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Chapter 3- Accounting and Financial Statements

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

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Chapter 3- Accounting and Financial Statements

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

  2. 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.

  3. Accounting as an Aid toDecision Making • Fundamental relationships in the decision-making process: Accountant’s analysis & recording Financial Statements Event Users

  4. 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.

  5. 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?

  6. CHART OF ACCOUNTS The Chart of Accounts is organized using three different methods. • First:  Accounting Types • Second:  Order of Liquidity - the ease of converting to cash without loss of value • Third: Account Numbers

  7. 7 TYPES OF ACCOUNTS • Assets - Things you own • Liabilities - Things you owe • Equity - Owners Stake in Company • Revenue - Income through Sales of the Products of the Business • Costs of Goods Sold - Costs to provide the service or to manufacture or acquire the product the business sells • Expenses - Things that are paid for that are consumable and are part of the cost of running a business • 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.

  8. 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.

  9. 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.

  10. 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

  11. 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.

  12. 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. • Assets  • Costs of Goods Sold • Expenses  • Other Expenses

  13. 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.

  14. 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. • Liabilities - Things you owe • Equity - Owners’ Stake in Company • Revenue - Income through Sales of the Products of the Business • 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.

  15. FINANACIAL STATEMENTS

  16. ANNUAL REPORT • 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

  17. 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

  18. 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

  19. Notes to Financial Statements • Provide additional information not included in body of statements • Describe accounting policies or explain uncertainties and contingencies

  20. 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.

  21. Statement of Cash Flows

  22. Statement of Cash Flows 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.

  23. 3 Types of Business Activity • Financing • Investing • Operating

  24. Financing Activities It Takes MONEY to Make MONEY!

  25. 2 Ways of Outside Financing of a Corporation • Borrowing Money(liabilities) • Selling Shares ofStock

  26. Investing Activities • Cash • Accounts Receivable • Prepaid Rent • Buildings, Equipment, Furniture Obtaining the Resources or Assets needed to operate the business Examples of assets...

  27. Investing Activities - Examples • Purchase or Sale of computers, delivery trucks, furniture, buildings • Purchase or Sale of investments

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

  29. A Company Can Survive a Long Time Without Profits... but It Can’t Survive Very Long Without CASH!

  30. Cash flow statement • Operating Activities Net 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

  31. 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)

  32. 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

  33. Income Statement

  34. 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.

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

  36. CSU CORPORATIONIncome StatementFor the Year Ended December 31, 2008 • 1st- head up the statement • name of company • name of statement • period of time covered

  37. CSU CORPORATIONIncome StatementFor the Year Ended December 31, 2008 Revenues Service revenue $17,000 2nd - List the revenues

  38. CSU CORPORATIONIncome StatementFor the Year Ended December 31, 2008 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 3rd - List and total the expenses

  39. CSU CORPORATIONIncome StatementFor the Year Ended December 31, 2008 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses 10,200 Net Income $ 6,800 4th - Subtract expenses from revenues to obtain net income.

  40. Retained Earning

  41. CSU CORPORATIONRetained Earnings StatementFor the Year Ended December 31, 2008 • 1st- head up the statement • name of company • name of statement • period of time covered

  42. CSU CORPORATIONRetained Earnings StatementFor the Year Ended December 31, 2008 Retained earnings, January 1 $ 0 2nd - Start with beginning retained earnings

  43. CSU CORPORATIONRetained Earnings StatementFor the Year Ended December 31, 2008 Retained earnings, January 1 $ 0 Add: Net Income 6,800 6,800 3rd - Add net income from the current year - subtotal

  44. CSU CORPORATIONRetained Earnings StatementFor the Year Ended December 31, 1998 Retained earnings, January 1 $ 0 Add: Net Income 6,800 6,800 Less: Dividends 0 Retained earnings, December 31 $ 6,800 4th - Subtract current year’s dividends and total

  45. Balance Sheet

  46. The Balance Sheet The balance sheet equation: Assets = Liabilities + Owners’ Equity or Owners’ Equity = Assets - Liabilities

  47. CSU CORPORATIONBalance Sheet December 31, 2008 • 1st- head up the statement • name of company • name of statement • date

  48. CSU CORPORATIONBalance Sheet December 31, 2008 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 2nd - list the assets and total

  49. CSU CORPORATIONBalance Sheet December 31, 2008 Assets Cash $ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Stockholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 3rd - list the liabilities and sub-total

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