overview of accounting environment and financial statements
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Overview of Accounting Environment and Financial Statements. WHAT DO ACCOUNTANTS DO?. WHY DO THEY DO WHAT THEY DO?. WHAT ARE THE OUPUTS?. WHO USE THE OUTPUTS? HOW?. Aim of the Accounting Information. - PowerPoint PPT PresentationTRANSCRIPT
Overview of Accounting Environment and Financial Statements
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WHAT DO ACCOUNTANTS DO?
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WHY DO THEY DO WHAT THEY DO?
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WHAT ARE THE OUPUTS?
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WHO USE THE OUTPUTS?
HOW?
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Aim of the Accounting Information accounting is an information system that
measures, processes and communicates financial information of an economic entity to the decision makers
measurable systematic financial statements and other financial reports economic entity is an economic organization that
acts independently business entity is an economic entity that sells
goods or provides services
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Environment of a Business Organization
General Environment of Businesses
Task Environment of Businesses
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Business Language
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Users of Accounting Information
executive officers 1. creditors ; investors 2. government ; regulatory
agencies ; labor unions; financial advisors; brokerage firms; auditors; lawyers; consumer groups; and academicians
Internal Users1. Top management2. Department managers
External Users1. Users with direct financial interest2. Users with indirect financial interest
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Objective of Financial Statements the objective of financial statements is to provide
information to users to help them in their economic decisions
the financial statements are expected to provide information about the future cash flows of an entity, its financial structure, profitability and liquidity, and its financial position and changes in financial position
financial statements provide information about assets, liabilities, revenues, expenses and cash flows
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Business Activities
Operating Activities
Investing Activities
Financing Activities
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Financing Activities initially - funds to setup a business in later periods – funds to run operations and to grow obtaining such funds either from external or internal
sources
Funds obtained: from creditors shareholdersFunds provided to: payment of payment of interest dividends repayment of debtsCash management
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Investing Activities
Spending the funds obtained effectively and efficiently
involve purchase and sale of buildings, machinery or other investment instruments such
as government bonds, treasury bills extending loans to other companies are expected to contribute directly or indirectly to the
profit maximization and solvency goals of the business
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Operating Activities involve the daily activities of the entities to run the
business include
sales and marketing of the goods sold and services provided
production purchasing merchandise and inventory items managing human resources
effective and efficient management of operating activities needed to achieve profitability and liquidity
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Financial Statements
All financial statements are interrelated because each statement provides information about a different aspect of the same entity
financial statements : balance sheet income statement the cash flow statement statement of changes in equity
Notes to the financial statements: accounting policies and explanatory notes about various items
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Financial Statements
balance sheet provides information about the financial position or the resources available and the claims on these resources
income statement provides information about how well these resources are used to generate income in a given period
cash flow statement provides information about the movement in the cash and cash equivalents in a given period
both the income statement and the balance sheet are prepared on accrual basis
the cash flow statement is prepared on cash basis of accounting
in order to meet the objective of financial statements, certain assumptions and qualitative characteristics are defined in the framework by IASB
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Balance Sheet
The main objective -to fairly disclose the financial position of a company at a certain date
a balance sheet is made up of assets, liabilities and owners' equity sections
IAS No.1 requires that the balance sheets should give the name of the company, the date it is prepared for, and the monetary unit and the level of precision adopted e.g. stated in thousands of TL.
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Balance Sheet or Statement of Financial Position As of a specific date The amount of resources owned by a
company in order to run business and How these resources were funded Assets Liabilities Owners’ or Shareholders’ Equity – depending
on the formation of business
Sections of Balance Sheet
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AssetsCurrent Assets:Expected to be converted into cash within
the normal operating cycle or held for resale purposes Assets that are kept on hand for a short period and are expected
to be converted into cash within the twelve months following the balance sheet date
Assets that are held primarily for the purpose of being traded, and Unrestricted cash and cash equivalents
Long-term assets: Assets that the entity expects to use longer than one year or the operating cycle; purpose of providing resources for the operations of an entity in the future
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AssetsCurrent AssetsCashNotes ReceivableAccounts ReceivablesTrading Securities InventoriesPrepaid Expenses
Long-Term AssetsInvestmentsProperty, Plant And EquipmentLess: Accumulated DepreciationIntangible Assets, netNatural Resources, netTotal Assets
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LiabilitiesAny liability for which the amount can reasonably be estimated and
with known payment date should be disclosed in the liabilities section of the balance sheet
Any liability with uncertain payment dates and amounts should be disclosed in the notes to the financial statements
Liabilities to various entities or groups such as the creditors, employees and customers should be clearly labeled and disclosed
Classified as short and long-term-Current liabilities include amounts with determinable amounts and payment
dates that are within the next year
Long-term liabilities are usually debts incurred by the entity for the purpose of financing the operations and investments
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Shareholders’ Equity
includes the amounts invested in the business by the founding owners or investors,
the earnings (losses) that are retained in the business from previous years’ income (losses)
current year income or loss *either separately or within retained earnings
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Liabilities and Shareholders’ EquityLIABILITIES SHAREHOLDERS’ EQUITYCurrent LiabilitiesShort-term Bank Loans Common Stock (Share capital)Current Portion of Long-term Loans Preferred StockAccounts Payable Additional Paid-In CapitalNotes Payable Treasury StockCustomer Advances Retained EarningsTaxes Payable ReservesSalaries and Wages PayableRent PayableLong-Term LiabilitiesConsumer LoansBonds PayableLong-term Loans or Bank LoansLease ObligationsTotal Liabilities Total Shareholders' Equity
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Balance Sheet[Date](all numbers in NTL000)
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash Accounts payable
Accounts receivable Short-term notes
(less doubtful accounts) Current portion of long-term notes
Inventory Interest payable
Temporary investment Taxes payable
Prepaid expenses Accrued payroll
Total Current Assets Total Current Liabilities
Fixed Assets Long-term Liabilities
Long-term investments Mortgage
Land Other long-term liabilities
Buildings Total Long-Term Liabilities
(less accumulated depreciation)
Plant and equipment
(less accumulated depreciation) Shareholders' Equity
Furniture and fixtures Capital stock
(less accumulated depreciation) Retained earnings
Total Net Fixed Assets Total Shareholders' Equity
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Income Statement
summarizes the revenues and expenses of an entity for a certain period in time
reveals the results of operations during a period
shows whether an entity is successful in achieving the goal of profitability
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Income Statement
flow statement reflecting the performance of a company in terms of utilizing the resources in a given period
provides information about the revenues and the related expenses in a given period, as well as the losses incurred in the same period
The bottom line figure of the income statement is the profit or income of the period
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Sections of Income Statement
Revenues from ordinary activities of an entity and the related expenses are reported in accordance with the matching principle classified according to the function, such as cost of goods sold; or
according to the nature of the expense reported in a separate section that reports the results of the
ordinary activities. The presentation and disclosure of discontinued operations-
the post-tax income or loss of the segment until disposition and the post-tax gain or loss of disposing the segment is presented in the income statement as separate line items
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Income Statement
RevenueGross SalesLess: Sales Returns and Allowances Net Sales 0
Cost of Goods SoldBeginning InventoryAdd: Purchases
Freight-inDirect LaborIndirect Expenses
Inventory Available 0Less: Ending Inventory Cost of Goods Sold 0
Gross Profit (Loss) 0
ExpensesAdvertisingAmortizationBad DebtsBank ChargesCharitable ContributionsCommissionsContract LaborDepreciationDues and SubscriptionsEmployee Benefit ProgramsInsurance InterestLegal and Professional FeesLicenses and FeesMiscellaneousOffice ExpensePayroll TaxesPostageRentRepairs and MaintenanceSuppliesTelephoneTravelUtilitiesVehicle ExpensesWages Total Expenses 0
Net Operating Income 0
Gain (Loss) on Sale of AssetsInterest Income Total Other Income 0
Net Income (Loss) 0
[Name][Time Period]
Other Income
in NTL 000
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Cash Flow Statement
deals with cash in-flows and out-flows company resulting from operating, financing and investing activities for a specific period
presents information regarding the goal of liquidity
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Cash Flow Statement
shows the amount of cash generated through the three main activities of any entity Financing Investing Operating
a cash flow statement has also three sections that parallel the main activities.
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[Name][Time Period] in NTL 000
Cash received from customers
Cash paid for merchandise
Cash paid for wages and other operating expenses
Cash paid for interest
Cash paid for taxes
Other
Cash received from sale of capital assets (plant and equipment, etc.)
Cash received from disposition of business segments
Cash received from collection of notes receivable
Cash paid for purchase of capital assets
Cash paid to acquire businesses
Other
Cash received from issuing stock
Cash received from long-term borrowings
Cash paid to repurchase stock
Cash paid to retire long-term debt
Cash paid for dividends
Other
Statement of Cash Flows
Cash flows from investing activities
Cash flows from financing activities
Cash flows from operating activities
Net cash provided (used) by operating activities
Net cash provided (used) by investing activities
Net cash provided (used) in financing activities
Increase (decrease) in cash during the period
Cash balance at the beginning of the period
Cash balance at the end of the period
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Statement of Changes in Equity
shows the amounts invested by the owners in a given period, as well as the movements in the shareholders’ equity accounts
main purpose of the statement is to present all the changes that affected the shareholders’ equity in a period
movements in the reserve accounts are based on the profit appropriation of the prior period
retained earnings column in the statement reflects the net of prior period income and losses
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[Name][Time period] in NTL 000
Preferred Stock
Common StockAdditional Paid-in Capital
Retained Earnings (Accumulated Deficit)
Total
Beginning balance
Issuance of stock
Net income (net loss)
Dividends
Other
Other
Other
Other
Ending balance
Statement of Change in Equity
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Statement of Cash Flows
for the year 2005Cash flow from operations(+)Cash flow from investments(+)Cash flow from financing(=) Net Change in Cash(+) Beginning Cash Balance(=) Ending Cash Balance
Statement of Changes in Equity
for the year 2005Beginning balance of SHE(+) increase in capital(-) dividends declared(+/-) other changes(=) ending balance of SHE
Statements of a single company
2004 2005 2004 2005
Assets Liabities and Shareholders' EquityCurrent Assets: Current LiabitiesCashLong-term Assets Long-term Liabilities
SHESharecapital (common stock)Retained EarningsTotal SHE
TOTAL ASSETS TOTAL LIABILITIES AND SHE
Balance Sheet as of a date for a company
Income Statement
For the year 2005
Revenues(-) Expenses
Net Income
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Auditing and Auditors’ Opinion
Independent audit of financial statements: the examination of the financial statements, accounting
system and internal controls, and the accounting records of a company
purpose of an independent audit is to express an opinion on the financial statements- whether they are prepared in accordance with the generally
accepted accounting principles whether they fairly present the financial position of the
company auditors’ report implies that the financial statements
are free of material misstatements
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Board of Directors XYZ CorporationWe have audited the accompanying balance sheets of XYZ Corporation as of 31 December 2005 and 2004, and the related statements of income, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Corporation at 31 December 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board.
Signature of the Independent AuditorDate and Place
of the Report
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Ethics in Accounting moral principles that an individual bases his/her behavior on should the project manager give away bribes if the competitors
are also bribing? if an accountant knows that a product is environmentally
hazardous although it is not illegal, should she or he report it to the authorities even if s/he knows that she might lose her job?
the ethics committee is working on the professional rules of conduct
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Regulatory Bodies National
Capital Markets Board (CMB) Ministry of Finance Turkish Accounting Standards Board (TASB) TURMOB (Union of Chambers of Certified Public
Accountants of Turkey) International
International Federation of Accountants International Accounting Standards Board- International
Financial Reporting Standards (IFRS) Financial Accounting Standards Board (FASB) Federation of European Accountants (FEA)
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ACCOUNTING IN TURKEY
Commercial Code of 1850 was a translation of the French Commercial Code
formed the first accounting regulation in Turkey second Commercial Code was enacted in 1926 code was based on the German commerce and
company laws that also regulated the accounting practices
accounting system has been heavily influenced by the American system or Anglo-Saxon system since the beginning of the 1960's
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Accounting in Turkey The law of Istanbul Stock Exchange (ISE) in 1984,
but full operations started in 1986 Foundation of the Capital Markets Board (CMB) and
the Istanbul stock exchange, and the increase in foreign investments advanced the development of the accounting and auditing standards
Increase in joint ventures and foreign trade led to establishment of offices of the then-"Big Eight" accounting firms in Turkey
As a result of these developments, large private enterprises started to report their financial statements in accordance with the International Accounting Standards in addition to national reporting requirements
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Accounting in Turkey
The first set of financial accounting standards for the publicly owned and/or traded companies was developed in January 1989 by the CMB to be in effect for the fiscal years that start on or after January 1, 1989
However, accounting standards used by the family-owned or small to medium sized companies was, and to some extent still is, treated as identical with tax accounting
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Uniform Chart of Accounts
In 1992, Ministry of Finance organized a committee to instigate the accounting principles and a uniform chart of accounts that would be used by all companies
The Ministry published the committee's report in a communiqué on December 26, 1992 establishing the principles and the uniform chart of accounts to be in effect starting January 1,1994
All companies except banks, brokerage firms, and insurance companies are required to conform
Banks are subject to accounting rules set by the Central Bank of Turkey and Banking Regulation and Supervision Agency, and brokerage and insurance firms comply with the CMB rules.
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Turkish Accounting Standards Board In February 1994, Turkish Accounting and
Auditing Standards Board (TAASB) was formed
mission to develop accounting and auditing standards
As of January 1, 2002, TAASB prepared 19 accounting standards under the name of Turkish Accounting Standards (TAS) that were published by TURMOB (Union of Chambers of Certified Public Accountants of Turkey)
standards were not widely applied by the Turkish companies and the Board was dissolved and re-formed as the Turkish Accounting Standards Board (TASB) under the Prime Ministry in April 2002
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Regulatory Environment
the Ministry of Finance's regulation of 1992, the CMB rules, the Commercial Code and the Procedural Tax Law, Banking Regulation and Supervision Agency and the Central Bank regulations
All profit oriented companies -The Commercial Code and the Procedural Tax Law ; and Uniform Chart of Accounts
Listed companies and financial intermediaries: Uniform Chart of Accounts, Commercial Code and Procedural Tax Law and CMB rules
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Current Status
New CMB accounting standards in effect starting 1 Jan 2005
Almost same as the IAS/IFRS Traded companies are required to comply TASB- officially translated the accounting
standards Turkish Commercial Code – Expected to be
in effect mid 2006
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What is helpful for the decision maker is right for the company.
Or vice versa?