© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin ACCT 102 Financial Accounting Overview of F/S (Chap 1,2,3,4) Cash Flows Statement (Chap 16) Investing activities (Chap 10,15) Operating activities (Chap 5,6,9,10,11) Financing activities (Chap 13,14) Management Accounting Cost Accounting (Chap 18,19,20) Cost-Volume-Profit Analysis (Chap 22) Operating Budgets (Chap 23) Capital Budgets (Chap 25) Managerial Decision (Chap 25)

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting in Business Chapter 1 1

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Learning objectives  1. Why accounting?  2. What is accounting?  3. Ethics in accounting  4. Accounting model / Accounting equation  5. Transaction analysis and recording  6. Financial Statement  7. Decision analysis: ROE & ROA Case: Coca Cola, Pepsi & Cadbury Schweppes

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1. Why accounting? External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Marketing Managers Production Managers Purchasing Managers HR Managers Related parties of a business

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 2. What is accounting Language of business Help users to make better decision Information and measurement system To identify, record, and communicate business activities Provide relevant, reliable, and comparable information

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Identifies Records Communicates Relevant Reliable Comparable 2. What is accounting Accounting is a system that information that is to help users make better decisions.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Identifying Business Activities  Recording Business Activities  Communicating Business Activities 2. What is accounting

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Financial and Managerial accounting External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics 3. Ethics in Accounting

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting Scandals  Accounting frauds in current years Enron (2001) Worldcom (2002) Parmalat (2003) AIG (2005)  Parties pay dearly for the fraud Enron Managers –CFO 10 year in prison (Jan,14,2004) –CAO 7 years in prison (Dec,28,2005) –Chairman maximum 45 years in prison (May,25,2006) –CEO maximum 185 years in prison (May,25,2006) Investors –Stock Price $90 on Aug,2000 –Less than $1 on Nov,28,2001

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 4. Accounting principles  General principles: basic assumptions, concepts, and guidelines for preparing financial statements.  Specific principles: detailed rules used in reporting business transactions and events.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). GAAP Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. FASB and SEC Financial Accounting Standards Board is the private group that sets both broad and specific principles.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Setting Accounting Principles  Hong Kong: Hong Kong Institute of Certified Public Accountants (HKICPA)Hong Kong Institute of Certified Public Accountants  China Ministry of Finance People’s Republic of China  International Accounting Standard Board (IASB) International Financial Reporting Standards (IFRS)

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Principles of Accounting Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Business Entity Forms Proprietorship Partnership Corporation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin * Characteristics of Businesses Exh. 1.8 *

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Assets Liabilities & Equity 4. Accounting Equation Liabilities Equity Assets =+ 資產 負債＋ 所有者權益

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting Equation  Assets Resources with future benefits that are owned or controlled by a company.  Liabilities Source of fund from creditors What a company owes its creditors of future products or services.  Equity Source of fund from owners The claims of its owners

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets: Resources owned or controlled by a business

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors’ claims on assets Liabilities: creditors’ claim on assets.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Owner’s claims on assets Owner’s claims on assets Revenues Owner Investments Owner Withdrawals Expenses Equity: the owner’s claim on assets.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ Expanded Accounting Equation Revenues Expenses Owner Capital Owner Withdrawals _ + _

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Expanded Accounting Equation  Revenues: gross increase in equity from a company’s earnings activities.  Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.  Owner investments: the assets an owner puts into the company.  Owner withdrawals: the assets take away from the company for personal use.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounting equation must remain in balance after each transaction. Liabilities Equity Assets =+ 5. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 1. J. Scott, the owner, contributed $20,000 cash to start the Scott Company. 2. Purchased supplies paying $1,000 cash. 3. Purchased equipment for $15,000 cash. 4. Purchased Supplies of $200 and Equipment of $1,000 on account. 5. Borrowed $4,000 from 1st American Bank. 6. Rendered consulting services receiving $3,000 cash. 7. Paid salaries of $800 to employees. 8. J. Scott withdrew $500 from the business for personal use. Transactions

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) J. Scott, the owner, contributed $20,000 cash to start the business. Transaction 1

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 1 J. Scott, the owner, contributed $20,000 cash to start the business.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction 2 Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 2 Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction 3 Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 3 Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction 4 Purchased Supplies of $200 and Equipment of $1,000 on account.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 4 Purchased Supplies of $200 and Equipment of $1,000 on account.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Transaction 5 Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 5 Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction 6 Rendered consulting services receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 6 Rendered consulting services receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction 7 Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity actually decreases because expenses reduce equity.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 7 Remember that expenses decrease equity. Paid salaries of $800 to employees.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Transaction 8 J. Scott withdrew $500 from the business for personal use. Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction 8 Remember that withdrawals decrease equity. J. Scott withdrew $500 from the business for personal use.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin 5. Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Net income is the difference between Revenues and Expenses. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The net income of $2,200 increases Scott’s capital by $2,200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The Balance Sheet describes a company’s financial position at a point in time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin ROE = Net income ÷ Average Shareholder’s Equity ROE evaluates efficiency of management using owner’ s capital to add value for owner 6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA) Comparison: with competitor with prior period Comparison: with competitor with prior period ROE is used by investors to evaluate the attractiveness of investment objects.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin ROA = Net income ÷ Average total assets ROA evaluates operating efficiency of management using assets 6. Decision analysis - Return on Equity (ROE) & Return on Assets (ROA) Comparison: with competitor with prior period Comparison: with competitor with prior period ROA is viewed as an indicator of operating efficiency.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Return on Assets (ROE & ROA) - Beverage Industry 1. Industry Background Objective: strong brands of beverage Key success factor: Marketing, especially branding 2. Key players: Coca Cola Company Pepsi Inc. Cadbury Schweppes Public Ltd. Co.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Return on Assets (ROE) - CoCa Cola, Pepsi, & Cadbury Schweppes ROE is used by investors to evaluate the attractiveness of investment objects. ROE KO30.18%32.29%33.58%26.33%38.38%23.12%27.14%45.07%61.63%57.01% PEP29.24%33.08%33.31%33.01%32.76%30.14%30.87%29.89%31.60%17.35% CSG14.71%13.01%10.13%15.43%13.58% Industry 22.45%20.52%22.40%

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Return on Assets (ROA) - CoCa Cola, Pepsi, & Cadbury Schweppes ROA evaluates operating efficiency of management using assets ROA KO16.01%16.47%16.76%12.97%18.30%10.26%11.93%19.61%25.03%21.67% PEP13.66%15.80%14.62%13.28%13.30%12.16%10.20%9.32%10.14%10.37% CSG5.43%4.24%3.56%6.36%5.67% Industry 9.59%7.84%8.18%