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Understanding
Accounting and
Financial StatementsJuly 26, 2014
AHMIELLE D. SALAZAR, CPA, MBM
Accounting for NonAccounting for NonAccounting for NonAccounting for Non----AccountantsAccountantsAccountantsAccountants
1
Explain the functions and importance of
accounting. Explain the functions and major components of
the four principal financial statements: statement
of financial position, income statement, statement
of owners equity and statement of cash flows.
To utilize financial reports as guide and aid in
handling business activities efficiently and
effectively.
To know the different users of accounting
information and how they use it. 2
Why do you need to study accounting when you
are not an Accountant?
Accounting is an activity you will do simply
because it is necessary especially if you
engage in profit-oriented undertaking.
To understand business records to make good
business decision.
3
Accounting is a service activity. Its function is to
provide quantitative information, primarily financial
in nature, about economic entities that is intended to
be useful in making economic decisions, in making
reasoned choices among alternative courses of
action.
Accounting is also defined as the process of
identifying, measuring and communicating
economic information to permit informed judgment
and decision by the users of the information. 4
Service Activity.
A Process, an Art and a Discipline.
The Language of Business.
The Eyes of the Business.
5
Primary to prepare financial reports and provide them to economic decision makers.
Basic the process of identifying, measuring and communicating economic information to permit informed judgment for an economic decision.
Advance or Critical - audit function to test reliability of financial reports 6
The purpose of accounting is to help financial users see the true picture of the business in financial terms.
In order to help them, the financial reports must be understandable, reliable, relevanttimely and complete.
A well-informed management is vital for the survival of a business organization. The management must have the right information at the right time. 7
Over-all objective - to provide useful information for economic decision making.
Specifically, the objectives of accounting are:
1) To ascertain the results of the business operation;
2) To ascertain the financial position of the business;
8
3) To assist financial users in predicting the enterprises financial capacity regarding the future cash flows, financial conditions and results of operation.
9
Financing activities provide necessary funds to start a business and expand it after it begins operating.
Investing activities provide valuable assets required to run a business.
Operating activities focus on selling goods and services, but they also consider expenses as important elements of sound financial management.
10
11
Accounting process - set of activities involved in
converting information about transactions
into financial statements.
12
Assets - anything of value owned or leased by a business.
Liability - claim against a firms assets by a creditor.
Owners equity - all claims of the proprietor, partners, or
stockholders against the assets of a firm, equal to the excess of
assets over liabilities.
Basic accounting equation - relationship that states that
assets equal liabilities plus owners equity.
13
Double-entry bookkeeping - system by which accounting
transactions are entered using the dual aspect concept; each
individual transaction always has an offsetting transaction.
In Accounting, journalizing is the process of
recording transactions.
Debit XXX
Credit XXX
Journal Entry:
14
A transaction is the act of conducting or negotiating
business affairs.
A transaction is an exchange or transfer of funds,
goods or services.
A transaction is a communicative action or activity
involving two parties or things that reciprocally
affect or influence each other.
15
Investing of money for capital purposes.
Selling of goods or services.
Purchase of merchandise inventory.
Collection of receivables.
Paying accounts to suppliers.
16
Accounting uses what we refer to as "accounts".
An account refers to assets, liabilities, revenues,
cost, expenses, and equity, as represented by
individual ledger pages, to which changes in value
are chronologically recorded with debit and credit
entries. These entries, referred to as postings,
become part of a book of final entry or ledger.
17
T device form where the debits are recorded on
the left-hand side and the credits are recorded on
the right hand side of the letter T.
To debit is to record the value received in an
economic transaction. To credit is to record the
value parted with in an economic transaction.
18
Ledger refers to the accounting book in which the
accounts and their related amounts as recorded in
the journal are posted periodically.
Ledger is called book of final entry.
19
General Ledger is a grouping of all accounts used
in preparing the financial statements. It is generally
called the controlling account because it reports in
summarized form the activities that have taken
place as recorded in its subsidiary ledger.
Subsidiary Ledger is a group ff like accounts that
contains the independent data of a specific ledger.
20
A chart of accounts provides a listing of all financial
accounts used by particular business, organization,
or government agency.
Examples of common financial accounts are cash,
accounts receivable, inventories, PP&E, common
stock, sales, cost of sales, wages, and payroll.
21
Account Name
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Property, Plant & Equipment
Accumulated Depreciation
Other Assets
Accounts Payable
Accrued Expenses
Income Tax Payable
Common Stock
Retained Earnings
Sales
Cost of Sales
Salaries & Wages
Rent Expense
Supplies Expense
Depreciation Expense
Utilities Expense
Provision for Income Tax
Assets
Liabilities
Equity
Revenue & Cost
Expenses22
Trial Balance is a device used to periodically test
the equality of debits and credits as recorded in
the ledger accounts.
A trial balance is useful to an accountant whenever
periodic financial statements are to be prepared.
23
1. Balance Sheet (Statement of Financial Position)
2. Income Statement (Profit and Loss Statement)
3. Statement of Changes in Owners Equity
4. Statement of Cash Flows
24
Balance sheet - statement of a firms financial
positionwhat it owns and the claims against its
assetsat a particular point in time.
Photograph of firms assets together with its liabilities
and owners equity
Follows the accounting equation
25
26
Income Statement - financial record of a companys
revenues and expenses, and profits over a period of
time.
Firms financial performance in terms of revenues,
expenses, and profits over a given time period.
Reports profit or loss.
Focus on revenues and costs associated with
revenues.
27
28
Statement of Owners Equity - is designed to show
the components of the change in equity from the end
of one fiscal year to the end of the next.
Begins with the amount of equity shown on the
balance sheet.
Net income is added, and cash dividends paid to
owners are subtracted.
29
30
Statement of cash flows - a firms cash receipts and
cash payments that presents information on its
sources and uses of cash.
Accrual accounting - method that records revenue
and expenses when they occur, not necessarily when
cash actually changes hands.
31
32
Whole Accounting Cycle
Exercises
33
1/2/2013 Received cash and issued 100,000
shares of common stock with a par value
of P10 per share.
Dr. Cash 1,000,000
Cr. Common Stock 1,000,000
Journal Entry:
34
1/3/2013 Purchased kitchen equipment worth
P600,000. P300,000 was paid in cash and the
balance on account. The equipment has a 5
year estimated useful life.
Dr. Property, Plant & Equipment 600,000
Cr. Cash 300,000
Cr. Accounts Payable 300,000
Journal Entry:
35
1/4/2013 Paid P100,000 as deposits for telephone
and water lines.
Dr. Other Assets 100,000
Cr. Cash 100,000
Journal Entry:
36
1/4/2013 Paid in advance one year advance rental
amounting to P240,000.
Dr. Prepaid Expenses 240,000
Cr. Cash 240,000
Journal Entry:
37
1/5/2013 Purchased inventory worth P300,000 on
account.
Dr. Inventory 300,000
Cr. Accounts Payable 300,000
Journal Entry:
38
1/7/2013 Bought supplies for one month
consumption worth P400.
Dr. Supplies Expense 400
Cr. Cash 400
Journal Entry:
39
1/8/2013 Sold inventory for P210,000 on account.
The inventory cost is P150,000.
Dr. Accounts Receivable 210,000
Cr. Sales 210,000
Dr. Cost of Sales 150,000
Cr. Inventory 150,000
Journal Entries:
40
1/24/2013 Collected P100,000 from its receivable.
Dr. Cash 100,000
Cr. Accounts Receivable 100,000
Journal Entry:
41
1/29/2013 Paid P150,000 to the supplier of
inventory.
Dr. Accounts Payable 150,000
Cr. Cash 150,000
Journal Entry:
42
1/31/2013 Record amortization for one month
rental.
Dr. Rent Expense 20,000
Cr. Prepaid Expenses 20,000
Journal Entry:
43
1/31/2013 Record one month depreciation of
kitchen equipment.
Dr. Depreciation Expense 10,000
Cr. Accumulated Depreciation 10,000
Journal Entry:
44
1/31/2013 Record one month accrued salary of the
staff amounting to P5,000.
Dr. Salaries and Wages 5,000
Cr. Accrued Expenses 5,000
Journal Entry:
45
1/31/2013 Record telephone bill for January
amounting to P1,500 and water amounting to
P500.
Dr. Utilities Expense 2,000
Cr. Accrued Expenses 2,000
Journal Entry:
46
1/31/2013 Record income tax expense for the
month of January amounting to P6,780.
Dr. Income Tax Expense 6,780
Cr. Income Tax Payable 6,780
Journal Entry:
47
Account Name Debit Credit
Cash 309,600
Accounts Receivable 110,000
Inventory 150,000
Prepaid Expenses 220,000
Property, Plant & Equipment 600,000
Accumulated Depreciation 10,000
Other Assets 100,000
Accounts Payable 450,000
Accrued Expenses 7,000
Income Tax Payable 6,780
Common Stock 1,000,000
Retained Earnings
Sales 210,000
Cost of Sales 150,000
Salaries & Wages 5,000
Rent Expense 20,000
Supplies Expense 400
Depreciation Expense 10,000
Utilities Expense 2,000
Provision for Income Tax 6,780
Total 1,683,780 1,683,780
JUNGLE COFFEE CORPORATION
TRIAL BALANCE
January 31, 2013
(In PhP)
48
JUNGLE COFFEE CORPORATION
INCOME STATEMENT
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
(In PhP)
Sales 210,000
Less: Cost of Sales 150,000
Gross Profit 60,000
Operating Expenses:
Salaries & Wages 5,000
Rent Expense 20,000
Supplies Expense 400
Depreciation Expense 10,000
Utilities Expense 2,000 37,400
Income Before Income Tax 22,600
Provision for Income Tax (30%) 6,780
Net Income 15,820 49
Sales 210,000
Cost of Sales 150,000
Salaries & Wages 5,000
Rent Expense 20,000
Supplies Expense 400
Depreciation Expense 10,000
Utilities Expense 2,000
Provision for Income Tax 6,780
Retained Earnings 15,820
210,000 210,000
To close nominal accounts to Retained Earnings 50
Account Name Debit Credit
Cash 309,600
Accounts Receivable 110,000
Inventory 150,000
Prepaid Expenses 220,000
Property, Plant & Equipment 600,000
Accumulated Depreciation 10,000
Other Assets 100,000
Accounts Payable 450,000
Accrued Expenses 7,000
Income Tax Payable 6,780
Common Stock 1,000,000
Retained Earnings 15,820
Total 1,489,600 1,489,600
JUNGLE COFFEE CORPORATION
POST CLOSING TRIAL BALANCE
January 31, 2013
(In PhP)
51
JUNGLE COFFEE CORPORATION
BALANCE SHEET
January 31, 2013
(In PhP)
Cash 309,600 Accounts Payable 450,000
Accounts Receivable 110,000 Accrued Expenses 7,000
Inventory 150,000 Income Tax Payable 6,780
Prepaid Expenses 220,000 Total Current Liabilities 463,780
Total Current Assets 789,600
Property, Plant and Equipment 600,000
Accumulated Depreciation (10,000)
Property, Plant and Equipment-Net 590,000 Capital Stock 1,000,000
Other Assets 100,000 Retained Earnings 15,820
Total Long Term Assets 690,000 Total Stockholders' Equity 1,015,820
Total Assets 1,479,600 Total Liabilities and Stockholders' Equity 1,479,600
ASSETS LIABILITIES
STOCKHOLDERS' EQUITY
52
JUNGLE COFFEE CORPORATION
STATEMENT OF CHANGES IN EQUITY
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
Retained
No. of Shares Amount Earnings Total
Balances at January 1, 2013 100,000 1,000,000 - 1,000,000
Profit for the month - - 15,820 15,820
Balances at January 31, 2013 100,000 1,000,000 15,820 1,015,820
Common Stock
(Par Value P10)
53
JUNGLE COFFEE CORPORATION
STATEMENT OF CASH FLOWS
FOR ONE MONTH PERIOD ENDING JANUARY 31, 2013
Cash flows from operating activities
Income before income tax 22,600
Adjustment for depreciation 10,000
Operating income before working capital changes 32,600
Changes in working capital:
Decrease (increase) in:
Accounts receivable (110,000)
Inventory (150,000)
Prepaid expenses (220,000)
Increase (decrease) in:
Accounts payable 450,000
Accrued expenses 7,000
Income tax payable 6,780
Net cash from operations 16,380
Income tax paid (6,780)
Net cash from operating activities 9,600
Cash flows from investing activities
Additions to property, plant & equipment (600,000)
Increase in other assets (100,000)
Net cash used in investing activities (700,000)
Cash flows from financing activities
Proceeds from issuance of common stock 1,000,000
Net increase in cash 309,600
Cash at the beginning of the month -
Cash at the end of the month 309,600
54
Ratio analysis - tool for measuring a firms liquidity, profitability,
and reliance on debt financing, as well as the effectiveness of
managements resource utilization.
55
Acid-test (or quick)
ratio measures the
ability of a firm to meet
its debt payments on
short notice.
Cash +accounts receivable
+ Prepaid Expenses
Total current liabilities
Current ratio compares
current assets to current
liabilities.
Total current assets
Total current liabilities
Current Ratio = Current Assets 789,600
= 1.70Current Liabilities 463,780
Acid Test Ratio = Current Assets-Inventory (789,600 - 150,000)
= 1.38Current Liabilities 463,780
56
Inventory turnover
ratio indicates the
number of times
merchandise moves
through a business.
Total asset turnover ratio
indicates how much in
sales each Peso invested
in assets generates.
Inventory Turn Over = Cost of Sales 150,000 = 1.00
(12X)Inventory 150,000
Asset Turn Over = Sales 210,000 = 0.14
(1.68)Total Assets 1,479,600
57
Profitability ratios measure the organizations overall financial
performance by evaluating its ability to generate revenues in excess of
operating costs and other expenses.
Gross Profit Ratio = Gross Profit 60,000
= 29%Sales 210,000
Net Income Ratio = Net Income 15,820
= 7.53%Sales 210,000
Return on Equity = Net Income 15,820
= 1.56% (18.72%)Equity 1,015,820
58
Leverage ratios measure the extent to which a firm relies on
debt financing.
Total liabilities to total assets ratio > 50 percent indicates that a
firm is relying more on borrowed money than owners equity.
59
60
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