© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin acct 102 financial accounting overview of...
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© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
ACCT 102
FinancialAccounting
Overview of F/S(Chap 1,2,3,4)
Cash Flows Statement(Chap 16)
Investing activities(Chap 10,15)
Operating activities(Chap 5,6,9,10,11)
Financing activities(Chap 13,14)
ManagementAccounting
Cost Accounting(Chap 18,19,20)
Cost-Volume-Profit Analysis(Chap 22)
Operating Budgets(Chap 23)
Capital Budgets(Chap 25)
Managerial Decision(Chap 25)
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Accounting in BusinessChapter
11
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Learning objectivesLearning objectives
1. Why accounting? 2. What is accounting? 3. Ethics in accounting 4. Accounting model / Accounting equation 5. Transaction analysis and recording 6. Financial Statement 7. Decision analysis: ROE & ROA
• Case: Coca Cola, Pepsi & Cadbury Schweppes
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1. Why accounting? 1. Why accounting?
External Users
•Lenders
•Shareholders
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Marketing Managers
•Production Managers
•Purchasing Managers
•HR Managers
Related parties of a business
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2. What is accounting2. What is accounting
Language of business Help users to make better decision Information and measurement system To identify, record, and communicate
business activities Provide relevant, reliable, and
comparable information
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IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
2. What is accounting2. What is accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
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Identifying Business Activities
Recording Business Activities
Communicating Business Activities
2. What is accounting2. What is accounting
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Financial and Managerial accountingFinancial and Managerial accounting
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
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Beliefs that distinguish right from
wrong
Accepted standards of good and bad
behavior
Ethics
3. Ethics in Accounting3. Ethics in Accounting
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Accounting ScandalsAccounting Scandals Accounting frauds in current years
• Enron (2001)• Worldcom (2002)• Parmalat (2003)• AIG (2005)
Parties pay dearly for the fraud
• Enron • Managers
– CFO 10 year in prison (Jan,14,2004)– CAO 7 years in prison (Dec,28,2005)– Chairman maximum 45 years in prison (May,25,2006)– CEO maximum 185 years in prison (May,25,2006)
• Investors – Stock Price $90 on Aug,2000– Less than $1 on Nov,28,2001
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4. Accounting principles4. Accounting principles
General principles: • basic assumptions, concepts, and guidelines for
preparing financial statements.
Specific principles: • detailed rules used in reporting business
transactions and events.
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Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
Financial accounting practice is governed by concepts and rules known as generally accepted
accounting principles (GAAP).
GAAPGAAP
Relevant Information
Relevant Information
Affects the decision of its users.
Affects the decision of its users.
Reliable InformationReliable Information Is trusted by users.
Is trusted by users.
Comparable Information
Comparable Information
Is helpful in contrasting organizations.
Is helpful in contrasting organizations.
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The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
The Securities and Exchange Commission is the government group that establishes
reporting requirements for companies that issue stock to the public.
FASB and SECFASB and SEC
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
Financial Accounting Standards Board is the private group that sets both broad and
specific principles.
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Setting Accounting PrinciplesSetting Accounting Principles
Hong Kong: • Hong Kong Institute of Certified Public Account
ants (HKICPA)
China• Ministry of Finance People’s Republic of China
International Accounting Standard Board (IASB)• International Financial Reporting Standards
(IFRS)
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Principles of AccountingPrinciples of Accounting
Now Future
Going-Concern PrincipleReflects assumption that the
business will continue operating instead of being closed or sold.
Cost PrincipleAccounting information is
based on actual cost.
Objectivity PrincipleAccounting information is supported by independent,
unbiased evidence.
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Principles of AccountingPrinciples of Accounting
Revenue Recognition Principle1. Recognize revenue when it is
earned.2. Proceeds need not be in cash.3. Measure revenue by cash
received plus cash value of items received.
Monetary Unit PrincipleExpress transactions and events in
monetary, or money, units.
Business Entity PrincipleA business is accounted for
separately from other business entities, including its owner.
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Business Entity FormsBusiness Entity Forms
ProprietorshipProprietorship PartnershipPartnership CorporationCorporation
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Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
Characteristics Proprietorship Partnership CorporationBusiness entity yes yes yesLegal entity no no yesLimited liability no no yesUnlimited life no no yesBusiness taxed no no yesOne owner allowed yes no yes
*
Characteristics of BusinessesCharacteristics of Businesses
Exh.1.8
*
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Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it
common stock (or capital stock).
CorporationCorporation
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AssetsLiabilities & Equity
4. Accounting Equation4. Accounting Equation
LiabilitiesLiabilities EquityEquityAssetsAssets = +
資產負債+所有者權益
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Accounting EquationAccounting Equation
Assets • Resources with future benefits that are owned or
controlled by a company. Liabilities
• Source of fund from creditors• What a company owes its creditors of future products
or services.
Equity• Source of fund from owners • The claims of its owners
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store Supplies
Store Supplies
Notes Receivable
Notes Receivable
Accounts Receivable
Accounts Receivable
Resources owned or controlled
by a company
Resources owned or controlled
by a company
Assets: Resources owned or controlled by a business Assets: Resources owned or controlled by a business
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Taxes Payable
Taxes Payable
Wages Payable
Wages Payable
Notes Payable
Notes Payable
Accounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
Liabilities: creditors’ claim on assets. Liabilities: creditors’ claim on assets.
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Owner’sclaims
on assets
Owner’sclaims
on assets
RevenuesRevenues
Owner Investments
Owner Investments
Owner Withdrawals
Owner Withdrawals
ExpensesExpenses
Equity: the owner’s claim on assets. Equity: the owner’s claim on assets.
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Expanded Accounting EquationExpanded Accounting Equation
RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital
Owner Withdrawals
Owner Withdrawals
_ + _
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Expanded Accounting EquationExpanded Accounting Equation
Revenues: gross increase in equity from a company’s earnings activities.
Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.
Owner investments: the assets an owner puts into the company.
Owner withdrawals: the assets take away from the company for personal use.
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The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
5. Transaction Analysis 5. Transaction Analysis
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1. J. Scott, the owner, contributed $20,000 cash to start the Scott Company.
2. Purchased supplies paying $1,000 cash.3. Purchased equipment for $15,000 cash.4. Purchased Supplies of $200 and Equipment of $1,000
on account.5. Borrowed $4,000 from 1st American Bank.6. Rendered consulting services receiving $3,000 cash.7. Paid salaries of $800 to employees.8. J. Scott withdrew $500 from the business for personal
use.
TransactionsTransactions
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
J. Scott, the owner, contributed $20,000 cash to start the business.
Transaction 1Transaction 1
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Transaction 1Transaction 1
J. Scott, the owner, contributed $20,000 cash to start the business.
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction 2Transaction 2
Purchased supplies paying $1,000 cash.
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Transaction 2Transaction 2
Purchased supplies paying $1,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction 3Transaction 3
Purchased equipment for $15,000 cash.
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Transaction 3Transaction 3
Purchased equipment for $15,000 cash.
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The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
Transaction 4Transaction 4Purchased Supplies of $200 and Equipment of $1,000 on account.
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Transaction 4Transaction 4Purchased Supplies of $200 and Equipment of $1,000 on account.
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The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
Transaction 5Transaction 5
Borrowed $4,000 from 1st American Bank.
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Transaction 5Transaction 5
Borrowed $4,000 from 1st American Bank.
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Transaction AnalysisTransaction AnalysisThe balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Now let’s look at transactions involving revenue, expenses and withdrawals.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction 6Transaction 6Rendered consulting services
receiving $3,000 cash.
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Transaction 6Transaction 6Rendered consulting services
receiving $3,000 cash.
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The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Transaction 7Transaction 7
Paid salaries of $800 to employees.
Remember that the balance in the salaries expense account actually increases.
But, equity actually decreases because expenses reduce equity.
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Transaction 7Transaction 7
Remember that expenses decrease equity.
Paid salaries of $800 to employees.
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The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Transaction 8Transaction 8J. Scott withdrew $500 from the
business for personal use.
Remember that the balance in the J. Scott, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
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Transaction 8Transaction 8
Remember that withdrawals decrease equity.
J. Scott withdrew $500 from the business for personal use.
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5. Financial Statements5. Financial StatementsLet’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
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Net income is the difference between
Revenues and Expenses.
The income statement describes a company’s revenues and expenses
along with the resulting net income or loss over a period of time due to
earnings activities.
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The net income of $2,200 increases
Scott’s capital by $2,200.
The Statement of Owner’s Equity
explains changes in equity from net
income (or net loss) and from
owner investments and withdrawals for
a period of time.
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The Balance Sheet describes a company’s
financial position at a point in time.
The Balance Sheet describes a company’s
financial position at a point in time.
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The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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ROE = Net income ÷ Average Shareholder’s Equity
ROE evaluates efficiency of management using owner’ s capital to
add value for owner
ROE evaluates efficiency of management using owner’ s capital to
add value for owner
6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA)6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA)
Comparison: with competitor
with prior period
Comparison: with competitor
with prior period
ROE is used by investors to evaluate the attractiveness of investment
objects.
ROE is used by investors to evaluate the attractiveness of investment
objects.
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ROA = Net income ÷ Average total assets
ROA evaluates operating efficiency of management using assets
ROA evaluates operating efficiency of management using assets
6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA)6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA)
Comparison: with competitor
with prior period
Comparison: with competitor
with prior period
ROA is viewed as an indicator of operating efficiency.
ROA is viewed as an indicator of operating efficiency.
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Return on Assets (ROE & ROA)- Beverage IndustryReturn on Assets (ROE & ROA)- Beverage Industry
1. Industry Background• Objective: strong brands of beverage• Key success factor: Marketing, especially branding
2. Key players:• Coca Cola Company• Pepsi Inc.• Cadbury Schweppes Public Ltd. Co.
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Return on Assets (ROE)- CoCa Cola, Pepsi, & Cadbury Schweppes Return on Assets (ROE)- CoCa Cola, Pepsi, & Cadbury Schweppes
ROE is used by investors to evaluate the attractiveness of investment objects.
ROE is used by investors to evaluate the attractiveness of investment objects.
Return on Equity
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
RO
E
KO PEP CSG
ROE 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
KO 30.18% 32.29% 33.58% 26.33% 38.38% 23.12% 27.14% 45.07% 61.63% 57.01%
PEP 29.24% 33.08% 33.31% 33.01% 32.76% 30.14% 30.87% 29.89% 31.60% 17.35%
CSG 14.71% 13.01% 10.13% 15.43% 13.58%
Industry 22.45% 20.52% 22.40%
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Return on Assets (ROA)- CoCa Cola, Pepsi, & Cadbury Schweppes Return on Assets (ROA)- CoCa Cola, Pepsi, & Cadbury Schweppes
ROA evaluates operating efficiency of management using assets
ROA evaluates operating efficiency of management using assets Return on Total Assets
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
RO
A
KO PEP CSG
ROA 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996
KO 16.01% 16.47% 16.76% 12.97% 18.30% 10.26% 11.93% 19.61% 25.03% 21.67%
PEP 13.66% 15.80% 14.62% 13.28% 13.30% 12.16% 10.20% 9.32% 10.14% 10.37%
CSG 5.43% 4.24% 3.56% 6.36% 5.67%
Industry 9.59% 7.84% 8.18%