Presentation is loading. Please wait.

Presentation is loading. Please wait.

Financial Statements and Accounting Concepts/Principles

Published byArthur O’Connor’ Modified over 6 years ago

Similar presentations

Presentation on theme: "Financial Statements and Accounting Concepts/Principles"— Presentation transcript:

1 Financial Statements and Accounting Concepts/Principles
CHAPTER 2 Financial Statements and Accounting Concepts/Principles Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

2 Overview Accounting transactions Financial statements
The accounting equation Time line for financial statements Generally accepted concepts and principles Limitations of financial statements Company annual report Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

3 Accounting Transactions
Transactions are economic exchanges between entities that are accounted for and reflected in financial statements. Trans + action = between parties Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

4 Financial Statements Transactions FINANCIAL STATEMENTS
Procedures for sorting, classifying, and presenting (bookkeeping). Selection of alternative methods of reflecting the effects of certain transactions (accounting). FINANCIAL STATEMENTS Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

5 Financial Statements ACCOUNTS Transactions are summarised in accounts.
Accounts are further summarised in the financial statements. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

6 Financial Statements Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

7 Balance Sheet It is a snapshot of its financial position.
The balance sheet lists an organization's ASSETS, LIABILITIES and OWNERS’ EQUITY at a point in time. It is a snapshot of its financial position. It used to be called the STATEMENT OF FINANCIAL POSITION. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

8 Balance Sheet Two sections shown side by side, with total of each side the same. A= L + OE Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

9 Two sections shown side by side, with total of each side the same.
Balance Sheet Two sections shown side by side, with total of each side the same. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

10 Assets represent the amount of resources owned by the entity.
Balance Sheet Assets represent the amount of resources owned by the entity. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

11 Liabilities are amounts owed to other entities.
Balance Sheet Liabilities are amounts owed to other entities. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

12 Balance Sheet Equity is the right of the owner(s) of the entity in the assets that remain after deducting the liabilities (known as net assets) or residual amount. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

13 Balance Sheet Current assets are those assets that are likely to be converted into cash or used to benefit the entity within one year. Current liabilities are those liabilities that are likely to be paid with cash within one year of the balance sheet date. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

14 Balance Sheet Explanation of balance sheet accounts:
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

15 Balance Sheet Explanation of balance sheet accounts:
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

16 The Accounting Equation
= L + OE Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

17 The Accounting Equation
= L + OE Sometimes re-arranged as: OE = A - L NET ASSETS Consistent with everyday meaning of EQUITY as residual interest Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

18 Income Statement It is sometimes called:
The income statement shows the profit or loss for the period of time under consideration. It is sometimes called: Statement of financial performance Statement of earnings Profit and loss statement Statement of operations Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

19 Income Statement Revenues result from the entity’s operating activities (e.g. selling inventory). Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 3

20 Income Statement Costs and expenses are incurred in generating revenues and operating the entity. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 3

21 Income Statement Explanation of income statement accounts: 3
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 3

22 Income Statement Explanation of income statement accounts: 3
Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 3

23 ROA and ROE ratios A ratio is a relationship. The Return on Assets (ROA) measures the return on investment on assets that management had available during the year = Operating Profit Average Assets Return on Equity (ROE) measures the net return the owners receive on their ownership in the company. = Profit - interest and tax Average Owners’ Equity Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

24 Statement of Changes in Owners’ Equity
This financial statement shows the detail of owners’ equity and explains the changes that occurred in the components of owners’ equity during the year. It is sometimes called: Statement of changes in share capital Statement of changes in retained earnings Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

25 Statement of Changes in Owners’ Equity
Total amount invested by the owners Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

26 Statement of Changes in Owners’ Equity
Link between the balance sheet and the income statement Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

27 Statement of Changes in Owners’ Equity
Explanation of accounts: Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

28 Statement of Cash Flows
The purpose of this financial statement is to identify the sources and uses of cash during the year. This is done by reporting the changes in all other balance sheet items. Cash flow data is important as it is highly reliable and is less subject to manipulation than accrual accounting. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

29 Statement of Cash Flows
Cash consequences of the income statement Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

30 Statement of Cash Flows
Cash used to purchase, or cash received from sale of, long term assets. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

31 Statement of Cash Flows
Amounts raised from issue of long-term borrowings or shares, or dividends paid Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

32 Statement of Cash Flows
Explanation of headings: Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

33 Income Statement for the Year Statement of Changes in Owners’ Equity
Time-line Model Financial Year 2007 1/7/06 30/6/07 Balance Sheet Balance Sheet A = L + OE A = L + OE Income Statement for the Year Statement of Changes in Owners’ Equity Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

34 Time-line Model Financial Year 2007 1/7/06 30/6/07 Balance Sheet
A = L + OE A = L + OE Cash Flow Statement Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

35 Financial Statement Relationships
Horizontal Model The arrow indicates that net profit affects retained earnings, which is a component of owners’ equity. The key to using this model is to keep the balance sheet in balance. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola 6

36 Concepts/Principles Related to entire model Related to transactions
Broad concepts and principles (practices) that have been generally agreed upon over time Related to the accounting process Related to financial statements Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

37 Concepts/Principles Related to entire model
Accounting Entity; Every economic entity can be separately identified and accounted for. Not the same as legal entity. Going Concern Concept; The presumption that the entity will continue to operate in the future—it is not being liquidated. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

38 Concepts/Principles Related to transactions
Unit of Measurement; Only transactions denominated in $A dollars are recorded in the accounting records. Objectivity; The accountant’s desire to have a given transaction recorded in the same way in all situations. Cost Principle; Transactions are recorded at their original cost to the entity as measured in dollars. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

39 Concepts/Principles Related to the accounting process
Matching Concept; All expenses incurred to generate that period’s revenues be deducted from revenues earned. Accounting Period; The period of time selected for reporting results of operations and changes in financial position. Accrual Accounting; Recognise revenue at the point of sale and recognise expenses when incurred, even though the cash receipt or payment occurs at another time. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

40 Concepts/Principles Related to financial statements
Relevance; Financial information should assist users to make informed decisions. Comparability; Consistent use of accounting treatments, with changes and effects of changes disclosed Materiality; The increased benefit of increased accuracy should out weigh the cost of achieving the increased accuracy. Full Disclosure; Circumstances and events that make a difference to financial statement users should be disclosed. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

41 Concepts/Principles Related to financial statements
Understandability; Information must be presented in such a way that it is comprehensible to users Prudence; Conservatism should guide accounting choices and judgments. Timeliness; Information should be provided within the decision time frame to assist in economic decision making. Reliability; Financial information should be free from error or bias. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

42 Limitations of Financial Statements
Financial statements report only quantitative economic data. They do not reflect qualitative economic variables, such as the value of the management team or the employee morale. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

43 Limitations of Financial Statements
The balance sheet does not generally report market values or the replacement costs of the assets. Many estimates are used, such as warranty costs, depreciation and doubtful debts expense. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

44 Limitations of Financial Statements
Financial statements are not adjusted to show the impact of inflation. Financial statements do not reflect opportunity cost, i.e. income foregone when an income earning opportunity is foregone. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

45 The Company’s Annual Report
The annual report is distributed to shareholders (and others). It contains the financial statements and notes, together with the report of the external auditor’s examination of the financial statements. It may also contain highlights for the year, including net revenue, earnings per share and return on average shareholders equity, as well as an historical summary of some financial data for the last five years. Copyright  2010 & 2007 McGraw-Hill Australia Pty Ltd PPTs t/a Accounting: What the Numbers Mean 2e (revised) by Marshall, McCartney & Van Rhyn PowerPoint presentation prepared by John Tretola

Download ppt "Financial Statements and Accounting Concepts/Principles"

Similar presentations

Home.

Home.
Financial and Managerial Accounting

Financial and Managerial Accounting
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights.
MSE608C – Engineering and Financial Cost Analysis The Income Statement.

MSE608C – Engineering and Financial Cost Analysis The Income Statement.
2-1 A FURTHER LOOK AT FINANCIAL STATEMENTS Financial Accounting, Sixth Edition 2.

2-1 A FURTHER LOOK AT FINANCIAL STATEMENTS Financial Accounting, Sixth Edition 2.
Uses of Accounting Information and the Financial Statements

Uses of Accounting Information and the Financial Statements
The Role of Accounting in Business Chapter 1

The Role of Accounting in Business Chapter 1
CHAPTER 2 Financial Statements and Accounting Concepts/Principles.

CHAPTER 2 Financial Statements and Accounting Concepts/Principles.
Financial Information and Accounting Concepts

Financial Information and Accounting Concepts
Slide 2.1 Accounting and Reporting on an Accrual Accounting Basis Chapter 2.

Slide 2.1 Accounting and Reporting on an Accrual Accounting Basis Chapter 2.
Conceptual Framework u By the end of this class you should be familiar with …. u Activities of the firm u Major items in the Balance sheet and Income Statement.

Conceptual Framework u By the end of this class you should be familiar with …. u Activities of the firm u Major items in the Balance sheet and Income Statement.
HFT 2401 Chapter 1 Introduction to Accounting. Accounting A Means to an End  Provides answers to questions  How much cash do we have  What was our.

HFT 2401 Chapter 1 Introduction to Accounting. Accounting A Means to an End  Provides answers to questions  How much cash do we have  What was our.
Chapter 1 Accounting and the Business Environment

Chapter 1 Accounting and the Business Environment
The Ownership of a Corporation

The Ownership of a Corporation
Accounting for the Nonfinancial Manager Chapter 2: The Financial Statements (Part A)

Accounting for the Nonfinancial Manager Chapter 2: The Financial Statements (Part A)
1 Introduction to Accounting and Business Financial Accounting 14e

1 Introduction to Accounting and Business Financial Accounting 14e
© 2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e © 2006 Prentice Hall Business Publishing Introduction to Financial Accounting,

© 2006 Prentice Hall Business Publishing Introduction to Financial Accounting, 9/e © 2006 Prentice Hall Business Publishing Introduction to Financial Accounting,
Chapter 15 The Statement of Cash Flows: Reporting and Analyzing.

Chapter 15 The Statement of Cash Flows: Reporting and Analyzing.
McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights.

McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-1 McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, Inc., All Rights.
GAAP PowerPoint #3. Understandability Decision Usefulness Relevance Predictive Value Feedback Value Timeliness Reliability Verifiability Neutrality Representational.

GAAP PowerPoint #3. Understandability Decision Usefulness Relevance Predictive Value Feedback Value Timeliness Reliability Verifiability Neutrality Representational.

Similar presentations

Ads by Google