Financial Accounting

Chapter 1
Alibaba Group
 Learning Objectives

1.1 Understand the role of accounting in communicating

financial information.
1.2 Understand the underlying accounting concepts in the IFRS
Conceptual Framework.
1.3 Obtain insights into business operations through financial
statements.
1.4 Identify financial statements and their inter-relationships.
1.5 Understand the role of ethics in accounting.
Role of Accounting in Communicating
Financial Information

• Accounting is an information system that:

– Measures business activities
– Processes data into reports
– Communicates results to decision makers
The Flow of Accounting Information
 Business Decisions

Accounting helps companies, their shareholders, and

management make the following decisions:
• sources of funding and capital
• costing and pricing
• analyze the performance of various business groups
within the company
 Accounting Is the Language of Business

Accounting is the language of communication in all

businesses. The better our understanding of this language,
the better we can understand our finances, our businesses,
or our investments.
It is used by:
• Individuals
• Investors and creditors
• Regulatory bodies
 Two Kinds of Accounting

Financial Accounting
• For decision makers outside the entity
– Investors
– Creditors
– Government agencies
– The public
 Two Kinds of Accounting

Managerial Accounting
• For managers inside the entity
– Budgets
– Forecasts
– Projections
 Role of Accounting Standards

In accounting, we assign monetary amounts to represent

elements of financial statements in accordance to some
accounting standards.
• International Financial Reporting Standards (IFRS)
– Formulated by the International Accounting Standards
Board (IASB)
– Use of IFRS by jurisdictions
https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#profiles

• Generally Accepted Accounting Principles (GAAP)

– Formulated by the Financial Accounting Standards Board
(FASB)
 The Conceptual Framework

• Generally the “Why, Who, What, How” of financial reporting, it:

– lays the foundation for resolving the big issues in accounting
– prescribes the nature, function, and boundaries within which
financial accounting and reporting operate
– is a joint publication by the IASB and the FASB, used as a
foundation for reviewing existing and developing new
accounting standards
Conceptual Framework of Financial Reporting
 Overview

The Conceptual Framework helps us answer the following questions:

1. Why Is Financial Reporting Important?
2. Who Are the Users of Financial Reports?
3. What Makes Financial Information Useful?
4. What Constraints Do We Face in Providing Useful Information?
5. What Are Our Assumptions in Financial Reporting?
The Accounting Equation
Apply the Accounting Equation to
Business Organizations

The financial statements are based on the accounting

equation.
• Assets
– Resources expected to produce future benefit
• Liabilities
– Outsider claims – debts payable to outsiders
• Owner’s Equity
– Insider claims, shareholders’ interest in the assets
Apply the Accounting Equation to
Business Organizations

• Assets
– Cash and cash equivalents
– Inventories
– Property, plant, and equipment (fixed assets)
• Liabilities
– Accounts payable
– Income taxes payable
– Long-term debt
Apply the Accounting Equation to
Business Organizations

Owner’s Equity
• The accounting equation can be rewritten as:
– Assets – Liabilities = Owners’ Equity
• Corporation’s equity is called shareholders’ equity and it
has two parts:
– Paid-in capital
– Retained earning
Apply the Accounting Equation to
Business Organizations

Owner’s Equity
• Paid-in capital
– The amount shareholders have invested in the
business.
• Retained Earnings
– The amount of earned income kept for use in the
business.
The Components of Retained Earnings
 Components of Retained Earnings

• Revenues
– Inflow of resources from delivering goods or services
– Increase retained earnings
• Expenses
– Outflow of resources due to the cost of operations
– Decrease retained earnings
• Dividends
– Distribution of assets to shareholders
– Decrease retained earnings
Questions from Decision Makers
 Flow of the Financial Statements

• Income statement
• Statement of retained earnings
• Balance sheet
• Statement of cash flows
 The Income Statement

• The income statement reports revenues and expenses

for the period.
– The bottom line net income (loss) for the period
Net income = Total Revenues and Gains − Total
Expenses and Losses
Alibaba’s Income Statement
The Statement of Changes in Equity

• Equity
– owner’s residual interest in the entity after
deducting liabilities
– Net income increases total equity
– Net losses and dividends decrease total equity
– Net income (net loss) flows from the income
statement to the statement of changes in equity
Alibaba’s Changes in Equity
 The Balance Sheet

Balance Sheet
• Also called the statement of financial position
• Reports three items:
– Assets
– Liabilities
– Shareholders’ equity
• Reflects the company’s position at a specific moment in
time
The Balance Sheet – Assets

Assets
• Current assets – expected to be used or converted to
cash within one business cycle
– Examples: cash and cash equivalents, short-term
investments, accounts receivable, prepaid expenses
• Long-term assets – expected to benefit the company
beyond just the next fiscal year
– Examples: property, plant, and equipment (PPE),
long-term investments, intangible assets
The Balance Sheet – Assets
 The Balance Sheet – Liabilities

Liabilities
• Current liabilities – debts due within one year
– Examples: accounts payable, salaries payable, short-
term notes payable, accrued liabilities
• Long-term liabilities – debts payable after one year
– Examples: long-term notes payable, long-term bonds
payable
The Balance Sheet – Liabilities
 The Balance Sheet – Equity

Equity (Shareholders’ Equity)

• Represents the shareholders’ ownership of the business’s
assets
• Examples: capital (paid-in capital), common shares,
retained earnings, treasury stock, accumulated other
comprehensive income (loss)
The Balance Sheet – Equity (2 of 2)
Alibaba’s Consolidated Balance Sheets
 The Statement of Cash Flows

• Measures cash receipts and payments

• Three types of activities:
– Operating activities: cash flows from selling goods
and services to customers
– Investing activities: cash flows from purchasing and
selling long-term assets
– Financing activities: cash flows from borrowing or
repaying funds or equity transactions
Alibaba’s Consolidated Statements
of Cash Flows
Relationships among the Financial Statements
Relationships among the Financial Statements
 Evaluate Business Decisions Ethically

Three factors influence business and accounting decisions

• Economics
– Decision should maximize the economic benefits
• Legal
– Free societies are governed by laws written to provide
clarity and prevent abuse of others’ rights
• Ethical
– Recognizes that even when economically profitable and
legal, some actions still may not be right
 Code of Ethics

• The International Ethics Standards Board for

Accountants (IESBA) provides the industry a Code of
Ethics for Professional Accountants with these principles:
– Integrity
– Objectivity
– Professional Competence and Due Care
– Confidentiality
– Professional Behavior