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ACCT 201 FINANCIAL ACCOUNTING LECTURE 1

ACCT 201 FINANCIAL ACCOUNTING LECTURE 1. Asst. Prof. Özlem OLGU Room: 202 Tel No: 0212 338 1457 E-Mail: oolgu@ku.edu.tr. ACCOUNTING AND THE BUSINESS ENVIRONMENT. Chapter 1. Chapter Objectives. Use accounting vocabulary Apply accounting principles and concepts Use the accounting equation

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ACCT 201 FINANCIAL ACCOUNTING LECTURE 1

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  1. ACCT 201 FINANCIAL ACCOUNTINGLECTURE 1 Asst. Prof. Özlem OLGU Room: 202 Tel No: 0212 338 1457 E-Mail: oolgu@ku.edu.tr

  2. ACCOUNTING AND THEBUSINESS ENVIRONMENT Chapter 1

  3. Chapter Objectives • Use accounting vocabulary • Apply accounting principles and concepts • Use the accounting equation • Analyse business transactions • Prepare financial statements • Evaluate business performance • Revision questions

  4. O1:Use accounting vocabularyAccounting... is an information system that... measures business activities, processes information, and... communicates financial information. is called the language of business.

  5. Users of Accounting Information Financial Acct Managerial Acct Internalusers make decisions for the entity. External users make decisions about the entity. Managers, partnerts etc. İnvestors, creditors, govt agencies

  6. The Authority Underlying Accounting Public Sector (SEC) Private Sector (AICPA) (IMA) Private Sector (FASB) GAAP

  7. Standards of Professional Conduct AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants

  8. Types of Business Organizations 1. Proprietorships 2. Partnerships 3. Corporations

  9. 1. Proprietorships: single owner • What are some advantages? • total undivided authority • no restrictions on type of business – must be legal • What are some disadvantages? • unlimited liability • limitation on size – fund raising power

  10. 2. Partnerships: more than 1 owner • What are some advantages? • better credit standing – possibly • more brain power, but consultation with partners required • What are some disadvantages? • unlimited personal liability for general partners • need for written partnership agreement

  11. 3. Corporations: more than 2 owners or shareholders • What are some advantages? • separate legal existence • limited liability of stockholders • transferability of ownership relatively easy • What are some disadvantages? • taxes – possible double taxation • extensive governmental regulation

  12. O 2: Apply AccountingConcepts and Principles • GAAP • Entity concept • Reliability concept • Cost principle • Going concern principle • Stable monetary unit concept

  13. Generally AcceptedAccounting Principles (GAAP) • What is the primary objective of financial reporting? To provide information useful for making investment and lending decisions

  14. The Entity Concept Example • Assume that John decides to open up a gas station and coffee shop. • The gas station made $250,000 in profits, while the coffee shop lost $50,000.

  15. The Entity Concept Example • How much money did John make? • At a first glance, we would assume that John made $200,000. • However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.

  16. The Reliability (Objectivity) Principle Information must be free from bias. Information must be reasonably accurate. Information must report what actually happened. Individuals would arrive at similar conclusions using same data.

  17. The Cost Principle Assets and services acquired should be recorded at their actual cost.

  18. The Going Concern Concept The entity will continue to operate in the future.

  19. Stable-Monetary-Unit Concept The dollar’s purchasing power is relatively stable.

  20. IMPORTNAT!!!O 3: Use the Accounting Equation = Liabilities + Owner’sEquity Assets Claims to Economic Resources Economic Resources

  21. What is an asset? • It is something a company owns which has future economic value. • land • building • equipment • goodwill

  22. What is a liability? • It is something a company owes. • money • service – legal retainers • product – magazines

  23. What is owner’s equity? • It is what’s left of the assets after liabilities have been deducted. • the same as net assets • the owner’s claim on the entity’s assets

  24. Transactions that AffectOwner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Withdrawals from the Business Owner Investments in the Business Owner’s Equity Revenues Expenses

  25. 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 • interest

  26. 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 • utilities • supplies used • advertising

  27. What is a transaction? It is any event that both affects the financial position of the business and can be reliably recorded. O 4: Analyze Business Transactions

  28. Accounting for Business Transactions: Example • Gay Gillen invests $30,000 to begin Gay Gillen eTravel. • Gillen purchases an office location, paying $20,000 in cash. • She buys office supplies, agreeing to pay $500 in 30 days. • She earns and collects $5,500 revenues.

  29. Example Continues... • Gillen performs services, and the client agrees to pay $3,000 within one month. • During the month, she pays $3,300 for expenses incurred. • Gillen pays $300 to the store from which she purchased $500 worth of supplies. • What is the effect of these transactions on the accounting equation?

  30. Accounting for BusinessTransactions Owner’s Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash – 20,000 Land + 20,000 3) Supplies + 500 + 500 4) Cash + 5,500 + 5,500 5) Receivable + 3,000 + 3,000 6) Cash – 3,300 – 3,300 7) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200

  31. Important Points: • 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.

  32. Financial Statements... O 5: Prepare Financial Statements – are the final product of the accounting process. – tell how the business is performing and where it stands.

  33. Financial Statements • income statement • statement of owner’s equity or retained earnings • balance sheet • statement of cash flows

  34. O 6: Evaluate Business PerformanceIncome Statement Revenue: Fees earned $8,500 Expenses: Salary expense $1,200 Utilities and telephone expense 400 Equipment rental expense 600 Office rent expense 1,100 3,300 Net income $5,200

  35. Statement of Owner’s Equity G. Gillen, capital, April 1, 20xx $ 0 Contribution of capital 30,000 Net income $ 5,200 Cash distributions – 2,000 G. Gillen, capital, April 30, 20xx $33,200

  36. Balance Sheet Assets Cash $19,900 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets $ 33,400 Liabilities Accounts payable $ 200 Owner’s equity, G. Gillen, capital 33,200 Total liabilities and owner’s equity $33,400

  37. Statement Of Cash Flows Cash flows from operating activities: Cash receipts from services rendered $6,500 Cash payments: Supplies $ 300 Operating expenses 3,300 3,600 Net cash flows from Operating activities $2,900 Cash flows from investing activities Purchase and sale of land ($11,000)

  38. Cash Flows from Financing Activities: Investment by Owner $30,000 Withdrawals 2,000 Net Cash Flows from Financing Activities $28,000 Cash at Beginning of Year 0 Cash at End of the Year $19,900 Statement Of Cash Flows

  39. Revision Questions:QUESTION 1 A corporation with 2 stockholders goes bankrupt owing $10,000. How much does each stockholder owe the creditors?

  40. Answer: $0. The stockholders of a corporation have limited liability, which means that stockholders are not responsible for the debts of the corporation.

  41. Land was acquired for a future building site at a cost of $80,000. An appraiser placed its value at $85,000. Another company offered to buy the land for cash of $90,000. At what amount should land be reported in the financial statements? QUESTION 2

  42. Answer: $80,000. The cost principle states that assets should be recorded at their cost.

  43. The assumption that the entity will remain in operation for the foreseeable future is the: QUESTION 3 • Reliability principle • Entity concept • Going concern concept • Cost principle Answer: C

  44. A basic principle of accounting that requires activities of an entity be kept separate from other organizations and individuals as a separate economic unit is the QUESTION 4 • Reliability principle • Entity concept • Going concern concept • Cost principle Answer: B

  45. Which of the following is a correct expression of the accounting equation? QUESTION 5 • Assets = revenues + expenses • Assets = revenues - expenses • Assets = liabilities – owner’s equity • Assets = liabilities + owner’s equity Answer: D

  46. If a company’s assets total $400 and owner’s equity totals $300, how much are total liabilities? QUESTION 6 • Answer: $100. • The accounting equation is: • Assets = liabilities + owner’s equity • $400 = ? + $300

  47. Owner's equity can be described as QUESTION 7 • Creditors’ claims on total assets • Owner’s claim on total assets • Current obligations of the company • Economic resources of the company

  48. Answer: B Assets Liabilities + Owner’s Equity = Creditors’claims to assets Owner’sclaims to assets

  49. What is the effect on the accounting equation if a company collects $50 of an Accounts Receivable? QUESTION 8 • increases an asset $50; decreases an asset $50 • decreases an asset $50; decreases a liability $50 • increases an asset $50; decreases a liability $50 • decreases a liability $50; increases owner's equity $50

  50. Answer: A When a company collects on an accounts receivable, cash is increased. Accounts receivable is decreased by the same amount since customers owe the company less.

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