Financial Accounting Fall 2013 Sias International University

Accounting: The language of Business ► Accounting-The information system that measures business activities, process that information into reports and Financial Statements and communicates the results to decision makers

Financial Statements ► Business documents that report financial information about a business entity to decision makers.

4 Financial Statements ► Income statement (Statement of operations) ► Statement of retained earnings ► Balance sheet(Statement of Financial position) ► Statement of Cash Flow

3 Forms of Business organization ► Proprietorships-A business with a single owner ► Partnerships-2 or more person who owns a business ► Corporations-a business owned by stockholders

Corporation ► A legal entity, an “artificial “ person in the eyes of the law ► Stockholder-A person who owns stock in a corporation also called a shareholder ► Stock-Shares into which the Owner’s equity of a corporation is divided ► Board of Directors-Group elected by the stockholders to set policy for a corporation and to appoint its officers

Corporation ► Chief Executive Officer-(CEO) elected by the board of directors ► Question: Who has the higher position, the CEO or the President?

Accounting Foundation:Principles and Concepts ► GAAP-Generally Accepted Accounting Principle ( Accounting guidelines formulated by the financial accounting standards Board, that govern how accounting is practice ►

Accounting Foundation:Principles and Concepts ► Entity Concept-An organization or a section of an organization that stands apart from other organizations and individuals as a separate economic unit ► E.g. Page 1. YUM! Brands, Inc. includes Pizza Hut or (Mcdonald) and KFC

Accounting Foundation:Principles and Concepts ► Reliability (Objectivity) principle- Accounting Principle that ensures that accounting records and statements are based on the most reliable data available. ► E.g. receipts and deed of sale transactions ►

Accounting Foundation:Principles and Concepts ► Cost Principle-Principle that states assets and services should be recorded at their actual cost. E. g page 9 ► Going concern concept-Holds that the entity will remain in operation for the foreseeable future ► Stable monetary unit concept-The basis of ignoring the effects of inflation in the accounting records

Accounting Equation ► Assets=Liabilities +Owners’ Equity or (Capital) or (Stockholder’s Equity) ► A=L+OEC or (C) or (SE) See exhibit 1-4) ► Assets-An economic resource that is expected to be of benefit in the future. ► 1) Cash-Money and any medium of exchange that a banks accepts at face value ► 2)Merchandise Inventory-The goods or merchandise that a company sells to customers

Accounting Equation ► 3) Property, Plant and Equipment (PPE)- Land, building, or equipments used in the operation of business, also called Fixed Assets.

Accounting Equation ► Liabilities – An economic obligation payable to an individual or an organization outside the business ► 1) Accounts Payable- A liability for goods and services purchased on credit supported only by the credit standing of the purchaser ► 2) Notes Payable- A written promise to pay on a certain date ► 3) Long term debt- A liability payable beyond 1 year from the date of the Financial statements.

Accounting Equation ► Owners’ Equity – or (Capital) or (stockholders’ Equity) The claim of the owners of a business to the assets of the business. ► Assets-Liabilities=Owner’s Equity (Capital) (stockholders’ equity) ► A-L=OE or (C ) or (SE) ► Stockholder’s Equity has two main subparts ► 1) Paid in capital-Amount invested in the corporation usually in the form of a common stock

Accounting Equation ► 2) Retained Earnings- Amount earned by income producing activities and kept in use in the business, this amount has not been given back to the stockholders ► Two types of transaction affecting Retained Earnings ► A) Revenues-Increase in Retained earnings from delivering goods or services. E.g. sale of KFC or mcdonalds ► B) Expenses –Decrease in Retained earnings ► That results from operations. Cost of doing business. E.g.Rent, salaries, utilities

Accounting Equation ► “Net” = refers to an amount after a subtraction

Accounting Equation ► Net Income or Net Profit or Net Earnings=Total Revenues exceeds total Expenses ► Net Loss =Total Expenses exceeds total Revenues ► Both are also called “bottom Line” of an Income statement. See page 2, for year 2006 $824 and for year 2005 $762 ► Dividends-distribution of Assets, usually cash to stockholders generated by net income. ► Can you declare Dividends if your bottom line is a net loss? /income=not enough cash?

The Financial Statements

Income statement ► A financial statement listing an entity’s revenue, expenses, net income or net loss for a specific period, also called statement of operations ► Note: The Heading(including subsidiaries ) or capital for proprietorship, the word “ consolidated”, and the date, fiscal year ►

Statement of Retained Earnings ► A summary of the changes in the retained earnings of a corporation during a specific period ► it links the income statement to the balance sheet

Balance Sheet ► Also called statement of financial position ► Includes assets, Liabilities and SE ► Assets have two parts: Current and Long- term ► Long-term includes intangibles like trademark and patent and investments ► Liabilities are also divided by two parts. ► Current and long-term (more than 1 year)

Statement of cash flows ► Operating activities: activities that affect revenue or expenses ► Investing Activities: Activities that increase or decrease long term assets ► Financing activities: Activities that obtain from investors and creditors

The “relationship” see page22