AcforFinance15 1

ACCOUNTING FOR FINANCE
Eric CAUVIN, Ph.D.
Accounting for Finance 1

Eric Cauvin, IAE Nice-Sophia-Antipolis
Course Outline
An introductory course on financial
accounting,
Will include two main parts: financial
accounting and financial analysis,
The course is geared to people who have not
been exposed to accounting and corporate
finance before. For those with previous
accounting experience, this is an opportunity
to review the basic concepts…
INTRODUCTION

The
accounting
process
Accounting “links”
decision makers with
economic activities
Economic and with the results Accounting
activities of their decisions. information
Decision
Actions
makers
(decisions)
Types of Accounting
Information
Financial Tax
Management

Information System
Information Financial Decisions

Users Information Supported
Investors Provided Performance
Creditors Profitability evaluations
Managers Stock
Owners Financial investments
Customers position Tax strategies
Employees Labor relations
Regulators Cash flows Resource
allocations
Lending
decisions
Borrowing
Basic Functions of an
Accounting System
Interpret and
record business
transactions.
Payment
Car
Basic Functions of an
Accounting System
 Interpret  Classify
and record similar
business transactions
transactions. into useful  Summarize
reports. and
communicate
information to
decision makers.

Definition of accounting
Accounting is the process of
identifying,
measuring and
communicating financial information
about an entity
to permit informed judgements and decisions by
users of the information.

The development of a conceptual
framework
A conceptual framework for accounting is
a statement of principles which provide
generally accepted guidance for the
development of new reporting practices
and for challenging and evaluating the
existing practices.

External reporting
A conceptual framework is particularly
important when practices are being
developed for reporting to those who are
not part of the day-to-day running of the
business.
This is called external reporting or financial
accounting.
Some Accounting Principles…
Going concern: assumes business can “keep going”,
Accruals or “matching”: all income and related
expenditure to be included, not just cash paid and
received,
Consistency: usual to apply same procedures from year
to year,
Prudence: be realistic when valuing assets or measuring
profits,
Fair value: the amount for which an asset could be
exchanged,
True and fair view…
Internal reporting
For those who are managing the business
on a day-to-day basis, special techniques
have been developed.
This is called internal reporting or
management accounting.

Objectives of External
Financial Reporting
Balance Sheet
The primary
Income Statement financial
Statement of Cash Flows statements.

Integrity of Accounting Information
Institutional Features
Generally Accepted Accounting Principles (GAAP)
Financial Accounting Standards Board
Securities and Exchange Commission
Internal Control
Audits

PART 1:
FINANCIAL ACCOUNTING
Accounting for Finance

16
INTRODUCTION TO
FINANCIAL STATEMENTS

The Concept of the Business
Entity
A business
entity is separate
Vagabond from the
Travel Agency personal affairs
of its owner.

Types of Business Entity
Sole Trador Partnership Corporation
One owner Several owners. Easy to Limited company.

only. Easy to set set up and spreads the Limited liability for
up and flexible to burdens of ownership but owners but
operate but the partners usually have obligations imposed
owner has unlimited liability and there on the way a
unlimited liability. are ownership risks if the company conducts
partners are unsuitable. its affairs.

Introduction to Financial
Statements
Balance Sheet
Describes where
the company
Income Statement stands at a specific
Statement of Cash Flows
date.

Statements
Balance Sheet
Income Statement Depicts the

revenue and
Statement of Cash Flows expenses for a
designated period
of time.

Statements
Balance Sheet
Income Statement Net income (or net

loss) is simply the
Statement of Cash Flows difference between
revenues and
expenses.

Statements
Balance Sheet
Income Statement
Statement of Cash Flows

Depicts the ways
cash has changed
during a
designated period
of time.

The Balance Sheet
It lists all assets, liabilities and owner’s equity

a specific date, usually the end of a month
or a year. The balance sheet is like a snapshot
of entity, it is called the
statement of financial position.

24
Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets Liabilities & Owners' Equity
Cash $ 22 500 Liabilities:
Assets are economic
Notes receivable 10 000 resources that are
Notes payable $ 41 000
Accounts receivable 60 500 Accounts payable 36 000
Supplies 2 000 owned by the business
Salaries payable 3 000
Land 100 000 and are expected to
Total liabilities $ 80 000
Building 90 000 Owners' Equity:
Office equipment 15 000 provide positive future
Capital stock 150 000
Total $ 300 000 Total

cash flows.
Retained earnings 70 000
$ 300 000
Liabilities
Balance Sheet
December 31, 2005
Liabilities are debts
that represent negative

Notes receivable
Accounts receivable
10 000
60 500
Notes payable
Accounts payable
$ 41 000
36 000
future cash flows for
Supplies 2 000 Salaries payable 3 000
Land 100 000 Total liabilities $ 80 000
the company.
Office equipment 15 000 Capital stock 150 000
Total $ 300 000 Total $ 300 000
Owners’ Equity
Balance Sheet
December 31, 2005
CashOwners’ equity $ 22 500 Liabilities:
represents the owners’

Notes receivable
Accounts receivable
10 000
60 500
Notes payable
Accounts payable
$ 41 000
36 000
claims to the assets of
the business.
Total $ 300 000 Total $ 300 000
The Balance Sheet
BALANCE SHEET
USES OF THE FUNDS SOURCES OF THE FUNDS
ASSETS LIABILITIES+OWNERS’
EQUITY

The Balance Sheet
BALANCE SHEET
What the company owns What the company owes
(the assets) (the liabilities)
What the company is worth
(the owners’ equity)
ASSETS LIABILITIES + OWNERS’

EQUITY

The Balance Sheet
THE ACCOUNTING EQUATION:
ASSETS – LIABILITIES = OWNERS’ EQUITY

The Accounting Equation
Assets = Liabilities
Vagabond + Owners’
Travel Equity
Agency
Balance Sheet
December 31, 2005
$300,000 =
Assets
$80,000 + Liabilities
$220,000 & Owners' Equity
Notes receivable 10 000 Notes payable $ 41 000
Accounts receivable 60 500 Accounts payable 36 000
Building 90 000 Owners' Equity
Total $ 300 000 Total $ 300 000
Let’s analyze some
transactions for JJ’s
Lawn Care Service.

On May 1, 2005, Jill Jones and her family invested $8,000
in JJ’s Lawn Care Service and received 800 shares of stock.
JJ's Lawn Care Service

Balance Sheet
May 1, 2005
Assets Owners' Equity
Cash $ 8 000 Capital Stock $ 8 000
Total $ 8 000 Total $ 8 000

On May 2, JJ’s purchased a riding lawn mower for
$2,500 cash.
Balance Sheet
May 2, 2005
Assets Owners' Equity
Cash $ 5 500 Capital Stock $ 8 000
Tools & Equipment 2 500
Total $ 8 000 Total $ 8 000

On May 8, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a note payable for the
remaining $13,000.
Balance Sheet
May 8, 2005
Assets Liabilities and Owners' Equity
Tools & Equipment 2 500 Notes Payable $ 13 000
Truck 15 000 Owners' Equity:
Capital Stock 8 000
Total $ 21 000 Total $ 21 000

On May 11, JJ’s purchased some repair parts for
$300 on account.

Balance Sheet
May 11, 2005
Tools & Equipment 2 800 Notes Payable $ 13 000
Truck 15 000 Accounts Payable 300
Total Liabilities $ 13 300
Owners' Equity:
Capital Stock 8 000
Total $ 21 300 Total $ 21 300

Jill realized she had purchased more repair parts than needed.
On May 18, JJ’s was able to sell half of the repair parts to ABC Lawns for $150, a price
equal to JJ’s cost. JJ’s will receive the cash within 30 days.

Balance Sheet
May 18, 2005
Accounts Receivable 150 Notes Payable $ 13 000
Tools & Equipment 2 650 Accounts Payable 300
Truck 15 000 Total Liabilities $ 13 300
Owners' Equity:
Capital Stock 8 000
Total $ 21 300 Total $ 21 300

On May 25, ABC Lawns pays JJ’s $75 as a partial
settlement of its accounts receivable.

Balance Sheet
May 25, 2005
Truck 15 000 Total Liabilities $ 13 300
Owners' Equity:
Capital Stock 8 000
Total $ 21 300 Total $ 21 300

On May 28, JJ’s pays $150 of its accounts payable.

Balance Sheet
May 28, 2005
Truck 15 000 Total Liabilities 13 150
Owners' Equity:
Capital Stock 8 000
Total $ 21 150 Total $ 21 150

Assets
On May 28, JJ’s Lawn Care Service owns:
A truck: 15,000
Some tools and equipment: 2,650
An account receivable: 75
Some cash: 3,425
Total of assets: 21,150

Liabilities
On May 28, JJ’s Lawn Care Service owes:
13, 000 to the truck seller
150 to the repair parts seller
“8,000 to the owners (Jill Jones and her
family)”
Total of liabilities: 21,150

Owners’ Equity
On May 28, Book value of JJ’s Lawn Care
Service is its assets minus its liabilities:
21,150 – 13,150 = 8,000

Reporting Ownership Equity in the
Balance Sheet
Sole trador Ow ner's equity:
Jill Jones, capital $ 8,000
Partners' equity
Jill Jones, capital $ 4,000
Partnership
Bill Jones, capital 4,000
Total partners' equity $ 8,000
Stockholders' equity
Capital stock $ 8 000
Corporation
Total stockholders' equity $ 8 000
The Balance Sheet
It lists assets in the order of their relative
liquidity. Liquidity is a measure of how
quickly an item can be converted to cash.
It lists liabilities in the order in which they
are due.

Definition of an asset
A resource:
controlled by the entity,
as a result of past events,
and from which future economic benefits are
expected to flow to the entity.

Assets Recognition
Recognised as an asset (i.e., reported in the
balance sheet), only if:
It is probable that the future economic
benefits will flow to the entity,
and the asset has a cost or value that can be
measured reliably.

Recognise or Not?
Recognise Not recognise
Land and buildings Workforce
Raw materials Advertising campaign
Why? Why?
Relative certainty of Uncertainty of benefits:
future benefit. lack of evidence that
cash will flow to the
business in the future.
The Assets
Assets are subdivided into:
FIXED ASSETS: any asset acquired for
retention for the purpose of providing a
service to the business, and not for resale.
CURRENT ASSETS: cash or other
assets expected to be converted into cash
within the trading cycle.

Fixed Assets
Intangible assets: for example, patents, trade
marks, brand name.
Tangible assets: for example, lands, buildings,
tools and equipment.
Investments (held long term): for example,
long-term investments in other companies
(when a company owns<50%, above 50%
subsidiary’s accounts are consolidated with the
parent company).
Depreciation
The allocation of the cost of an asset to expense in the
periods in which services are received from the asset.
Balance Sheet
Assets:
Cost of Plant and
assets equipment
as the services
Income Statement are received
Revenues:
Expenses:
Depreciation
Current Assets
Inventories: raw materials, work-in-
progress, finished goods.
Debtors: including Accounts
Receivable and Prepayments.
Short-term investments.
Cash at bank.
Definition of a liability
A present obligation of the entity,
Arising from past events,
The settlement of which is expected to
result in an outflow from the entity of
resources embodying economic benefits.

The Liabilities
Liabilities are subdivided into:
LONG-TERM OR NON CURRENT
LIABILITIES: a liability that is expected to be
repaid within a long period of time, usually
after one year.
CURRENT LIABILITIES: a liability that is
expected to be repaid within a short period of
time, usually within one year (i.e., the
business’ operating cycle).
Long-Term Liabilities
Long-term loans.
Provisions: represent the setting aside of
funds to provide for a future event that is
likely to occur, but the precise amount of
money involved or the time event will take
place is uncertain. For example, costs
related to closure of a division of the
company, warranties given for repair of
goods.
Current Liabilities
Creditors: including Accounts Payable
(creditors).
Bank Overdraft.

Owners’ equity
The owners’ claims against the business.
It is the residual amount found by
deducting all of the entity’s liabilities
from all the entity’s assets:
Original share capital invested by
owners (capital stock) and cumulative
retained earnings of the business.

On May 29, JJ’s recorded lawn care services provided
during May of $750. All clients paid in cash.

Balance Sheet
May 29, 2005
Owners' Equity:
Capital Stock 8 000
Variance ?
Total $ 21 900 Total $ 21 150
On May 31, JJ’s purchased gasoline for the lawn
mower and the truck for $50 cash.
Balance Sheet
May 31, 2005
Owners' Equity:
Capital Stock 8 000
Variance ?
Total $ 21 850 Total $ 21 150
Variance Analysis (1)
On May 31, book value of JJ’s Lawn Care
Service is :
21,850 – 13,150 = 8,700
On May 28, book value of JJ’s Lawn Care
Service was : 8,000
Variance = 8,700 – 8,000 = 700

Variance Analysis (2)
JJ’s Lawn Care Service increases its value by
700,
The owners of JJ’s Lawn Care Service (Jill Jones
and her family) “get rich” for 700,
The Net Income of JJ’s Lawn Care Service,
during May 2005, was 700.
This Net Income is the difference between

the Revenue and the Expenses.
What is Net Income?
Net income is not an asset it’s an increase in owners’ equity
from profits of the business.
A = L + OE
Increase Decrease Increase
Either (or both) of these effects ... but this is what

occur as net income is earned ... “net income” really
means. 61
Retained Earnings
A = L + OE
Capital Retained
Stock Earnings
The balance in the Retained Earnings account represents the total

net income of the corporation over the entire lifetime of the
business, less all amounts which have been distributed to the
stockholders as dividends.
The Income Statement (Profit and
Loss Account)
It presents a summary of the revenue

and expenses for a specific period of time,
such as a month or a year.
The income statement is like a video
of the operation during the period.

Revenue and Expenses
The price for goods
sold
and services Increases owner’s
rendered during a equity.
given accounting
period.

Income Statement
For the Month Ended May 31, 2005
Sales Revenue $ 750

Operating Expense:
Gasoline Expense 50
Net Income $ 700

On May 31, the owners’ equity increases by 700.

Balance Sheet
May 31, 2005
Owners' Equity:
Capital Stock 8 000
Net Income 700
Total $ 21 850 Total $ 21 850

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ACCOUNTING FOR FINANCE

Eric CAUVIN, Ph.D.

Accounting for Finance 1

Accounting for Finance 3

Accounting for Finance 5

Information Financial Decisions

Accounting for Finance 8

Accounting for Finance 9

Accounting for Finance 10

Accounting for Finance 13

Accounting for Finance 14

Accounting for Finance 15

Accounting for Finance

Accounting for Finance 17

Accounting for Finance 18

One owner Several owners. Easy to Limited company.

Accounting for Finance 19

Accounting for Finance 20

Income Statement Depicts the

Accounting for Finance 21

Income Statement Net income (or net

Accounting for Finance 22

Statement of Cash Flows

Accounting for Finance 23

It lists all assets, liabilities and owner’s equity

Accounting for Finance

Total $ 300 000 Total

that represent negative

represents the owners’

USES OF THE FUNDS SOURCES OF THE FUNDS

Accounting for Finance 28

ASSETS LIABILITIES + OWNERS’

Accounting for Finance 29

THE ACCOUNTING EQUATION:

ASSETS – LIABILITIES = OWNERS’ EQUITY

Accounting for Finance 30

Accounting for Finance 32

JJ's Lawn Care Service

Total $ 8 000 Total $ 8 000

Total $ 8 000 Total $ 8 000

Accounting for Finance 34

Total $ 21 000 Total $ 21 000

Accounting for Finance 35

JJ's Lawn Care Service

Total $ 21 300 Total $ 21 300

Accounting for Finance 36

JJ's Lawn Care Service

Total $ 21 300 Total $ 21 300

Accounting for Finance 37

JJ's Lawn Care Service

Total $ 21 300 Total $ 21 300

Accounting for Finance 38

JJ's Lawn Care Service

Total $ 21 150 Total $ 21 150

Accounting for Finance 39

Total of assets: 21,150

Accounting for Finance 40

Total of liabilities: 21,150

Accounting for Finance 41

21,150 – 13,150 = 8,000

Accounting for Finance 42

Accounting for Finance 44

Accounting for Finance 45

Accounting for Finance 46