acc1002 jan 2012 overview
TRANSCRIPT
ACCOUNTING IN BUSINESSDr Winston Kwok
Learning Objectives1. Explain the importance of accounting and
identify its uses2. Explain the meaning of GAAP and apply
accounting principles and assumptions3. Define and interpret the accounting
equation and each of its components4. Identify and prepare basic financial
statements and explain how they interrelate
OBJECTIVE 1Explain the importance of accounting and identify its uses
Importance of Accounting
AccountingAccountingis a
system that IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesinformation
that isRelevantRelevant
ReliableReliable
ComparableComparableto help users make
better decisions.to help users make
better decisions.
Users of Accounting Information
External Users
•Shareholders (Investors)
•Lenders (Creditors)
•Governments
•Consumer Groups
•External Auditors
•Customers
Internal Users
•Managers
•Officers/Directors
•Internal Auditors
•Sales Staff
•Budget Officers
•Controllers
Users of Accounting Information
External Users
Financial accounting provides external users with financial
statements.
Internal Users
Managerial accounting provides information needs for internal
decision makers.
Annual Reports
• Required by law to be issued by listed/public companies.
• An annual report contains financial statements, auditor’s report, notes to accounts and other information such as chairman’s statement.
• Important source of information for key users such as investors and creditors.
ACCOUNTING
(analyses and professional judgment)
BOOKKEEPING
(recording)
Financial Accounting versusTax Accounting
• Financial Accounting based on guidelines on how best to reflect the nature or reality of business.
• Tax accounting influenced by economic and political objectives of governments.
OBJECTIVE 2Explain the meaning of GAAP and apply accounting principles and assumptions
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).
Generally Accepted Accounting Principles
Relevant InformationRelevant 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
Used in comparisons across years & companies.
Used in comparisons across years & companies.
GAAP
• Help determine what information to be included in financial statements.
• Not physical science laws, but can change based on needs of society.
• Applied based on professional judgment.• Therefore, a business transaction could have
more than one accounting treatment or method resulting in different financial numbers.
Setting Specific Accounting Principles or Accounting Standards
International• The International
Accounting Standards Board (IASB) issues International Financial Reporting Standards (IFRS).
• If IFRS are adopted worldwide, a company can potentially use a single set of financial statements in all financial markets.
U.S.• Financial Accounting
Standards Board is the private group that sets both broad and specific principles.
• The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue shares to the public.
IFRS• More than 100 countries and more than 40% of Global
Fortune 500 companies are already using IFRS.– Blue areas: countries that require or permit IFRS. – Grey areas: countries pursuing adoption of IFRS.– Asia: Adopted or in-process:
Singapore, Malaysia, Taiwan, China, Hong Kong, Australia, India and South Korea
IFRS and FRS• In Singapore, the Accounting Standards Council
(ASC) is empowered under the Accounting Standards Act to prescribe financial reporting standards (FRS) for use by companies.http://www.asc.gov.sg/account.htm
• The broad policy intention is to adopt IFRS, taking into account the local economic and business circumstances and context.
General Accounting Principles and Assumptions
General Accounting Principles
Measurement or Cost Principle• Accounting information is based on actual
or historical cost which is considered objective or reliable.
• Business transactions recorded at the original price paid at the time of the transaction.
• Accounting records reflect original cost as long as organization holds asset e.g. - a hospital records purchase price of equipment it buys.
• Profession moving towards market or fair values.
General Accounting Principles
Revenue Recognition Principle
• Recognize or record revenue when it is earned. This is often when the business has delivered the product or provided the service.
• Proceeds need not be in cash.• Measure revenue by cash received plus cash
value of items received.
General Accounting Principles
Expense Recognition or Matching Principle
A company must record its expenses incurred to generate the revenue reported.
General Accounting Principles
Full Disclosure Principle
Report the details behind financial statements that would impact users’ decisions.
Accounting AssumptionsBusiness Entity
• A business is accounted for separately from other business entities, including its owner.• 3 general business entity forms:
Sole Proprietorship
Sole Proprietorship
Corporation or Company
Corporation or Company
PartnershipPartnership
Accounting AssumptionsMonetary Unit
• Express transactions and events in monetary, or money, units.
• Examples of monetary units are the Singapore dollar, the Euro, the Thai baht, the Japanese yen, the Chinese renminbi.
• The purchasing power of the monetary unit is often assumed to be stable, i.e. inflation is ignored.
Accounting Assumptions
Going-Concern• The business will continue operating
instead of being closed or sold.• Property is reported at cost instead of
liquidation values that assume closure of business.
Accounting Assumptions
Time Period Assumption• The life of a business can be divided into time periods,
such as months and years.• Periodic financial statements provide users with relevant
and timely information on each accounting period.• At a minimum, companies prepare financial statements
once each year, which is called a fiscal year or a financial year.
• A fiscal year is any consecutive 12-month time period which may be different from the calendar year.
Accounting Constraints
• The materiality constraint prescribes that only information that would influence the decisions of a reasonable person need be disclosed. This constraint looks at both the relative size and importance of an amount.
• The cost-benefit constraint prescribes that only information with benefits of disclosure greater than the costs of providing it need be disclosed.
The Audit Report or Auditor’s Report
Companies are required by law to hire external (independent or statutory) auditors from accounting firms.
These auditors examine financial statements to verify that they are prepared according to GAAP. An unqualified or ‘clean’ opinion.
The Audit Report or Auditor’s Report
Such reports are opinions on the financial statements, not guarantees about future profitability.
Financial statements are the responsibility of the company’s management and not the auditors.
‘Big 4’ firms:KPMG
Ernst & YoungDeloitte
PricewaterhouseCoopers
OBJECTIVE 3Define and interpret the accounting equation and each of its components
AssetsLiabilities &
Equity
LiabilitiesLiabilities EquityEquityAssetsAssets = +
ACCOUNTING EQUATION
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Resources owned or controlled by an entity
Claims against the entity’s resources
Claims byCreditors (lenders)
Claims by owners(investors or shareholders)
ACCOUNTING EQUATION
LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
VehiclesVehicles
Store SuppliesStore
Supplies
Notes Receivable
Notes Receivable
Accounts ReceivableAccounts
Receivable
Resources owned or
controlled by a company
Resources owned or
controlled by a company
Assets
Taxes PayableTaxes
PayableWages
PayableWages
Payable
Notes PayableNotes
PayableAccounts Payable
Accounts Payable
Creditors’ claims on
assets
Creditors’ claims on
assets
Liabilities
• What’s left (residual) of the entity’s assets after it pays liabilities
• Also called net assets, net worth, or residual equity
Equity is Assets less Liabilities
Equity
Owner’s Claims on
Assets
Expanded Accounting Equation
Net Income or Net Profit
• The common measure of a company’s result for a period.
• Revenues: Sales of products or services.• Expenses: Cost incurred to provide products or
services.• Net income increases equity.• If expenses greater than revenues, then net loss
which decreases equity.
RevenuesRevenues ExpensesExpensesNet IncomeNet Income = -
Withdrawals
Disbursement of cash or other business assets to the owners.
Cash or other property withdrawn from the business by a proprietor or partner.
For a company with issued shares, such cash payments to shareholders (which are owners of the company) are called dividends.
OBJECTIVE 4Identify and prepare basic financial statements and explain how they interrelate
The Four Basic Financial Statements
• Income statement• Statement of comprehensive income
• Statement of changes in equity• Balance sheet
• Statement of financial position• Statement of cash flows
These are the titles of financial statements generally used under IFRS.Comprehensive income will be explained in the lecture on corporations.
Relationships among the Financial Statements
• Each financial statement tells a portion of the story about business operations.
• Users rely on all four statements when analyzing financial performance and fiscal health.
Relationships by time periods
Time
Covering the intervening period:
Income Statement
Statement of Changes in Equity
Statement of Cash Flows
Balance Sheet
At beginning of period
Balance Sheet
At end of period
Financial Statement Heading
• Name of business or reporting entity
• Title of statement• Reporting period• Currency and units
From Nestlé 2010 Annual Report
Net income is the difference between
Revenues and Expenses.
Net income is the difference between
Revenues and Expenses.
Revenues: Consulting revenue 3,000$ Expenses: Salaries expense 800 Net income 2,200$
Scott ConsultingIncome Statement
For Month Ended December 31, 2010
The income statement describes the revenues and expenses of the entity along with the resulting net income or loss over a period of time due to earnings activities.
The income statement describes the revenues and expenses of the entity along with the resulting net income or loss over a period of time due to earnings activities.
Income Statement
Statement of Changes in Equity
S.Scott, Capital, December 1, 2010 -$ Plus: Investments by owner 20,000$ Net income 2,200 22,200
22,200 Less: Withdrawals by owner 500 S.Scott, Capital, December 31, 2010 21,700$
Statement of Changes in EquityFor Month Ended December 31, 2010
Scott Consulting
The statement of changes in equity explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time.
The statement of changes in equity explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time.
The net income of $2,200 increases equity by $2,200. The net income of $2,200 increases equity by $2,200.
Income Statement and Statement of Changes in Equity
S.Scott, Capital, December 1, 2010 -$ Plus: Investments by owner 20,000$ Net income 2,200 22,200
22,200 Less: Withdrawals by owner 500 S.Scott, Capital, December 31, 2010 21,700$
Statement of Changes in EquityFor Month Ended December 31, 2010
Scott Consulting
Revenues: Consulting revenue 3,000$ Expenses: Salaries expense 800 Net income 2,200$
Scott ConsultingIncome Statement
For Month Ended December 31, 2010
The balance sheet describes an entity’s financial position at a point in time. It is like taking a ‘snapshot’ of the assets, liabilities and equity on the last day of the accounting period.
The balance sheet describes an entity’s financial position at a point in time. It is like taking a ‘snapshot’ of the assets, liabilities and equity on the last day of the accounting period.
Balance Sheet
Cash 9,700$ Accounts payable 1,200$ Supplies 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200
S.Scott, Capital 21,700
Total assets 26,900$ Total liabilities and equity 26,900$
Equity
Assets Liabilities
Scott ConsultingBalance Sheet
December 31, 2010
Statement of Changes in Equity and Balance Sheet
S.Scott, Capital, December 1, 2010 -$ Plus: Investments by owner 20,000$ Net income 2,200 22,200
22,200 Less: Withdrawals by owner 500 S.Scott, Capital, December 31, 2010 21,700$
Statement of Changes in EquityFor Month Ended December 31, 2010
Scott Consulting
Cash 9,700$ Accounts payable 1,200$ Supplies 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200
S.Scott, Capital 21,700
Total assets 26,900$ Total liabilities and equity 26,900$
Equity
Assets Liabilities
Scott ConsultingBalance Sheet
December 31, 2010
Cash flows from operating activities: Cash received from clients 3,000$ Cash paid for supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities 1,200$ Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities (15,000) Cash flows from financing activities: Investments by owner 20,000 Borrowed from bank 4,000 Withdrawals by owner (500) Net cash provided by financing activities 23,500 Net increase in cash 9,700$ Cash balance, December 1, 2010 - Cash balance, December 31, 2010 9,700$
Statement of Cash FlowsFor Month Ended December 31, 2010
Scott Consulting
Statement of Cash Flows
• The statement of cash flows explains changes in entity’s cash balance during accounting period.
• 3 sections showing the business activities:• Operating• Investing• Financing
• The statement of cash flows explains changes in entity’s cash balance during accounting period.
• 3 sections showing the business activities:• Operating• Investing• Financing
Cash flows from operating activities: Cash received from clients 3,000$ Cash paid for supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities 1,200$ Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities (15,000) Cash flows from financing activities: Investments by owner 20,000 Borrowed from bank 4,000 Withdrawals by owner (500) Net cash provided by financing activities 23,500 Net increase in cash 9,700$ Cash balance, December 1, 2010 - Cash balance, December 31, 2010 9,700$
Statement of Cash FlowsFor Month Ended December 31, 2010
Scott Consulting
Balance Sheet and Statement of Cash Flows
Cash 9,700$ Accounts payable 1,200$ Supplies 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200
S.Scott, Capital 21,700
Total assets 26,900$ Total liabilities and equity 26,900$
Equity
Assets Liabilities
Scott ConsultingBalance Sheet
December 31, 2010
Notes to the Financial Statements
• Four general types:* Summary of significant accounting policies:
assumptions, estimates, and judgments.* Additional information about the summary totals in
financial statements.* Disclosure of important information that is not
recognized in the financial statements.* Supplementary information.
• Notes can be used to convey information that is too uncertain or needs further explanation.