topic 1 intro to finl acc

8/2/2019 Topic 1 Intro to Finl Acc

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Scoil Ghn U Chuinn UCDUCD Quinn School of Business

Financial Accounting 1Topic 1

Introduction to Financial Accounting

Professor Aileen Pierce

Room Q206 Quinn School

Phone 716 4745 (x4745)

[email protected]


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Financial accounting

Financial accounting is the process by which

financial information is prepared and

communicated to users

Prepared and communicated by whom? How?

Limited companies are required to provide

shareholders with an audited set of accounts, or

financial statements

Typically, they do this within the companys

Annual Report


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Information useful for economic decision-making

Corporate reporting

Annual Reports

FinancialStatements

Accompanying the


Other means of

communication by the

company

Other market

information

e.g. e.g. e.g. e.g.

Statements offinancial

performance

OFR Investor andanalyst briefings

Analysts' reports

Statement offinancial position

Historicalsummaries and

trends

Websites Industry journals

Cash flowstatement

Non-financialinformation

Interim andquarterly reports

Economic statistics Notes Letters to

shareholders

News articles Press releases

Figure 1: The communication of decision-useful informationSource: Inside Out: Reporting on shareholder value, ICAEW, 1999


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Figure 1.5 Useful information


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Objective of Financial Statements

The IASB states that the objective of financial

statements is to provide information about the

financial position,

performance, andchanges in financial position

of an entity that is useful to a wide range of

users in making economic decisions.


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Users of Financial Statements

Investors

Employees

Lenders

Suppliers and other trade creditors

Customers

Governments and their agencies

Public

Put yourself in the

position of a business andask:Who uses ourfinancial statements?

And: For what?


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Figure 1.4 A set of financial accounting users


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Use withFinancial Accounting and Reporting: A GlobalPerspective, 3rd Edition, ISBN 1-4080-2113-2

Table 1.1 Users and their different needs (1/4)

Users Needs Accounting

source-

documents

Accessible

information

(Accounting and other)

Delay to obtain

information

Management Information to plan, make

strategic- and resource-

allocation decisions and control

Transaction

documents,

Financial

statements

Total access, from

source documents to


Information is

accessible on an

ongoing basis. Its

availability depends

on the organization

itself

Shareholders/Investors

Are concerned with the riskinherent in, and return provided

by, their investments:

- Information to help themdetermine whether they

should buy, hold or sell

- Information to assess theability of the enterprise topay dividends

Financialstatements

Financial statementsplus additional

publicly available

information about the

successes of the firm in

its markets and in its

operations

The date on which thefinancial statements

must be made

available before the

general assembly is

regulated in each and

every country. The

trend is towardsearlier publication


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Table 1.1 Users and their different needs (2/4)Users Needs Accounting

source-

documents

Accessible

information


Delay to obtain

information

Bankers,

lenders

Information to determine

whether their loans, and theinterest attached to them, will

be paid when due

Financial

statements,both

historical

and pro

forma (i.e.,

forecasts)

Financial statements

plus additionalpublicly and privately

available information

about the successes of

the firm in its markets

and in its operations

A business will

produce anyadditional ad hoc

documents whenever

it needs to raise funds

from banks or on the

market

Suppliers and

other trade

creditors


whether amounts owed to them

will be paid when due. Tradecreditors are likely to be

interested in an enterprise over

a shorter period than lenders

unless they are dependent upon

the continuation of the

enterprise as a major customer.


whether the studied firm offersbetter business opportunity in

the future and therefore to

decide if any preferential

treatments should be offered to

this particular firm

Financial

statements

In theory these users

have no particular

claim on financialinformation beyond the


but by benchmarking

and comparative

analysis plus an

organized intelligence

watch, they can

interpret financialinformation in a

detailed manner

Case by case


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Table 1.1 Users and their different needs (3/4)Users Needs Accounting

source-

documents

Accessible

information


Delay to obtain

information

Customers Information about the going

concern nature of an enterprise,

especially when they have a

long-term involvement with, or

are dependent on, the

enterprise. Customers are

especially interested in

evaluating the viability of the

firm as an ongoing supplier forservice after sales and/or for

future orders

Financial

statements

Just like suppliers,

customers will ask

information directly

and cross-reference it

to be able to have

leading signals

indicating possible

opportunities or

problems

Case by case

Competitors To compare relative

performance

Financial

statements

Competitive analysis

will be the output of

large databases of

financial statements,

cross-referenced with

business intelligence

and a good

understanding of the

economic sector

Case by case, as a

function of the

amount of resources

dedicated to

information gathering


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Table 1.1 Users and their different needs (4/4)

Users Needs Accounting

source-

documents

Accessible

information

(Accounting and

other)

Delay to obtain

information

Employees Information about the stability and profitability oftheir employers.

Information to assess the ability of the enterprise to

provide remuneration, retirement benefits and

employment opportunities

Financialstatements

Access isregulated through

legislation in

every country

Case by case moderatedby local legislation

Government,

regulatory

agencies, tax

authorities

Are interested in resource allocation and, therefore,

want to know about the activities of enterprises.

Also use information in decisions to stimulate the

economy, to determine taxation policies and

assessments. Also use some or all the information in

the calculation of national economic statistics

Financial

statements,

often recast in a

pre-defined

tax-based

format possiblyfollowing

different rules

On a recurring

basis the tax-

formatted

financial

statements plus,

in the case of atax audit, access

to all source

documents

Each country has specific

rules. For example, in the

UK, most companies are

required to pay

corporation tax nine

months and a day after theend of an accounting

period

General public Enterprises affect members of the public

individually and collectively. For example,

enterprises may make a substantial contribution to

the local economy in many ways, including the

number of people they employ and their patronage

of local suppliers.Financial statements may assist the public by

providing information about the trends and recent

developments in the prosperity of the enterprise and

the range of its activities

Financial

statements

Regulated access Case by case


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The Statement of Financial Position (SoFP)

What is included?

Assets and liabilities

Equity

What do these terms mean?

How are items in SoFP valued?

What is excluded?

Goodwill?

Employees?

Also known as theBALANCE SHEET


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Is a list of

resources of the firm and

claims on those resources

Prepared as at a particular date

on a single company basis

on a Group or Consolidated basis

The Statement of Financial Position

Equity

Liabilities

Assets


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Assets, Liabilities and Equity

Extract from IASBs Framework for the Preparation

and Presentation of Financial Statements

An asset is a resource controlled by the entity as aresult of past events and from which future economicbenefits are expected to flow to the entity

Non-currentAssets

CurrentAssets


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Non-current assets are used on a continuing

basis in the organisation

Land and Buildings Motor Vehicles

Plant and Machinery

Furniture

Long Term Investments

Non-current assets - examples


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Glanbia plc Non-current Assets Section of the

Group statement of financial position (SoFP)2010 2009

ASSETS Notes 000 000Non-current assetsProperty, plant and equipment 14 369,346 363,152Intangible assets 15 356,830 342,112

Investments in associates 16 11,757 10,041Investments in joint ventures 17 58,945 58,276Trade and other receivables 19 23,084 50,555Deferred tax assets 27 7,388 12,022

Available for sale financial assets 18 14,127 20,397Derivative financial instruments 32 1,643 2,718

843,120 859,273


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Receivables (amounts due to the entity from

outside the business)

Bank and Cash (amounts owned by the entity)

Prepaid Expenses - any guesses?

Inventory

Current Assets


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There are some underlying assumptions


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Underlying assumptions

Items included in financial statements (e.g., assets)

are defined in terms of their relationship to the

business

The business is the reporting entity

A reporting period is assumed

Typically, this is a year

SFP is a snap-shot as at a particular date


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Glanbia plc Current Assets Section of the

Statement of Financial Position (SFP)

2010 2009Notes 000 000

Current assets

20 Inventories 303,991 201,57719 Trade and other receivables 246,831 204,32632 Derivative financial instruments 3,912 7,50121 Cash and cash equivalents 229,101 152,789

Total current assets 783,725 566,193

Total assets 1,626,845 1,425,466


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Extract from IASBs Framework for the Preparation

and Presentation of Financial Statements

An assetis a resource controlled by the entity as aresult of past events and from which future economicbenefits are expected to flow to the entity

A liabilityis a present obligation of the entity arisingfrom past events, the settlement of which is expectedto result in an outflow from the entity of resourcesembodying economic benefits

CurrentLiabilities

Non-currentLiabilities


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Payables (amounts owed by the organisation to

outsiders)

Bank Overdrafts

Taxes

Accrued Expenses - any guesses?

Current Liabilities


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Glanbia plc Current Liabilities Section

of the Statement of Financial Position (SFP)

Notes 2010 2009000 000

Current liabilities

Trade and other payables 31 366,246 295,481Current income tax liabilities 2,538 2,816Borrowings 26 972 945Derivative financial instruments 32 6,487 10,615Provisions for liabilities and charges 29 21,105 27,311

397,348 337,168

Total liabilities 1,202,441 1,128,078


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When liabilities are not due for payment within

one year from the Statement of Financial

Position date (balance sheet date), they are

classified as non-current liabilities

Non-current Liabilities


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Represents owners stake in the business

Amount of assets not funded by liabilities

Equity can also be called: Net Worth (US)

Capital

Shareholders funds (UK)

Stockholders equity (US)

Equity


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Extract from IASBs Framework for the Preparationand Presentation of Financial Statements

An assetis a resource controlled by the entity as aresult of past events and from which future economicbenefits are expected to flow to the entity

A liabilityis a present obligation of the entity arisingfrom past events, the settlement of which is expectedto result in an outflow from the entity of resourcesembodying economic benefits

Equityis the residual interest in the assets of the entityafter deducting all its liabilities.


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Another underlying assumption!


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Items included in financial statements (e.g., assets)

are defined in terms of their relationship to the

business

The business is the reporting entity

A reporting period is assumed

Typically, this is a year

Assets of a business are funded by liabilities plus

equity

Assets equal (liabilities + equity)


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Glanbia plc Equity Section of the Group

statement of financial position (SoFP)

2010 2009Notes 000 000

EQUITYIssued capital and reserves attributable to equity

holders of the ParentShare capital and share premium 23 99,741 99,219Other reserves 22 132,227 108,672Retained earnings 24 185,544 83,004

417,512 290,895Non-controlling interests 25 6,892 6,493

Total equity 424,404 297,388


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Accounting Equation

Assets = Liabilities + Equity(or Capital/NetWorth/Shareholders Funds)

Assets - Liabilities = Equity


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Simple example:

At 31st December 2010, ABC plc

Has cash in the bank of1,000 (had 2,000 atend 2009)

Owes 300 to DEF plc (owed 500 at end 2009)

How much equity have the owners of ABC plc in

the business at 31 December?

How do we work this out?Prepare the Statement of Financial Position


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ABC plc

31.12.2010

31.12.2009

Assets

-

1,000 2,000

Liabilities

=

300 500

Equity 700 1,500

Minus

Equals


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ABC plc

Suppose the shareholders in ABC plc had

originally invested 300 in exchange for all of

the issued share capital of ABC plc

Analyse equity of700 and 1,500 on 31December 2010 and 2009, respectively, to

show original share capital separately


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ABC plc

31.12.2010

31.12.2009

Share capital 300 300

Retained income 400 1,200

Total equity 700 1,500

Profits have been earned andretained in the business


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How do we calculate amounts for

financial statements?

Cost

Resale value (what it could be sold for netrealizable value)

Value in use (what it is worth to the business)

Replacement cost (what would it cost toreplace)

Cost less allowance for wear and tear(depreciation)


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How are items valued in SFP?

Accountants use (mainly)

For non-current assets: Cost less depreciation

For inventory: Lower of cost and net realizablevalue (sale value)

Why?

Verifiable (can look at documents to establishcost and realizable value)

Expect to recover at least the amount included in

the SFP through regular trading


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Another underlying assumption!


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Accounting entity The business is the reporting entity

Accounting period

Typically, this is a year Accounting equation

Assets equal (liabilities + equity)

The business will continue for the foreseeable

future The going concern principle


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Objective of Financial Statements

The IASB states that the objective of financial

statements is to provide information about the

financial position,

performance, andchanges in financial position

of an entity that is useful to a wide range of

users in making economic decisions.


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The Income Statement

Example: Glanbia

Overview

Income and expenses

Accruals/matching principle


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2010 2009

000 000

Note

5 Revenue 2,166,695 1,830,327

Cost of sales (1,784,263) (1,512,203)Gross profit 382,432 318,124Distribution expenses (115,896) (117,601)

Administration expenses (130,029) (104,412)

Other gains and losses 10,238 60,730

Operating profit 146,745 156,84110 Finance income 3,290 5,542

10 Finance costs (25,420) (29,576)

Share of results of JVs and Associates 10,103 10,225Profit before taxation 134,718 143,032

11 Income taxes (26,085) (29,873)

Profit for the year 108,633 113,159

Attributable to:

Equity holders of the parent 108,047 112,676

25 Non-controlling interests 586 483

108,633 113,159

12 Basic earnings per share (cents) 36.86 38.46

12 Diluted earnings per share (cents) 36.63 38.35

Glanbia plc Group Income Statement


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The Income Statement: Overview

The income statement summarises sourcesof income and types of expenditure

Surplus = profit

Deficit = loss

Prepared for the period from x to y or for

the year ended


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Income and Expenses

Income Inflow to the business

e.g. sales revenues, fees, interest earned

Increases net assets (Assets-Liabilities)

Expense

Outflow from the business

e.g. wages and salaries, cost of goods sold,telephone expense, interest expense

Decrease in net assets


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Cost of Goods Sold

This is the cost of buying in (or making) the

goods that have been sold in this accounting

period

The Gross Profit is sales revenue less cost ofgoods sold

See CRH Income Statement


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Accruals/Matching Basis of Accounting

Under this principle, the effects of transactions and

other events are recognized in accounts when they

occur(and not as cash or its equivalent is received

or paid)

and

they are recorded in the accounting records and

reported in the financial statements of the periods to

which they relate

IASB Definition


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To-Do-List

Buy Textbook

Read pages of SL&D specified for Week 1

Attend and participate in Tutorial

Complete Tutorial problems

See Module Outline (Week 1)

Read pages 80-83 of SL&D before next Monday

topic 1 intro to finl acc

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