Welcome to BU 227
BU 227
Chapter 1:
Financial Statements
and Business Decisions
Overview of Chapter 1
Nature of accounting
Accounting profession
Types of business organizations
Accounting equation
Financial statements
Ethics in accounting
Nature of Accounting
WHAT IS IT?
The identification, measurement and
communication of financial information
about economic entities to interested
persons.
INFO ON RESULTS OF ECONOMIC ACTIVITIES
(OPERATING, INVESTING, FINANCING)
RECORD
,
MEASURE
,
CLASSIFY
,
SUMMARIZE
,
COMMUNICATE
,
INTERPRET
&
ANALYSE
Nature of Accounting
Nature of Accounting
GOOD ACCOUNTING INFORMATION IS:
USEFUL
Fundamental Qualitative Characteristics
RELEVANCE
REPRESENTATIONAL FAITHFULNESS
Enhancing Qualitative Characteristics
COMPARABILITY
VERIFIABILITY
TIMELINESS
Nature of Accounting -GAAP
CONCEPTS, RULES, PROCEDURES
THAT DEFINE ACCEPTED ACTG
PRACTICE
COMPARE F/S
AUDIT – GAAS (CAS)
CICA HANDBOOK – 5 Parts
IFRS
ASPE
Nature of Accounting
TYPES OF ACCOUNTING:
FINANCIAL ACCOUNTING
EXTERNAL USERS
MANAGERIAL ACCOUNTING
Accounting Profession
TYPES OF ACCOUNTANTS:
PUBLIC
PRIVATE
PROFESSIONAL CERTIFICATION:
CHARTERED ACCOUNTANT (CA) now CPA, CA
CERTIFIED GENERAL ACCOUNTANT (CGA)
CERTIFIED MANAGEMENT ACCOUNTANT (CMA)
CHARTERED PROFESSIONAL ACCOUNTANT
(CPA) – Quebec… and soon to be across Canada
PROFESSIONAL CERTIFICATION:
Forms of Business Organization
Owner(s) Proprietor – one owner
Partners – two or more owners
Shareholders – usually many owners
Life of entity Limited by
owner’s choice or death
Limited by
partners’ choice or death
Indefinite
Legal status Owner & business are one legal
entity
Owner & business are one legal
entity
Shareholders & business are separate legal entities
Accounting status Owner & business are separate
accounting entities
Owner & business are separate accounting entities Shareholders & business are separate actg entities
The Four Basic Financial
Statements
1.
STATEMENT OF FINANCIAL POSITION aka Balance Sheet
–
reports the amount of assets (resources owned), liabilities (amounts
owed), and shareholders’ equity of an accounting entity at a point in
time.
2.
INCOME STATEMENT
– reports the revenues less the expenses of
the accounting period.
3.
STATEMENT OF CHANGES IN EQUITY
– reports the way that
profit, distribution of profit (dividends), and other changes to
shareholders’ equity affected the financial position of the company
during the accounting period.
4.
STATEMENT OF CASH FLOWS
– reports inflows (receipts) and
outflows (payments) of cash during the accounting period in the
Statement of Financial Position
(Balance Sheet)
SHOWS THE FINANCIAL POSITION OF THE
FIRM
AT ONE POINT IN TIME
Statement of Financial Position
aka Balance Sheet
ASSETS
RESOURCES
CONTROLLED BY
ENTITY
RESULT OF PAST
TRANSACTION
EXPECTED TO
BENEFIT FUTURE
LIABILITIES
OBLIGATIONS
DUE BY
ENTITY
RESULT OF PAST
TRANSACTION
EXPECTED TO CAUSE
FIRM TO PAYOUT
ASSETS OR RENDER
SERVICES IN FUTURE
SHAREHOLDERS’
EQUITY
OWNERS’ RESIDUAL
(
LEFTOVER
) INTEREST
IN FIRM’S ASSETS
AFTER DEDUCTING
LIABLITIES
The Accounting Equation
ASSETS
LIABILITIES
SHAREHOLDERS’
EQUITY
ASSETS = LIABILITIES + SHAREHOLDERS’
EQUITY
Income Statement
SUMMARY OF HOW WELL ENTITY
Income Statement
(Statement of Comprehensive Income)
REVENUE:
INCREASES
IN ECONOMIC
RESOURCES (EQUITY) DUE TO FIRM’S
ORDINARY ACTIVITIES
E.G. SALE OF GOODS/SERVICES,
RENT/INTEREST FROM LETTING OTHERS
USE FIRM ASSETS
June 2011
Cash from sale
collected on June 10.
X
May 2011
$1,000 sale made
on May 25.
X
Revenues
Earnings from the sale of goods or services.
Statement of Comprehensive Income
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
When will the revenue from this transaction be recognized?
May 2011
$1,000 revenue
recognized in May
June 2011
Statement of Comprehensive Income
When will the revenue from this transaction be recognized?
Earnings from the sale of goods or services.
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
Revenues
Income Statement
EXPENSES:
DECREASES
IN ECONOMIC
RESOURCES (EQUITY) DUE TO FIRM’S
ORDINARY ACTIVITIES
CAUSED BY REVENUE-GENERATING
ACTIVITIES
NOT
DUE TO WITHDRAWALS BY OWNERS
May 2011
June 2011
Paid $75 cash on May 11
for newspaper ad.
X
Ad appears
on June 8.
X
Expenses
The dollar amount of resources used up by the entity
to earn revenues during a period.
Statement of Comprehensive Income
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
May 2011
June 2011
Advertising expense
recognized in June.
Statement of Comprehensive Income
The dollar amount of resources used up by the entity
to earn revenues during a period.
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
When will the expense for this transaction be recognized?
Expenses
The Accounting Equation
ASSETS = LIABILITIES + EQUITY
CONTRIBUTED CAPITAL (OWNER CONTRIBUTIONS)
DIVIDENDS
(OWNER WITHDRAWALS)
RETAINED EARNINGS NET INCOME
(REVENUE – EXPENSES)
LET’S TRY SOME QUESTIONS!
Statement of Owners’ Equity OR
Statement of Retained Earnings (ASPE)
SUMMARIZES CHANGE IN EQUITY DURING THE
PERIOD
OE BALANCE, BEGINNING OF PERIOD
+ OWNER INVESTMENTS DURING
-
OWNER WITHDRAWALS DURING
+ NET INCOME or
-
NET LOSS
= OE BALANCE, END OF PERIOD
LINKS
BALANCE SHEET AND INCOME STATEMENT
Beginning Retained Earnings
+ Net Income OR
-Net Loss
-Dividends
= Ending Retained Earnings
Statement of Changes in Equity
(IFRS)
Share Retained Other Capital Earnings Components
Balance as at Jan. 1, 2009 6,266 58,646 (9,996) Profit for the year 11,793
Distribution of dividends (5,779) Decrease in share capital (18)
Other comprehensive income (loss) (834) Other changes, net (6,447) Balance as at Dec. 31, 2009 6,248 64,660 (17,277)
THE NESTLE GROUP
Statement of Changes in Equity
(in thousands of CHF)
For the Year Ended December 31, 2009
LO 1
E1-2 (2)
Beginning Retained Earnings + Net Income – Dividends
=
Ending Retained Earnings
Therefore
Net Income= Ending Retained Earnings + Dividends -
Beginning Retained Earnings
= $12,780 + 0 – 0
= $12,780
Who has financed more?
How much have shareholders financed? $112,780
How much have creditors financed? $ 10,120
Statement of Cash Flows
SUMMARIZES CASH RECEIPTS AND
PAYMENTS MADE DURING PERIOD,
SHOWING CASH FROM (OR USED IN):
OPERATIONING ACTIVITES
INVESTING ACTIVITIES
FINANCING ACTIVITIES
Financial Statements
INCOME STATEMENT
BALANCE SHEET STMT OF RETAINED EARNINGS
STMT OF CASH FLOWS NET INCOME
Retained Earnings, ENDING BALANCE
CASH, BEG & END
P1-3
New Delivery Company was organized on January 1, 2012. At the end of the first
quarter (three months) of operations, the owner prepared a summary of its operations as shown in the first row of the following tabulation:
Summary of Transactions Profit Cash a. Services performed for customers, $66,000, of which
one-sixth remained uncollected at the end of the quarter. $66,000 $55,000 b. Cash borrowed from the local bank, $30,000 (one-year note). c. Small service truck purchased for use in the business: cost,
$9,000; paid 30% down, balance on credit.
d. Expenses, $36,000, of which one-sixth remained unpaid at the end of the quarter.
e. Service supplies purchased for use in the business, $3,000, of which one-fourth remained unpaid (on credit) at the end of the quarter. Also, one-fifth of these supplies were unused (still on hand) at the end of the quarter.
f. Wages earned by employees, $21,000, of which one-half remained unpaid at the end of the quarter
Compute the following for the quarter: Profit (or loss)