financial accounting
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FINANCIAL ACCOUNTING. Robert Libby Patricia A. Libby Daniel G. Short George Kanaan Maureen Gowing. Chapter 1. Financial Statements and Business Decisions. Balance Sheet. Income Statement. Stakeholders. The Objectives of Financial Accounting. - PowerPoint PPT PresentationTRANSCRIPT
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FINANCIAL ACCOUNTING
Robert LibbyPatricia A. LibbyDaniel G. ShortGeorge Kanaan
Maureen Gowing
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Chapter 1
Financial Statements and Business Decisions
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The Objectives of Financial Accounting
Financial statements are the primary means of communicating financial information to parties outside the
business organization.Balance Sheet
Income Statement
Stakeholders
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Business Background
Business owners (called investors or shareholders) look for two sources of
possible gain:
Sellownership
interest in thefuture for more
than they paid.
Receive aportion of thecompany’s
earnings in cash(dividends).
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Business Background
Creditors lend money to a company for a specific length of time and gain by
charging interest on the money loaned.
Mel’sDiner
Loan
Interest
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Understanding Business Operations
Manufacturers either make the parts needed to produce its products or buy
the parts from suppliers.
Manufacturer Product Customer
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Understanding Business Operations
All businesses should have an accounting system that . . .
Collects and processesfinancial information
about an organization.
Reportsinformationto decision
makers.
Businessmanagers(internal)
Investors(external)
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Understanding Business Operations
Accounting System
Financial Accounting System(preparation of four basic
financial statements).
Managerial Accounting System(preparation of detailed plans,
forecasts and reports).
External Decision Makers(investors, creditors,
suppliers, customers, etc.).
Internal Decision Makers(managers throughout the
organization).
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Information Conveyed in Financial Statements
The four basic financial statements . . .
Income StatementBalance Sheet
Cash Flow Statement Statement of Retained Earnings
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Information Conveyed in Financial Statements
Most companies prepare financial statements at the end of the month, the
end of the quarter (called quarterly reports) and the end of the year (called
annual reports).2003
X
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Let’s look at MAXIDRIVE
CORP.’s financial
statements.
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MAXIDRIVE CORP.Balance Sheet
At December 31, 20A(In thousands of dollars)
AssetsCash 4,235$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 26,601$
Liabilities and Shareholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Shareholders' EquityShare capital 2,000$ Retained earnings 8,445 Total shareholders' equity 10,445 Total liabilities and shareholders' equity 26,601$
1. Name of entity (the separate-entity assumption)2. Title of statement3. Specific date (financial snapshot at a specific point in time)4. Unit measure (thousands of dollars)
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The Balance Sheet
Body of the StatementAssetsAssets
Economic resources controlled by the entity as a result of past transactions from which future economic benefits may be obtained.
LiabilitiesLiabilities Debts or obligations of the entity that result from past
transactions.
Shareholders’ EquityShareholders’ Equity Amount of financing provided by owners of the corporation and
from earnings.
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The Balance Sheet
Basic Accounting Equation
Economic Sources of financing . . .resources Liabilities: from creditors
Equity: from shareholders.=
Assets = Liabilities + Shareholders’ Equity
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MAXIDRIVE CORP.Balance Sheet
At December 31, 20A(In thousands of dollars)
AssetsCash 4,235$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 26,601$
Liabilities and Shareholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Shareholders' EquityShare capital 2,000$ Retained earnings 8,445 Total shareholders' equity 10,445 Total liabilities and shareholders' equity 26,601$
Assets are listed by their
ease ofconversion into
cash.
Cash Amount of cash in the company’s bank account.
Accounts receivable
Amounts owed by customers from prior sales.
Inventories Partial and completed but unsold products.
Plant and equipment Factories and production machinery.
Land Property on which factories are located.
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MAXIDRIVE CORP.Balance Sheet
At December 31, 20A(In thousands of dollars)
AssetsCash 4,235$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 26,601$
Liabilities and Shareholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Shareholders' EquityShare capital 2,000$ Retained earnings 8,445 Total shareholders' equity 10,445 Total liabilities and shareholders' equity 26,601$
Accounts payable
Amounts owed to suppliers for prior purchases.
Notes payable
Amounts owed on written debt contracts.
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MAXIDRIVE CORP.Balance Sheet
At December 31, 20A(In thousands of dollars)
AssetsCash 4,235$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 26,601$ Liabilities and Shareholders' Equity
LiabilitiesAccounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Shareholders' EquityShare Capital 2,000$ Retained earnings 8,445 Total Shareholders' equity 10,445 Total liabilities and shareholders' equity 26,601$
Share capital
Amounts invested in the business by shareholders.
Retained earnings
Past earnings not distributed to shareholders.
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MAXIDRIVE CORP.Balance Sheet
At December 31, 20A(In thousands of dollars)
AssetsCash 4,235$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 26,601$
Liabilities and Shareholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Shareholders' EquityShare capital 2,000$ Retained earnings 8,445 Total shareholders' equity 10,445 Total liabilities and shareholders' equity 26,601$
Use $ on the first item in a
groupand on the group total.
Assets = Liabilities + Shareholders’ Equity
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1. Name of entity2. Title of statement 3. Specific date (Unlike the balance sheet, this statement covers a specified period of time.)4. Unit measure (in thousands of dollars)
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The income statement is divided into three major captions.
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Revenues are earnings from the sale of goods or services.
Revenue is recognized in the period in whichgoods and services are sold, not necessarily
the period in which cash is received.
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The Income Statement
June 2003
Cash from salecollected on June 10.X
May 2003
$1,000 sale madeon May 25.
X
RevenuesRevenues
When will the revenue from thistransaction be recognized?
Earnings from the sale of goods or services.
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The Income Statement
May 2003
$1,000 revenue$1,000 revenuerecognized in Mayrecognized in May
Earnings from the sale of goods or services.
When will the revenue from thistransaction be recognized?
June 2003
RevenuesRevenues
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Expenses are the dollar amount of resources usedup by the entity to earn revenues during a period.
An expense is recognized in the period in whichgoods and services are used, not necessarily
the period in which cash is paid.
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Cost of goods sold
The cost of the products sold during this period.
Selling, general and
administrative
Operating expenses not directly related to production.
Research and development
Expenses incurred to develop new products.
Interest expense The cost of using borrowed funds.
Income tax expense
Income taxes on the current period’s pre-tax income.
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The Income Statement
May 2003 June 2003
Paid $75 cash on May 11 for newspaper ad.
X
Ad appearson June 8.
X
ExpensesExpensesThe dollar amount of resources used
up by the entity to earn revenuesduring a period.
When will the expense for thistransaction be recognized?
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The Income Statement
May 2003 June 2003
Advertising expenseAdvertising expenserecognized in June.recognized in June.
The dollar amount of resources usedup by the entity to earn revenues
during a period.
When will the expense for thistransaction be recognized?
When will the expense for thistransaction be recognized?
ExpensesExpenses
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When revenues exceed expenses,we report net income.
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When expenses exceed revenues,we report net loss.
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Statement of Retained Earnings
Income of the corporation
Shareholders
Dividends Retained by
the corporation
Retained Earnings
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MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 20A(In thousands of dollars)
Retained earnings, January 1, 20A 6,805$ Net income for 20A 3,300 Dividends for 20A (1,000) Retained earnings, December 31, 20A 9,105$
1. Name of entity2. Title of statement 3. Specific date (like the income statement, this statement covers a specified period of time.)4. Unit measure (in thousands of dollars)
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MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 20A(In thousands of dollars)
Retained earnings, January 1, 20A 6,805$ Net income for 20A 2,640 Dividends for 20A (1,000) Retained earnings, December 31, 20A 8,445$
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Cash Flow Statement
Because revenues reported do not always equal
cash collected. . .
. . . and expensesreported do not
always equalcash paid . . .
Income isusually not equal
to the changein cash forthe period.
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MAXIDRIVE CORP.Cash Flow Statement
For the Year Ended December 31, 20A(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
1. Name of entity2. Title of statement 3. Specific date (like the income statement and statement of retained earnings, this statement covers a specified period of time.)4. Unit measure (in thousands of dollars)
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MAXIDRIVE CORP.Cash Flow Statement
For the Year Ended December 31, 20A(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
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Cash Flow StatementFor the Year Ended December 31, 20A
(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
Cash flows directly related to earning income are shown in the
operating section.
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MAXIDRIVE CORP.Cash Flow Statement
For the Year Ended December 31, 20A(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
Cash flows related to the acquisition or sale of productive
assets are shown in the investing section.
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MAXIDRIVE CORP.Cash Flow Statement
For the Year Ended December 31, 20A(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
Cash flows from or to investors or creditors are shown in the
financing section.
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MAXIDRIVE CORP.Cash Flow Statement
For the Year Ended December 31, 20A(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (816)$ Cash at beginning of the year 5,051 Cash at end of the year 4,235$
The statement ends with a reconciliation of Cash.
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Notes Notes provide supplemental
information about the financial condition of a company.
Three types . . .Describe accounting rules applied.Present additional detail about an
item on the financial statements.Provide additional information
about an item not on the financial statements.
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Price/Earnings Ratio
Price/Earnings Ratio =Market Price (of the Company)
Net Income
This ratio is one method for estimating
the value of a company.
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Decision makers need to understandDecision makers need to understandaccounting measurement rules.accounting measurement rules.
Responsibilities for the Accounting Communication Process
Effective communication means that the recipient understands what the
sender intends to convey.
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The Securities and Exchange Commission Securities and Exchange Commission (SEC)has been given broad powers to determine
measurement rules for financial statements in the United States.
Securities Act of 1933Securities and Exchange Act of 1934
Generally Accepted Accounting Principles (GAAP)
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The OntarioOntario Securities Commission Securities Commission (OSC)has been given broad powers to determine
measurement rules for financial statements in Canada.
Generally Accepted Accounting Principles (GAAP)
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Generally Accepted Accounting Principles (GAAP)
Currently, the AccountingAccountingStandards Board (AcSB)Standards Board (AcSB) is recognized
as the body to formulate GAAP in Canada.
The OSC has worked closely with theaccounting profession to
work out the detailed rules that havebecome known as GAAP.
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Generally Accepted Accounting Principles (GAAP)
Companies are interested inGAAP because methods ofreporting can have the followingeconomic consequences . . .
Affect the selling price of shares. Affect the amount of bonuses received by managers and other employees. Cause a loss of competitive advantage.
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To ensure the accuracy of the company’s records:
Management maintains a system of controls. Management hires an outside independent auditor. The board of directors reviews these two safeguards.
Management Responsibility and the Demand for Auditing
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Independent Auditors
Auditors express an opinion as to the fairness of the financial statement presentation.
Independent auditors have responsibilities that extend to the general public.
Overall, I believethese financialstatements are
fair.
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Independent Auditors
An audit involves . . .Examining the financial
reports to ensure compliance with GAAP.
Examining the underlying transactions incorporated into the financial statements.
Expressing an opinion as to the fairness of presentation of financial information.
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Accounting Designations
Chartered Accountant = CACertified General Accountant = CGA
Certified Management Accountant = CMACertified Public Accountant = CPA*
(* in USA only)
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Ethics, Reputation, and Legal Liability
In Canada all Accounting Institutes require that all members adhere to a
professional code of ethics.
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The reputation for honesty and competence is the most important asset of an accountant.
Like physicians, all accountants haveLike physicians, all accountants haveliability for malpractice.liability for malpractice.
Ethics, Reputation, and Legal Liability
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End of Chapter 1