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INTRODUCTION
TOPIC 1 : Accounting as a Form of Communication
TOPIC 2 : Financial Statements and the Annual Report
TOPIC 3 : Processing Accounting Information
TOPIC 4 : Income Measurement and Accrual Accounting
TOPIC 5 : Inventories and Cost of Goods Sold
TOPIC 6 : Receivables and Investments
TOPIC 7 : Operating Assets: Property, Plant and Equipment, and
Intangibles
TOPIC 8 : Liabilities
TOPIC 9 : Stockholders’ Equity

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TOPIC 2 : Financial Statements and the Annual Report

1. The objectives of financial reporting
2. The qualitative characteristics of Accounting inform.
3. The classified balance sheet
4. The classified balance sheet to analyze financial position
5. The single step and a multiple-step income statement
6. The multiple-step to analyze financial position
7. The components of the statement of retained earnings
8. The components of the statement of cash flows
9. The financial statements of a publicly held company

“ Provide useful information to those who

must make financial decisions ”

In the absence of useful information, decisions will be made

upon biased information leading to BAD decisions

INVESTORS BANKERS SUPPLIERS

Risk losing their money if Risk losing their money if Risk losing their money
they invest in companies they lend an amount in a if they deliver their
that communicates company that products on credit to
unreliable information communicates a very good an untrustworthy
about dividends capacity to refund but don’t company who won’t
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To be useful, accounting information should meet certain conditions allowing for users to
take sound and informed decisions

QUALITATIVE CHARACTERISTICS
FAITHFULL COMPARABILITY AND MATERIALITY CONSERVATISM
UNDERSTANDABILITY RELEVANCE
REPRESENTATION CONSISTENCY
When When the size When accounting
When accounting accounting When When accounting accounting information take into
information is information has accounting information permits information consideration the
comprehensible to the capacity to information is comparisons errors will affect least optimistic
those willing to influence complete, between and the judgment of estimate when two
spend the decisions neutral, and free among companies someone relying estimates of
necessary time from error. on the amounts are about
Confirming Predictive Among Between information. equally likely.
value value Consistency Comparability 55
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The formal presentation of the balance sheet. The latter separates Assets from
Liabilities and Current from Non-Current of both elements.

The period of time between the purchase of inventory and the collection of any receivable
from the sale of the inventory

START END

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CUSTOMER PAYS AFTER 30 DAYS IN CASH

CUSTOMER PAYS DIRECLY IN CASH

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STOCKHOLDERS’
ASSETS LIABILITIES
EQUITY
Current
Current Assets Contributed capital
Liabilities

Non-Current Non-Current
Retained earnings
Assets Liabilities

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“An asset that is expected to be realized in cash or

sold or consumed during the operating cycle or within
one year if the cycle is shorter than one year”

Short-term investments in other companies (stks & bnds)

Items paid before getting consumed

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“An asset that doesn’t meet the definition of a current Asset.

It’s also called a long-term Asset. ”

Stocks of other companies either with a long-term profit or a controlling purpose

Or lands held for future use and buildings and equipment not currently used in operations

Tangible productive assets used in the operation of a business

Intangible (without physical substance) productive assets used

in the operation of a business

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“An obligation that will be satisfied within the next

operating cycle or within one year if the cycle is shorter
than one year”

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“Any obligation that will not be paid or otherwise satisfied

within the next year or the operating cycle, whichever is
longer. It’s also called a long-term Debt ”

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“The owners’ claims on the assets of the business that arise

from two sources: contributed capital and earned capital”

The owners’ investment in the business

The accumulated earnings, or net income, of the

business since its inception less all dividends paid.

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A company’s ability to pay its Knowing how to keep those

debts as they come due (Liquidity) two indicators in high
can be judged by computing the standards means knowing how
amount of working capital and to good manage the operating
the current ratio. cycle of a company.

WORKING CAPITAL CURRENT ASSETS CURRENT LIABILITIES

ABSOLUTE VALUE
CURRENT RATIO CURRENT ASSETS CURRENT LIABILITIES
RELATIVE VALUE
GROSS PROFIT SALES COST OF GOODS SOLD
ABSOLUTE VALUE

PROFIT MARGIN NET INCOME SALES OR REVENUES

RELATIVE VALUE 64
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“It summarizes the results of operations of an entity for a

period of time. It reports the excess of revenue over
expense (net income, profits or earnings)

SINGLE STEP FORMAT MULTIPLE STEP FORMAT

An income statement in An income statement that
which all expenses are shows classifications of
added together and revenues and expenses as
subtracted from all well as important
revenues subtotals.
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“A company’s profitability (profit margin or return on sales)

is computed by dividing net income by sales ‘’

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“It reports the net income and any dividends declared during
the period. The purpose of a statement of stockholders’
equity is to explain the changes in the components of
owners’ equity during the period‘’

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“The purpose of the statement is to summarize the cash-

flow effects of a company’s operating, investing, and
financing activities for the period‘’

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6
3
8
12
16
15
2
5
17
13
9
14
10
7
1
4
18
11
19

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CA
NCA
CA
CA
NCA
CA
NCA

CA
CL
CA
NCA
NCL
CL
CA
NCL
NCA
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CA
SE
CL
CA
NCA
CA
CL
NCA
SE
NCL

S
S
G&A
G&A
S
S
G&A
S
G&A
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Net Income = Sales – COGS – S,G&A Expenses - IT

= 100,000 – 60,000 – 15,000 – 10,000 = 15,000

Profit margin = Net Income/Sales = 15,000/100,000 = 15%

For each 1$ expensed the company gains $0.15

Retained earning balance (eoy) = REB (boy) + NI – Dividends

= 200,000 + 80,000 – 50,000 = 230,000

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1. Current ratio = Current Assets / Current Liabilities

= 300,000/200,000 = 1.5

The company has a good liquidity because it can pay its current liabilities just
from its current assets without calling out its capital stock

2. Profit margin = Net Income/Sales

= 150,000/1,000,000 = 15%

For each 1$ expensed the company gains $0.15

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Big
Working capital = Current Assets - Current Liabilities
= 500,000 - 400,000 = 100,000
Current ratio = Current Assets / Current Liabilities = 500,000/400,000 = 1.25

Small
Working capital = Current Assets - Current Liabilities
= 80,000 - 20,000 = 60,000
Current ratio = Current Assets / Current Liabilities = 80,000/20,000 = 4

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Materiality

Relevance
Faithfull representation
Consistency
Understandability

Comparability

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Net Income = Sales – COGS – SE – G&AE

= 1,200,000 – 450,000 – 60,800 – 75,000 = 614,200

Profit margin = Net Income/Sales = 614,200/1,200,000 = 51,18%

For each 1$ expensed the company gains $0.51

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