acct 201 financial accounting lecture 1

ACCT 201 FINANCIAL ACCOUNTING

LECTURE 1Asst. Prof. zlem OLGURoom: 202Tel No: 0212 338 1457E-Mail: oolgu@ku.edu.tr

ACCOUNTING AND THEBUSINESS ENVIRONMENTChapter 1

Chapter ObjectivesUse accounting vocabularyApply accounting principles and conceptsUse the accounting equationAnalyse business transactionsPrepare financial statementsEvaluate business performanceRevision questions

O1:Use accounting vocabulary Accounting...is an information system that...measures business activities,processes information, and...communicates financial information.is called the language of business.

Users of Accounting InformationExternal usersmake decisionsabout the entity.Internal usersmake decisionsfor the entity.Financial AcctManagerial Acctnvestors, creditors, govt agenciesManagers, partnerts etc.

The Authority Underlying AccountingPublic Sector(SEC)Private Sector(FASB)Private Sector(AICPA) (IMA)GAAP

Standards of Professional ConductAICPAs Code ofProfessionalConductStandards ofEthicalConduct of theInstitute ofManagementAccountants

Types of Business Organizations1. Proprietorships2. Partnerships3. Corporations

1. Proprietorships: single ownerWhat are some advantages?total undivided authorityno restrictions on type of business must be legalWhat are some disadvantages?unlimited liabilitylimitation on size fund raising power

2. Partnerships: more than 1 ownerWhat are some advantages?better credit standing possiblymore brain power, but consultation with partners requiredWhat are some disadvantages?unlimited personal liability for general partnersneed for written partnership agreement

3. Corporations: more than 2 owners or shareholdersWhat are some advantages?separate legal existencelimited liability of stockholderstransferability of ownership relatively easyWhat are some disadvantages?taxes possible double taxationextensive governmental regulation

O 2: Apply Accounting Concepts and PrinciplesGAAPEntity conceptReliability conceptCost principleGoing concern principleStable monetary unit concept

Generally AcceptedAccounting Principles (GAAP)What is the primary objective of financial reporting?To provide information usefulfor making investment andlending decisions

The Entity Concept ExampleAssume that John decides to open up a gas station and coffee shop.The gas station made $250,000 in profits, while the coffee shop lost $50,000.

The Entity Concept ExampleHow much money did John make?At a first glance, we would assume that John made $200,000.However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.

The Reliability (Objectivity) PrincipleInformation mustbe reasonablyaccurate.Information mustbe free from bias.Information must report what actually happened.Individuals wouldarrive at similarconclusions usingsame data.

The Cost PrincipleAssets and servicesacquiredshould be recordedat their actual cost.

The Going Concern ConceptThe entity will continueto operate in the future.

Stable-Monetary-Unit ConceptThe dollars purchasingpower is relativelystable.

IMPORTNAT!!!O 3: Use the Accounting EquationEconomicResourcesClaims toEconomicResourcesAssets=Liabilities + Owners Equity

What is an asset?

It is something a company owns which has future economic value.landbuildingequipmentgoodwill

What is a liability?

It is something a company owes.moneyservice legal retainersproduct magazines

What is owners equity?

It is whats left of the assets after liabilities have been deducted.the same as net assetsthe owners claim on the entitys assets

Transactions that AffectOwners EquityOWNERS EQUITYINCREASESOWNERS EQUITYDECREASESOwner Investmentsin the BusinessRevenuesExpensesOwner Withdrawalsfrom the BusinessOwners Equity

RevenuesWhat are revenues?They are amounts received or to be received from customers for sales of products or services.salesperformance of servicesrentinterest

ExpensesWhat are expenses?They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue.salaries and wagesutilitiessupplies usedadvertising

O 4: Analyze Business TransactionsWhat is a transaction?It is any event that both affects the financial position of the business and can be reliably recorded.

Accounting for Business Transactions: ExampleGay Gillen invests $30,000 to begin Gay Gillen eTravel.Gillen purchases an office location, paying $20,000 in cash.She buys office supplies, agreeing to pay $500 in 30 days.She earns and collects $5,500 revenues.

Example Continues...Gillen performs services, and the client agrees to pay $3,000 within one month.During the month, she pays $3,300 for expenses incurred.Gillen pays $300 to the store from which she purchased $500 worth of supplies.What is the effect of these transactions on the accounting equation?

Accounting for Business Transactions Owners Assets = Liabilities + Equity1)Cash+ $30,000+ $30,0002)Cash 20,000Land+ 20,0003) Supplies+ 500+ 5004)Cash+ 5,500+ 5,5005)Receivable+ 3,000+ 3,0006)Cash 3,300 3,3007)Cash 300 300 Totals+ $35,400+ 200+ $35,200

Important Points:Notice that the equation always stays in balance.Each transaction affects at least two accounts, sometimes more.Some transactions affect only one side of the equation; some affect both sides.

O 5: Prepare Financial StatementsFinancial Statements... are the finalproduct of theaccounting process. tell how thebusiness is performingand where it stands.

Financial Statementsincome statementstatement of owners equity or retained earningsbalance sheetstatement of cash flows

O 6: Evaluate Business Performance Income StatementRevenue:Fees earned$8,500Expenses:Salary expense $1,200Utilities and telephone expense 400Equipment rental expense 600Office rent expense 1,100 3,300Net income$5,200

Statement of Owners EquityG. Gillen, capital, April 1, 20xx$ 0Contribution of capital 30,000Net income$ 5,200Cash distributions 2,000G. Gillen, capital, April 30, 20xx$33,200

Balance Sheet AssetsCash $19,900Accounts receivable 2,000Supplies 500Land 11,000Total assets$ 33,400 LiabilitiesAccounts payable$ 200Owners equity,G. Gillen, capital 33,200Total liabilities andowners equity$33,400

Statement Of Cash FlowsCash flows from operating activities:Cash receipts from services rendered$6,500Cash payments:Supplies $ 300Operating expenses 3,300 3,600Net cash flows fromOperating activities $2,900Cash flows from investing activitiesPurchase and sale of land ($11,000)

Statement Of Cash FlowsCash Flows from Financing Activities: Investment by Owner $30,000Withdrawals 2,000Net Cash Flows from Financing Activities $28,000Cash at Beginning of Year 0Cash at End of the Year $19,900

A corporation with 2 stockholders goes bankrupt owing $10,000. How much does each stockholder owe the creditors?Revision Questions: QUESTION 1

Answer: $0. The stockholders of a corporation have limited liability, which means that stockholders are not responsible for the debts of the corporation.

Land was acquired for a future building site at a cost of $80,000. An appraiser placed its value at $85,000. Another company offered to buy the land for cash of $90,000. At what amount should land be reported in the financial statements?QUESTION 2

Answer: $80,000. The cost principle states that assets should be recorded at their cost.

The assumption that the entity will remain in operation for the foreseeable future is the: Reliability principle Entity conceptGoing concern conceptCost principleQUESTION 3Answer: C

A basic principle of accounting that requires activities of an entity be kept separate from other organizations and individuals as a separate economic unit is theReliability principle Entity conceptGoing concern conceptCost principleAnswer: BQUESTION 4

Which of the following is a correct expression of the accounting equation? Assets = revenues + expensesAssets = revenues - expensesAssets = liabilities owners equityAssets = liabilities + owners equityAnswer: D

QUESTION 5

If a companys assets total $400 and owners equity totals $300, how much are total liabilities?Answer: $100. The accounting equation is:Assets = liabilities + owners equity$400 = ? + $300QUESTION 6

Owner's equity can be described asCreditors claims on total assetsOwners claim on total assetsCurrent obligations of the companyEconomic resources of the companyQUESTION 7

Answer: B Creditors claims to assetsAssets=Liabilities + Owners EquityOwners claims to assets

What is the effect on the accounting equation if a company collects $50 of an Accounts Receivable?increases an asset $50; decreases an asset $50decreases an asset $50; decreases a liability $50increases an asset $50; decreases a liability $50decreases a liability $50; increases owner's equity $50QUESTION 8

Answer: AWhen a company collects on an accounts receivable, cash is increased. Accounts receivable is decreased by the same amount since customers owe the company less.

What is the effect on the accounting equation if a company pays the monthly rent in cash? Assets decrease and liabilitie