ACC100 Introduction to

Accounting

© Study Group Australia Pty Limited, SGA1286-F2/10/12 2

Week 2 –Financial Decision Making

Chapter 2 - Financial statements for decision making

Learning Outcomes

On completion of this week’s study, you should be able to:

• explain general accounting information

• explain the standard presentation and information contained in the four basic

financial statements

• explain relationships between the four basic financial statements.

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Basic Financial Statements

Accounting is an information system

• Designed to communicate financial information

• To interested users

• For making economic decisions

Financial statements

• Are the outcome of the accounting process

• Are the primary information source for users

• Are useful for many decisions

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3 Primary Information Types

Financial Performance

• The ability of the entity to utilise its assets effectively and efficiently to

generate cash flow

Financial Position

• The financial resources controlled by the entity, its financial structure, its

liquidity and solvency

Cash Movements

• The ability of the entity to generate cash flow

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Business Activities

Investing Activities

• The acquisition and disposal of long term assets

Financing Activities

• The raising of funds for an entity to carry out its operating and investing

activities.

Operating Activities

• The provision of goods and services

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The Balance Sheet

Also known as the Statement of Financial Position.

Shows assets, liabilities and equity.

At a specific point in time.

Represents the accounting equation.

Assets = Liabilities + Equity

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The Balance Sheet – Account Format

DON’S AUTO REPAIR

Balance Sheet

As at 30 June 2012

ASSETS LIABILITIES

Cash at bank $ 50 340 Accounts payable $ 80 760

Accounts receivable 77 790 Mortgage payable 401 000

Repair Supplies 14 610 481 760

Repair Equipment 110 700

Land 260 000 EQUITY

Building 455 000 Don Brady, Capital 486 680

$968 440 $968 440

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The Balance Sheet – Narrative Format

Assets

- Liabilities

= Equity

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ASSETS

Cash at bank $ 50 340

Accounts receivable 77 790

Repair Supplies 14 610

Repair Equipment 110 700

Land 260 000

Building 455 000

TOTAL ASSETS $968 440

LIABILITIES

Accounts payable $ 80 760

Mortgage payable 401 000

TOTAL LIABILITIES 481 760

NET ASSETS 486 680

EQUITY

Don Brady, Capital 486 680

TOTAL EQUITY $486 680

The Balance Sheet

Assets

• Resources controlled by the entity as a result of past transactions or

events from which future economic benefits are expected to flow to the

entity.

Liabilities

• Present obligations of an entity arising from past transactions or events,

the settlement of which is expected to result in an outflow of resources

from the entity.

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The Balance Sheet

Equity

• The residual interest of the owner/s in the assets (less liabilities) of the

entity

• Also called Capital or Accumulated/Surplus Funds

ASSETS = LIABILITIES + EQUITY

ASSETS – LIABILITIES = NET ASSETS

NET ASSETS = EQUITY

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The Income Statement

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DON’S AUTO REPAIR

Income Statement

For the year ended 30 June 2012

INCOME

Repair income $642 500

EXPENSES

Advertising expense $ 20 250

Repair supplies expense 133 710

Salaries and wages expense 173 800

Rent expense 110 260

Telephone expense 20 190

Light and power expense 47 940 506 150

PROFIT $136 350

The Income Statement

Income

• Increases in economic benefits in the form of inflows or enhancements

of assets or decreases of liabilities that results in equity, other than

those relating to equity participants.

Expenses

• Decreases in economic benefits in the form of outflows or incurrences of

liabilities that result in decreases in equity, other than those relating to

equity participants.

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Statement of Changes in Equity

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DON’S AUTO REPAIR

Statement of Changes in Equity

For the year ended 30 June 2012

Don Brady, Capital – 1 July 2011 $437 330

Add: Profit for the year 136 350

573 680

Less: Drawings 87 000

Don Brady, Capital – 30 June 2012 $486 680

The Effects of Transactions on The

Accounting Equation

The accounting equation always balances.

Transactions result in changes in assets, liabilities and owners equity.

Elements of the accounting equation change with each transaction.

The basic equality of the accounting equation remains unchanged.

ASSETS = LIABILITIES + EQUITY

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Example

1. Darren Jones deposits $35 000 in a business bank account

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Assets = Liabilitie

s

+ Equity

Cash at

Bank

D. Jones,

Capital

(1) $35 000 = $35 000

Example

2. Darren purchases a vehicle and some lawn mowing and gardening

equipment

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Assets = Liabilitie

s

+ Equity

Cash at

Bank

Equipment Vehicle D. Jones,

Capital

(1) $35 000 = $35 000

(2) -30 000 + 9 000 + 21 000

5 000 + 9 000 + 21 000 = 35 000

($35 000) ($35 000)

Example

3. Darren purchases fuel supplies for $2500 on credit

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Assets = Liabilitie

s

+ Equity

Cash at

Bank

Equipment Vehicle Fuel

Supplies

Accounts

Payable

D. Jones,

Capital

(1) $35 000 $35 000

(2) -30 000 + 9 000 + 21 000

(3) + 2 500 + 2 500

5 000 + 9 000 + 21 000 + 2 500 = 2 500 + 35 000

($37 500) ($37 500)

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Statement of Changes in Equity

Income statement

for the period

I – Ex = Profit

Balance sheet

as at beginning of period

A1 – L1 = Eq1

Balance sheet

as at end of period

A2 – L2 = Eq2

Statement of owner’s equity

for the period

Eq1 + Profit – Drawings = Eq2

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3

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The Statement of Cash Flows

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DON’S AUTO REPAIR

Statement of Cash Flows

For the year ended 30 June 2012

CASH FLOWS FROM OPERATING ACTIVITIES

Cash received from customers $ 564 710

Cash paid to suppliers and employees (440 000)

Net cash from operating activities $124 710

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of land and buildings (715 000)

Purchases of repair equipment (110 700)

Net cash from investing activities (825 700)

CASH FLOWS FROM FINANCING ACTIVITIES

Amount borrowed under mortgage 401 000

Investment by owner 437 330

Drawings by owner (87 000)

Net cash from financing activities 751 330

Net increase (decrease) in cash held 50 340

Cash at beginning of year -

Cash at end of year $ 50 340

Summary

• Understand general accounting information

• Understand the standard presentation and information contained in the four

basic financial statements

• Understand relationships between the four basic financial statements.

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