1. © 2007 by Nelson, a division of Thomson Canada Limited. 1 PART I: PART I: Introduction to Financial Accounting PART II: PART II: Preparing and Using Financial Accounting Reports PART III: PART III: Doing Financial Accounting PART IV: PART IV: Financial Accounting Analysis www.accounting.nelson.com

2. 2 © 2007 by Nelson, a division of Thomson Canada Limited. CHAPTER 1: Introduction: Linking Financial Accounting’s Production and Uses

3. © 2007 by Nelson, a division of Thomson Canada Limited. 3 CHAPTER 1 Introduction: Linking Financial Accounting’s Production & Uses Main Topics in Chapter 1: The people and social settings of financial accounting Financial accounting’s transactional base The idea of accrual accounting as a way of measuring economic performance The importance of analysis in accounting

4. Financial Accounting External Focus Management Accounting Internal Focus Focus of course

5. 5 © 2007 by Nelson, a division of Thomson Canada Limited. Financial Accounting HOWWHYUSES Procedures & Techniques Analysis & Decisions Concepts & Principles

6. Methods Ch. 1, 2, 3, 4, 6, 7, 8, 9 Accounting System Ch 1, 2, 3, 7 Standards Principles Ch. 5, 6, 7, 8, 9 ManagementCash Flow Internal Control Financial Position Disclosure Income Financial Analysis Ch. 1,2,3,4,5,10Ch. 1, 4, 10 Ch. 2, 3, 4, 5, 8, 9, 10 Ch. 1, 3, 6, 8, 9 Ch. 2, 6, 8, 9 Ch. 7 Ch. 2, 3, 4, 5, 10 Plugged Into the Economic Events of the World Book’s Coverage of Financial Accounting

7. 7 © 2007 by Nelson, a division of Thomson Canada Limited. 2 Main Elements Measured by Financial Accounting Financial Performance Financial Position GOOD (Poor) Financial Position facilitates GOOD (Poor) Financial Performance. GOOD (Poor) Financial Performance lead to GOOD (Poor) Financial Position

8. 8 © 2007 by Nelson, a division of Thomson Canada Limited. Periodic Reporting Dec. 31 Mar. 31 Jun. 30 Sept. 30 PERIODIC Financial Reports Events in the World

9. 9 © 2007 by Nelson, a division of Thomson Canada Limited. People Involved In Financial Accounting Who?Why?

10. 10 © 2007 by Nelson, a division of Thomson Canada Limited. People & Financial Accounting Financial Accounting Preparers Users Auditors

11. People Involved In Financial Accounting External Auditors (credibility providers) Preparers ManagersManagers BookkeepersBookkeepers Internal AccountantsInternal Accountants Financial Statements Users ShareholdersShareholders Potential ShareholdersPotential Shareholders CreditorsCreditors Potential CreditorsPotential Creditors GovernmentsGovernments UnionsUnions CompetitorsCompetitors ManagersManagers Data

12. 12 © 2007 by Nelson, a division of Thomson Canada Limited. Information Classifying Summarizing Organizing Data Bank Ongoing events in world BookkeepingAccounting Financial Accounting’s Transaction Filter Users Users Recording

13. 13 © 2007 by Nelson, a division of Thomson Canada Limited. Accounting Transactions A Transaction is an event that meets the following criteria: 1.The event must involve an exchange of goods, money, financial instruments, legal promises, etc.exchange 2.The exchange must have already occurred in the past 3.The exchange must be with an external party (e.g. customer, employee, owner, supplier, tax collector) 4.There must be evidence to document what has happened 5.The event must be measurable in dollars or another currency unitmeasurable

14. 14 © 2007 by Nelson, a division of Thomson Canada Limited. Which of these constitute a Financial Transaction?? 1. The payroll department issues a cheque to pay an employee 2. A customer orders a machine to be delivered six months from now 3. Real estate reports indicate the company’s land has gone up in value by 14% since last year 4. A customer pays, in cash, an account owing since last month and gets a receipt 5. The president of the company breaks her leg while skiing

15. 15 © 2007 by Nelson, a division of Thomson Canada Limited. Which of these constitute a Financial Transaction?? 1. The payroll dept. issues a cheque to pay an employee 2. A customer orders a machine to be delivered six months from now 3. Real estate reports indicate the company’s land has gone up in value by 14% since last year 4. A customer pays, in cash, an account owing since last month and gets a receipt 5. The president of the company breaks her leg while skiing

16. 16 © 2007 by Nelson, a division of Thomson Canada Limited. Another Example- JKL Inc. JKL sold land and will start collecting annual payments starting next year JKL sold land and will start collecting annual payments starting next year The president decided that one of the divisions would be reorganized next month The president decided that one of the divisions would be reorganized next month JKL acquired a new vehicle for cash plus the trade-in of an old car JKL acquired a new vehicle for cash plus the trade-in of an old car The company is sued for $X, a large amount, and the outcome is uncertain The company is sued for $X, a large amount, and the outcome is uncertain

17. 17 © 2007 by Nelson, a division of Thomson Canada Limited. Accrual Accounting Accrual Accounting Information Accrual Accounting Records of Cash Transactions + Cash Records of Other (e.g. Credit) Transactions + Other Transactions Information not in the Transactional Records = Information

18. 18 © 2007 by Nelson, a division of Thomson Canada Limited. Accrual Accounting Narrative and other disclosure in addition to the accounting numbers Estimates and future expectations over the long term (years) Estimates and future expectations over the short term (months) Credit transactions (promises): cash to be exchanged Cash transactions (already exchanged) Levels of Financial Accounting Increasing uncertainty & complexity, and decreasing clarity

19. 19 © 2007 by Nelson, a division of Thomson Canada Limited. Christine’s Jewellery Business Calculation of Accrual Income for the Year 2006 Revenue($4,350 collected, plus $310 still to be received)$4,660 Expenses ($1,670 paid, minus $280 deducted because the goods are still on hand, plus $85 unpaid, plus $120 estimated amortization)1,595 Accrual income based on the info. provided$3,065

20. 20 © 2007 by Nelson, a division of Thomson Canada Limited. Christine’s Jewellery Business Revised Calculation of Accrual Income for 2006

21. 21 © 2007 by Nelson, a division of Thomson Canada Limited. More Accrual Accounting! Gaspard Farm Supply Inc. (Income data for the year ended August 31, 2006) Cash revenues and expenses: Revenue collected from customers$329,000 Cash income for the year$56,000 Noncash and incomplete items: Sales revenue not yet collected31,000 Expenses not yet paid(27,000) Operating expenses and taxes paid(273,000) Amortization on equipment(22,000) Accrual income for the year$38,000

22. 22 © 2007 by Nelson, a division of Thomson Canada Limited. Cash vs. Accrual Accounting- JKL Inc. In the year 2006, JKL Inc. collected $1,000,000 in cash from its customers. It also paid out $600,000 in operating expenses and taxes. At the end of the year, the company had $50,000 worth of unpaid bills and a supply of inventory that had cost $100,000. JKL was also waiting for customers to pay the balance on their outstanding accounts. These uncollected sales totaled $40,000.

23. 23 © 2007 by Nelson, a division of Thomson Canada Limited. Cash vs. Accrual Accounting- JKL Inc. Cash Income data for the year ended December 31, 2006

24. 24 © 2007 by Nelson, a division of Thomson Canada Limited. Cash vs. Accrual Accounting- JKL Inc. Accrual Income data for the year ended December 31, 2006

25. 25 © 2007 by Nelson, a division of Thomson Canada Limited. Reconciliation ReconciliationReconciliation is a common analytical technique in accounting. It is accomplished through the comparison of two different amounts. It is very helpful to see why the two amounts differ. Reconciliation

26. 26 © 2007 by Nelson, a division of Thomson Canada Limited. Bank Reconciliation Balance according to the bank $613 Balance in your record $534 Add back error made by bank 55 Bank's recordsYour records Add deposit not recorded 70 Revised balance according to $597 bank Revised balance in your $597 records Deduct bank charges not (7) recorded Deduct cheques still (71) outstanding

27. 27 © 2007 by Nelson, a division of Thomson Canada Limited. Bank Reconciliation - Another Example Balance, per bank$3,356.18 Bank adjustment needed: cheque of another company charged against our account in error100.00 Deposits received at month end, but not taken to bank until the following day854.76 Balance, per Beverly Hills books before adjustments($2,356.87) Adjustments needed: Cheque deposited, but returned NSF(8.50) Outstanding cheques(6,788.51) Corrected balance (overdraft) ($2,477.57) Corrected balance (overdraft) ($2,477.57) Beverly Hills Company- Bank Reconciliation August 31, 2006 Bank charges not yet recorded in books (112.20)

28. 28 © 2007 by Nelson, a division of Thomson Canada Limited. Reconciliation- Cash vs. Accrual JKL Inc. Cash income for the year$400,000 Noncash and incomplete items: Sales revenue not yet collected$40,000 Expenses not yet paid (50,000) Cost of goods paid but not yet sold 100,000 Equals Accrual income$490,000

29. 29 © 2007 by Nelson, a division of Thomson Canada Limited. Reconciliation- Cash vs. Accrual Beverly Hills Company Cash income for the year$240,000 Noncash and incomplete items: Expenses not yet paid(30,000) Sales revenue not yet collected 34,000 Cost of goods paid but not yet sold70,000 Amortization(25,000) EqualsAccrual income$289,000

30. 30 © 2007 by Nelson, a division of Thomson Canada Limited. Net of Tax Analysis “What would be the effect on net income (after-tax) IF we revised our selling prices, increasing revenue by $230,000 per year???” Revision $230,000 Revenues Expenses Income before tax Tax @ 40% Net Income Before Revision $11,310,200 (9,774,800) $1,535,400 (614,160) $921,240 After Revision $11,540,200 (9,774,800) $1,765,400 (706,160) $1,059,240 Change $230,000 N/C 230,000 (92,000) $138,000

31. 31 © 2007 by Nelson, a division of Thomson Canada Limited. Net of Tax Analysis “What would be the effect on net income (after-tax) IF we tightened up on admin. costs and decreased expenses by $150,000 per year???”