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Power Point Slides - Week 1

The document provides an overview of the key learning objectives for week 1 of an introduction to financial accounting course. It defines financial accounting and its relationship to economic decision making. It also describes the four basic financial statements - the income statement, statement of retained earnings, balance sheet, and statement of cash flows - and explains their purpose and how they are related.

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32 views

Power Point Slides - Week 1

The document provides an overview of the key learning objectives for week 1 of an introduction to financial accounting course. It defines financial accounting and its relationship to economic decision making. It also describes the four basic financial statements - the income statement, statement of retained earnings, balance sheet, and statement of cash flows - and explains their purpose and how they are related.

Uploaded by

damini.sharma1221
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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ACTG 2010: Introduction to

Financial Accounting I
-Dr. Gregory Saxton
Learning Objectives – Week 1
Overview of Corporate Financial Reporting
• Understand course outline, including expectations, components, evaluations.
• Define financial accounting and understand its relationship to economic decision-making.
• Identify the main users of financial accounting information and explain how they use this information.
• Describe the major forms of business organization and explain the key distinctions between them.
• Explain the three categories of business activities and identify examples of transactions related to each category.
• Identify and explain the content and reporting objectives of the four basic financial statements and the notes to the financial
statements.

Financial Accounting from a User’s Perspective


Ethical Implications of Accounting Decisions

2
The Accounting System Reports
Information for Decision Makers
Financial Statements

1. Statement of
Income
2. Statement of
Changes in
Equity
3. Statement of
Financial
Financial statements Position
are typically prepared
in this order. 4. Statement of
Cash Flows
1. Statement of Income

 Measures an entity’s economic activity over a period of time

 Revenues - Expenses = Net Income (“Bottom line”)


Statement of Income

The Income Statement reports the amount of revenues


less expenses for a period of time.
2. Statement of Changes in Equity
 Provides detail on how each component of shareholder’s
equity has changed over the period
 The two major components of shareholder’s equity
include:
 Share Capital
 Retained Earnings
Share Capital
 Represents the shares that have been issued by the
company
 Usually stated at an amount equal to what was originally
paid by investors for the shares
 Market value of the shares is the price the shares are
trading at on the stock market
Facebook’s Market Value

Share Price # of Shares Market Value


$173.21 2,900,000,000 $502,309,000,000
Basic Retained Earnings Formula

Beginning Retained Earnings


+ Net Income
Revenues - Expenses
- Dividends
Ending Retained Earnings

R.E. is the earnings of the company that have been


kept (retained) and not paid out in the form of dividends
Statement of Changes in Equity

The Statement of Changes in Equity reports the way


that net income and the distribution of dividends
affected the financial position of the company during a
period of time.
3. Statement of Financial Position

Assets Resources owned

=
Liabilities Amounts owed

+
Shareholders’ Shareholder investments
Equity
Balance Sheet & the Accounting Equation
 Assets (A) are economic resources that provide future
benefits to an entity

 Liabilities (L) are an entity’s obligations

 Shareholders’ equity (SE) is the investment the owners


have made in the entity

A = L + SE
(accounting equation)
Liquidity

 Assets and liabilities are classified on the statement of


financial position into current and non-current categories
and are listed in order of liquidity
 Liquidity: how quickly the company can turn the asset
into cash
Assets - Definition
 Characteristics
• resource controlled by the entity
• Company expects future economic benefits from use or sale of
the resource
• The event that gave the company the ownership or right has
already happened
Assets – beware!
 Some assets are missing from balance sheet
 e.g., Brand recognition
 e.g., Customer loyalty
 e.g., Strong workforce
Liabilities - Definition

 Characteristics
• A present obligation of the entity
• Company expects to settle it through an outflow of resources
that represent future economic benefits
• Obligation results from an event that has already happened
Shareholder’s Equity

A = L + SE

Direct Investment Reinvestment of Net Income

(Revenue – Expenses)

 Shareholders’ equity - represents the amount of the assets


financed by the owners (SE = A-L)
Shareholders’ Equity
 Value of the shareholders’ interest in the company as
defined earlier; also, re-arranging the accounting equation
SE = A-L
 SE is equivalent to the shareholders’ total equity or net
worth of the business
 It is also referred to as the company’s book value
 Book value and market value are usually different
Facebook’s Book Value vs. Market Value

Share Price # of Shares Market Value


$173.21 2,900,000,000 $502,309,000,000

Book Value (A-L) # of Shares Book value/share


$66,481,000,000 2,900,000,000 $22.92

Price-to-Book Ratio
(Share Price / Book value per share)
$7.56
Statement of Financial Position

• The Statement of
Financial Position
(balance sheet)
reports the amount of
assets, liabilities, and
shareholders’ equity
of a business at a
point in time.

• Assets = Liabilities +
Shareholders’ Equity
4. Statement of Cash Flows
 Measures inflows and outflows of cash during a
specific period of time
 Sections
• Cash Flow from Operating Activities
 All inflows & outflows related to the company’s sale of goods
or services
• Cash Flow from Financing Activities
 Transactions that either generate new funds from investors or
return funds to investor
• Cash Flow from Investing Activities
 Inflows and outflows related to long-term assets
Business Activities
Financing Activities
 A company’s financing comes from two sources:
 Investors
 Creditors
 Cash Inflows:
 Borrowing money
 Issuing Shares
 Cash Outflows:
 Repaying loans
 Paying dividends on shares
Investing Activities
 Investing activities include:
 Buying and selling of property, plant, and equipment
 Buying and selling the shares of other companies
 Cash Inflows:
 Sale proceeds from PPE
 Sale proceeds from shares of other companies
 Cash Outflows:
 Purchase of PPE
 Purchase of shares of other companies
Operating Activities

 Operating activities are related to the company’s revenues


and expenses and fall into two general categories:
 Sales and customer collections (Cash Inflows)
 Payment of business expenses (Cash Outflows)
Business Activities
Statement of Cash Flows

• The Statement of Cash


Flows reports the
operating, investing,
and financing activities
that caused increases
and decreases in cash
during a period of
time.
5. Notes to the Financial Statements
 More detail about specific referenced items
 Includes the Summary of Accounting Policies
 Includes information about various segments of the
company
Summary of Four Basic Financial Statements
Relationships among the
Financial Statements
1. Net Income, from the income statement, is a
component in determining ending Retained
Earnings on the statement of retained earnings.
Relationships among the
Financial Statements
2. Ending Retained Earnings from the statement of
changes in equity is then reported on the balance sheet.
Relationships among the
Financial Statements
3. The Cash on the balance sheet is equal to the ending
Cash reported on the statement of cash flows.

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