2. By the end of the chapter you should be able to ---- Discuss the purpose of accounts to different stakeholders Examine principles & ethics of accounting practice Prepare and interpret final accounts, namely the profit and loss account and the balance sheet Describe the different types of intangible assets Calculate & distinguish between straight-line and reducing balance depreciation methods Explain strengths & weaknesses of straight-line and reducing balance methods (HL)

3. Purpose of accounts to different stakeholders Final accounts – financial statements prepared at the end of an accounting period – end of year or end of a fiscal period. Include transactions, revenues and expenses Help to inform internal & external stakeholders about the financial position of an organization Internal stakeholders = shareholders, managers, employees External – customers, suppliers, gov’t, competition, etc.

4. Stakeholder Interests Shareholders – interested to know how valuable the business is becoming Managers – used to set targets, to compare performance to other years; helps to set budgets and assist in strategic planning Employees – can signal that jobs will be secure Customers – need to know if there will be a constant supply of products Suppliers – can use final accounts to negotiate better cash or credit terms

5. Stakeholder Interests – cont’d The government – will check if business is abiding by laws regarding accounting regulations Competitors – businesses compare financial stmts to other firms – how do profitability & revenue compare? Financiers – banks check on creditworthiness of businesses to determine how much $$ can be lent Local community – profitable businesses create more job opportunities and growth

6. Principles & Ethics of Acctg. Accountants are responsible to act in the public interest Are accountable to their employers and clients Need to comply with a code of ethics Fundamental Principles – Integrity Objectivity Professional competence and due care (due diligence) Confidentiality Professional behavior

7. Profit and Loss (Income) Statement

8. Income Statement How complex depends on the type of business Service Business Revenue – Expenses = Net Income Merchandising Business Revenue – Cost of Goods Sold – Expenses = Income Cost of Goods Sold Beginning Inventory + Purchases – Ending Inventory Opening “Stock” aka Inventory

9. 2 nd Part of Income Statement Net profit before Interest and Taxes Interest paid must be deducted from gross profit Taxes paid must also be deducted Terms – Right side of page 195 – Very important

10. The Balance Sheet Assets - Fixed and Current Liabilities - Long-term and Current Your debts, or what you owe to other firms or people Working Capital Total Current Assets – Total Current Liabilities Is there enough $$ to cover day-to-day expenses Equity – your value in the Business – Equity = Assets – Liabilities Basic Accounting Equation

11. Equity - continued Equity = Share Capital + Retained Profit Share capital – original capital investment Retained Profit – Profit put back into the business; obtained from the income statement Money reinvested in the business

12. Example of Balance Sheet

13. Intangible Assets Lack physical substance, or are non-physical Patents Protects inventions Goodwill Value of positive business qualities – strong brand name, good customer base, etc. Copyrights Protects creative works Trademarks Recognizable symbol, word, phrase, etc.

14. Depreciation - HL Decrease in value of a fixed asset over time Due to use, obsolescence. Non-cash expense that is recorded in the income statement Straight-line Method – spreads the cost of the asset equally over its useful life. Original Cost – Salvage Value divided by useful life

15. Straight-line - continued Advantages Simple to calculate Mostly suited for less expensive items Disadvantages Not suitable for expensive items Known to inflate the value of assets Doesn’t account for fast-changing tech environment

16. Reducing-Balance Method Percentage of depreciation rate over asset’s useful life Advantages – More realistically matches cost & revenue of business More accurate measure of depreciation Increases non-cash expenses immediately Disadvantages More complex method of calculating Charges high amts of deprecation in early years Formula may be subjective Can impact profits and tax burden

17. Revision Checklist Financial statements report financial position for internal and external stakeholders Ethics in accounting – morals and values Income statement shows revenue and expenditures over a period of time Balance sheet is a snapshot of business financial position at a point in time. Current assets one year Long-term liabilities > one year; short-term < one year Intangible Assets Depreciation