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Introduction to Financial Accounting

• Chapter 1
• Introduction to Financial Accounting

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Chapter 1 Learning Objectives
LO1 Define accounting.
LO2 Identify and describe the forms of business
organization.
LO3 Identify and explain the Generally Accepted
Accounting Principles (GAAP).
LO4 Identify, explain, and prepare the
financial statements.
LO5 Analyze transactions by using the
accounting equation.
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A. What is Accounting?
LO1 Define accounting.

• What is accounting?
• A process that identifies, measures, records, and
  reports on a businesss economic activities to
  various users
• Two areas of accounting are managerial accounting
  and financial accounting
• Who are the users?
• Internal users i.e. management managerial
  accounting
• External users i.e. investors, creditors,
  customers, and labour unions financial
  accounting
• What is financial accounting?
• An area of accounting that focuses on external
  reporting for external users

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B. Business Organizations
LO2 Identify and describe the forms of business
organization.

• What are the types of organizations that use
  accounting information?
• a business organization sells products and/or
  services for profit
• a non-business organization does not have profit
  as a goal hospitals, schools or charities serve
  the needs of society
• Three types of business organizations
• a proprietorship, a partnership and a corporation

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Proprietorship

• Proprietorship characteristics
• a business that is owned by one person
• not a separate legal entity
• business profits are included in the owners
  personal tax return
• unlimited liability with regard to debts owed by
  the business
• are often small businesses

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Partnership

• Partnership characteristics
• a business that is owned by two or more
  individuals
• not a separate legal entity
• owners are subject to unlimited liability with
  regard to debts owed by the business

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Corporation

• Corporation characteristics
• a business that is owned by one or more
  individuals, called stockholders, where ownership
  is in the form of stocks
• a separate legal entity
• files its own tax return
• liability of owners is limited to their
  investment in the corporation

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Corporation

• Corporation characteristics - continued
• stockholders can own any amount of stocks. The
  amount of stock held by a stockholder represents
  how much of the corporation they own
• a corporation can have different types of stocks
  such as common stock and preferred stock.
• common stock can be privately held or publically
  traded
• stockholders from larger corporations are
  represented by the Board of Directors and daily
  management is delegated to officers of the
  corporation

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Corporation
Generalized Form of a Corporate Organization
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C. Generally Accepted Accounting Principles
LO3 Identify and explain Generally Accepted
Accounting Principles (GAAP).

• Accounting principles differ among countries.
• In the United States, public companies use US
  GAAP when reporting their financial transactions.
  
• These accounting principles are established by
  the Securities and Exchange Commission (SEC).
• The SEC relies on the Financial Accounting
  Standards Board (FASB) to specify accounting
  principles.

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Qualitative Characteristics

• Accounting practices are guided by qualitative
  characteristics and principles
• Six qualitative characteristics
• Relevance ability to make a difference
• Faithful representation complete, neutral, free
  from error
• Comparability utilizing similar accounting
  practices
• Verifiability financial reports logically flow
  from the data and are reproducible
• Timeliness financial reports are available in
  time to be useful to decision makers
• Understandability information is clear and
  concise

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Accounting Principles

• Nine principles - general rules and concepts that
  govern the field of accounting
• Business entity each economic entity maintains
  separate records
• Consistency a business uses the same accounting
  policies and procedures from period to period
• Historical Cost each economic transaction is
  based on the actual original cost
• Full disclosure accounting information is
  sufficient to make knowledgeable decisions
• Going concern assume that the business will
  continue into the future

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Accounting Principles

• Principles continued
• Matching financial transactions are reported in
  the
• period occurred/realized
• Materiality applies to items that are
  significant
• enough to affect decisions made by users
• Monetary unit financial information expressed
  in stable units of money
• Recognition revenues are recorded when earned
  and expenses are recorded when incurred

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D. Financial Statements
LO4 Identify, explain, and prepare the
financial statements.
The income statement reports revenues and
expenses during the period.
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Financial Statements (cont.)

• The statement of changes in equity reports
  changes in the stock and retained earnings during
  the period.

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Financial Statements (cont.)

• The balance sheet reports assets, liabilities,
  and equity at a point in time.

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Financial Statements (cont.)

• The balance sheet is the basis for the accounting
  equation
• Assets Liabilities Equity
• 22,100 10,100 12,000

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Financial Statements (cont.)

• The statement of cash flows reports changes in
  the cash balance during the period
• This statement will be covered in detail later in
  the course.

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Financial Statements (cont.)

• Notes to the financial statements accompany the
  financial statements and provide greater detail
  about the various items and amounts shown in the
  financial statements.

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Sources of Financing

• Internally generated funds from profits retained
  by the business
• Acquiring debt from creditors
• Issuing stock to investors

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E. Transactions Analysis
LO5 Analyze transactions by using the accounting equation.
Accounting Equation Typical
Accounts
Assets Liabilities
Equity
(economic resourcesowned by an entity)
(creditors claimson assets)
(owners claimson assets)
Debits Credits
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Transaction Analysis

• Three steps to analyze each transaction
• Determine which accounts are affected
• Determine if the account has increased or
  decreased (/-)
• Record the entry

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Transaction Analysis

• Determine which accounts are affected
• ASSETS ACCOUNTS
• cash coins, currency, bank accounts, petty cash
• accounts receivable amounts owed by customers
• prepaid expenses goods or services paid in
  advance and are expensed as consumed
• plant assets assets that provide benefits for
  the current year and beyond, like land,
  buildings, and equipment

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Transaction Analysis

• 1. Determine which accounts are affected (cont.)
• LIABILITY ACCOUNTS
• bank loan an obligation to repay cash in the
  future to the bank
• accounts payable obligations to repay suppliers
  for goods and/or services
• unearned revenue advance payment of cash from a
  customer for goods and/or services not yet
  provided

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Transaction Analysis

• 1. Determine which accounts are affected (cont.)
• EQUITY ACCOUNTS
• common stock amounts invested by stockholders
  as owners of the business
• retained earnings the sum of all net
  income/losses over the life of a business, less
  any dividends declared

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Transaction Analysis

• Determine if the accounts have increased or
  decreased (/-)
• Assets Liabilities
  Equity
• Debits must always equal
  Credits
• The accounting equation must always balance for
  every transaction.

Debits
Credits
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Transaction 1

• 3. Record the entry

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Transaction 2
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Transaction 3
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Transaction 4
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Transaction 5
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Transaction 6
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Transaction 7
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Transaction 8
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Transaction 9
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Transaction 10
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Transactions Worksheet
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Big Dog Carworks Corp. Income Statement and
Balance Sheet
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Big Dog Carworks Corp. Statement of Changes in
Equity
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Financial Statements

• Accounting Time Periods
• Annual financial statements are prepared at the
  end of each fiscal year
• Some companies prepare interim financial
  statements, usually monthly or quarterly

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References

• All clip-art was retrieved from
  http//openclipart.org on July 21, 2016.
• Slide 5 http//openclipart.org/detail/234419/litt
  le-shop-with-sign-fixed
• Slide 6 http//openclipart.org/detail/120691/busi
  ness-people-siluete
• Slide 7 http//openclipart.org/detail/223107/busi
  ness-meeting
• Slide 10 http//openclipart.org/detail/219063/inj
  ustice
• Slide 19 http//openclipart.org/detail/182517/pap
  er-notes
• Slide 26 http//openclipart.org/detail/544/balanc
  e-scale (modified)
• Slide 40 http//openclipart.org/detail/78169/offi
  cenotesline-drawing