Welcome to BU 227. Carolyn MacTavish, PhD, CPA, CA
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1 Welcome to BU 227 Carolyn MacTavish, PhD, CPA, CA
2 BU 227 Chapter 1: Financial Statements and Business Decisions
3 Overview of Chapter 1 Nature of accounting Accounting profession Types of business organizations Accounting equation Financial statements Ethics in accounting
4 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 MORE THAN JUST BOOKKEEPING!
5 Nature of Accounting WHO USES ACTG INFO?
6 Nature of Accounting GOOD ACCOUNTING INFORMATION IS: USEFUL Fundamental Qualitative Characteristics RELEVANCE REPRESENTATIONAL FAITHFULNESS Enhancing Qualitative Characteristics COMPARABILITY VERIFIABILITY TIMELINESS UNDERSTANDABILITY
7 Nature of Accounting -GAAP CONCEPTS, RULES, PROCEDURES THAT DEFINE ACCEPTED ACTG PRACTICE COMPARE F/S AUDIT GAAS (CAS) CICA HANDBOOK 5 Parts IFRS ASPE
8 Nature of Accounting TYPES OF ACCOUNTING: FINANCIAL ACCOUNTING EXTERNAL USERS MANAGERIAL ACCOUNTING INTERNAL USERS
9 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: FUNCTION?
10 Forms of Business Organization Owner(s) PROPRIETORSHIP PARTNERSHIP CORPORATION 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
11 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 categories of operating, investing, and financing. LO 1
12 Statement of Financial Position (Balance Sheet) SHOWS THE FINANCIAL POSITION OF THE FIRM AT ONE POINT IN TIME
13 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
14 The Accounting Equation ASSETS = LIABILITIES + SHAREHOLDERS EQUITY LIABILITIES ASSETS SHAREHOLDERS EQUITY E1-2
15 Income Statement SUMMARY OF HOW WELL ENTITY PERFORMED DURING A SPECIFIC PERIOD
16 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 NOT DUE TO INVESTMENTS BY OWNERS
17 Statement of Comprehensive Income Revenues 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. When will the revenue from this transaction be recognized? $1,000 sale made on May 25. May 2011 X Cash from sale collected on June 10. X June 2011 LO 1
18 Statement of Comprehensive Income Revenues 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. When will the revenue from this transaction be recognized? $1,000 revenue recognized in May May 2011 June 2011 LO 1
19 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 REVENUES EXPENSES = NET INCOME (LOSS)
20 Statement of Comprehensive Income Expenses 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? Paid $75 cash on May 11 for newspaper ad. Ad appears on June 8. X X May 2011 June 2011 LO 1
21 Statement of Comprehensive Income Expenses 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? Advertising expense recognized in June. May 2011 June 2011 LO 1
22 The Accounting Equation ASSETS = LIABILITIES + EQUITY CONTRIBUTED CAPITAL (OWNER CONTRIBUTIONS) RETAINED EARNINGS NET INCOME (REVENUE EXPENSES) DIVIDENDS (OWNER WITHDRAWALS) LET S TRY SOME QUESTIONS! E1-3, E1-5
23 Statement of Owners Equity OR Statement of Retained Earnings (ASPE) SUMMARIZES CHANGE IN EQUITY DURING THE PERIOD OE Beginning BALANCE, Retained BEGINNING Earnings OF PERIOD + + OWNER Net Income INVESTMENTS OR DURING -Net Loss - OWNER WITHDRAWALS DURING -Dividends + = NET Ending INCOME Retained or Earnings - NET LOSS = OE BALANCE, END OF PERIOD Separate Capital Account for purchase of shares LINKS BALANCE SHEET AND INCOME STATEMENT
24 Statement of Changes in Equity (IFRS) THE NESTLE GROUP Statement of Changes in Equity For the Year Ended December 31, 2009 (in thousands of CHF) Share Retained Other Capital Earnings Components Balance as at Jan. 1, ,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, ,248 64,660 (17,277) Let s try E 1-6 & revisit E 1-2 LO 1
25 E1-2 (2) Beginning Retained Earnings + Net Income Dividends = Ending Retained Earnings Therefore Net Income= Ending Retained Earnings + Dividends - Beginning Retained Earnings = $12, = $12,780 Who has financed more? How much have shareholders financed? $112,780 How much have creditors financed? $ 10,120
26 Statement of Cash Flows SUMMARIZES CASH RECEIPTS AND PAYMENTS MADE DURING PERIOD, SHOWING CASH FROM (OR USED IN): OPERATIONING ACTIVITES INVESTING ACTIVITIES FINANCING ACTIVITIES NOT THE SAME AS THE INC. STMT.
27 Financial Statements INCOME STATEMENT NET INCOME STMT OF RETAINED EARNINGS BALANCE SHEET Retained Earnings, ENDING BALANCE CASH, BEG & END E1-10 STMT OF CASH FLOWS
28 P1-3 New Delivery Company was organized on January 1, 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) Cash inflow (or outflow)
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