Chapter 1 introduction

OPEN UNIVERSITY HCMC MBA PREPARATORY COURSE Principles of Financial Accounting Lecturer: NGUYEN TAN BINH Chapter Introduction to Accounting 06/04/16 NGUYEN TAN BIN Learning Objectives After studying this chapter, you should be able to:  Explain how accounting information assists in making decisions  Describe the components of the balance sheet  Analyze business transactions and relate them to changes in the balance sheet  Classify operating, investing, and financing activities in a cash flow statement 06/04/16 NGUYEN TAN BIN Introduction  Accounting - a process of identifying, recording, summarizing, and reporting economic information to decision makers in the form of financial statements  Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies 06/04/16 NGUYEN TAN BIN The accounting system  The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements 06/04/16 NGUYEN TAN BIN The accounting system  Accounting systems are designed to meet the needs of the decision makers who use the financial information  Every business maintains some type of accounting system  These accounting systems may be very complex or very simple, but the real value of any accounting system lies in the information that the system provides 06/04/16 NGUYEN TAN BIN Accounting as an Aid to Decision Making  Accounting information is useful to anyone who makes decisions that have economic results • • • • • Managers want to know if a new product will be profitable Owners want to know which employees are productive Investors want to know if a company is a good investment Legislators want to know how a proposed law will affect budgets Creditors want to know if they should extend credit, how much to extend, and for how long 06/04/16 NGUYEN TAN BIN Accounting as an Aid to Decision Making   Accounting helps in decision making by showing where and when money has been spent, by evaluating performance, and by showing the implications of choosing one plan instead of another Fundamental relationships in the decision-making process: Transaction (Event) Accountant’s recording 06/04/16 Financial statements NGUYEN TAN BIN Users Financial accounting and Management accounting  The major difference between financial and management accounting is the users of the information   Financial accounting serves external users, such as investors, creditors, and suppliers Management accounting serves internal users, such as executives, managers, and administrators within organizations 06/04/16 NGUYEN TAN BIN Financial accounting and Management accounting  The primary questions about an company’s success that decision makers want to know are: (i) What is the financial picture of the company on a given day? (ii) How well did the company during a given period? 06/04/16 NGUYEN TAN BIN 10 The Balance Sheet  The balance sheet shows the financial position of a company at a particular point in time   The balance sheet is sometimes referred to as the statement of financial position or the statement of financial condition The left side lists assets – the right side lists liabilities and owners’ equity 06/04/16 NGUYEN TAN BIN 12 The Balance Sheet  The balance sheet equation: Assets = Liabilities + Owners’ Equity or Owners’ Equity = Assets - Liabilities 06/04/16 NGUYEN TAN BIN 13 The Balance Sheet  Elements of the balance sheet:    Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners) 06/04/16 NGUYEN TAN BIN 14 The Balance Sheet SAIGON MILK COMPANY Balance Sheet, December 31, 2005 (in millions VND) Assets Current assets: Cash Accounts receivable Total current assets Plant assets: Land Equipment Total plant assets Total assets 06/04/16 Liabilities and OE’s $ 400 450 $ 850 $ 1,200 800 2,000 $ 2,850 Current liabilities: Accounts payable Wages payable Total liabilities Owner’s Equity $ 800 120 $ 920 1,930 Total liabilities and owner’s equity $ 2,850 NGUYEN TAN BIN 15 Balance Sheet Transactions  The balance sheet is affected by every transaction that an entity encounters  Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation and the balance sheet must always be balanced 06/04/16 NGUYEN TAN BIN 16 Transaction Analysis  Transactions are recorded in accounts, which are summary records of the changes in particular assets, liabilities, or owners’ equity  The account balance is the total of all entries to the account 06/04/16 NGUYEN TAN BIN 17 Transaction Analysis  For each transaction, the accountant determines:    Which specific accounts are affected Whether the account balances are increased or decreased The amount of the change in each account 06/04/16 NGUYEN TAN BIN 18 Transaction Analysis Some definitions to remember:  Inventory - goods held by a firm for resale to customers  Account payable - a liability that results from the purchase of goods or services on account  Compound entry - a transaction that affects more than two accounts  Creditor - one to whom money is owed  Debtor - one who owes money 06/04/16 NGUYEN TAN BIN 19 Introduction to Cash Flows Statement  Companies three basic things     They invest in assets to conduct business They raise money to finance these assets They use the assets and the money they raise to operate the business These transactions can be classified into one of three categories – operating, investing, and financing activities 06/04/16 NGUYEN TAN BIN 20 Introduction to Cash Flows Statement    Operating activities – include sale and purchase of goods and payment of items such as rent, taxes, and interest Investing activities – include acquiring and selling assets and securities held for investment purposes Financing activities – include obtaining resources from owners and creditors and repaying amounts borrowed 06/04/16 NGUYEN TAN BIN 21 Introduction to Cash Flows Statement  The statement of cash flows gives a direct picture of where cash came from and where cash went  Preparation of the statement of cash flows   List the activities that increased (inflow) or decreased (outflow) cash Place each inflow or outflow into the proper categories 06/04/16 NGUYEN TAN BIN 22 Types of Ownership  Three basic forms of ownership: Sole proprietorships  Partnerships  Corporations  06/04/16 NGUYEN TAN BIN 23 Accounting for Owners’ Equity Proprietorships and Partnerships vs Corporations  Owners’ equities for proprietorships and partnerships are called capital  Owners’ equity for a corporation shareholders’ equity 06/04/16 is called stockholders’ equity or NGUYEN TAN BIN 24 Accounting for Owners’ Equity  In a corporation, the total capital investment actively invested by the owners is called paid-in capital  Paid-in capital consists of two parts:   Capital stock at par value Paid-in capital in excess of par value 06/04/16 NGUYEN TAN BIN 25 The Auditor  The audit is described in the auditor’s opinion (independent auditor’s report)  The auditor’s opinion is included the financial statements of the organization being examined with References: Horngren, Introduction to financial accounting 06/04/16 NGUYEN TAN BIN 26 [...]... given period 06/04 /16 NGUYEN TAN BIN 11 The Balance Sheet  The balance sheet shows the financial position of a company at a particular point in time   The balance sheet is sometimes referred to as the statement of financial position or the statement of financial condition The left side lists assets – the right side lists liabilities and owners’ equity 06/04 /16 NGUYEN TAN BIN 12 The Balance Sheet... after deducting liabilities (rights of the owners) 06/04 /16 NGUYEN TAN BIN 14 The Balance Sheet SAIGON MILK COMPANY Balance Sheet, December 31, 2005 (in millions VND) Assets Current assets: Cash Accounts receivable Total current assets Plant assets: Land Equipment Total plant assets Total assets 06/04 /16 Liabilities and OE’s $ 400 450 $ 850 $ 1, 200 800 2,000 $ 2,850 Current liabilities: Accounts payable... 06/04 /16 NGUYEN TAN BIN 18 Transaction Analysis Some definitions to remember:  Inventory - goods held by a firm for resale to customers  Account payable - a liability that results from the purchase of goods or services on account  Compound entry - a transaction that affects more than two accounts  Creditor - one to whom money is owed  Debtor - one who owes money 06/04 /16 NGUYEN TAN BIN 19 Introduction. .. $ 800 12 0 $ 920 1, 930 Total liabilities and owner’s equity $ 2,850 NGUYEN TAN BIN 15 Balance Sheet Transactions  The balance sheet is affected by every transaction that an entity encounters  Each transaction has counterbalancing entries that keep total assets equal to total liabilities and owners’ equity, i.e., the balance sheet equation and the balance sheet must always be balanced 06/04 /16 NGUYEN... equation and the balance sheet must always be balanced 06/04 /16 NGUYEN TAN BIN 16 Transaction Analysis  Transactions are recorded in accounts, which are summary records of the changes in particular assets, liabilities, or owners’ equity  The account balance is the total of all entries to the account 06/04 /16 NGUYEN TAN BIN 17 Transaction Analysis  For each transaction, the accountant determines: ... 06/04 /16 NGUYEN TAN BIN 20 Introduction to Cash Flows Statement    Operating activities – include sale and purchase of goods and payment of items such as rent, taxes, and interest Investing activities – include acquiring and selling assets and securities held for investment purposes Financing activities – include obtaining resources from owners and creditors and repaying amounts borrowed 06/04 /16 NGUYEN... amounts borrowed 06/04 /16 NGUYEN TAN BIN 21 Introduction to Cash Flows Statement  The statement of cash flows gives a direct picture of where cash came from and where cash went  Preparation of the statement of cash flows   List the activities that increased (inflow) or decreased (outflow) cash Place each inflow or outflow into the proper categories 06/04 /16 NGUYEN TAN BIN 22 Types of Ownership ... stock at par value Paid-in capital in excess of par value 06/04 /16 NGUYEN TAN BIN 25 The Auditor  The audit is described in the auditor’s opinion (independent auditor’s report)  The auditor’s opinion is included the financial statements of the organization being examined with References: Horngren, Introduction to financial accounting 06/04 /16 NGUYEN TAN BIN 26 ... basic forms of ownership: Sole proprietorships  Partnerships  Corporations  06/04 /16 NGUYEN TAN BIN 23 Accounting for Owners’ Equity Proprietorships and Partnerships vs Corporations  Owners’ equities for proprietorships and partnerships are called capital  Owners’ equity for a corporation shareholders’ equity 06/04 /16 is called stockholders’ equity or NGUYEN TAN BIN 24 Accounting for Owners’ Equity... liabilities and owners’ equity 06/04 /16 NGUYEN TAN BIN 12 The Balance Sheet  The balance sheet equation: Assets = Liabilities + Owners’ Equity or Owners’ Equity = Assets - Liabilities 06/04 /16 NGUYEN TAN BIN 13 The Balance Sheet  Elements of the balance sheet:    Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) Liabilities - obligations