Financial Accounting Introduction

Copyright © 2006 Pearson Education Canada Inc. 6-2 Engineers need to understand how financial data is recorded and organized Not your job…however… 6.1 Introduction

Copyright © 2006 Pearson Education Canada Inc. 6-3 Financial Accounting – is concerned with recording and analyzing the financial data of a business. The object is to provide information to both internal management and external parties who wish to make decisions about an enterprise. Managerial Accounting – is concerned with estimating and monitoring costs and benefits of the various activities of an enterprise. Elements of Financial Accounting

Copyright © 2006 Pearson Education Canada Inc. 6-4 Managers: Managers use accounting information for day to day decisions and for long range planning. Do we accept an order, drop the price of a product or service. Do we introduce a new product? Managers should be aware of the messages that financial statements make to other audiences. Investors: Anyone who currently owns or may invest in the organization will use accounting information to ask questions such as “Is the company profitable? Is there a risk of bankruptcy? Who uses accounting information?

Copyright © 2006 Pearson Education Canada Inc. 6-5 Creditors: A creditor is any person or group to whom the organization is indebted (e.g. bank, supplier). Will the organization pay its bills? Will it be a reliable business partner? Government: The government is interested to know if the organization is paying an appropriate amount of taxes or if it is following government regulations. Does it qualify for certain government tax incentive programs? Who uses accounting information?

Copyright © 2006 Pearson Education Canada Inc. 6-6 Areas of interest for financial accounting are a firm’s revenues and expenses, its assets and liabilities. These items are contained in two key financial statements: The Balance Sheet - is a snapshot of a firm’s financial position at a particular point in time. The Income Statement - summarizes revenues and expenses over a period of time. These two financial statements form the core of a financial report which is usually produced on a monthly, quarterly or yearly basis. Basic Financial Statements

Copyright © 2006 Pearson Education Canada Inc. 6-7 Every organization for which accounting information is kept, has assets (what it owns), and liabilities (what it owes). The difference between the two is Owners’ Equity (the value of the organization). A Balance Sheet (also called a position statement) summarizes, assets, liabilities and owners’ equity The Balance Sheet

Copyright © 2006 Pearson Education Canada Inc. 6-8 A Sample Balance Sheet

Copyright © 2006 Pearson Education Canada Inc. 6-9 Assets are those items to which the organization has legal title, that have some value and can create future benefits. Current assets typically can be converted into cash within one year. Examples are: –Cash is money on hand, or in checking or savings accounts, and other demand deposits that are convertible to cash easily and quickly. –Accounts Receivable debts of other firms and individuals to the company for e.g. products or services they have purchases. –Inventory represents the purchased raw materials that the company will use to make final products, work-in-process, partially completed products, and finished goods ready for sale Components of a Balance Sheet

Copyright © 2006 Pearson Education Canada Inc Fixed assets (or, capital assets) have a life greater than one year. Examples are: –Plant and Equipment includes such items as manufacturing equipment, computers, copy machines, desks, lawn mowers, material-handling equipment, and delivery trucks –Buildings and Land are also long-term assets. Components of a Balance Sheet

Copyright © 2006 Pearson Education Canada Inc Liabilities: These are debts the firm owes. For example, the company can owe to suppliers, employees, government (taxes) and others. –Current Liabilities are those that are normally paid within a year. Accounts payable (money owed to suppliers), taxes or wages payable, bank loan payable (within a year) are examples of current liabilities. –Long-term liabilities are money owed later than in the current year. Long term bank loans are an example. Components of a Balance Sheet

Copyright © 2006 Pearson Education Canada Inc Owners’ Equity: The difference between assets and liabilities is a means of measuring what the organization is worth – it’s equity: –Assets – Liabilities = Owners’ Equity or Owners’ equity often appears as two components in a balance sheet: –Stock, or shares –Retained earnings As equity builds up, the better off are the owners ( e.g. a sole proprietor, partnership or shareholders) Components of a Balance Sheet

Copyright © 2006 Pearson Education Canada Inc A Sample Income Statement

Copyright © 2006 Pearson Education Canada Inc The Income Statement An income statement summarizes revenues and expenses over a specified accounting period. The Income Statement has three major components: Revenue, Expenses and Profits.

Copyright © 2006 Pearson Education Canada Inc Revenues increase owners equity. Most revenues come from sales of goods or services. Other sources of revenues are interest on investments or savings, rental income or the sale of assets. Components of the Income Statement

Copyright © 2006 Pearson Education Canada Inc Expenses decrease owners equity. Some examples are: –cost of goods sold, which are expenses that can be directly associated with goods or services sold to customers. –rent, insurance, wages, depreciation, and advertising are associated with operating the organization. –other examples include interest paid on debt. Components of the Income Statement

Copyright © 2006 Pearson Education Canada Inc The difference between revenues and expenses is Profits before Taxes. Taxes are deducted from Profits before taxes to arrive at Net Profit. Net Profit (or, after tax profits) can be reinvested in the organization or disbursed to shareholders in dividends. Components of the Income Statement

Copyright © 2006 Pearson Education Canada Inc The values shown in the financial statements are often estimates and may not reflect market values. They are commonly recorded using the cost principle of accounting The cost principle of accounting values assets on the basis of their original cost as opposed to their market value (or other value) Estimated Values in Financial Statements:

Copyright © 2006 Pearson Education Canada Inc land is listed at the price paid, not its market value plant and equipment is listed at the price paid less accumulated depreciation. –Depreciation on the equipment is computed using a depreciation model –The remaining book value is the price paid less accumulated depreciation. stock or shares are listed at par value (the price when the shares were originally issued). finished goods inventory accounts receivable. Cost Principle of Accounting: Examples

Copyright © 2006 Pearson Education Canada Inc Elements of Financial Accounting –The Balance Sheet –The Income Statement –Estimated Values in Financial Statements Summary

Copyright © 2006 Pearson Education Canada Inc Quiz---When and Where Quiz: Tuesday, Oct. 11, : :20 (Quiz: 30 minutes) Tutorial: Wednesday, Oct. 12, 2005 ELL 168 Group 1 (Students with Last Name A-M) ELL 061 Group 2 (Students with Last Name N-Z)

Copyright © 2006 Pearson Education Canada Inc Quiz---Who will be there CraigTipping Group 1 (Last Name A-M) ELL 168 LeYang Group 2 (Last Name N-Z) ELL 061 If you cannot make it, me before the quiz, not your TA!!! If you have emergency, or talk to your TA and me as early as possible

Copyright © 2006 Pearson Education Canada Inc Quiz----Recourse Do not go to ECE department to find me, this course is from Engineering faculty Visit my Homepage Please, you have my phone, , Address Marks: Talk to TAs, if no good, then you want to talk to me your TA to get a good time marks are not that important

Copyright © 2006 Pearson Education Canada Inc Quiz---Problems, Solutions All problems on sheet this time Solutions will be given on Tutorial Bring: Blank Letter Paper, Pen, Formula Sheet, Calculator, Student Card Write: Name, Student No. and

Copyright © 2006 Pearson Education Canada Inc Quiz---Based on Chapter Important: Wei’s Slides Even More Important: Examples in Slides 1 Formula Sheet is a good idea 3 Questions for 1800 seconds. Wei used 192 seconds Today’s content/slides not required

Copyright © 2006 Pearson Education Canada Inc Quiz---Important Points Cover Chap 4-6 Comparison Method I Comparison Method II Depreciation, derivation of methods Key: Understand the Question (if you do not understand the question correctly, you will get nothing even the calculation is correct)

Copyright © 2006 Pearson Education Canada Inc Project----Time Table Find your group: Mid-October Select Topic: End of October Survey finished: End of October Project: November (3 Weeks) Project Report Due: Final Quiz

Copyright © 2006 Pearson Education Canada Inc Project----Requirements Group: 3-6 Students (you find your group, not me!!!) Topic: Practical, (means real data, reasonable topic) Report: On Time, Original Marks: 1 mark to 1 report, one group Report: 25 marks out of 100

Copyright © 2006 Pearson Education Canada Inc Project Topic----What to do You Find the topic Example: Do some survey for investment evaluation, and then make the decision Example: start and Run a Store for computer renting, find how much you have to make Example: Example: Compare two purchases Team Work Independent work

Copyright © 2006 Pearson Education Canada Inc Project----Recourse Not your teaching group No spoon feed: Independent work Example: Government Web Example: Library, Database, Google Example: Economics Faculty Example: Newspaper, TV Example: Friends