MBA Unit 1 FF

8/6/2019 MBA Unit 1 FF

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Introduction to Financial Accounting and to

Financial Statements


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Overview

What is accounting?

How has accounting developed?

What is financial accounting?

Financial accounting standard setting

Financial statements

Accounting concepts and principles

The annual report


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Learning Objectives

Be able to define accounting

Understand the difference between various branches of accounting

Understand that financial accounting standards are not a fixed codeof rules but are established in response to user needs and business

developments Know the basic form of the four financial statements

Understand and be able to use the accounting equation

Be able to explain the concepts of financial accounting and financialstatement preparation

This page contains content owned by RMIT, and other materials copyrighted by Marshall, McCartney & VanRhyn Accounting: What the Numbers Mean 2e (revised) 2010 McGraw Hill


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Why study accounting?

Accounting is the language of business.

Anyone involved in the economic activities of our society needs to

know enough of this language to be able to make decisions andinformed judgements about those activities.

Understanding the key concepts and processes of accounting is an

essential skill for all managers.

This page contains content owned by RMIT, and other materials copyrighted by Marshall, McCartney & Van Rhyn

Accounting: What the Numbers Mean 2e (revised) 2010 McGraw Hill


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What is accounting?

Accounting is the process of:

identifying

measuring

communicating

economicinformation

about an

entity

for decisions

and informed

judgements.

Copyright 2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: Whatthe Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn


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Users and uses of accountinginformation

User Decision Informed Judgment ade

Management P anning, directing and controlling

Investors Assessing amount, timing, and risk of

future cash returns on their investmentCreditors Assessing probability of collection and the

risk of late (or non-) payment

Employees Assess long-term job prospects and

attractive salary packages

Australian Securitiesand Investment

Commission

Ensure compliance with regulations fordisclosure



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What do accountants do?

FinancialAccounting

Financial accounting generallyrefers to the process that results inthe preparation and reporting of financial statements for an entity.

Financial accounting is primarily

externally oriented and concerned

with the historical results of anentitys performance.



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Financial statements reflect whathas happened in the past. Thesepast results can also be used topredict future results.

The 3 main Financial Statementswe will focus on are:

The Income Statement;

The Balance Sheet; and

The Cash Flow Statement.



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Management / Cost Accounting

Cost accountingrelates to the

determination andaccumulation of

product, process orservice costs.

Management accounting isconcerned with the use of

economic and financialinformation to plan and

control many of the activitiesof the entity and to supportthe management decision-

making process.



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What is auditing?

Auditing / PublicAccounting

An audit is a review by an

independent third party. Public

accounting firms and individual

Certified PractisingAccountants

(CPAs) and Chartered

Accountants (CAs) provide

auditing services and issue an

independent auditors report.

The audit report states whether the financial statements areprepared in conformity with Australian Accounting

Standards and the Corporations Act. An auditors report

can be unqualified or qualified.



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nternalAuditing

nternal auditors areprofessional accountants

who perform functionsmuch like those of an

external auditor. However,internal auditors areemployed in industry

rather than public

accounting, and often theirfunctions are more specific

and detailed.



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ncome Tax Accounting

Tax practitioners deal withFederal, State and Foreign

income tax laws.

They often developspecialties in the taxation

of individuals,partnerships, corporations,

trusts and estates, orinternational tax lawissues.



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Ethics and the accounting profession

oint Code ofProfessionalConduct

CPAAustralia

CAA

Integrity

Independence

Objectivity

Confidentiality

Competence

Obligation to serve employer, client and public



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3000BC

Mesopotamiansrecord tax receipts onclay tablets.

3000B.C.

1494AD

1494AD - Luca Pacioli published the first textbook describing

a comprehensive double-entry bookkeeping system.



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The industrial revolution of the 19th century

generated the need for large amounts of capital tofinance the large scale enterprises that replaced thereliance on individual craftsmen.

3000B.C.

1494 1800s

This need resulted in the corporate form of

organization and the need to provide investors withreports showing the financial position and the resultsof operations.



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Accounting professionals in Australia organised themselves in theearly 1900s and worked hard to establish certification laws,standardised audit procedures and other attributes of a professionusing the model from the Institute of Chartered Accountants inEngland and Wales.

3000B.C.

14941800s 1900s 1928

1928 The Institute of Chartered Accountants in

Australia (ICAA) was constituted by Royal Charter.



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1946 The ICAA issued the first attempt atcodified standards: it released a series of fiverecommendations of accounting principles.

3000B.C.

1494 1800s 1900s 1928 1946 1952

1952 The Australian Society of Accountants(ACA) was established.

Forerunner to CPA Australia.



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1966 The Australian Accounting Research Foundation (AARF)was established by the two professional accounting bodies, to

conduct research and issue accounting standards (however,

these lacked legal status).

3000B.C.

1494 1800s 1900s 1928 1946 1952 1966 1984

1984 The Accounting Standards Review Board (ASRB) wasestablished.Accounting standards now given legal backing.



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1991 The Australian Accounting Standards Board (AASB)

replaced ASRB. Accountable to Australian Securities

Commission, later to become Australian Securities and

Investment Commission (ASIC).

3000B.C.

1991

1494 1800s 1900s 1928 1946 1952 1966 1984 1994

1994 The Urgent Issues Group (UIG) was established aninterpretive committee for issues arising from existing

accounting standards and SACs .



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Late 1990s Corporate Law Economic Reform Program(CLERP) and creation of Financial Reporting Council (FRC) with

members appointed by the Treasurer to oversee AASB.

3000B.C.

1991 2000

1494 1800s 1900s 1928 1946 1952 1966 1984 1994

2000 Creation of new AASB with merging of Public Sector

Accounting Standards Board (PSASB) and old AASB.

This new body is the official regulator, whose standards

become law after acceptance by the Federal Parliament.



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3000B.C.

1494 1800s 1900s 1946 1952 1966 2006

2000

1994

1991

19841928

By 2006 AASBhad issued more than 50 accountingstandards and more than 50 interpretations.



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Accounting standards

AASB responsiblefor setting standards

FinancialAccountingand Reporting

n consultation with:

CAA and CPAAustralia AS C ASX nstitute of irectors Group 100

academics others.



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Financial Accountingand Reporting

GAAPs

GENERALLY ACCEPTEDACCOUNTING

PRINCIPLES

Principles that have developed over time, in

response to the changing needs of society, to guide

financial accounting and reporting. They are notcodified in a set of rules that can be blindly followed.



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Other types of accounting:

Management/CostAccounting

Companies self-regulate

Auditing/PublicAccounting

Auditing StandardsBoard

Government andNot-for-Profit

AASB

Income TaxAccounting

Income TaxAssessment Actand regulations



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The InternationalAccounting Standards

Board (IASB) is based in

London and seeks

methods of providingcomparability between

financial statements

prepared according to the

differing accounting

standards of its member

nations.

InternationalAccountingStandards



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Australia adopted these

international standards

(known as IFRS) from 1

anuary 2005. Included

in our law as AIFRS.

Over 90 countries have

also done so.

InternationalAccountingStandards



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The conceptual framework (CF)

Statements of Accounting Concepts (SACs) areguidelines that describe the concepts and relationshipsthat underlie the financial accounting standards.

Those still existing today:

SAC1 Definition of the Reporting Entity;SAC2 Objective of General Purpose Financial

Reporting.

AASB Frame work supports these SACs



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Objective and financial reporting- SAC

2.U

seful info for decisionsInformation

about:

Financialposition

What does thefirm own? How much doesthe firm owe?

Earnings andCash Flow

Profitability

Dividends Cash to pay debt



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Objective of financial reporting

Financial reporting is carried out

for individual firms

to meet the needs of external users ofaccounting information who would otherwisenot have access to such information

e.g. investors, creditors



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Accounting Transactions

Transactions are economic exchangesbetween entities that are accounted forand reflected in financial statements.

Trans + action = between parties



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Transactions

Procedures for sorting, classifying,

and presenting (bookkeeping).

Selection of alternative methods ofreflecting the effects of certain

transactions (accounting).

FINANCIALSTATEMENTS



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ACCOUNTS

Transactions are summarised in accounts.

Accounts are further summarised in the financial statements.



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Required Disclosure

Financial Statement that

Satisfies Requirement

Financial position att

end oft e period

Balance Sheet

Resultforthe period Income Statement

Cash flows during the

period

Statement ofCash Flows

Investments by and

distributions to ownersduring the period

Statement ofChanges in

Owners' Equity



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Balance Sheet

34

3

4

4

4 3

tal et

tal l a l t e an

ne e t

a n St eet St e nc

Balance Sheet

at ne

et a l t e an ne t

Current assets are thoseassets that are likely to be

converted into cash orused to benefit the entity

within one year.

Current liabilities are thoseliabilities that are likely to

be paid with cash withinone year of the balance

sheet date.



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Balance Sheet

4

5

4

5

4

4

tal et

tal lia ilitie an

ne e it

ain St eet St e Inc

Balance Sheetat ne

et ia ilitie an ne it

ia ilitie a e

am nt et theentitie

(

)

01

2 3 4

56

2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: Whatthe Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn


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Balance Sheet

4

4 6

4

4

tal ettal l a l t e anne e t

a n St eet St e ncBalance Sheet

at ne

et a l t e an ne t

Current assets are thoseassets that are likely to be

converted into cash orused to benefit the entity

within one year.

Current liabilities are thoseliabilities that are likely to

be paid with cash withinone year of the balance

sheet date.



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The Account Equation

A = L +

Cash 34,000$ Short-term borrowings 20,000$

Accounts receivable 80,000 Accounts payable 35,000

Inventory 170,000 Other accrued liabilities 12,000Total current assets 284,000$ Total current liabilities 67,000$

Plant and Equipment Long-term borrowings 50,000

Equipment 40,000 Total Liabilities 117,000Less: Accumulateddepreciation (4,000) Owners' equity 203,000

Total Assets 320,000$

Total liabilities and

owners' equity 320,000$

Current Assets Current Liabilities

Main Street Store, Inc.

Balance Sheet

As at 30 June 2007

Assets Liabilities and Owners' Equity

ACCOUNTING

EQUATION OE



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Income Statement

It is sometimes called:

Statement of financial performance

Statement of earnings

Profit and loss statement

Statement of operations

The income statement shows the profit or lossfor the period of time under consideration.



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Income Statement

Costs andexpenses are

incurred ingenerating

revenues andoperating the

entity.

et sales , ,

Cost of goods sold ,

ross profit ,

Selling, general, and admin. expenses ,

rofit from operations ,

Interest expense ,

rofit before taxes ,

Income taxes ,

et profit ,

et profit per ordinary share .

ain Street Store, Inc.

Income Statement

For the ear nded June



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Income Statement

N

RR

G D

; R x" " x

Explanation of income statement accounts:

E

F

GH

I P Q

RS



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Income Statement

Explanation of income statement accounts:ccount Explanation

S .

C .

P

S

N A

. O

" " EPS

T

U

V

W

X Y

ab



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ROA and ROE ratiosA ratio is a relationship. The Return

on Assets (ROA) measures the returnon investment on assets thatmanagement had available during theyear

= Profit from operationsAverage Assets

Return on Equity (ROE) measures

the net return the owners receive ontheir ownership in the company.

= Net profit - interest and taxAverage Owners Equity



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Statement ofChanges in Owners Equity

This financial statement shows the detail ofowners equity and explains the changes thatoccurred in the components of owners equityduring the year.

It is sometimes called:

Statement of changes in share capital

Statement of changes in retained earnings



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Statement ofChanges in Owners Equity

ount Exp anation

i i l s s l i s i

i si i s s s c l i i

i s i s isi ss i s

i i s is i i s i s s

Exp anation of a ounts:

c

d

ef

g i hi

p



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The purpose of this financial statement is toidentify the sources and uses of cash during

the year.

This is done by reporting the changes in allother balance sheet items.

Cash flow data is important as it is highly

reliable and is less subject to manipulationthan accrual accounting.



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Cash Flows from Operating Activities:

Cash Received from operations 1,120,000$

Cash paid to suppliers (985,000)

Other expenses paid (287,000)

Interest paid (9,000)

Taxes paid -

Net cash used by operating activities (161,000)Cash Flows from Investing Activities:

Cash paid for equipment (40,000)$

Cash Flows from Financing Activities:

Cash received from issue of long-term borrowings 50,000

Proceeds from issue of ordinary shares 190,000

Dividend paid on ordinary shares (5,000)

Net cash provided by financing activities 235,000$

Net increase in cash for the year 34,000$

Cash balance at beginning of year -$

Cash balance at end of year 34,000$


Statement of Cash Flows

For the Year Ended June 30 2007

Cash used topurchase, or

cash received

from sale of,long termassets.



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Cash Flows from Operating Activities:

Cash Received from operations 1,120,000$

Cash paid to suppliers (985,000)

Other expenses paid (287,000)

Interest paid (9,000)Taxes paid -

Net cash used by operating activities (161,000)

Cash Flows from Investing Activities:

Cash paid for equipment (40,000)$

Cash Flows from Financing Activities:

Cash received from issue of long-term borrowings 50,000

Proceeds from issue of ordinary shares 190,000Dividend paid on ordinary shares (5,000)

Net cash provided by financing activities 235,000$

Net increase in cash for the year 34,000$

Cash balance at beginning of year -$

Cash balance at end of year 34,000$


Statement of Cash Flows

For the Year Ended June 30 2007

Amounts raisedfrom issue of

long-term

borrowings orshares, or

dividends paid



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Concepts/ Principles

Broad concepts and

principles (practices) thathave been generally agreed

upon over time

Related toentire model

Related tofinancial

statements

Related totransactions

Related to theaccounting

process



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Related to entire model

Accounting Entity; Every economic entity can beseparately identified and accounted for. Not the same aslegal entity.

Going Concern Concept; The presumption that the

entity will continue to operate in the futureit is not

being liquidated.



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Objectivity; The accountants desire to have a giventransaction recorded in the same way in all situations.

Cost Principle; Transactions are recorded at their

original cost to the entity as measured in dollars.

Related to transactions

Unit of Measurement; Only transactions denominated

in $A dollars are recorded in the accounting records.


C t / P i i l


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Accounting Period; The period of timeselected for reporting results of operationsand changes in financial position.

Accrual Accounting; Recognise revenue at the point

of sale and recognise expenses when incurred, eventhough the cash receipt or payment occurs atanother time.

Matching Concept; All expensesincurred to generate that periodsrevenues be deducted from revenuesearned.

Related to the accounting process



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Full Disclosure; Circumstances and events that makea difference to financial statement users should bedisclosed.

Materiality; The increased benefit of increasedaccuracy should out weigh the cost of achievingthe increased accuracy.

Relevance; Financial information should assistusers to make informed decisions.

Relevance; Financial information should assist

users to make informed decisions.

Related to financial statements



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Prudence; Conservatism should guide accounting

choices and judgments.

Timeliness; Information should be provided withinthe decision time frame to assist in economicdecision making.

Understandability; Information must be presented insuch a way that it is comprehensible to users

Related to financial statements

Reliability; Financial information should be free fromerror or bias.



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Limitations of Financial Statements

The balance sheet does not generally

report market values or the replacementcosts of the assets.

Many estimates are used, such aswarranty costs, depreciation and doubtfuldebts expense.



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The Companys Annual Report

The annual report is distributed toshareholders (and others).

It contains the financial statementsand notes, together with the report ofthe external auditors examination of

the financial statements. It may also contain highlights for theyear, including net revenue, earningsper share and return on averageshareholders equity, as well as an

historical summary of some financialdata for the last five years.



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Recall Learning Objectives

Be able to define accounting Understand the difference between various branches of

accounting

Understand that financial accounting standards are not a fixedcode of rules but are established in response to user needs and

business developments Know the basic form of the four financial statements

Understand and be able to use the accounting equation

Be able to explain the concepts of financial accounting andfinancial statement preparation

Documents

MBA Unit 1 FF