Chapter 3- Accounting and Financial Statements Pr. SAMLAL Zoubida.

Chapter 3- Accounting and Financial Statements

Pr. SAMLAL Zoubida

The Nature of Accounting

• The accounting system is a series of steps performed to analyze, record, quantify, accumulate, summarize, classify, report, and interpret economic events and their effects on an organization and to prepare the financial statements.

Accounting as an Aid toDecision Making

• Fundamental relationships in the decision-making process:

EventAccountant’s

analysis &recording

FinancialStatements

Users

Financial and Management Accounting

• The major distinction between financial and management accounting is the users of the information.– Financial accounting serves external users.– Management accounting serves internal users,

such as top executives, management, and administrators within organizations.

Financial and Management Accounting

The primary questions about an organization’s success that decision makers want to know are:

1-What is the financial picture of the organization -on a given day?

2- How well did the organization do during a given period?

CHART OF ACCOUNTS

The Chart of Accounts is organized using three different methods.

1.First: Accounting Types2.Second: Order of Liquidity - the ease of

converting to cash without loss of value3.Third: Account Numbers

6

7 TYPES OF ACCOUNTS

1. Assets - Things you own2. Liabilities - Things you owe3. Equity - Owners Stake in Company4. Revenue - Income through Sales of the Products of the Business5. Costs of Goods Sold - Costs to provide the service or to

manufacture or acquire the product the business sells6. Expenses - Things that are paid for that are consumable and are

part of the cost of running a business7. Other Revenue and Expenses - Revenue and Expenses that are

unusual cases and are not directly related to the business product and are not usual costs of running a business.

7

ORDER OF LIQUIDITY

• The Chart of Accounts’ second method of organization is Order of Liquidity. Liquidity refers to the expectation that the item can be converted to cash at least close to its current value within one year.

• Accounts are listed in descending order of liquidity within their accounting types, with cash at the top of the list for Assets.

• The liquidity classification is so important that Assets and Liabilities are divided into the Subtypes of Current and Long Term/Fixed to group items of similar liquidity together.

8

ACCOUNT NUMBERS

• Assigning Account numbers starts by assigning a range of numbers to each Accounting Type.

• The number of digits will be important in your software system so when using ranges in the 1000’s there are 4 digits, and the Account Numbers would range from 1000 to 9999.

9

ACCOUNT NUMBERS

• Assets: 1000’s– Current Assets 1000 – 1499; Fixed Assets 1500 -1999

• Liabilities: 2000’s– Current Liabilities 2000 – 2499; Long Term Liabilities 2500 -

2999• Equity: 3000’s• Revenue: 4000’s• Costs of Goods Sold: 5000’s• Expenses: 7000’s• Other Revenue: 8000’s• Other Expenses: 9000’s

10

Use of Funds (Debit) Accounting Types

• Each Accounting Type under the “Funds/Use of Funds” Category increases in value or balance with each debit (Use of Funds) transaction entry and decreases in value or balance with each credit (Source of Funds) transaction entry.

• Use of Funds Accounts are sometimes referred to as Debit Accounts.

11

Use of Funds (Debit) Accounting Types

Positive balances for these accounts are balances where total debits > total credits to the account and their balances should show in the Debit Column.

1. Assets 2. Costs of Goods Sold 3. Expenses 4. Other Expenses

12

Source of Funds (Credit) Accounting Types

• Each Accounting Type under the “Source of Funds” Category increases in value or balance with each credit (Source of Funds) transaction entry and decreases in value or balance with each debit (Use of Funds) transaction entry.

• Source of Funds Accounts are sometimes referred to as Credit Accounts.

13

Source of Funds (Credit) Accounting Types

Positive balances for these accounts are balances where total credits > total debits to the account and their balances should show in the Credit Column.

1. Liabilities - Things you owe2. Equity - Owners’ Stake in Company3. Revenue - Income through Sales of the Products of the

Business4. Other Revenues - Revenues that are unusual cases and are

not directly related to the business product and are not usual revenues from running a business.

14

FINANACIAL STATEMENTS

• Financial Statements

– Income Statement

– Statement of Retained Earnings

– Balance Sheet

– Statement of Cash Flows

• Management Discussion and Analysis

• Notes to Financial Statements

• Auditor's Report

ANNUAL REPORT

Financial Accounting Statements

• Income Statement - reports the results of operations for a specific period of time

• Retained Earnings Statement - reports the changes in retained earnings for a specific period of time

• Balance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date

• Statement of Cash Flows - reports the cash receipts and payments for a specific period of time

17

Management Discussionand Analysis

Covers three aspects of a company: – liquidity - ability to pay near term

obligations

– capital resources - fund operations and expansions

– results of operation

18

Notes to Financial Statements

• Provide additional information not

included in body of statements

• Describe accounting policies or explain

uncertainties and contingencies

19

Auditor's Report

• Auditor, a professional accountant who conducts

an independent examination of the financial

accounting data presented by a company.

• Auditor gives an unqualified opinion if the

financial statements present the financial

position, results of operations, and cash flows in

accordance with GAAP.

20

Statement of Cash Flows

21


The Cash Flow Statement (Statement of Cash Flows) provides an overview of the way Funds move through an Entity, how they impact Overall Value and eventually reconcile with Cash Balances and determine Net Cash Flow in any given year.

22

3 Types of Business Activity

• Financing

• Investing

• Operating

23

Financing Activities

24

It

Takes

MONEY

to

Make

MONEY!

2 Ways of Outside Financing of a Corporation

• Borrowing Money(liabilities)

• Selling Shares ofStock

25

Investing Activities

• Cash• Accounts Receivable• Prepaid Rent• Buildings, Equipment, Furniture

26

Obtaining the Resources or Assets needed to operate the businessExamples of assets...

Investing Activities - Examples

• Purchase or Sale of computers, delivery trucks, furniture, buildings

• Purchase or Sale of investments

27

Remember...

Remaining Liquid and Solvent is as important as making a profit because...

A Company Can Survive a Long Time Without Profits...

but It Can’tSurvive Very Long Without

CASH!

Cash flow statement

1. Operating ActivitiesNet Income

+ Depreciation Expense (+ Increase and -Decrease in Accumulated Depreciation)

+ Increases in Current Liabilities+ Decreases in Current Assets- Increases in Current Assets- Decreases in Current Liabilities

Cash flow statement

2. Investing Activities+ Decreases in Long Term/Fixed Assets (Independent

of Accumulated Depreciation)- Increases in Long Term/Fixed Assets (Independent of

Accumulated Depreciation)

Cash flow statement

3. Financing Activities+ Increases in Long Term Liabilities/Debt- Decreases in Long Term Liabilities/Debt+ Increases in Owners’ Capital- Decreases in Owners’ Capital- Increases in Dividends

Beginning Cash Balance - Net Increase/Decrease = Ending Cash Balance


Cash Flows From Operating ActivitiesNet Income $45,104Depreciation $496Increase in Payables $1,700

————Net Cash Provided by Operating Activities $47,300

————Cash Flows From Investing ActivitiesIncrease in Fixed Assets $2,950

————Net Cash Used by Investing Activities -$2,950

————Cash Flows From Financing Activities

$0————

Net Cash Provided by Financing Activities $0————

Increase in Cash and Cash Equivalents (Net Cash Flow) $44,350Cash and Cash Equivalents at Beginning of Year $0

————Cash and Cash Equivalents at End of Year $44,350

Income Statement

Income Statement

• The Income Statement Accounting Types are Revenue, Cost of Goods Sold and Expenses. The Accounts that are not on the Income Statement are on the Balance Sheet.

• As its name suggests, the purpose of the Income Statement is to report Income. Income = Revenue - Expenses. It is almost that simple, but there is more to the Income Statement than a simple calculation.

Income Statement

Revenue-Cost of Goods Sold—————-=Gross Margin-Expenses—————-=Operating Income+Other Revenue-Other Expenses—————-=Net Income

CSU CORPORATIONIncome Statement

For the Year Ended December 31, 2008

1st- head up the statement•name of company•name of statement•period of time covered

Revenues Service revenue

$17,000



2nd - List the revenues


$17,000 Expenses

Rent expense $9,000 Insurance expense 1,000 Supplies expense 200Total expenses 10,200



3rd - List and total the expenses


$17,000 Expenses


Net Income $ 6,800



4th - Subtract expenses from revenues to obtain net income.

Retained Earning

CSU CORPORATIONRetained Earnings Statement


1st- head up the statement•name of company•name of statement•period of time covered



Retained earnings, January 1 $ 0

2nd - Start with beginning retained earnings



Retained earnings, January 1 $ 0Add: Net Income 6,800 6,800

3rd - Add net income from the current year - subtotal

CSU CORPORATION Retained Earnings Statement


Retained earnings, January 1 $ 0Add: Net Income 6,800 6,800Less: Dividends 0Retained earnings, December 31 $ 6,800

4th - Subtract current year’s dividends and total

Balance Sheet

The Balance SheetThe balance sheet equation:

Assets = Liabilities + Owners’ Equityor

Owners’ Equity = Assets - Liabilities

CSU CORPORATION Balance Sheet

December 31, 2008

1st- head up the statement•name of company•name of statement•date


December 31, 2008

AssetsCash $ 2,000Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,800

2nd - list the assets and total


December 31, 2008

AssetsCash $ 2,000Accounts receivable 4,000Supplies 1,800Equipment 16,000Total assets $23,800Liabilities and Stockholders’ EquityLiabilities Accounts payable $ 2,000

Notes payable 5,000 Total liabilities 7,000

3rd - list the liabilities and sub-total


December 31, 2008

4th - list stockholders’ equitysubtotal. Add to liabilities,Total


December 31, 2008


Notes payable 5,000 Total liabilities 7,000Stockholders’ equity

Common stock 10,000Retained earnings 6,800

Total Stockholders’ equity 16,800Total liabilities and stockholders’ equity $23,800


December 31, 2008


Notes payable 5,000 Total liabilities 7,000

3rd - list the liabilities and sub-total


December 31, 1998

4th - list stockholders’ equitysubtotal. Add to liabilities,Total

In what order are financial statements prepared?

WHY?


$17,000 Expenses


Net Income $ 6,800

CSU CORPORATION Income Statement


Net Income is needed for theStatement of Retained Earnings.

CSU CORPORATION Retained Earnings Statement


Retained earnings, January 1 $ 0Add: Net Income 6,800 6,800Less: Dividends 0Retained earnings, December 31 $ 6,800

Ending Retained Earnings is neededfor the balance sheet.


December 31, 2008


Notes payable 5,000 Total liabilities 7,000Stockholders’ equity

Common stock 10,000Retained earnings 6,800

Total Stockholders’ equity 16,800Total liabilities and stockholders’ equity $23,800

Chapter 3- Accounting and Financial Statements Pr. SAMLAL Zoubida.

Documents

Transcript of Chapter 3- Accounting and Financial Statements Pr. SAMLAL Zoubida.