ACCOUNTING AND FINANCIAL STATEMENTS UNIT 19

WHAT DO YOU THINK? What is accounting? What skills do you think accountants need? Do you think you have these skills? If you have not yet chosen a career, could it be accountancy?

READING – INTRODUCTION TO BUSINESS FINANCE – RB, p. 69. What different ways of RAISING CAPITAL do you remember? Read the text in RB, p. 69 and find out. In addition, find out about the difference between ASSETS and LIABILITIES. Do the vocabulary Tasks II & III.

WHAT IS ACCOUNTING? ACCOUNTING is a service that provides: reliable and relevant f___________ information about a business useful in making decisions safeguard over the a___________ of the business ACCOUNTING is a process of: a___________ financial data r___________ business transactions s___________ financial data of a particular business activity which have an impact on the financial position of a business FINANCIAL DATA – actual business t___________ (e.g. sale of goods, provision of services, purchase of assets, taxes and other figures). PURPOSE OF THIS PROCESS – to prepare financial s___________ (FINANCIAL REPORTING) and have an accurate and timely accounting data based on which interested parties (o___________, c___________, s___________, c___________, e___________, g___________ institutions and other) can judge on the r___________ the business has achieved during a particular period of time and on the assets the business possesses.

WHAT IS ACCOUNTING? ACCOUNTING is a service that provides: reliable and relevant financial information about a business useful in making decisions safeguard over the assets of the business ACCOUNTING is a process of: analyzing financial data recording business transactions summarizing financial data of a particular business activity which have an impact on the financial position of a business FINANCIAL DATA – actual business transactions (e.g. sale of goods, provision of services, purchase of assets, taxes and other figures). PURPOSE OF THIS PROCESS – to prepare financial statements (FINANCIAL REPORTING) and have an accurate and timely accounting data based on which interested parties (owners, creditors, suppliers, customers, employees, governmental institutions and other) can judge on the results the business has achieved during a particular period of time and on the assets the business possesses.

USERS OF ACCOUNTING INFORMATION FINANCIAL ACCOUNTING provides information designed to satisfy the needs of external users, usually done in the form of financial statements. MANAGERIAL ACCOUNTING provides information useful in running a company by internal users, usually done through custom designed reports.

USERS OF ACCOUNTING INFORMATION Interested parties are also called ACCOUNTING INFORMATION USERS: E _____________ users I _____________ users EXTERNAL USERS: parties outside the company who are interested in the accounting information. I_____________ use accounting information to buy, sell or make decisions related to shares, bonds, etc. C____________ (suppliers, banks) utilize accounting information to make lending decisions. T____________ A _____________ (Internal Revenue Service) need accounting information to determine a company's tax liabilities. C____________ may need accounting information to decide which products and from which company to buy. INTERNAL USERS: parties inside the company who are interested in the A company's senior and middle M _____________ uses accounting information to run business. S____________ use this information to assess performance of the management. E____________ use accounting information to determine a company's profitability and profit sharing.

USERS OF ACCOUNTING INFORMATION Interested parties are also called ACCOUNTING INFORMATION USERS: EXTERNAL users INTERNAL users EXTERNAL USERS: parties outside the company who are interested in the accounting information. INVESTORS use accounting information to buy, sell or make decisions related to shares, bonds, etc. CREDITORS (suppliers, banks) utilize accounting information to make lending decisions. TAXING AUTHORITIES (Internal Revenue Service) need accounting information to determine a company's tax liabilities. CUSTOMERS may need accounting information to decide which products and from which company to buy. INTERNAL USERS: parties inside the company who are interested in the A company's senior and middle MANAGEMENT uses accounting information to run business. SHAREHOLDERS use this information to assess performance of the management. EMPLOYEES use accounting information to determine a company's profitability and profit sharing.

BOOKKEEPING AND ACCOUNTING BOOKKEEPING AND ACCOUNTING – the r____________ of transactions, the e___________ of budgets, the c____________ of costs and expenses, the p___________ of financial statements and tax returns, and so on – is central to all commercial activity, from the smallest sole-trader or self-proprietorship to the largest multinational company. Financial control is equally crucial for all non-commercial organizations and institutions.

TYPES OF ACCOUNTING, MK pp. 95 & 96 BOOKKEEPING – w ___________ down the details of transactions (debits and credits) ACCOUNTING – p___________ financial statements showing income and expenditure, assets and liabilities MANAGERIAL ACCOUNTING – p ___________ information that will allow a business to make d___________, p___________ future operations and d___________ business strategies COST ACCOUNTING – c ___________ all the expenses involved in producing something, including materials, labour and all other expenses TAX ACCOUNTING – c ___________ how much an individual or a company will have to pay to the government (and trying to r___________ this to a minimum) AUDITING – i ___________ and e ___________ of accounts and financial records by a second set of accountants 'CREATIVE ACCOUNTING' – u ___________ all available accounting procedures and tricks to d ____________ the true financial position of a company

WHICH TYPE OD ACCOUNTING IS ILLUSTRATED BY THIS CARTOON?

ACCOUNTING VOCABULARY – MK, p. 95 – CALL MY BLUFF! INCOME equals profits made during a given period. All the money that a business spends on goods and services constitutes the company’s LIABILITIES. A financial operating plan showing expected income and expediture is a BUDGET. All the money that a company will have to pay to someone else in the future, including debts, taxes and interest rates is EXPENDITURE. An entry in an account, recording a payment made is DEBIT. An entry in an account, recording a payment received is CREDIT. An adjective describing something without a material existence, which you can’t touch is TANGIBLE. ACCRUED is an adjective describing a liability which has been incurred but not yet invoiced to the company. RETAINED is the same as delayed or postponed until a later time.

SUMMARY WRITING – WHAT IS THE ANNUAL REPORT? – RB, p. 70 presented at the AGM (Annual General Meeting) to shareholders published by listed companies quoted on the Stock Exchange giving information about the performance of the company SUMMARY PEOPLE INVOLVED IN RUNNING COMPANIES’ ACCOUNTS: _______________ _______________ _______________ PARTS OF THE ANNUAL REPORT: _______________ _______________ _______________ FINANCIAL STATEMENTS:

FINANCIAL REPORTING Deals with FINANCIAL T______________ that involve money: making payments – E______________ receiving money – I_______________ Each transaction is entered in a record known as an A_____________ accounting system of a business: How much is a business earning and how much tax does it have to pay? Managers want to know who owes them money (D_____________) and to whom they owe money (C_____________) What is the performance of the company? Some of the accounting information is used internally and some, in limited companies, for the annual FINANCIAL S_______________: B______________ S______________ PROFIT & LOSS ACCOUNT (UK) OR I_______________ STATEMENT (US) C______________ FLOW STATEMENT OR FUNDS FLOW STATEMENT Which of the above financial statements include the following items? CASH INFLOWS AND CASH OUTFLOWS (PAYMENTS IN AND OUT) ASSETS AND LIABILITIES INCOME AND EXPENDITURE

FINANCIAL REPORTING Deals with FINANCIAL TRANSACTIONS that involve money: making payments – EXPENDITURE receiving money – INCOME Each transaction is entered in a record known as an ACCOUNT accounting system of a business: How much is a business earning and how much tax does it have to pay? Managers want to know who owes them money (DEBTORS) and to whom they owe money (CREDITORS) What is the performance of the company? Some of the accounting information is used internally and some, in limited companies, for the annual FINANCIAL STATEMENTS: BALANCE SHEET PROFIT & LOSS ACCOUNT (UK) OR INCOME STATEMENT (US) CASH FLOW STATEMENT OR FUNDS FLOW STATEMENT Which of the above financial statements include the following items? CASH INFLOWS AND CASH OUTFLOWS (PAYMENTS IN AND OUT) ASSETS AND LIABILITIES INCOME AND EXPENDITURE

ACCOUNTING - BASIC VOCABULARY HOW MANY WORDS DO YOU KNOW? ● ASSETS ● EARNINGS OR INCOME ● LIABILITIES ● DIVIDEND ● EQUITIES ● ACCOUNT ● CREDITOR ● DEBTOR ● TURNOVER ● EXPENDITURE ● STOCK (GB) OR INVENTORY(US) ● OVERHEADS ● GROSS ● NET ● DEBTORS (GB) OR ACCOUNTS RECEIVABLE (US) ● DEPRECIATION (GB) OR AMORTIZATION (US) ● CREDITORS (GB) OR ACCOUNTS PAYABLE (US) ● SHAREHOLDERS (GB) OR STOCKHOLDERS (US)

THE BALANCE SHEET – A VIDEO Watch the video and find out: What type of financial statement is the BALANCE SHEET? Which items does it show? What is the basic equation of the balance sheet? https://www.youtube.com/watch?v=Zr4CLcAYu80

THE BALANCE SHEET WHAT DOES IT SHOW? a ‘snapshot’ of the financial position of a firm at a particular time, usually the l____________ day of its financial year A____________ L____________ O____________’ (what the company (what the company E ____________ owns) owes) (shareholders’ capital) ASSETS= L __________ + O _________ E _________ (CLAIMS ON ASSETS) C ____________ and O ____________ of the company

THE BALANCE SHEET WHAT DOES IT SHOW? a ‘snapshot’ of the financial position of a firm at a particular time, usually the last day of its financial year ASSETS LIABILITIES OWNERS’ (what the company (what the company EQUITY owns) owes) (shareholders’ capital) ASSETS= LIABILITIES + OWNERS’ EQUITY (CLAIMS ON ASSETS) CREDITORS and OWNERS of the company

THE BALANCE SHEET ASSETS F_________ (buildings,machinery, vehicles, equipment) – long-lasting and needed for making company’s p _________ and providing s __________, they take more time to convert into c__________ C_________ (stock, debtors, cash) – used for day-to-day o _________ and are important for the l_________ of the company LIABILITIES 1) L__________ (loan, mortgage), money lent and paid paid back with interest after twelve months 2) C__________ (creditors, overdrafts, dividends payable, taxation), amounts p___________ within twelve months SHAREHOLDERS’/OWNER’S EQUITY (CAPITAL) 1) S__________ C__________ - the money put into the business received from the issue of shares 2) R__________ (such as retained profit)

THE BALANCE SHEET ASSETS FIXED (buildings,machinery, vehicles, equipment) – long-lasting and needed for making company’s products and providing services, they take more time to convert into cash CURRENT (stock, debtors, cash) – used for day-to-day operations and are important for the liquidity of the company LIABILITIES 1) LONG-TERM (loan, mortgage), money lent and paid paid back with interest after twelve months 2) CURRENT (creditors, overdrafts, dividends payable, taxation), amounts payable within twelve months SHAREHOLDERS’/OWNER’S EQUITY (CAPITAL) 1) SHARE CAPITAL - the money put into the business received from the issue of shares 2) RESERVES (such as retained profit)

THE BALANCE SHEET - DISCUSSION How would you put a value on your college or university? What are its major assets – buildings and equipment, or people and their skills, knowledge and reputation? In most countries, companies record the historical cost of their assets – their original price, and not their (estimated) current selling price or replacement cost. Why? Should companies record raw materials, work-in-progress, and their inventory of products ready for sale at their cost price, or their current market price (the price at which they could be sold)? Give examples of companies whose value largely derives from intangible assets such as their well-known brands, or their good reputation.

PROFIT AND LOSS ACCOUNT – A VIDEO Watch the video and find out: What type of financial statement is the PROFIT & LOSS ACCOUNT? Which items does it show? What is the basic equation of the P&L ACCOUNT? https://www.youtube.com/watch?v=ulpX3jX_UT0

THE PROFIT & LOSS ACCOUNT PURPOSE shows the profit e__________ and losses m __________ over a period of time c __________ the net profit and s __________ the profitability of the company helps a business to make d __________ about the future helps tax authorities to know how much tax to c __________ a company on its profits helps banks to give companies financial s __________

THE PROFIT & LOSS ACCOUNT PURPOSE shows the profit earned and losses made over a period of time calculate the net profit and summarise the profitability of the company helps a business to make decisions about the future helps tax authorities to know how much tax to charge a company on its profits helps banks to give companies financial support

THE PROFIT & LOSS ACCOUNT WHAT DOES IT SHOW? r____________ and e ____________ t___________ c ____________ o ____________ r ____________, s ____________, u ____________, i ____________ PROFIT = R____________ - E____________ HOW IS THE PROFIT DISTRIBUTED? t ____________ to government d____________ to shareholders part is r____________ by the company for futher g____________ or bad d____________

THE PROFIT & LOSS ACCOUNT WHAT DOES IT SHOW? revenue and expenditure turnover costs overheads rent, salaries, utilities, insurance PROFIT = REVENUE - EXPENSES HOW IS THE PROFIT DISTRIBUTED? taxation to government dividend to shareholders part is retained by the company for futher growth or bad debts

WHAT IS CASH FLOW? – A VIDEO Watch this video and find out the answers to this question by giving examples. https://www.youtube.com/watch?v=hISdzmjNO5w

CASH FLOW CATEGORIES

WHAT IS A CASH FLOW STATEMENT? – A VIDEO Watch this video and find out: What does the cash flow statement show? What are its three main sections? Give examples of items that it records in each section. What are the items that the cash flow statement ignores? https://www.youtube.com/watch?v=9DcRJD9rbbQ

THE CASH FLOW STATEMENT WHAT DOES IT SHOW? The l__________ and the financial strength of the company THE SOURCES OF THE A_________ OF F________ (cash i ________) FUNDS (cash o_______) ▪ owners’ own funds from ▪ p_________ of fixed the i _________ of shares and financial assets ▪ t _________ profits ▪ running e_________ ▪ b _________ funds ▪ i_________ payments ▪ the sale of a __________ ▪ t_________ ▪ payment of d_________

THE CASH FLOW STATEMENT WHAT DOES IT SHOW? The liquidity and the financial strength of the company THE SOURCES OF THE APPLICATIONS OF FUNDS (cash inflows) FUNDS (cash outflows) ▪ owners’ own funds from ▪ purchases of fixed the issuing of shares and financial assets ▪ trading profits ▪ running expenses ▪ borrowed funds ▪ interest payments ▪ the sale of assets ▪ taxation ▪ payment of dividends

THE CASH FLOW STATEMENT CASH – items to which an organization has immediate or one-day a__________: actual c __________ bank a __________ short-term d __________ CASH D __________ - more cash outflows than inflows CASH S __________ - more cash inflows than outflows NEGATIVE OPERATING CASH – solutions → make more p __________, decrease s ___________, decrease d __________ and increase c ____________.

THE CASH FLOW STATEMENT CASH – items to which an organization has immediate or one-day access: actual cash bank accounts short-term deposits CASH DEFICIT - more cash outflows than inflows CASH SURPLUS - more cash inflows than outflows NEGATIVE OPERATING CASH – solutions → make more profit, decrease stock, decrease debtors and increase creditors.

ACCOUNTING REVISION – RB, p. 76. Do the vocabulary tasks I & II.