FINANCIAL ACCOUNTING (FIU-E)

Transcription

1 FINANCIAL ACCOUNTING (FIU-E) Winter semester 2015/2016 Lecturer: Ing. Olga Malíková, Ph.D. Technical University of Liberec Faculty of Economics Department of Finance and Accounting

2 FINANCIAL ACCOUNTING Contact info: Office:Building H of TUL (VoroněžskáStreet), 7 th floor, room H837 Tel.: / olga.malikova@tul.cz Contact hours: Monday p.m. (or individual term ordered by in advance)

3 Conditionson to obtaincertificate; finalexam Final exam: writtenform(test), practical(50 %) and theoretical(50 %) part, passed, whensucceedfrom60 % on eachpart.

4 FINANCIAL ACCOUNTING working paper:

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7 working paper: FIU_N

8 FINANCIAL ACCOUNTING structure of the course A) Essential terms of accounting (September + revision, extended in February) B) Basic Concept of Financial Accounting (February-May)

9 FINANCIAL ACCOUNTING structure of the course A) Essential terms of accounting The need for information (types of information, The need for information (types of information, definition of accounting); history of accounting, accounting as a language etc.; definition and detailed structure of assets and liabilities.

10 FINANCIAL ACCOUNTING structure of the course B) Basic concept of financial accounting Subject (object) of accounting and methodical tools for its evidence Definition of subject of accounting; Tools: acc. documents, books of account, acc. period, acc. evidence, entries and records, account in use; Trial balance: substantiality, itsform, types of errors revealed and not revealed by T.B., differences between T.B. and Balance Sheet

11 FINANCIAL ACCOUNTING structure of the course B) Basic concept of financial accounting Financial Statements BALANCE SHEET: its basic structure and concept, its development B.S. changes, definition and detailed structure of assets and liabilities with examples; PROFIT and LOSS (INCOME) STATEMENT (ACCOUNT): its vertical structure regardingnature(purpose)of expenses and revenues, definition of expense, revenue, profit and loss; Relations between financial statements.

12 FINANCIAL ACCOUNTING structure of the course B) Basic concept of financial accounting Basic accounting concepts money measurement, entity, going concern, cost, money measurement, entity, going concern, cost, dual-aspect, accounting period, conservatism, realization, matching, consistency, materiality, accruals

13 FINANCIAL ACCOUNTING structure of the course B) Basic concept of financial accounting Proceeding of accounting works performed within accounting period in D-E bookkeeping system description from beginning till the end of acc. period, definition of double-entry, types of expenditures, process of keeping accounts and types of accounts.

14 FINANCIAL ACCOUNTING structure of the course B) Basic concept of financial accounting Valuation methods measurement bases valuation methods based on historical cost and their application, depreciation its substance and application as an balance sheet item and as an P/L account item. Choosen topics of closing-the-books inventory taking

15 USEFUL LINKS FOR ACCOUNTING: AmericanInstitute ofcertifiedpublic Accountants. [online]. < Deloitte Touche&Tohmatsu. [online]. < European Accounting Association. [online]. < Financial Accounting Standards Board. [online]. < International Accounting Standards Board. [online]. < International Federation of Accountants. [online]. < PriceWaterhousCoopers. [online]. < The Academy of Accounting Historians. [online]. < : David Krug s accounting classes(jccc video)

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17 NATURE AND PURPOSE OF ACCOUNTING (Lecture 1) Key terms Information, accounting, definition of accounting, accounting history, users of accounting information, stakeholders, accounting language.

18 Structureofthelecture1 1.1 The nature of organization (What is the company?) 1.2 The need of information 1.3 Accounting as an information. What is accounting? 1.4 Accounting systems: financial vs. management accounting 1.5 Greatest events in past accounting history 1.6 Accounting framework 1.7 Accounting ethics 1.8 Accounting as a service function 1.9 Accounting and users needs. Who is the user of accounting information?

19 Organizations 1.1The nature of organization (What is the company?) are groups of individuals that have joined together to perform particular tasks to achieve particular goals which reflect the interests of stakeholders of the organization. They include schools, businesses,clubs, religious groups, hospitals, governmental bodies, Reasons for having joined together: groups can perform tasks more easily than individuals operating alone.

20 1.2The need of information Production and distribution of goods andservicesineconomicenvironment: isprimarilylefttoindividualsortoagroupofpeople; these entrepreneurs can own property and conduct their business with the view of making a profit from their efforts; all businesses need a system of planning and maintaining information about their financial affairs.

21 1.2The need of information Different types of information might be useful to people interested in the firm: non-quantitative information (visual impressions, conversations, television programs, newspaper stories, ). Quantitative information such information that is expressed in numbers.

22 1.3Accounting as an information Financial accounting information = quantitative information expressed in monetary amounts (e.g. acquisition cost of purchased equipment). Non-monetary information is often included in accounting reports for reader's understanding the report (e.g. number of employees; products sold).

23 1.3What is accounting? Accounting is the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by users of the information. (American Accounting Association, A Statement of Basic Accounting Theory. Sarasota, Fla.: 1966)

24 1.3Accounting as an information system a part of the business s total information system users have to make decisions based on it Accounting Information Systems the processes and procedures required to generate accounting information. Sequential stages of accounting information system: Information identification Information recording Information analysis Information reporting

25 1.3Accounting as an information system Overview of financial accounting:

26 1.3Accounting as an information Information Non-quantitative Information Quantitative Information Accounting Information Non-accounting Information Operating Information Financial Accounting Management Accounting Figure 1.1 Types of information Source: ANTHONY, R. N. REECE, J. S. Accounting Principles. 7 th ed. USA: Irwin, p. 4

27 1.3Accounting as an information Operating information is required to conduct an organization's day-to-day activities to provide the basic data for both management accounting and financial accounting (E.g. In the stockroom the material list has to be known to order new supply of depleted sorts). Financial accounting providesinformation to decision makers whoare external to the business; focuses on external reporting that is guided by generally accepted accounting principles (GAAP). Management accounting providesinformation to decision makers whoare internal to the business; measures and reports financial information as well as other types of information that assist managers in fulfilling the goals of the organization (planning and control).

28 1.4Financial versus managerialaccounting Financial Accounting Managerial Accounting Users and decision makers External users: Investors, creditors, government, Managers, employees, and decision makers internal to the organization Purpose of information Assist external users in making investment, credit,and other decision Assist managers in making planning and control decisions Flexibility of practice Structured, regulated (by legislation or professional istitution), controlled by GAAP Timelinessof information For external users often available only after an audit is completed Relatively flexible (no GAAP) Availablequickly without the need to wait for an audit Time dimension Historicalinformation Manyprojections and estimates; historical info also presented Focus of information Emphasison whole organization Emphasis on an firm sprojects, processes, and subdivisions Nature of information Monetaryinfo only Mostly monetarybut also nonmonetary info

29 1.5 Greatest events inpastaccountinghistory BC (The birth of civilization. Fortified cities) Clay tokens. Simple tokens were associated with agricultural sites, clay ballsofvariousshapes(round, oval etc.) representing specific goods.

30 1.5 Greatest events inpastaccountinghistory 3200 BC (Sumeria) Writing. Accounting records advanced from simple to complex tokens, and then from abstract symbols in clay tablets to cuneiform writing. Abstract symbols in clay tablet Developed cuneiform writing

31 1.5 Greatest events inpastaccountinghistory 3000 BC (Middle East, China, Egypt) Bronze, abacus, papyrus BC The Code of Hammurabi. One of the earliest law codes, whichstandardized weights and measures, commercial transactions and contracts, and criminal penalties. 700 BC (Lydia) Coins. It started with crude slugs of electrum (gold and silver alloy) of a standard weight. Later coins were stamped, first with simple lines and then with more complicated designs.

32 Period Event 1.5 Greatest events inpastaccounting history 500 BC The development of Greek banking. From200 BC Roman empire. Rome adopted coinage, abacus,greek alphabet, writing on papyrus, banking. It resulted in development of auditing, taxation, public administration education including accounting. 410 AD Fall of Rome Dark Ages Crusades. Stimulating of banking in Europe. Italian city states prosper. From1000 Italianmerchants extend trade from England to the Far East and improve bookkeeping LUCASPACIOLI Summa de ArithmeticaGeometriaProportioniet Proporcionalita. Codified double entry bookkeeping as the Venice system. Thanks to Gutenberg s printing press, Summa was printed and spread throughout Europe.

33 LUCAS PACIOLI, Summa part of first printed accounting text.

34 1.6 Accounting framework During the evolution of accounting certain terminology, rules, and conventions have come to be accepted as useful. If readers are to understand accounting reports (i.e. the end products of an accounting system) they must be familiar with the rules and conventions lying behind these reports. Accounting is called the language of business.

35 1.7 Accounting ethics Ethics in accounting is a complex issue. Ethics is a topical subject given the collapse of Enron in USA and HIH Insurance in Australia in late 2001 and 2002 respectively. Accountants have a significant responsibility to the public because the public relies upon financial statements in order to make business decisions. Virtues considered essential to ethical behaviour are: Honesty and integrity. Trustworthiness and faithfulness. Reliability and dependability. Ability to care about others. It is imperative that accountants follow the highest ethical principles in order to keep that public trust in the profession. CONNELL, D. A case for ethics. National Accountant, vol. 18, No. 5, October/November 2002.

36 1.8Accounting as a service function Accountants provide economic information to their clients (i.e. users stakeholders). Quality of this service = to be useful, accounting information should possess certain key qualities (characteristics): Relevance acc.info must have the ability to influence decisions (i.e. for prediction of future events or helping confirm past events) Reliability accounting should be free from significant errors Comparability to identify changes in the business over time, to evaluate performance of the business in relation to other similar businesses Understandability accounting reports should be understood by those at whom the information is aimed

37 1.9 Accounting and users needs For accounting information to be useful, the accountant must be clear: for whomthe information is being prepared and for what purposethe information will be used. There are likely to be various groups of people (known as user groups ) with an interest in a particular organisation, in the sense of needing to make decisions about it.

38 1.9 Main users of accounting information Owners Managers Shareholders Investors Government Employees Enterprise Creditors Competitors Suppliers Public Customers Source: Own elaboration The majority of user groups are outside the business but, nevertheless, they have a stake in it. The groups above identified are normally the most important.

39 1.9 Main users of accounting information Present and potential owners (investors)assess and compare the prospects of alternative investments. They evaluate two variables: Expected return theincrease intheinvestor's wealth that is expected over the investment's time horizon. Risk theuncertainty surrounding estimates of expected return. Shareholdersmust decide whether to buy, hold, or sell shares in the firm. Creditorsmust decide whether to extend credit and on what terms.

40 References ALEXANDER, D. NOBES, CH. Financial Accounting. An International Introduction. 4 nd ed. Essex: Pearson Education Limited, ISBN ANTHONY, R. N. REECE, J. S. Accounting Principles. 7 th ed. USA: Irwin, ISBN HORNGREN, CH. T. et al. Introduction to Financial Accounting. 9 th ed. New Jersey: Pearson Education, ISBN LARSON, K. D. WILD, J. J. CHIAPPETTA, B. Fundamental Accounting Principles. 17 th ed. New York: McGraw-Hill, ISBN NOBES, CH. PARKER, R. Comparative International Accounting. 11 th ed. Essex: Pearson Education Limited, ISBN WEYGANDT J.J., P.D. KIMMEL andd.e. KIESO. FinancialAccounting: IFRS Edition. 2 nd ed., USA: John Wiley& Sons, ISBN: ELLIOTT, B. andj. ELLIOTT. FinancialAccountingandReporting. 11 th ed., Harlow: Prentice Hall, ISBN: GIROUX, G. Whowasthefirstaccountant? AccountingHistory.[online] [cit ]. Retrieved from WWW: <

41 EXERCISE 1.1 Devise an example of existing firm; taking the user groups identified below, suggest what sort of decision each group is likely to make about this firm. Name of the firm:. Characterization:... Owners Managers Shareholders Creditors-lenders Suppliers Customers Competitors Government Investors and their analysts Public Others: