Financial accounting

Session 1
Info
Lecturer: Katarzyna Jermakowicz, PhD
Contact: forum of the course
Office hours: info in CloudA

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How to pass?
You can score up to 100 credits for:
 short test – 30 credits
 project – 30 credits
 final test – 40 credits

You need 51 in total in order to pass.

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Grades
Credits Grade
0 – 50 2,0
51 – 60 3,0
61 – 70 3,5
71 – 78 4
79 – 86 4,5
87 – 94 5
95 - 100 5,5
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References
 Jonick C., Principles of financial accounting,
https://open.umn.edu/opentextbooks/textbooks/principles-of-
financial-accounting
 Dauderis H., Annand D., Introduction to financial accounting,
https://lifa1.lyryx.com/textbooks/ANNAND_1/marketing/DauderisAnn
and-IntroFinAcct-2019B.pdf
 Walgenbach P.H., Hanson E.I., Hamre J.C. „Principles of
accounting”
 Fess P.E., Warren C.S. „Financial accounting”
 B.E.Needles, H.R.Anderson, J.C.Caldwell, „Financial and
managerial accounting”
 Spiller E.A., May P.T. „Financial accounting: basic concepts”

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Accounting “is not an end in itself,” but
it’is an information system that
measures (by recording and classifying
data) and processes (by reporting and
interpreting) financial information about
an identifiable economic entity.

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Accounting
as an
Information
System

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Business Goals, Activities,
and Performance Measures
 A business is an economic unit that aims
to sell goods and services to customers at
prices that will provide an adequate return
to its owners.

 Businesses, though diverse, have similar

goals and engage in similar activities.

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Business Goals
1. Profitability.
A business must take in enough money
to pay all the costs of doing business, with
enough left over as profit for the owners
to want to stay in business.
2. Liquidity.
A business must have enough cash available to
pay debts when they are due.

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 Business Activities
1. Financing Activities

Obtaining capital from owners and creditors.

Repaying creditors and a return to owners.
2. Investing Activities

Spending the capital it receives in ways that are productive and
will help the business achieve its objectives.

Buying and selling assets to be used in the business.
3. Operating Activities

Selling of goods and services to customers.

Employing managers and workers, buying and producing goods
and services, and paying taxes.

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 Performance Measures
 Indicate whether or not managers are achieving the
business goals and if they are managing business
activities well.
 Performance measures include:
 Earned income.
 Cash flow.
 Ratio of expenses to revenues.
 Ratio of money owed to total resources controlled.
 Managers should understand these measures!!!

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Processing Accounting Information

Accounting vs. bookkeeping

 Bookkeeping is the mechanical and repetitive

process of recording financial transactions and
keeping financial records.
 Bookkeeping is a small part of accounting.
 Accounting includes the design of an information
system that meets user’s needs.
 Accounting goals are the analysis, interpretation,
and use of information.

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The Users of Accounting
Information

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 What is measured?
 Business transactions as the object of
measurement.
 Business transactions are economic
events that effect the financial position
of a business entity.
 Transactions are the raw material of
accounting reports.
 Transactions must relate directly to a
business entity.
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 Money Measure.
 Money is the only factor common to all business
transactions.
 The monetary unit a business uses depends on
the country in which the business resides.
 Exchange rates translate one currency to
another.
 The Concept of Separate Entity.
 A business (accounting entity) is a separate
entity, distinct from its creditors and customers
and from its owner or owners.

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Assets
 Assets – are the economic resources of the
entity, and include such items as cash, accounts
receivable (amounts owed to a firm by its customers),
inventories, land, buildings, equipment, and even
intangible assets like patents and other legal rights.
 Property – something owned
 Possession – control over things

Assets are recorded at their acquisition price, or

historical cost.

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Equity vs. Debt
 Equity – capital contributed by owner (owners)

 Debt – capital borrowed (amounts owed to

others relating to loans, extensions of credit, and
other obligations arising in the course of
business)

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Liquidity
 Liquidity of an asset
Ease of transforming into cash

 Liquidity of a company
Ability to pay all liabilities and interest when
they are due.

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Fixed vs. current, variable
 Balance
 Fixedassets – to be used for >1 year
 Current assets – to be used for < 1 year

 Income statement
 Fixed cost – does not change with change in volume
of transactions
 Variable cost – changes with change in volume of
transactions

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Revenue, income, reception
 Revenue
All amounts received and to be received
for selling goods or services

 Income
Difference between revenues and costs
 Reception
Receiving money

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Earnings
Earnings before interest, tax, depreciation,
 EBITDARM amortization, rent and management fees

 EBITDA Earnings before interest, tax, depreciation, amortization

 EBIT Earnings before interest and tax

 EBT Earnings before tax

 EAT Earnings after tax

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Expense, cost, disbursement
 Expense
The costs incurred in producing revenues
(already paid or to be paid)

 Cost
Price of something purchased
 Disbursement
Paying money

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Materials vs. goods
 Materials
Things used or to be used in production

 Goods
Finished production or things purchased with intent
to resell

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Importance of
Financial Statements
 Financial statements are the primary means of
communicating important accounting
information to users.
 Financial statements represent models of the
business enterprise because they show the
business in financial terms.
 Financial statements are not perfect pictures
of the real thing.

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Income statement
 Summarizes revenues earned and
expenses incurred over a period of
time.
 Is considered by many to be the most
important financial report because it
shows whether or not a business
achieved its profitability goal of
earning an acceptable income.

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Income statement for June
Revenue
Fees Earned
Expenses
Rent expense
Salaries expense
Utilities expense
Insuranse expense
Supplies expense
Total expenses
Net income

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The Statement of Owners’
equity
 Shows the changes in owners’ equity over a period
of time

 The added capital can be contributed by the owner

or can be generated by the company (net income,
in a corporation it’s called retained earnings)

 The capital can be also reduced (withdrawn by the

owner, in the stock company it’s called dividend)

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Statement of Owner’s Equity for June

Capital, June 1
Add: Capital contributed in June
Net income
Less: Capital withdrawn in June
Capital, June 30

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 The Balance Sheet
 Shows financial position at a point in time.
 Is often called the statement of financial
position.
 Presents a view of the business as the
holder of resources, or assets, that are
equal to the claims against those assets.

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Balance sheet on the 30th of June
Assets Debt & Equity
Cash Loan
Accounts Receivable Accounts Payable
Prepaid Insurance Owner’s Equity
Supplies on hand
Land
Total Total

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Balance sheet – new terms
 Accounts Receivable (AR) is the proceeds or payment which the
company will receive from its customers who have purchased its
goods & services on credit.
 Prepaid insurance refers to payments that are made by
businesses to their insurers in advance for insurance services or
coverage.
 Supplies on hand refers to the stock of on-hand supplies of
consumable items that is typically maintained by a business to
support its operations. ... If the amount is more substantial, the cost
can be initially classified as an asset, and then charged to expense
as supplies on hand are consumed ( supplies expense).
 Accounts payable (AP) represents a company's obligation to pay
off a short-term debt to its creditors or suppliers.

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 The Statement of Cash
Flows
 Focuses on a company’s liquidity goal.
 Shows cash produced by operating a
business as well as important financing and
investing transactions that take place
during an accounting period.
 Is derived from the income statement and
the balance sheet.
 Is directly related to the other three
statements.
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The statement of cash flows for June

Cash flow from operating activities

Cash flow from investing activities
Cash flow from financing activities
Total cash flow

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 Financial statements are
prepared by management and
may be biased.

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Equation of accounting
 Equation of accounting shows equilibrium
on which whole accountancy is based
 The main idea of equation of accounting is
that all of assets and expenses need to be
financed.
 Equation of accounting is also base of
double entry system.

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Two versions of equation
 Equation of accounting has two versions.
The version depends on time in accounting
period.

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Simplified version
 Simplified version is used on day when
balance sheet is made.

Assets = Debt + Owner’s Equity

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Full version
 Full version of equation is valid always!!
 It is one of most important facts
concerning principles of accounting

Assets + Expenses = Debt + Equity + Revenues

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