ACC100 Introduction to Accounting · Chapter 2 - Financial statements for decision making ... •...
Transcript of ACC100 Introduction to Accounting · Chapter 2 - Financial statements for decision making ... •...
ACC100 Introduction to
Accounting
© Study Group Australia Pty Limited, SGA1286-F2/10/12 2
Week 2 –Financial Decision Making
Chapter 2 - Financial statements for decision making
Learning Outcomes
On completion of this week’s study, you should be able to:
• explain general accounting information
• explain the standard presentation and information contained in the four basic
financial statements
• explain relationships between the four basic financial statements.
3
Basic Financial Statements
Accounting is an information system
• Designed to communicate financial information
• To interested users
• For making economic decisions
Financial statements
• Are the outcome of the accounting process
• Are the primary information source for users
• Are useful for many decisions
4
3 Primary Information Types
Financial Performance
• The ability of the entity to utilise its assets effectively and efficiently to
generate cash flow
Financial Position
• The financial resources controlled by the entity, its financial structure, its
liquidity and solvency
Cash Movements
• The ability of the entity to generate cash flow
5
Business Activities
Investing Activities
• The acquisition and disposal of long term assets
Financing Activities
• The raising of funds for an entity to carry out its operating and investing
activities.
Operating Activities
• The provision of goods and services
6
The Balance Sheet
Also known as the Statement of Financial Position.
Shows assets, liabilities and equity.
At a specific point in time.
Represents the accounting equation.
Assets = Liabilities + Equity
7
The Balance Sheet – Account Format
DON’S AUTO REPAIR
Balance Sheet
As at 30 June 2012
ASSETS LIABILITIES
Cash at bank $ 50 340 Accounts payable $ 80 760
Accounts receivable 77 790 Mortgage payable 401 000
Repair Supplies 14 610 481 760
Repair Equipment 110 700
Land 260 000 EQUITY
Building 455 000 Don Brady, Capital 486 680
$968 440 $968 440
8
The Balance Sheet – Narrative Format
Assets
- Liabilities
= Equity
9
ASSETS
Cash at bank $ 50 340
Accounts receivable 77 790
Repair Supplies 14 610
Repair Equipment 110 700
Land 260 000
Building 455 000
TOTAL ASSETS $968 440
LIABILITIES
Accounts payable $ 80 760
Mortgage payable 401 000
TOTAL LIABILITIES 481 760
NET ASSETS 486 680
EQUITY
Don Brady, Capital 486 680
TOTAL EQUITY $486 680
The Balance Sheet
Assets
• Resources controlled by the entity as a result of past transactions or
events from which future economic benefits are expected to flow to the
entity.
Liabilities
• Present obligations of an entity arising from past transactions or events,
the settlement of which is expected to result in an outflow of resources
from the entity.
10
The Balance Sheet
Equity
• The residual interest of the owner/s in the assets (less liabilities) of the
entity
• Also called Capital or Accumulated/Surplus Funds
ASSETS = LIABILITIES + EQUITY
ASSETS – LIABILITIES = NET ASSETS
NET ASSETS = EQUITY
11
The Income Statement
12
DON’S AUTO REPAIR
Income Statement
For the year ended 30 June 2012
INCOME
Repair income $642 500
EXPENSES
Advertising expense $ 20 250
Repair supplies expense 133 710
Salaries and wages expense 173 800
Rent expense 110 260
Telephone expense 20 190
Light and power expense 47 940 506 150
PROFIT $136 350
The Income Statement
Income
• Increases in economic benefits in the form of inflows or enhancements
of assets or decreases of liabilities that results in equity, other than
those relating to equity participants.
Expenses
• Decreases in economic benefits in the form of outflows or incurrences of
liabilities that result in decreases in equity, other than those relating to
equity participants.
13
Statement of Changes in Equity
14
DON’S AUTO REPAIR
Statement of Changes in Equity
For the year ended 30 June 2012
Don Brady, Capital – 1 July 2011 $437 330
Add: Profit for the year 136 350
573 680
Less: Drawings 87 000
Don Brady, Capital – 30 June 2012 $486 680
The Effects of Transactions on The
Accounting Equation
The accounting equation always balances.
Transactions result in changes in assets, liabilities and owners equity.
Elements of the accounting equation change with each transaction.
The basic equality of the accounting equation remains unchanged.
ASSETS = LIABILITIES + EQUITY
15
Example
1. Darren Jones deposits $35 000 in a business bank account
16
Assets = Liabilitie
s
+ Equity
Cash at
Bank
D. Jones,
Capital
(1) $35 000 = $35 000
Example
2. Darren purchases a vehicle and some lawn mowing and gardening
equipment
17
Assets = Liabilitie
s
+ Equity
Cash at
Bank
Equipment Vehicle D. Jones,
Capital
(1) $35 000 = $35 000
(2) -30 000 + 9 000 + 21 000
5 000 + 9 000 + 21 000 = 35 000
($35 000) ($35 000)
Example
3. Darren purchases fuel supplies for $2500 on credit
18
Assets = Liabilitie
s
+ Equity
Cash at
Bank
Equipment Vehicle Fuel
Supplies
Accounts
Payable
D. Jones,
Capital
(1) $35 000 $35 000
(2) -30 000 + 9 000 + 21 000
(3) + 2 500 + 2 500
5 000 + 9 000 + 21 000 + 2 500 = 2 500 + 35 000
($37 500) ($37 500)
19
Statement of Changes in Equity
Income statement
for the period
I – Ex = Profit
Balance sheet
as at beginning of period
A1 – L1 = Eq1
Balance sheet
as at end of period
A2 – L2 = Eq2
Statement of owner’s equity
for the period
Eq1 + Profit – Drawings = Eq2
2
3
41
The Statement of Cash Flows
20
DON’S AUTO REPAIR
Statement of Cash Flows
For the year ended 30 June 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 564 710
Cash paid to suppliers and employees (440 000)
Net cash from operating activities $124 710
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of land and buildings (715 000)
Purchases of repair equipment (110 700)
Net cash from investing activities (825 700)
CASH FLOWS FROM FINANCING ACTIVITIES
Amount borrowed under mortgage 401 000
Investment by owner 437 330
Drawings by owner (87 000)
Net cash from financing activities 751 330
Net increase (decrease) in cash held 50 340
Cash at beginning of year -
Cash at end of year $ 50 340
Summary
• Understand general accounting information
• Understand the standard presentation and information contained in the four
basic financial statements
• Understand relationships between the four basic financial statements.
21