Financial Accounting. Course: prof. univ. dr. Adriana TIRON-TUDOR, ( room 222) Seminar: Vasile CARDOS ( room 258)

Transcription

1 Financial Accounting Course: prof. univ. dr. Adriana TIRON-TUDOR, ( room 222) Seminar: Vasile CARDOS ( room 258)

2 Recap: accounting fundamentals

3 Why study accounting? Accounting provides information for decision making. Almost every business and organization needs accountants to measure performance and provide information for decisions.

4 Areas of study There are two areas of study: Financial Accounting and Management Accounting. Financial accounting involves consideration of the presentation of financial statements and techniques for their analysis. Management accounting explores the use of accounting data for managerial planning, decision making, and control.

5 Introduction to Financial Accounting Financial accounting is a specialized branch of accounting that keeps track of a company's financial transactions. Using standardized guidelines, the transactions are recorded, summarized, and presented in a financial report or financial statement such as an income statement or a balance sheet. Companies issue financial statements on a routine schedule. The statements are considered external because they are given to people outside of the company, with the primary recipients being owners/stockholders, as well as certain lenders. If a corporation's stock is publicly traded, however, its financial statements (and other financial reporting) tend to be widely circulated, and information will likely reach secondary recipients such as competitors, customers, employees, labor organizations, and investment analysts. Because external financial statements are used by a variety of people in a variety of ways, financial accounting has common rules known as accounting standards and regulations.

6 What you will learn? You will learn how to present financial statements that can be used to assist business planning and decision making. Should you wish to study accounting at postgraduate level, you will cover more advanced subjects and methods to enable you to further develop your skills, knowledge, and career options.

7 Career opportunities The study of accounting can be regarded as either a specialist professional area in itself or as a basic tool which can be applied across the broad spectrum of business or non-profit organizations. If you study accounting at undergraduate level, you may decide to embark on a career in one of these careers: Financial accounting: accountant or auditor in a chartered accountancy practice, industry, or the public sector. Management accounting: business consultant or financial manager in a manufacturing, service, or consultancy organization. You can further develop your knowledge with postgraduate study leading to more senior or specialized career roles in both financial and management accounting. An academic career specializing in accounting is also an option when you complete either an undergraduate or a postgraduate degree.

8 Benefits of a Career in Financial Accounting There are numerous benefits for a career in financial accounting. No matter which country you reside in accountancy skills is needed across the world. If you are thinking of emigrating, your skills will help you to get a job. Furthermore, wherever that financial accounting job may be, if you have the right skills and qualifications you can expect the job to pay well in this industry. Earnings potential for qualified accountants can be highly lucrative. If job security is a concern, then accountancy is a good choice of career. With demand across the world both in practice and organisations, once you have a job it should be yours to lose. Should you go into practice, you ll also have the chance to try a variety of other types accountancy too such as corporate and tax.

9 Tools to Help Financial Accountants There is an array of financial accounting tools for use in the role. Use of the tools is often dependent on the size and complexity of the organization. For many small businesses only the most basic of accounting standards may be appropriate while in large corporations detailed analysis of all figures may create significant variances in year-end profits. Here are ten tools to consider:

10 Tools to Help Financial Accountants Profit and Loss Account a tool which helps accountants to analyse income and expenditure of the business across a twelve-month period. Balance Sheet a snapshot of the assets and liabilities in business as well as an overview of shareholder capital. Net Profit Net Profit Tools will help to identify profits as a ratio of sales after all costs are taken into account. Cash Flow Statements A Cash Flow statement is useful to an organisation as it allows the business to identify how changes in the balance sheet will impact upon cash in the business.

11 Tools to Help Financial Accountants Operating Expenses tools relating to operating expenses help companies to identify and analyze any costs which are not directly related to production and stock costs. Gross Margin these tools enable the organization to identify gross margin, analyzing the sales income less the cost of goods sold. Variance Analysis tools used for variance analysis help an organization to identify variances in budgetary spending, comparing actual spend and forecast spend Rolling Forecasts A rolling forecast tool helps the accountant to many ongoing budgets by using real-time costings to update future budgets correctly.

12 Double Entry and the Accrual Basis of Accounting A. Every transaction affects at least two accounts The advantage of double entry accounting is this: at any given time, the balance of a company's asset accounts will equal the balance of its liability and stockholders' (or owner's) equity accounts EX: if a company borrows $50,000 from its bank, the company's Bank account increases, and the company's Payable ( Bank loan) account increases. Here's a Tip Debit means left Credit means right B. one of the accounts must have an amount entered as a DEBIT, and one of the accounts must have an amount entered as a CREDIT. For any given transaction, the debit amount must equal the credit amount. After you have identified the two or more accounts involved in a business transaction, you must debit at least one account and credit at least one account. To debit an account means to enter an amount on the left side of the account. To credit an account means to enter an amount on the right side of an account.

13 Accrual accounting Financial accounting is required to follow the ACCRUAL BASIS OF ACCOUNTING (as opposed to the "cash basis" of accounting). Under the accrual basis, revenues are reported when they are earned, not when the money is received. Similarly, expenses are reported when they are incurred, not when they are paid. For example, although a magazine publisher receives a $24 check from a customer for an annual subscription, the publisher reports as revenue a monthly amount of $2 (one-twelfth of the annual subscription amount). In the same way, it reports its property tax expense each month as one-twelfth of the annual property tax bill. By following the accrual basis of accounting, a company's profitability, assets, liabilities and other financial information is more in line with economic reality.

14 Financial statements Financial accounting generates the following general-purpose, external, financial statements: Balance sheet (sometimes referred to as "statement of financial position") Income statement (sometimes referred to as "results of operations" or "earnings statement" or "profit and loss [P&L] statement") Statement of cash flows (sometimes referred to as "cash flow statement") Statement of stockholders' equity

15 Balance sheet The balance sheet presents a company's financial position at the end of a specified date. Some describe the balance sheet as a "snapshot" of the company's financial position at a point (a moment or an instant) in time. Its major components, elements, or major categories: Assets (things that the company owns. They are the resources of the company that have been acquired through transactions, and have future economic value that can be measured and expressed in monetary units. Assets also include costs paid in advance that have not yet expired, such as prepaid advertising, prepaid insurance, prepaid legal fees, and prepaid rent. Liabilities (obligations of the company; they are amounts owed to creditors for a past transaction and they usually have the word "payable" in their account title. Along with owner's equity, liabilities can be thought of as asource of the company's assets. They can also be thought of as a claim against a company's assets.) Owner's (Stockholders') Equity (along with liabilities can be thought of as a source of the company's assets. Owner's equity is sometimes referred to as the book value of the company, because owner's equity is equal to the reported asset amounts minus the reported liability amounts. Owner's equity may also be referred to as the residual of assets minus liabilities

16 Balance sheet Cash Petty Cash Temporary Investments Accounts Receivable Inventory Supplies Prepaid Insurance Land Land Improvements Buildings Equipment Goodwill Bond Issue Costs Notes Payable Accounts Payable Salaries Payable Wages Payable Interest Payable Other Accrued Expenses Payable Income Taxes Payable Customer Deposits Warranty Liability Lawsuits Payable Unearned Revenues Bonds Payable Common Stock Preferred Stock Paid-in Capital in Excess of Par Value Paid-in Capital from Treasury Stock Retained Earnings Accumulated Other Comprehensive Income

17 Income statement The profit and loss statement (P&L), statement of operations, or statement of income. shows revenues, expenses, gains, and losses; it does not show cash receipts (money you receive) nor cash disbursements (money you pay out). A. Revenues and Gains 1. Revenues from primary activities 2. Revenues or income from secondary activities 3. Gains (e.g., gain on the sale of long-term assets, gain on lawsuits) B. Expenses and Losses 1. Expenses involved in primary activities 2. Expenses from secondary activities 3. Losses (e.g., loss on the sale of long-term assets, loss on lawsuits)

18 Cash flow statement reports the cash generated and used during the time interval specified in its heading. The cash flow statement organizes and reports the cash generated and used in the following categories:

19 Statement of stockholders' equity Lists the components of stockholders' equity, their balances, and the changes that occurred during an accounting year The major components of stockholders' equity include: Paid-in capital common stock Paid-in capital excess of par value Retained earnings (or accumulated deficit when negative) Accumulated other comprehensive income (or loss) Treasury stock (an amount that is a subtraction)

20 Quizz 1.Financial accounting is focused on the financial statements of a company. External Internal 2.Every transaction will have one account being credited and one account being 3.The accounting equation is Assets = + Stockholders' (or Owner's) Equity. 4.The profitability of a company for a specified period of time is reported on the statement. 5.The main components or elements of the income statement are, expenses, gains, and losses. 6.Prepaid insurance is reported as an on a company's balance sheet.

21 Word Scramble: Balance Sheet 1. Resources. SSSTAE 2. Obligations. EITILASIBIL 3. Sales on account that have not yet been collected are accounts LVEIECAERB 4. Merchandise on hand. NYTRIEONV 5. Amounts owed for goods and services received on account are accounts LAABEPY 6. A corporation s owner s equity is referred to as... equity. THEROLKODSCS 7. Inventory is reported as a asset. NTRUCER 8. Patents, trademarks, and goodwill are examples of assets. BALEGITNIN 9. One section of stockholders equity is paid-in or contributed. PLATCIA 10. The amounts reported on the balance sheet are as of a...in time. NITPO

22 Balance sheet word search

23 Recap Here are some of the highlights from this major topic: Debit means left. Credit means right. Every transaction affects two accounts or more. At least one account will be debited and at least one account will be credited. The total of the amount(s) entered as debits must equal the total of the amount(s) entered as credits. When cash is received, debit Cash. When cash is paid out, credit Cash. To increase an ASSET, debit the asset account. To increase a LIABILITY, credit the liability account. To increase OWNER S EQUITY, credit an owner's equity account. To increase REVENUES, credit the revenues account To increase EXPENSES, debit the expense account

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