1/21/2019

Financial Accounting
for Managers
ACTG 5100
Day 2

Administrative Matters

 Weekly materials posted on CMD

 Participation evaluations
 As discussed last week, done on a peer basis
 Review items posted on CMD
 Instructions re: what to do in this course

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Financial Statements

 “General” purpose
 Prepared at least once a year
 Report information for a “fiscal” period
 Public companies – must use IFRS

Financial Statements

 Statement of Income
 a.k.a. “Income Statement” or “P&L”
 Statement of Financial Position
 a.k.a. “Balance Sheet”
 Statement of Changes in Equity (“IFRS”) /
Statement of Retained Earnings (“ASPE”)
 Statement of Cash Flows
 Notes to the F/S 4

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Balance Sheet

 Financial position at a point in time

 Assets = Liabilities + Owner’s Equity

Assets

 IFRS criteria:
 Controlled by entity
 Result of past transaction or event

 Provides measurable future benefit

 It is probable that the future benefit will be

realized by the entity

Consider: inventory, car, advertising… 6

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Liabilities

 Obligations to pay $ or provide

goods/services to other entities, as a result
of a past transaction or economic event

 May or may not represent a legal liability

Consider: car loan, unearned revenue, warranty..

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Owner’s Equity

 The “investment” in or “value” of an entity

 Capital Stock
 Retained Earnings
• Called “deficit” if negative

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Balance Sheet - Presentation

 Assets and liabilities are classified as

either current on long-term (non-current)
 Current = used up, sold, converted into cash
or settled within 1 year or 1 operating cycle

Income Statement

 Revenue = money earned from sales of

products or services
 Expenses = costs incurred to earn revenue
 Revenue less Expenses = Net Income
 Reports activities over a period of time

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Link Between BS & IS

 Revenues less expenses = net income

 Net income (“NI”) increases value of entity
 Owner’s equity (“OE”) = “value” of entity
 Hence, NI causes OE to increase
 Concept of “retained earnings”

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Statement of Retained Earnings

 Beginning Retained Earnings

plus Net Income
minus Dividends
 Ending Retained Earnings

 Often shown at bottom of IS, not as a

separate statement
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Accounting – cash vs. accrual

 Cash actg. measures impact of

transactions involving cash
 Accrual accounting measures economic
impact of transactions and economic
events, whether they involve cash or not

Eg. Consider amortization, fire, inventory

obsolescence
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Cash Flow Statement

 Summarizes changes to the cash balance

over the fiscal period

 Divided into 3 types of activities:

 Operating
 Investing

 Financing

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Link Between BS, IS and CFS

 Income from IS increases R/E, which

increases OE on BS
 This is fundamental
 CFS explains change in cash from PY

 Need IS to do BS, so usually do IS first

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Notes to Financial Statements

 Provide further information/description of

the figures shown on the FS

 Disclose basic information regarding the

business of the entity

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Special-Purpose Reports

 FS are “general” purpose

 Many users may need more specific
information
 This is referred to as a “special-purpose
report” when provided by the entity to
users
 E.g. operating budget for upcoming year
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Analysis of Financial Statements

 Current ratio
 Debt-to-equity ratio
 Gross margin percentage
 Profit margin percentage
 Return on equity
 Return on assets

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Comprehensive Income

 Mentioned in chapter 4

 Ignore this concept until later on in this

course

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Financial Statements - Wrap-up

 In-class problem?
 Fill in the blank – exercises E2-11, E2-12

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Accounting - what is it?

 Keeping track of transactions and

economic events

 Summarizing data into useful format

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Accounting Cycle

 The process followed to:

 Keep track of transactions and economic events
 Summarize data into useful format

 End product = financial statements

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Accounting Cycle

 In-class problem P3-14 (posted on CMD)

 Do part (a) only

 Use a spreadsheet in the form of:

ASSETS = LIABILITIES + OE
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Journal Entries

 Spreadsheet format works well for a

business with few transactions
 Many transactions = a really big
spreadsheet
 This is not practical
 Thus, use “journal entries” as part of the
accounting cycle instead
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Accounting Cycle

 Journal entries (instead of a “spreadsheet”)

 Posting to General Ledger (“T-accounts”)

 Adjusting journal entries

 Trial Balance
 Financial statements
 Closing journal entries
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Journal Entry

 Keeps track of a particular transaction or

economic event

 Indicates the accounts affected, the

amount, and whether each account is
“debited” or “credited”

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Debits and Credits

 Debit = left
 Credit = right

 Think of a balance sheet!

 Sum of all debits = sum of all credits

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Debits and Credits

 Assets Debit Credit

 Liabilities Credit Debit
 Owners Equity Credit Debit
 Revenue Credit Debit
 Expenses Debit Credit

 Prepare journal entries for P3-14

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Next Class

 Finish Chapter 3 – Accounting Cycle

 Start Chapter 4 – Revenue Recognition

and the Income Statement

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