© the mcgraw-hill companies, inc., 2005 mcgraw-hill/irwin acct 102 financial accounting overview of...

© 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)

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Accounting in BusinessChapter

11

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Identifying Business Activities

Recording Business Activities

Communicating Business Activities

2. What is accounting2. What is accounting

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Beliefs that distinguish right from

wrong

Accepted standards of good and bad

behavior

Ethics

3. Ethics in Accounting3. Ethics in Accounting

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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)

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Business Entity FormsBusiness Entity Forms

ProprietorshipProprietorship PartnershipPartnership CorporationCorporation

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

*

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

AssetsLiabilities & Equity

4. Accounting Equation4. Accounting Equation

LiabilitiesLiabilities EquityEquityAssetsAssets = +

資產負債＋所有者權益

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

LiabilitiesLiabilities EquityEquityAssetsAssets = +

Expanded Accounting EquationExpanded Accounting Equation

RevenuesRevenues ExpensesExpensesOwner CapitalOwner Capital

Owner Withdrawals

Owner Withdrawals

_ + _

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The accounting equation must remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +

5. Transaction Analysis 5. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 1Transaction 1

J. Scott, the owner, contributed $20,000 cash to start the business.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Supplies (asset)

Transaction 2Transaction 2

Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 2Transaction 2

Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Equipment (asset)

Transaction 3Transaction 3

Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 3Transaction 3

Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 4Transaction 4Purchased Supplies of $200 and Equipment of $1,000 on account.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Notes payable (liability)

Transaction 5Transaction 5

Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 5Transaction 5

Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The accounts involved are:

(1) Cash (asset)

(2) Revenues (equity)

Transaction 6Transaction 6Rendered consulting services

receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 6Transaction 6Rendered consulting services

receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 7Transaction 7

Remember that expenses decrease equity.

Paid salaries of $800 to employees.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

Transaction 8Transaction 8

Remember that withdrawals decrease equity.

J. Scott withdrew $500 from the business for personal use.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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.

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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%            

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

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%