Financial accounting fundamentals

Financial Accounting Fundamentals John J Wild Third Edition McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc All rights reserved Chapter 01 Introducing Financial Accounting 1-2 Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting C2: Identify users and uses of accounting C3: Explain why ethics are crucial to accounting C4: Explain generally accepted accounting principles and define and apply several accounting principles C5: Appendix 1B – Identify and describe the three major activities of organizations 1-3 Analytical Chapter Objectives A1: Define and interpret the accounting equation and each of its components A2: Compute and interpret return on assets A3: Appendix 1A – Explain the relation between return and risk 1-4 Procedural Chapter Objectives P1: Analyze business transactions using the accounting equation P2: Identify and prepare basic financial statements and explain how they interrelate 1-5 C1 Importance of Accounting Accounting Accounting is a system that Identifies Identifies Records Records Relevant Relevant Reliable Reliable Comparable Comparable information that is Communicates Communicates about about an an organization’s organization’s business businessactivities activities 1-6 C1 Accounting Activities  Identifying Business Activities  Recording Business Activities  Communicating Business Activities 1-7 Users of Accounting Information C2 Internal Users External Users •Lenders •Consumer Groups •Managers •Sales Staff •Shareholders •External Auditors •Officers •Budget Officers •Governments •Customers •Internal Auditors •Controllers 1-8 C2 Users of Accounting Information External Users Internal Users Financial accounting provides external users with financial statements (shareholders, lenders, etc.) Managerial accounting provides information needs for internal decision makers (officers, managers, etc.) 1-9 C2 Opportunities in Accounting Financial Financial •Preparation •Preparation •Analysis •Analysis •Auditing •Auditing •Regulatory •Regulatory •Consulting •Consulting •Planning •Planning •Criminal •Criminal investigation investigation AccountingAccountingrelated related Managerial Managerial •General •Generalaccounting accounting •Cost •Costaccounting accounting •Budgeting •Budgeting •Internal •Internalauditing auditing •Consulting •Consulting •Controller •Controller •Treasurer •Treasurer •Strategy •Strategy •Lenders •Lenders •Consultants •Consultants •Analysts •Analysts •Traders •Traders •Directors •Directors •Underwriters •Underwriters •Planners •Planners •Appraisers •Appraisers Taxation Taxation •Preparation •Preparation •Planning •Planning •Regulatory •Regulatory •Investigations •Investigations •Consulting •Consulting •Enforcement •Enforcement •Legal •Legalservices services •Estate •Estateplans plans •FBI •FBIinvestigators investigators •Market •Marketresearchers researchers •Systems •Systemsdesigners designers •Merger services •Merger services •Business •Businessvaluation valuation •Forensic •Forensicaccountant accountant •Litigation •Litigationsupport support •Entrepreneurs •Entrepreneurs 1-10 P1 Transaction Analysis Purchased equipment for $15,000 cash 1-27 P1 Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account 1-28 P1 Transaction Analysis Borrowed $4,000 from 1st American Bank 1-29 P1 Transaction Analysis The balances so far appear below Note that the Balance Sheet Equation is still in balance 1-30 P1 Transaction Analysis Now, let’s look at transactions involving revenue, expenses and dividends 1-31 P1 Transaction Analysis Provided consulting services receiving $3,000 cash 1-32 P1 Transaction Analysis Paid salaries of $800 to employees Remember that expenses decrease equity 1-33 P1 Transaction Analysis Dividends of $500 are paid to shareholders Remember that dividends decrease equity 1-34 P2 Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows 1-35 P2 Income Statement Net income is the difference between Revenues and Expenses The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities 1-36 P2 Statement of Retained Earnings The net income of $2,200 increases Retained Earnings by $2,200 1-37 P2 Balance Sheet The TheBalance BalanceSheet Sheetdescribes describes aacompany’s company’sfinancial financialposition position at ataapoint pointin intime time 1-38 P2 Statement of Cash Flows 1-39 A2 Return on Assets (ROA) Return on assets Net income = Average total assets ROA ROA is is aa profitability profitability measure measure 1-40 End of Chapter 01 1-41 [...]... Make ethical decision Choose best option after weighing all consequences 1-13 C4 Generally Accepted Accounting Principles Financial Financialaccounting accounting practice practiceis isgoverned governedby by concepts conceptsand and rules rulesknown knownas as generally generallyaccepted accepted accounting accountingprinciples principles (GAAP) (GAAP) Relevant RelevantInformation Information Reliable... issuestock stockto tothe thepublic public The The Financial Financial Accounting Accounting Standards Standards Board Board is is the the private private group group that that sets sets both both broad broad and and specific specific principles principles The International Accounting Standards Board (IASB) issues international standards that identify preferred accounting practices in other countries More... other countries More than 100 countries now require or permit companies to prepare financial reports following IFRS standards 1-15 C4 Principles and Assumptions of Accounting Measurement principle (also called cost principle) means that accounting information is based on actual cost Going-concern assumption means that accounting information reflects a presumption the business will continue operating... Sarbanes-Oxley Act (also called SOX) in 2002 to help curb financial abuses at companies that issue their stock to the public The act requires that public companies apply both accounting oversight and stringent internal controls The desired results include more transparency, accountability, and truthfulness in reporting transactions 1-18 A1 Accounting Equation Assets Assets = Liabilities Liabilities... transactions and events External transactions are exchanges of value between two entities, which yield changes in the accounting equation Internal transactions are exchanges within any entity; they can also affect the accounting equation Events refer to happenings that affect an entity’s accounting equation and can be reliably measured Transaction analysis is defined as the process used to analyze transactions... report the details behind financial statements that would impact users’ decisions Business entity assumption means that a business is accounted for separately from its owner or other business entities 1-16 C4 Business Entity Forms Sole Sole Proprietorship Proprietorship Partnership Partnership Corporation Corporation 1-17 C4 Sarbanes-Oxley Act In response to a number of publicized accounting scandals (Enron,... salaries of $800 to employees Remember that expenses decrease equity 1-33 P1 Transaction Analysis Dividends of $500 are paid to shareholders Remember that dividends decrease equity 1-34 P2 Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded 1 Income Statement 2 Statement of Retained Earnings 3 Balance Sheet 4 Statement of Cash Flows 1-35 P2 Income Statement... Wages Wages Payable Payable 1-21 A1 Equity Retained Retained Earnings Earnings Contributed Contributed Capital Capital Owner’s Owner’s claim claim on on assets assets Dividends Dividends 1-22 A1 Expanded Accounting Equation Assets Assets Assets Assets Contributed Contributed Capital Capital = = _ Liabilities Liabilities Liabilities Liabilities Dividends Dividends + + + Revenues Revenues Equity Equity Equity...C2 Accounting Jobs by Area 1-11 C3 Ethics—A Key Concept Ethics Beliefs that distinguish right from wrong Accepted standards of good and bad behavior 1-12 C3 Guidelines for Ethical Decisions  Identify ethical... Affects Affectsthe thedecision decisionof of its itsusers users Is Istrusted trustedby by users users Used Usedin incomparisons comparisons across acrossyears years&&companies companies 1-14 C4 Setting Accounting Principles In Inthe theUnited UnitedStates, States,the theSecurities Securitiesand andExchange Exchange Commission, Commission,aagovernment governmentagency, agency,has hasthe thelegal legalauthority ... •Criminal investigation investigation AccountingAccountingrelated related Managerial Managerial •General •Generalaccounting accounting •Cost •Costaccounting accounting •Budgeting •Budgeting •Internal... transactions using the accounting equation P2: Identify and prepare basic financial statements and explain how they interrelate 1-5 C1 Importance of Accounting Accounting Accounting is a system... 1-8 C2 Users of Accounting Information External Users Internal Users Financial accounting provides external users with financial statements (shareholders, lenders, etc.) Managerial accounting provides