Financial Accounting
Belverd E. Needles, Jr. Marian Powers
----------Multimedia Slides by: Dr. Howard A. Kanter, CPA
DePaul University
Milton M. Pressley
University of New Orleans Copyright2001 by 1
LEARNING OBJECTIVES
1. Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions. 2. Identify the many users of accounting information in society. 3. Explain the importance of business transactions, money measure, and separate entity to accounting measurement. 4. Describe the corporate form of business organization.
Copyright2001 by 2
LEARNING OBJECTIVES
(continued) 5. Define financial position, state the accounting equation, and show how they are affected by simple transactions. 6. Identify the four financial statements. 7. State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPAs report, and identify the organizations that influence GAAP. 8. Define ethics and describe the ethical responsibilities of accountants.
Copyright2001 by 3
Accounting as an Information System
OBJECTIVE 1
Define accounting, identify business goals and activities, and describe the role of accounting in making informed decisions.
Copyright2001 by
Accounting
provides a vital service by supplying the information decision makers need to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities.
Copyright2001 by 5
Accounting
is a link between business activities and decision makers.
Accounting
measures business activities by recording data about them for future use. The data are stored until needed and then processed to become useful information.
Copyright2001 by
Business Goals
1. Profitability. A business must take in enough money to pay all the costs of doing business, with enough left over as profit for the owners to want to stay in business. 2. Liquidity. A business must have enough cash available to pay debts when they are due.
Copyright2001 by
Business Goals and Activities
Copyright2001 by
Business Activities
1. Financing Activities. Obtaining capital from owners and creditors. Repaying creditors and a return to owners. 2. Investing Activities. Spending the capital it receives in ways that are productive and will help the business achieve its objectives. Buying and selling assets to be used in the business.
Copyright2001 by
Business Activities (continued)
3. Operating Activities. Selling of goods and services to customers. Employing managers and workers, buying and producing goods and services, and paying taxes.
Copyright2001 by
10
Financial and Management Accounting
Accountings
role of assisting decision makers by measuring, processing, and communicating information is usually divided into two categories: 1. Management accounting. 2. Financial accounting. The two may be distinguished by the principal users of their information.
Copyright2001 by 11
Management Accounting
Is
oriented toward the needs of internal decision makers. Provides managers and employees with information regarding how they have done in the past and what they can expect in the future.
Copyright2001 by 12
Financial Accounting
Is
oriented toward the needs of external decision makers. Provides information in the form of financial statements so that external decision makers can evaluate how well the business has achieved its goals. Financial statements report directly on the goals of profitability and liquidity.
Financial statements are used extensively both inside and outside a business to evaluate the businesss success. Copyright2001 by 13
Processing Accounting Information
Accounting versus bookkeeping
Bookkeeping is the mechanical and repetitive process of recording financial transactions and keeping financial records. Bookkeeping is a small part of accounting. Accounting includes the design of an information system that meets users needs. Accounting goals are the analysis, interpretation, and use of information.
Copyright2001 by
14
Computers
are used extensively in accounting as a tool for the accountant. A businesss many information needs are organized into a Management Information System (MIS). An MIS consists of various interconnected subsystems. The Accounting Information System (AIS) is the most important subsystem.
Copyright2001 by
15
Decision Makers: The Users of Accounting Information
OBJECTIVE 2
Identify the many users of accounting information in society.
Copyright2001 by
16
The Users of Accounting Information
Copyright2001 by
17
Management
Requires
financial information to carry out its basic functions. 1. Financing the business. 2. Investing the resources of the business. 3. Producing goods and services. 4. Marketing goods and services. 5. Managing employees. 6. Providing information to decision makers.
Copyright2001 by 18
Outside Users with a Direct Financial Interest
Investors
Creditors
Copyright2001 by
19
People, Organizations, and Agencies with an Indirect Financial Interest
Tax
Authorities. Regulatory Agencies. Labor Unions. Customers. Economic Planners.
Copyright2001 by 20
Accounting Measurement
OBJECTIVE 3
Explain the importance of business transactions, money measure, and separate entity to accounting measurement.
Copyright2001 by
21
What Is Measured?
Business
transactions as the object of measurement. Business transactions are economic events that effect the financial position of a business entity.
Transactions are the raw material of accounting reports. Transactions must relate directly to a business entity.
Copyright2001 by
22
Money
Measure.
Money is the only factor common to all business transactions. The monetary unit a business uses depends on the country in which the business resides. Exchange rates translate one currency to another.
The
Concept of Separate Entity.
A business is a separate entity, distinct from its creditors and customers and from its owner or owners.
Copyright2001 by
23
The Corporation as a Separate Entity
OBJECTIVE 4
Describe the corporate form of business organization.
Copyright2001 by
24
Types of Business Organization
Sole
Proprietorship. Partnership. Corporation.
Copyright2001 by
25
The Corporate Form of Business
Formation
of a Corporation. Organization of a Corporation.
Stockholders. Board
of Directors. Management.
Copyright2001 by
26
Number and Receipts of U.S. Proprietorships, Partnerships, and Corporations, 1994
Copyright2001 by
27
Financial Position and the Accounting Equation
OBJECTIVE 5
Define financial position, state the accounting equation, and show how they are affected by simple transactions.
Copyright2001 by
28
Assets
Assets
are economic resources owned by a business that are expected to benefit future operations. Monetary items. Nonmonetary physical things.
Copyright2001 by
29
Liabilities
Liabilities
are the present obligations of a business to pay cash, transfer assets, or provide services to other entities in the future.
Copyright2001 by
30
Owners Equity
Owners
equity represents the claims by the owners of a business to the assets of the business. Owners equity is the residual equity that remains after deducting liabilities from assets. OE = Assets - Liabilities. Assets = Liabilities + SE. SE = Contributed Capital + Retained Earnings.
Copyright2001 by 31
Three Types of Transactions That Affect Retained Earnings
Copyright2001 by
32
Some Illustrative Transactions
Copyright2001 by
33
T1. Owners Investments
ASSETS Cash Beg. Bal. T1. End. Bal. $ 0 50,000 $50,000 SE C/S $ 0 50,000 $50,000
Assets = $50,000; L+SE = $50,000 Copyright2001 by 34
T2. Purchase of Assets with Cash
ASSETS Cash Land Bldg. $50,000 $ 0 $ 0 -35,000 +10,000 +25,000 $15,000 $10,000 $25,000
Beg. Bal. T2. End. Bal.
Assets = $50,000; L+SE = $50,000
Copyright2001 by
35
T3. Purchase of Assets by Incurring a Liability
Beg. Bal. T3. End. Bal.
ASSETS LIABILITIES Supplies A/P $ 0 $ 0 +500 +500 $500 $500
Assets = $50,500; L+SE= $50,500
Copyright2001 by
36
T4. Payment of a Liability with Cash
ASSETS LIABILITIES Cash A/P $15,000 $500 200 -200 $14,800 $300
Beg. Bal. T4. End. Bal.
Assets = $50,300; L+SE = $50,300
Copyright2001 by
37
T5. Revenues Earned Commission That Was Paid in Cash
Beg. Bal T5. End. Bal.
ASSETS Cash $14,800 + 1,500 $16,300 SE R/E $ 0 +1,500 $1,500
Assets = $51,800; L+SE = $51,800 Copyright2001 by 38
T6. Revenues Earned Commission with Deferred Receipt
ASSETS A/R $ 0 +2,000 $2,000 SE R/E $1,500 +2,000 $3,500
Beg. Bal T6. End. Bal.
Assets = $53,800; L+SE = $53,800
Copyright2001 by
39
T7. Collection of Accounts Receivable
ASSETS Cash A/R $16,300 $2,000 + 1,000 - 1,000 $17,300 $1,000
Assets = $53,800; L+SE = $53,800
Beg. Bal. T7. End. Bal.
Copyright2001 by
40
T8. Paid Equipment Rental Expense T9. Paid Wages Expense with Cash
ASSETS Cash $ 17,300 - 1,000 400 $15,900
Assets = $52,400; L+SE = $52,400 Copyright2001 by 41
Beg. Bal T8. T9. End. Bal.
SE R/E $3,500 -1,000 - 400 $2,100
T10. Paid Utility Expense Incurring a Current Liability
SE Beg. Bal. T10. End. Bal.
A/P $300 +300 $600
Assets = $52,400; L+SE = $52,400 Copyright2001 by 42
R/E $2,100 - 300 $1,800
T11. Paid Dividends with Cash
Beg. Bal T11. End. Bal.
ASSETS Cash $15,900 - 600 $15,300
Assets = $51,800; L+SE = $51,800 Copyright2001 by 43
SE R/E $1,800 - 600 $1,200
Communication Through Financial Statements
OBJECTIVE 6
Identify the four financial statements.
Copyright2001 by
44
The Importance of Financial Statements
Financial
statements are the primary means of communicating important accounting information to users. Financial statements represent models of the business enterprise because they show the business in financial terms. Financial statements are not perfect pictures of the real thing.
Copyright2001 by 45
The Income Statement
Summarizes
revenues earned expenses incurred over a period of time. Is considered by many to be the most important financial report because it shows whether or not a business achieved its profitability goal of earning an acceptable income.
Copyright2001 by
46
[Entity] Shannon Realty, Inc. [Title] Income Statement [Period] For the Month Ended December
31, 20xx
Revenues Commissions Earned $3,500 $1,000 400 300 $1,700 $1,800
Expenses Equipment Rental Wages Utilities Total Expenses Net Income
Trace to Statement of Retained Earnings Copyright2001 by
47
The Statement of Retained Earnings
Shows
the changes in retained earnings over a period of time.
Copyright2001 by
48
Shannon Realty, Inc. Statement of Retained Earnings For the Month Ended December 31, 20xx
Retained Earnings, 12/1/xx Net Income for the Month Subtotal Less Dividends Retained Earnings, 12/31/xx
Trace to Owners Equity Section of Balance Sheet Copyright2001 by
0 1,800 $ 1,800 600 $ 1,200
49
The Balance Sheet
Shows
financial position at a point in
time. Is often called the statement of financial position. Presents a view of the business as the holder of resources, or assets, that are equal to the claims against those assets.
Copyright2001 by
50
Shannon Realty, Inc. Balance Sheet As of December 31, 20xx
ASSETS
Cash A/R Supplies Land Building $15,300 1,000 500 10,000 25,000
Total Assets
$51,800
Copyright2001 by
51
Shannon Realty, Inc. Balance Sheet As of December 31, 20xx
LIABILITIES
A/P $600 STOCKHOLDERS EQUITY Common Stock $50,000 Retained Earnings $1,200 Total SE $51,200 Total Liabilities and SE $51,800
Copyright2001 by
52
The Statement of Cash Flows
Focuses
on a companys liquidity goal. Shows cash produced by operating a business as well as important financing and investing transactions that take place during an accounting period. Is derived from the income statement and balance sheet. Is directly related to the other three statements.
Copyright2001 by 53
Shannon Realty, Inc. Statement of Cash Flows For the Month Ended December 31, 20xx
Cash Flows from Operating Activities
Net Income Noncash Expenses and Revenues Included in Income Increase in A/R $(1,000) Increase in Supplies (500) Increase in A/P 600
Net Cash Flows from Operating Activities $900 Copyright2001 by
$1,800
(900)
54
Shannon Realty, Inc. Statement of Cash Flows For the Month Ended December 31, 20xx
Cash Flows from Investing Activities
Purchase of Land ($10,000) Purchase of Building (25,000) Net Cash Flows from Investing Activities (35,000)
Copyright2001 by
55
Shannon Realty, Inc. Statement of Cash Flows For the Month Ended December 31, 20xx
Cash Flows from Financing Activities
Investments by Stockholders Dividends Net Cash Flows from Financing Activities Net Increase (Decrease) in Cash Cash at Beginning of Month Cash at End of Month $50,000 (600) 49,400 $15,300 0 $15,300
Trace to Balance Sheet
Copyright2001 by 56
Generally Accepted Accounting Principles
OBJECTIVE 7
State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPAs report, and identify the organizations that influence GAAP.
Copyright2001 by
57
Generally Accepted Accounting Principles (GAAP)
Focus
on understandability of financial statements. Encompass the conventions, rules, and procedures necessary to define accepted accounting practice at a particular time.
Copyright2001 by
58
Financial Statements, GAAP, and the Independent CPAs Report
Financial
statements are prepared by management and may be biased. Financial statements are audited by independent CPAs. An audit ascertains that the financial statements have been prepared in accordance with GAAP.
Copyright2001 by
59
Discussion
Q. Why are GAAP important to readers
of financial statements?
A. GAAP ensure that the financial
statements will be understandable to their users.
Copyright2001 by
60
Professional Ethics and the Accounting Profession
OBJECTIVE 8
Define ethics and describe the ethical responsibilities of accountants.
Copyright2001 by
61
What Are Professional Ethics?
A
code of conduct that applies to the practice of a profession. Code of conduct adopted by the AICPA and each state.
Responsibility Integrity. Objectivity.
to the public.
Independence.
Due
care.
Copyright2001 by 62
The Institute of Management Accountants (IMA) Code of Professional Conduct
Competency. Confidentiality. Integrity. Avoidance
of conflicts of
interest. Communication of information objectively and without bias.
Copyright2001 by 63
Discussion
Q. Discuss the importance of professional ethics in
the accounting profession.
A. Professional ethics forms a code of conduct that
applies to the practice of a profession. As members of a profession, accountants have a responsibility, not only to their employers and clients but also to society as a whole, to uphold the highest ethical standards.
Copyright2001 by
64