Financial Accounting
Lecture # 1
Accounting
• It is an information system that reports on the
economic activities and financial condition of
a business or other organization.
• There needs to be a system or set of rules so
you are able to compare entities to each
other.
Accounting Information
“A Means to an End”
• Basic objective is to provide
information that is useful for decision
making.
• Accounting is the “Language of
Business”
The language of business
• It will help you succeed in business
• It is the means that business information is
communicated to the stakeholders in the
business
Stakeholders
• Stakeholders are individuals and organizations
that need information about a business.
• They include lenders, government agencies,
employees, news reporters and others.
How accounting can help you
• Help you prepare a budget and keep on target.
• Realize how much cash you have and if there
is enough to pay bills.
• Uncover places where costs can be cut.
Types of Accounting
• Financial Accounting
• Cost and Management Accounting
• Tax Accounting
Managerial Accounting
Managerial Accounting
provides information to the
internal decision makers of a
business. Managerial
accounting provides both
financial and non-financial
information.
Managerial Accounting Topics
Some of the topics of managerial accounting
follow:
Determining the costs of products and services
Product Pricing
Cost Analysis
Budgeting
Break-even analysis
Profit Planning
COST ACCOUNTING - MEANING
Cost accounting is concerned with
recording, classifying and summarizing
costs for determination of costs of
products or services, planning,
controlling and reducing such costs
and furnishing of information to
management for decision making
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2. OBJECTIVES OF COST
ACCOUNTING
Ascertainment of costs
Estimation of costs
Cost control
Cost reduction
Determining selling price
Facilitating preparation of financial
and other statement
Providing basis for operating policy
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Financial Accounting
Provides information about financial
resources, obligation and activities of
an economic entity that is intended
for use primarily by external decision
makers- investors and creditors
Financial accounting
• Branch of accounting associated with
preparing reports for external users
• i.e. the bank, shareholders
Financial Accounting
• Provides information about the financial
resources, obligations and activities of an
organization to:
• Investors Specifically
• Creditors Specifically
• Owners
• Suppliers
• Customers
• Govt. Agencies
Accounting Vs Financial Accounting
Accounting:
An accounting deals with the theories and principles of
recording, classifying, summarizing and interpreting financial
transactions of a particular entity. Over the years,
accounting has extended from meeting the financial needs
within the organization, to the organization of various
groups of people
Financial Accounting:
Financial accounting is just one of the specialized fields of
accounting. It deals with the same theories and principles
but the focus is on the application of these theories and
principles in preparing financial statements for groups of
people outside the organization. This includes meeting the
requirements of local government bodies, stakeholders,
financial analysts,
economists and to attract potential and prospective clients.
Objectives of financial accounting
• To report the financial condition of a business
at a point in time.
• To report changes in the financial condition of
a business over a period of time.
Objectives continued
• First, record the economic events affecting a
business.
• Second, summarize the impact of these events
in a report called financial statements.
Who’s who in accounting
• Bookkeepers-record each transaction
• Accountants-prepare financial statements
• Auditors-review the company’s books and look for
errors and discrepancies (could be internal or
external)
• Controller-in charge of the accounting department
Who’s who in accounting
• CPAs-certified public accountants
• Typically work for an accounting firm called
public accounting
• Once a year come in and do an audit of the
books of the company and do the related tax
returns
• CPAs also work for private companies
Four financial statements
• Balance sheet
• Income statement (profit/loss)
• Statement of cash flows
• Statement of changes in equity
Balance sheet
• Highlights the relative strength of a company
at a point in time.
• Terms related to the balance sheet: assets,
liabilities, owner’s equity.
Assets
• Assets are things you own or resources a business owns.
• The assets of a business belong to its creditors and investors.
• Tangible assets-this you can touch like machinery, buildings,
land, computers, etc.
• Intangible assets-things you cannot tough such as right to
patents, rights to payments from customers, copyrights or
trademarks.
Liabilities
• Things you owe, future obligations of the
business
• Creditor claims
• Examples include a bank loan or car loan, or
buying supplies for your business on credit
Equity
• Rights of stockholders or their claim on assets
• There are two types of equity
– Common stock is issued by corporations to finance
their operations
– Retained earnings which is the portion of earned
assets kept in the business
Accounting equation
• This equation is how the balance sheet is completed.
• Assets=Claims
• Assets=Liabilities + Equity
• Assets=Liabilities + Common stock + Retained
earnings
Accounting equation
• The equation always needs to balance on both
sides of the equal sign.
• This is what people mean when they say
balance the books.
Example of accounting equation
• ABC Company has assets of $20,000 and
liabilities of $5,000. How much is
stockholder’s equity?
• A=L+OE
• 20,000=5,000+?
• 20,000-5,000=15,000
Income statement
• Also called the P&L (profit and loss statement)
• Shows your revenues and expenses over a period of time
(month, year)
• Revenue is income from the sale of goods
• If revenue is more than expenses, you have net income
• If expenses are more than revenue, you have a net loss
Statement of changes in Stockholder’s
Equity
• Sometimes called statement of changes in
owner’s equity
• Explains the effects of transactions on
stockholder’s equity during the accounting
period.
Statement of changes in Stockholder’s
Equity
• Starts with beginning common stock and adds
any additional shares of stock issued.
• Then it takes the beginning retained earnings
and adds on net income (subtracts net loss)
• Then it subtracts any dividends paid to
shareholders
Cash flow statement
• This explains how a company obtained and
used cash during the accounting period.
• Receipts of cash are called cash inflows.
• Payments of cash are called cash outflows.
• It tells you whether your cash increased or
decreased and why.
Cash flow statement
• There are three sections to the cash flow
statement: operating, investing and financing.
• Operating section is first. Operating activities
include receiving cash from revenue and
paying cash for expenses.
Cash flow statement
• Investing section includes paying cash to buy
productive assets (like machinery or
equipment) or receiving cash when you sell
productive assets.
• Financing section includes receiving cash from
owners or paying cash to owners (dividends)
It can also include borrowing cash from the
bank or repaying the cash.
Thank you!
