Accounting Framework Financial Statements Some Accounting Concepts Sharath N

Things to discuss Accountants Objective? Accounting Framework.. its premises Accounting Equation.. its components Balance sheet, Statement of cash flow and Statement of Income.. Coca Cola’s Accounting Concepts..

Accountants’ objective and Basic Accounting Framework Accountants’ objective – To provide information for decisions about the deployment and use of resources in an organization and in the economy Accounting Framework premises 1.It is possible to distinguish an accounting entity – person or organization for which accounts are kept – from other persons or organizations that are associated with it 2.Accounting equation Assets = Equities

Assets All things of ‘value’ that the organization has a right to use Financial Assets Cash and cash balance in banks Amounts owed to the organization by customers (accounts receivables) Marketable securities held by the firm Operating assets Land Buildings Equipment used Inventory of unsold products Other assets Intellectual properties as copyrights and patents, conveying exclusive rights to profit from the use of property or process

Equity Equity in an organization represents claims on its resources (Reveals suppliers of an organization’s resources) Creditors - – Provide resources and expect to be repaid Owners - Contribute resources and thereby become participants Owners share both risks and profits accrued Equities of non-owners - amounts owed to employees or suppliers, amounts owed on short-term loans, and loans represented by other debts of one kind or another

Classifications of assets and equities Expanded accounting equation Assets = Liabilities + Owners’ Equity Liabilities – Obligations to outsiders, not owners Equity – Obligations to owners or shareholders – those who have invested capital If organization is dissolved – Obligations of creditors is met before assets are distributed to owners If excess of assets over liabilities increases – then owner’s equity increase

Financial Statements Balance Sheet: – Snapshot of assets, liabilities and owner’s equity at a specified point in time Statement of Cash Flow: – (Asset-Flow statement) summarizes the reason why a class of assets has increased or decreased over a period of time – Shows why the amount of cash and cash equivalents changed because of operating, investing and financing activities Statement of income (or earnings): – Explains why the retained earnings classification within owner’s equity has changed over a period of time, assuming owners have not taken assets from the firm in form of dividends – Measures how retained earnings were affected by operations before the payment of cash dividends

Balance Sheet Measurements made in accordance with ‘generally accepted accounting principles’ (GAAP) ASSETSLIABILITIES + OWNERS’ EQUITY Current Assets 1.Cash and cash Equivalents 2.Marketable securities 3.Trade accounts receivables 4.Inventories 5.Prepaid expenses Current Liabilities 1.Long – term debts 2.Other liabilities Non Current AssetsShareowners’ Equity Non- Operating Assets 1.Investments 2.Marketable securities – long term 3.Equity method investments – owns 20-50% 4.Others - insurance 1.Common Stock with certain par value + Capital Surplus 2.Reinvested earning 3.Unearned compensation on restricted stock 4.Treasury stock Property, Plants and Equipment 1.Land – Original cost 2.Others – (original - depreciation cost) Goodwill

Statement of Income Revenues – Results from selling products or services to customers (Net operating revenue) Cost of Goods sold – direct, factory related cost of producing the products – For a retailer COGS will be the amount of money paid to outside suppliers for the merchandise – Gross Profit = Revenues – COGS Operating Expenses – Overhead cost of Sales, Administrative and general expenses – Operating Income = Gross Profit – operating Expenses Non Operating amounts – Such as income taxes – Net Income = Operating Income – Non Operating amounts REVENUE – EXPENSES = NET INCOME (or NET LOSS) Revenue C O G S Gross Profit Operating Expenses Other Expenses Operating Income Net income

Statement of Cash Flows Details the reason why the amount of cash (& cash equivalents) changed during an accounting period It can be thought as a checkbook register or bankbook Cash can increase or decrease because of 1.Operations 2.Acquisition or sale of asset or investment 3.Changes in debt or stock or other financial activities

Accounting concepts Accounting period concept – Time period for which income has been measured – One year, one-half year, quarter, or monthly Accrual concept – Income should be measured at the time major efforts or accomplishments occur rather than simply when cash is received or paid Realization / recognition concept – A family of set of rules that aid accountants in determining that a revenue or expense has occurred, so that it can be measured, recorded and reported Matching concept – Matching the cost and expenses of producing a product or service with revenues obtained from its delivery to customers, so that net income can be measured

Accounting Concepts contd.. Money measurement concept – Measure things in money so that its easy to do calculations. – However not everything can be measured in cash – knowledge, skills Business entity concept – Delineates the boundaries of the organization for which accounts are kept and reports are made for Going Concept – Entity will continue to operate for indefinitely long period in the future Cost Concept – Current value of assets are not considered. Amount paid in the initial record is used

Conservatism, consistency and Materiality Conservatism concept – Accounts are slower to recognize revenues and gains and quicker to recognize expenses and losses Consistency concept – Once an entity has selected an accounting method for a kind of event or a particular asset, same method should be used in all future events of same type and for that asset Materiality concept – Accountants does not need to attempt to measure and record events that are insignificant or to highlight events that differ from the usual or the norm