!PA and ea'( state.
N
 >es.onsibility  +nte&rity.  $b?e'tivity.  +nde.enden'e.  Due

to t(e .ubli'.

'are.
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T)e Institute of $anage!ent Accountants (I$A) Code of % ofessional Conduct

N N N N

!om.eten'y. !on#identiality. +nte&rity. Avoidan'e o# 'on#li'ts o# interest. !ommuni'ation o# in#ormation objectively and without bias.

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&iscussion
H. Dis'uss t(e im.ortan'e o# .ro#essional et(i's in
t(e a''ountin& .ro#ession.

A. Pro#essional et(i's #orms a 'ode o# 'ondu't t(at

a..lies to t(e .ra'ti'e o# a .ro#ession. As members o# a .ro#ession, a''ountants (ave a res.onsibility, not only to t(eir em.loyers and 'lients but also to so'iety as a w(ole, to u.(old t(e (i&(est et(i'al standards.

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