© 2007 by Nelson, a division of Thomson Canada Limited. 1 PART I: PART I: Introduction to Financial...

© 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

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2© 2007 by Nelson, a division of Thomson

Canada Limited.

CHAPTER 1:CHAPTER 1:

Introduction: Linking Introduction: Linking Financial Financial

Accounting’s Accounting’s Production and UsesProduction and Uses

© 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

Financial Accounting

External FocusExternal Focus

Management Accounting

Internal FocusInternal Focus

Focus of course


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Financial AccountingFinancial Accounting

HOWWHYUSES

Procedures&

Techniques

Analysis&

Decisions

Concepts&

Principles

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

Management Cash Flow

Internal Control

Financial Position

Disclosure

Income

Financial Analysis

Ch. 1,2,3,4,5,10 Ch. 1, 4, 10

Ch. 2, 3, 4, 5, 8, 9, 10

Ch. 1, 3, 6, 8, 9Ch. 2, 6, 8, 9

Ch. 7

Ch. 2, 3, 4, 5, 10

Plugged Into the

Economic Events of the World

Book’s Coverage of Book’s Coverage of Financial AccountingFinancial Accounting


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2 Main Elements Measured by Financial 2 Main Elements Measured by Financial AccountingAccounting

Financial Financial PerformancePerformance

Financial Financial PositionPosition

GOOD (Poor) GOOD (Poor) Financial Position Financial Position facilitates GOOD facilitates GOOD (Poor) Financial (Poor) Financial Performance.Performance.

GOOD (Poor) GOOD (Poor) Financial Financial Performance Performance lead to GOOD lead to GOOD (Poor) Financial (Poor) Financial PositionPosition


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Periodic ReportingPeriodic Reporting

Periodic ReportingPeriodic Reporting

Dec. 31

Dec. 31

Mar. 31

Mar. 31

Jun. 30Jun. 30

Sept. 30

Sept. 30

PERIODICPERIODIC Financial Financial ReportsReports

Events in the WorldEvents in the World


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People Involved In Financial AccountingPeople Involved In Financial Accounting

Who?Who? Why?Why?


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People & Financial AccountingPeople & Financial Accounting

Financial Financial AccountingAccounting

PreparersPreparers

UsersUsers AuditorsAuditors

People Involved In Financial AccountingPeople Involved In Financial Accounting

External Auditors (External Auditors (credibility providerscredibility providers))

PreparersPreparers

•ManagersManagers

•BookkeepersBookkeepers

•Internal Internal AccountantsAccountants

FinancialFinancial StatementsStatements

UsersUsers

•ShareholdersShareholders

•Potential Potential ShareholdersShareholders

•CreditorsCreditors

•Potential Potential CreditorsCreditors

•GovernmentsGovernments

•UnionsUnions

•CompetitorsCompetitors

•ManagersManagers

DataData


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InformationInformationClassifying Classifying

Summarizing Summarizing OrganizingOrganizing

Data BankData BankOngoing events in

world

Bookkeeping Accounting

Financial Accounting’s Transaction FilterFinancial Accounting’s Transaction Filter

UsersUsers

UsersUsers

RecordingRecording


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Accounting TransactionsAccounting 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.

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 unit


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Which of these constitute a Financial Which of these constitute a Financial Transaction??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


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Which of these constitute a Financial Which of these constitute a Financial Transaction??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


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Another Example- JKL Inc.Another Example- JKL Inc.

• JKL sold land and will start collecting annual JKL sold land and will start collecting annual payments starting next yearpayments starting next year

• The president decided that one of the divisions The president decided that one of the divisions would be reorganized next monthwould be reorganized next month

• JKL acquired a new vehicle for cash plus the JKL acquired a new vehicle for cash plus the trade-in of an old cartrade-in of an old car

• The company is sued for $X, a large amount, The company is sued for $X, a large amount, and the outcome is uncertain and the outcome is uncertain


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Accrual AccountingAccrual Accounting

Accrual Accrual Accounting Accounting InformationInformation

Accrual Accrual Accounting Accounting InformationInformation

Accrual Accrual AccountingAccounting

Records of Records of Cash Cash

TransactionsTransactions

Records of Records of Cash Cash

TransactionsTransactions++

CashCash

Records of Records of Other (e.g. Other (e.g.

Credit) Credit) TransactionsTransactions

Records of Records of Other (e.g. Other (e.g.

Credit) Credit) TransactionsTransactions

++

Other Other TransactionsTransactions

Information Information not in the not in the

Transactional Transactional RecordsRecords

Information Information not in the not in the

Transactional Transactional RecordsRecords

==

InformationInformation


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Accrual AccountingAccrual Accounting

Narrative and other disclosure in addition to the Narrative and other disclosure in addition to the accounting numbersaccounting numbers

Estimates and future expectations over the long Estimates and future expectations over the long term (years)term (years)

Estimates and future expectations over the short Estimates and future expectations over the short term (months)term (months)

Credit transactions (promises): cash to be Credit transactions (promises): cash to be exchangedexchanged

Cash transactions (already exchanged)Cash transactions (already exchanged)Lev

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Christine’s Jewellery BusinessChristine’s Jewellery BusinessCalculation of Accrual Income for the Year 2006Calculation 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


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Christine’s Jewellery BusinessChristine’s Jewellery BusinessRevised Calculation of Accrual Income for 2006Revised Calculation of Accrual Income for 2006

Revenue ($4,350 collected, minus $240from 2005, plus $310 still to be received) $4,420

Expenses($1,670 paid, minus $50 from 2005,plus $230 unused brought forward from 2005,minus $280 unused taken forward to 2007, plus$85 unpaid at the end of 2006, plus $120estimated amortization for 2006) 1,775

Accrual income based on the info. provided $2,645


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More Accrual Accounting!More Accrual Accounting!

Gaspard Farm Supply Inc.Gaspard Farm Supply Inc.(Income data for the year ended August 31, 2006)(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 collected 31,000 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


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Cash vs. Accrual Accounting- JKL IncCash 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.


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Cash vs. Accrual Accounting- JKL Inc.Cash vs. Accrual Accounting- JKL Inc.

Cash IncomeCash Income data for the year ended December 31, 2006 data for the year ended December 31, 2006

Cash Revenues and Expenses: Revenue collected from customers $1,000,000 Operating expenses and taxes paid (600,000)

Cash income for the year $400,000


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Cash vs. Accrual Accounting- JKL Inc.Cash vs. Accrual Accounting- JKL Inc.

Accrual IncomeAccrual Income data for the year ended December 31, 2006 data for the year ended December 31, 2006

Revenue ($1,000,000 collected plus $40,000 uncollected) $1,040,000Expenses ($600,000 paid minus $100,000 worth of inventory still on hand plus $50,000 in unpaid bills ($550,000)

Accrual income for the year $490,000


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ReconciliationReconciliation

Reconciliation 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.


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Bank ReconciliationBank Reconciliation

Balance according to the bank $613 Balance in your record $534

Add back error made by bank 55

Bank's records Your records

Add deposit not recorded 70

Revised balance according to $597bank

Revised balance in your $597records

Deduct bank charges not(7)recordedDeduct cheques still

(71)outstanding


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Bank Reconciliation - Another ExampleBank Reconciliation - Another Example

Balance, per bank $3,356.18Bank adjustment needed: cheque of another company charged against our account in error 100.00Deposits received at month end, but not taken to bank until the following day 854.76

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 ReconciliationBeverly Hills Company- Bank Reconciliation

August 31, 2006August 31, 2006

Bank charges not yet recorded in books (112.20)


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Reconciliation- Cash vs. AccrualReconciliation- Cash vs. AccrualJKL Inc.JKL Inc.

Cash income for the year $400,000Noncash 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


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Reconciliation- Cash vs. AccrualReconciliation- Cash vs. AccrualBeverly Hills CompanyBeverly Hills Company

Cash income for the year $240,000Noncash and incomplete items: Expenses not yet paid (30,000) Sales revenue not yet collected 34,000 Cost of goods paid but not yet sold 70,000 Amortization (25,000)

Equals Accrual income $289,000


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Net of Tax AnalysisNet of Tax Analysis

““What would be the effect on net income (after-tax) What would be the effect on net income (after-tax) IFIF we revised our we revised our selling prices, increasing revenue by $230,000 per year???”selling prices, increasing revenue by $230,000 per year???”

Revision

$230,000RevenuesExpensesIncome before taxTax @ 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

$230,000N/C

230,000(92,000)

$138,000


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Net of Tax AnalysisNet of Tax Analysis

““What would be the effect on net income (after-tax) What would be the effect on net income (after-tax) IFIF we tightened up we tightened up on admin. costs and decreased expenses by $150,000 per year???”on admin. costs and decreased expenses by $150,000 per year???”

Before Revision Revision After Revision Change

Revenues $11,310,200 $11,310,200 $0Expenses (9,774,800) 150,000 (9,624,800) 150,000Income before tax $1,535,400 $1,685,400 150,000Income tax @ 40% (614,160) (674,160) (60,000)Net Income $921,240 $1,011,240 $90,000

© 2007 by Nelson, a division of Thomson Canada Limited. 1 PART I: PART I: Introduction to Financial...

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Transcript of © 2007 by Nelson, a division of Thomson Canada Limited. 1 PART I: PART I: Introduction to Financial...