Week 1

ACC202 - Financial Accounting
Accounting and the Business Environment

Module 1
1Slide 1
Learning Objectives
1. Use accounting vocabulary 2. Apply accounting concepts and principles
3. Understand the conceptual framework

4. Understand the objective of financial reporting 5. Use the accounting equation to describe an organisations financial position 6. Use the accounting equation to analyse business transactions 7. Prepare the financial statements 8. Evaluate the performance of a business. 9. Understand the basic concepts of a cash flow statement
Slide 2
Horngren, Harrison, Bamber, Best, Fraser, Willett: Accounting 5e 2007 Pearson Education Australia
Accounting...
Objective 1
is an information system that...
measures business activities,

processes information, and... communicates financial information.
Slide 3
Accounting is called the language of business
Objective 1
Fields of Accounting
Financial Accounting
Management Accounting
Slide 4
Objective 1
Ethics in Accounting
What are Ethics ?
As accountants you are bound by:

Generally Accepted Accounting Principles Code of Professional Conduct
Slide 5
Australian Accounting Standards
Objective 1
Standards to govern measurement rules and level of disclosure. Australian Accounting Standards Board (AASB) is responsible for technical accounting standards. Australia, like much of the rest of the world has adopted International Accounting Standards.
Slide 6
Types of Business Organisations

Proprietorships (sole traders) Partnerships Companies
Slide 7
Objective 1
Generally Accepted Accounting Principles (GAAP)

What is the primary objective of financial reporting? To provide information useful for making investment and lending decisions.
Objective 2
Slide 8
Generally accepted and consistent concepts and principles are fundamental to achieving this objective
Objective 2
Accounting Concepts
The entity concept
the business activities and the personal affairs of the owner are separate.
The accounting period concept

Unit of time for which accounting data is collected and the financial statements prepared.
Slide 9
Objective 2
Accounting Principles
The cost principle
assets and services should be recorded at their actual cost (reliable and objective)
The matching principle

The cost of inputs is matched against the revenue from outputs of goods and services.
The profit recognition principle Conservatism principle Going concern principle

Slide 10
Objective 2
Reporting Principles
Understandability principle
Relevance principle
Materiality principle
The reliability (objectivity) principle

Comparability principle
Timeliness principle
Cost versus benefit principle
Slide 11
The Conceptual Framework
Objective 3
In Australia the Conceptual Framework is.

SAC 1 Definition of the Reporting Entity SAC 2 Objectives of General Purpose Financial Reporting AASB Framework for the Preparation and Presentation of Financial Statements.
Slide 12
Objective of financial reporting
Objective 4
is to provide information useful to users for making and evaluating decisions about the allocation of scarce resources. Useful - depends on the user, the decision to be made and the resources to be allocated. Users include:
Resource providers, recipients of goods and services, reviewers.
Slide 13
The Accounting Equation
Objective 5
Assets = Liabilities + Owners Equity
Economic Resources
Claims to Economic Resources
Slide 14
Components of the Equation

What is an asset?
Objective 5
A resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity
What is a liability?
A present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources
What is owners equity?

The residual interest in the assets of the entity after deducting all its liabilities
Slide 15
Transactions that Affect Owners Equity

OWNERS EQUITY INCREASES
Objective 5
OWNERS EQUITY DECREASES Owner Drawings from the Business Owners Equity
Owner Investments in the Business
Revenues
Slide 16
Expenses
Objective 5
Revenues
What are revenues? They are amounts received or to be received from customers for sales of products or services. sales performance of services rent received interest received
Slide 17
Objective 5
Expenses
What are expenses? They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. salaries and wages electricity and gas supplies used advertising
Slide 18
Accounting for Business Transactions
Objective 6
What is a transaction? It is any event that both affects the financial position of the business and can be reliably recorded.
Slide 19
Objective 6
Paula Lee starts a business. Lets look at some of the transactions that occurred (p. 15-19 text)
~ Paula Lee invests $30,000 to begin Paula Lee eTravel. (Transaction 1) ~ Lee purchases land, paying $20,000 in cash. (Transaction 2)
~ She earns and collects $5,500 revenues. (Transaction 4)
Slide 20
Objective 6
~ Lee performs services, and the client agrees to pay $3,000 within one month. (Transaction 5) ~ Lee pays $300 to the store from which she purchased $500 worth of supplies. (Transaction 7).
What is the effect of these transactions on the accounting equation?

Slide 21

Assets
Objective 6
Owners = Liabilities + Equity
1) Cash 2) Cash Land 3) Supplies 4) Cash 5) Receivable 6) Cash 7) Cash Totals

Slide 22
+ $30,000 20,000 + 20,000 + 500 + 5,500 + 3,000 3,300 300 + $35,400 =
+ $30,000
+ 500
+ + 5,500 3,000 3,300
300 + 200
+ $35,200
Objective 6
Notice that the equation always stays in balance. Each transaction affects at least two accounts, sometimes more. Some transactions affect only one side of the equation; some affect both sides.
Follow through Paulas transactions to complete the exercise in your own time.
Slide 23
Objective 7
Financial Statements...
are the final product of the accounting process. tell how the business is performing and where it stands.
Slide 24
Objective 7
Financial Statements
income statement statement of changes in equity balance sheet cash flow statement
Slide 25
Objective 7
Timeline of reporting
Income Statement
Balance Sheet
Balance Sheet
Cash Flow Statement
Slide 26
Relations Among the Statements: Income Statement
Objective 8
Revenue: Fees earned Expenses: Salary expense Electricity and gas expense Equipment rental expense Office rent expense Net profit
$8,500 $1,200 400 600 1,100
3,300 $5,200
Slide 27
Relations Among the Statements: Statement of Changes in Equity
Objective 8
Paula Lee, capital, April 1, 2007 Add Investments by owner Net profit Less Drawings by owner Paula Lee, capital, April 30, 2007
0 30,000 5,200 2,000 $33,200
Slide 28
Relations Among the Statements: Balance Sheet
Objective 8
Assets Cash $19,900 Accounts receivable 2,000 Supplies 500
Liabilities Accounts payable Owners Equity, Paula Lee, capital Total liabilities and owners equity $ 200
Land Total assets
11,000 $ 33,400
33,200 $33,400
Slide 29
Purposes of the Cash Flow Statement
Objective 9
The cash flow statement is designed to fulfill the following: predict future cash flows evaluate management decisions determine the ability to pay dividends plus interest and principal show the relationship of net profit to changes in the firms cash.
Slide 30
Basic Organization of the Cash Flow Statement
Objective 9
A business may be evaluated in terms of three types of business activities: Operating activities. Investing activities. Financing activities.
Slide 31
Paula eTravel: Cash Flow Statement

Cash flows from Operating activities: Cash receipts from services rendered Cash payments: To suppliers 2,400 To employees 3,300
Net cash flows from operating activities Cash flows from Investing activities: Acquisition of land (20,000) Sale of land 9,000 Net cash flow from investing activities
Slide 32
Objective 9
$6,500
(3,600)
2,900
(11,000)
Paula eTravel: Cash Flow Statement
Objective 9
Cash Flows from Financing activities: Investment by Owner Drawings by the Owner Net Cash Flows from Financing activities Net increase in cash Cash at Beginning of April Cash at End of April
Slide 33
$30,000 (2,000) 28,000 19,900 0 $19,900
Tutorial questions
E1-4 E1-5 P1-4 E18-2 E18-6
Slide 34
Important topics
Compare the three forms of business organisation (exhibit 1-4 p.g.11) Main points of the conceptual framework for financial reporting (exhibit 7-4 p.g. 295) Purpose of the Cash Flow Statement (Objective 1 p.g. 666-667)
Slide 35

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ACC202 - Financial Accounting

Accounting and the Business Environment

3. Understand the conceptual framework

is an information system that...

measures business activities,

Accounting is called the language of business

As accountants you are bound by:

Australian Accounting Standards

Types of Business Organisations

Generally Accepted Accounting Principles (GAAP)

The accounting period concept

The matching principle

The profit recognition principle Conservatism principle Going concern principle

The reliability (objectivity) principle

The Conceptual Framework

In Australia the Conceptual Framework is.

Objective of financial reporting

The Accounting Equation

Assets = Liabilities + Owners Equity

Claims to Economic Resources

Components of the Equation

What is owners equity?

Transactions that Affect Owners Equity

Owner Investments in the Business

Accounting for Business Transactions

Accounting for Business Transactions

Accounting for Business Transactions

What is the effect of these transactions on the accounting equation?

Accounting for Business Transactions

Owners = Liabilities + Equity

1) Cash 2) Cash Land 3) Supplies 4) Cash 5) Receivable 6) Cash 7) Cash Totals

+ $30,000 20,000 + 20,000 + 500 + 5,500 + 3,000 3,300 300 + $35,400 =

Accounting for Business Transactions

Cash Flow Statement

Relations Among the Statements: Income Statement

$8,500 $1,200 400 600 1,100

Relations Among the Statements: Statement of Changes in Equity

0 30,000 5,200 2,000 $33,200

Relations Among the Statements: Balance Sheet

Assets Cash $19,900 Accounts receivable 2,000 Supplies 500

Land Total assets

Purposes of the Cash Flow Statement

Basic Organization of the Cash Flow Statement

Paula eTravel: Cash Flow Statement

Paula eTravel: Cash Flow Statement

$30,000 (2,000) 28,000 19,900 0 $19,900

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