acct 201 financial accounting lecture 1

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ACCT 201 FINANCIAL ACCOUNTING LECTURE 1. Asst. Prof. Özlem OLGU Room: 202 Tel No: 0212 338 1457 E-Mail: ACCOUNTING AND THE BUSINESS ENVIRONMENT. Chapter 1. Chapter Objectives. Use accounting vocabulary Apply accounting principles and concepts Use the accounting equation - PowerPoint PPT Presentation



    LECTURE 1Asst. Prof. zlem OLGURoom: 202Tel No: 0212 338 1457E-Mail:


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

  • O1:Use accounting vocabulary an information system that...measures business activities,processes information, and...communicates financial 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


  • 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

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