Financial Accounting

An Introduction
Bachelor 1 30h

General Objective

Understanding of the
significant issues that
relate to financial
accounting in todays
dynamic global
business
environments
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Specifically. Semester 1

Defineandapplyfinancialaccountingterms;

Analyze,recordandreporttransactionsforserviceandmerchandisingbusinesses(you
sellservices,likeacarrefour,aphonecompany,airlines;

Preparethebasicfinancialstatements;abalance
sheet,anincomestatement,astatementof
retainedearningsandacashflowstatement;

Understandaccountingforassetsandstockholdersequity.

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Agenda
Semester 1 = 20h +10h
This class will:
1.Defineandapplyfinancialaccountingterms.
2.UnderstandaccountingforassetsandLiabilities.
3.Analyze,recordandreporttransactionsforserviceandmerch
andisingbusinesses.
4.Preparethe2 basicfinancialstatements:abalancesheet
andanincomestatement.

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PART 1

Introduction to
Financial Accounting
1:1:Introduction
IntroductiontotoFinancial
FinancialAccounting
Accounting
2:2:Key
KeyAccounting
AccountingConcepts
Concepts

1: Introduction to Financial Accounting

Objectives
1.

Explain why financial accounting is important

2.

Identify the main form of business enterprise

3.

Identify the main users of financial accounting and

their needs

4.

Identify the main differences between financial and

management accounting
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Definitions
1. The systematic recording, reporting, and analysis of
financial transactions of a business.
2. The process of identifying, measuring and
communicating economic information to permit
informed judgments and decisions by users of the
information!. . AAA

Providing
informatio
n to
others

Identifying
+
recording
accounting
transaction

Measuring
losses and
profits

Communicati
ng business
information

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Definitions
Identifying +
recording

Measuring
losses and
profits

Communicating
business
information

= select economic events

(transactions)
= classify and summarize

= prepare accounting reports

= analyse and interpret for users

Providing
information to
others

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Definitions

Accounting is about ACCOUNTABILTY

Most organizations are externally

accountable in some way for their
actions and activities. They will
produce reports on their activities that
will reflect their objectives and the
people to whom they are accountable

what happened?
whats the consequence?
9

How accounting information

helps businesses be accountable?
Providing a record of assets( things that you owned) [there is current assets : which is something
you have, and non current assets : a place where you store the things you have ] owned, amounts
owed to others and moneys invested
Providing reports showing the financial position of an organisation and the profitability of its
operations
Helping management actually manage the organisation
Providing a way of measuring an organisation's effectiveness
Helping stakeholders monitor organisations activities and performance
Enabling potential investors or funders to evaluate an organisation and make decisions

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Forms of firms

group

company

partnership

sole
1

s
d
e
e
N

c
a
for

n
u
co

?
it ng

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Companies need large amounts of

capital for operations
People put money to invest into a company
to make it work

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Companies may obtain capital by

borrowing from lenders
Love Money.

OR

Bank
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. or by issuing capital stock...

Stock Exchange

Angels?

14

Accounting Information,Economic
Activities and Decision Making
Impact
External
User
Companys
Economic
Activities

Accumulate

Accounting
Information

Communicate
Internal
User

Impact

External
Decision
Making

Internal
Decision
Making
15

Users of accounting Information

shareholde
rs

Government

customers
Financial
= external
departments

lenders

suppliers
employees

Managerial = internal

managers

CEOs

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The
The companys
companys
accountants
accountants prepare
prepare both
both
the
the financial
financial and
and the
the
managerial
managerial accounting
accounting
reports
reports

and
and the
the information
information
comes
comes from
from the
the same
same
information
information system.
system.

17

2: Key Accounting Concepts

Objectives

1.

Identify the general objective of financial reporting.

2.

Describe the three specific objectives of financial

reporting.

3.

Define the elements of financial statements.

4.

Discuss the types of useful information for investment

and credit decision making.

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Financial Reporting
Financial reporting is the
process of communicating
financial accounting information
about a company to external
users.

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Financial Reporting : objectives

Provide
Provideinformation
information that
thatisis useful
useful to
to
present
presentand
andpotential
potentialinvestors,
investors,
creditors,
creditors, and
andother
other users
users in
in making
making
rational
rationalinvestment,
investment, credit,
credit, and
and
similar
similardecisions.
decisions.

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Financial Reporting : objectives

Provideinformation
Provideinformation
aboutacompanys
aboutacompanys
cash
cashflows.
flows.

Provideinformationabouta
Provideinformationabouta
companyseconomic
companyseconomic
resources,
resources,obligations,
obligations,and
and
owners
ownersequity.
equity.

Specific
Objectives
Provideinformationabouta
Provideinformationabouta
companyscomprehensive
companyscomprehensive
incomeanditscomponents.
incomeanditscomponents.

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Financial Reporting : other issues

11 how
howthe
themanagement
managementhas
has
discharged
dischargedits
itsstewardship
stewardship
responsibilities.
responsibilities.

22 explanations
explanationsand
and

interpretations
interpretationsto
tounderstand
understandthe
the
financial
financialinformation
informationprovided.
provided.

Providing
Providingthis
thiscritical
critical
information
informationisisknown
known
as
asfull
fulldisclosure.
disclosure.

Financial Reporting : statements

Companies present at least
1.

2.
3.

3 major financial statements

The balance sheet (or statement of financial position) which summarizes a companys financial
position at a given date. ( its like a picture of a picture of a companys financial number at a certain
or specific time )
The income statement which summarizes the results of a companys income producing activities for
a period of time. ( to cross check with the balance sheet, they both always go together. )
The statement of cash flows which summarizes a companys cash inflows and outflows for a period
of time.( more detail than income statement, and there is more details on daily basis, the number
and everything)
cash flow: is all the cash that arrive and all the cash that goes.

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Financial Reporting : statements

aa statement
statement of
of

changes
changes in
in
stockholders
stockholdersequity
equity

This
statement
This
statement
also
is
included
by
also is included
by
summarizes
the
summarizes
the
many
companies.
many companies.
changes
changes in
in each
each
item
item of
of stockholders
stockholders
equity
equity for
for aa period.
period.

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Preparing accounting information

Information has to present an accurate
and true view of the business
performance and position

Adoption of certain conventions and

concepts which should be applied in
preparing accounts.
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25

Preparing accounting information

Accounting Standards = define the way in which
business transactions are disclosed and reported

International
Financial
Reporting
Standards

Generally
Accepted
Accounting
Principles
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Preparing accounting information

Both are the guidelines, procedures, and practices
that a company is required to use in recording and
reporting the accounting information in its audited
financial statements.

Theyarelikelawsandarethe
rulesthatmustbefollowedin
financialreporting.
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27

Interrelationship of Final Reports,

Useful Information and Decision Making
Communication
Documents

Types of Useful Information

External Decision
Making

Return on Investment
Buy

Risk

Hold
Sell

Financial
Reports

Financial Flexibility
Extend Credit

Liquidity

Continue Credit
Deny Credit

Operating Capability
2

Basic Accounting Equation

Assets =

Liabilities

Ressources
owned by a
business

Owners residual
claim on total
assets
Claims against
those assets

Stockholders
+
Equity

Basic Accounting Equation

As of December 31, BARCO company has
assets of 3,500 and stockholders' equity of
2,000.
What are the liabilities for this company as of
December 31, 2008 ??

1,500
3

Stockholders equity
=

Total assets

Total liabilities
=
Residual equity

Paid-in capital

Retained earnings

Stockholders equity
Increases ?
investment by stockholders
revenues

Decreases ?
??

dividends to stockholders
??

expenses
??

Stockholders equity
Choya Inc. had a stockholders equity balance of
164,000 at the beginning of the period. At the end
of the period, the stockholders equity balance was
198,000.
Assuming no additional investment or distributions
during the period,
what is the net income for the period ??

34,000
3

Transaction identification process

Every transaction must have a dual effect on the accounting equation.
Another
asset
OR

Liability

Asset

OR

Stockholders
equity
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Lets practice

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Transaction identification process

Is the financial position (assets, liabilities and stockholders
equity) of the company changed?

Record ?

Do not Record ?

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Transaction analysis (1)

SQ Soft Inc., a web company is investing 15,000 in exchange
for common stock

There is an increase in the asset cash 15,000 and an equal

increase in the equity common stock.

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Transaction analysis (2)

SQ Soft purchases computer equipement for 7,000 cash

cash is decreased 7,000 and the asset Equipement is

increased 7,000. After transaction 2, total assets = total
liabilities+equity.
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Transaction analysis (3)

SQ Soft purchases for 1,600 of supplies from BATNA supply.
The supplies will last several months. SQ Soft will pay the bill
next month.

The asset supplies is increased 1,600 and the liability

accounts payable is incresased by the same amount.
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Transaction analysis (4)

SQ Soft receive 1,200 cash from customers, for providing
web services.

(4)

Cash increased 1,200 and reatined earning is increased

1,200. (Reatined earning is indirectly increased because
revenue is increased).
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