This image cannot currently be displayed. Accounting Principles INDE-Engineering Economy Understanding Accounting & Financial Statements Presented By: Magdy Akladios, PhD, PE, CSP, CPE, CSHM ACCOUNTING - THE BASIS OF DECISION MAKING Accounting is the language of business Accounting is the information system that Measures business activities Processes that information into reports Communicates the results to decision makers THE ACCOUNTING SYSTEM: THE FLOW OF INFORMATION 1. People make decisions 2. Business transactions occur 3. Businesses prepare reports to show the results of their operations Presented by: Dr. Magdy Akladios 1
ACCOUNTING Vs. BOOKKEEPING Bookkeeping is the procedural element of accounting that processes the accounting data DECISION MAKERS WHO USE ACCOUNTING INFORMATION Individuals Businesses Investors and Creditors Government Regulatory Agencies Taxing Authorities Nonprofit Organizations FINANCIAL ACCOUNTING AND MANAGEMENT ACCOUNTING Financial accounting provides information to managers and people outside the firm Financial accounting information must meet certain standards of relevance and reliability Management accounting generates confidential information for internal decision makers, e.g., Top executives Department heads Presented by: Dr. Magdy Akladios 2
ETHICAL CONSIDERATIONS Ethical standards in accounting are designed to produce accurate information for decision making The result of ethical behavior by accountants is information that people can rely on for decision making TYPES OF BUSINESS ORGANIZATIONS Proprietorships Have a single owner who is generally the manager Are business entities, but not legal entities Have debt for which the proprietor is personally liable TYPES OF BUSINESS ORGANIZATIONS Partnerships Join two or more persons together as coowners Are business entities, but not legal entities Have debt for which each partner is personally liable Presented by: Dr. Magdy Akladios 3
TYPES OF BUSINESS ORGANIZATIONS Corporations Are owned by stockholders or shareholders Are business entities and legal entities Are liable for all debts Stockholders have no personal obligation for corporation debts ACCOUNTING PRINCIPLES AND CONCEPTS Generally accepted accounting principles (GAAP) are The rules that govern how accountants operate Based upon a conceptual framework written by the Financial Accounting Standards Board (FASB) ACCOUNTING PRINCIPLES AND CONCEPTS The FASB works with the SEC (Securities and Exchange Commission) and the AICPA (American Institute of Certified Public Accountants) Presented by: Dr. Magdy Akladios 4
KEY ACCOUNTING ORGANIZATIONS Public Sector Law creates the SEC to regulate the stock and bond market in the U.S. Private Sector Accountants apply GAAP through the AICPA GAAP governs accounting information Private Sector The FASB determines generally accepted accounting principles ACCOUNTING PRINCIPLES AND CONCEPTS The entity concept States that an organization is an economic entity that keeps its affairs separate from those of the owner(s) The reliability (objective) principle States that accounting records and statements are based on the most reliable data available and documented by objective evidence ACCOUNTING PRINCIPLES AND CONCEPTS The cost principle States that acquired assets and services should be recorded at their actual (historical) cost and should maintain that historical cost for as long as they are owned The going-concern concept States that the entity will remain in operation for the foreseeable future Presented by: Dr. Magdy Akladios 5
ACCOUNTING PRINCIPLES AND CONCEPTS The stable-monetary-unit concept States that each dollar has the same purchasing power as any other dollar at any other time THE ACCOUNTING EQUATION The accounting equation presents the resources of the business and the claims to those resources Economic Resources = Claims to Economic Resources or Assets = Liabilities + Owners Equity THE ACCOUNTING EQUATION Assets are the economic resources of a business that are expected to be of benefit in the future Claims to assets come from Liabilities Economic obligations - debts payable to outsiders, called creditors Owners equity (capital) Assets held by the owners of the business Presented by: Dr. Magdy Akladios 6
THE ACCOUNTING EQUATION For a corporation, stockholders (owners ) equity consists of two main categories Paid-in capital Retained earnings Assets = Liabilities + Stockholders Equity or Assets = Liabilities + Paid-in Capital + Retained Earnings THE ACCOUNTING EQUATION Paid-in (contributed) capital is The amount invested in the corporation by its owners Comprised basically of common stock THE ACCOUNTING EQUATION Retained earnings Is the amount earned by incomeproducing activities and kept for use in the business Is affected by Revenues - increases in retained earnings from delivering goods or services Expenses - decreases in retained earnings that result from operations Presented by: Dr. Magdy Akladios 7
THE ACCOUNTING EQUATION Net income (net earnings) Total revenues exceed total expenses Net loss Total expenses exceed total revenues Dividends Distributions to stockholders (usually cash) generated by net income COMPONENTS OF RETAINED EARNINGS Revenues for the Period - Expenses for the Period Start of the Period Beginning Balance of Retained Earnings = + - Net Income (Loss) - Dividends for the = for the Period Period End of the Period Ending Balance of Retained Earnings THE ACCOUNTING EQUATION The owners equity of Proprietorships and Partnerships Makes no distinction between paid-in capital and retained earnings Accounts for the equity of each owner under the single heading of Capital Presented by: Dr. Magdy Akladios 8
Accounting Basics It uses Fixed-Dollar, double entry accounting procedures Uses T -accounts T-Accounts Left side: Represents company assets (in the balance sheet) An addition to left side represents a debit (in the income statement) Right side: Represents company Liabilities or Equities (in the balance sheet) An addition to right side represents a credit (in the income statement) JOB ORDER COST FLOWS Presented by: Dr. Magdy Akladios 9
SUMMARY OF JOB ORDER COST FLOWS INFORMATION REPORTED ON THE FINANCIAL STATEMENTS Question Answer Financial Statement 1. How well did the company perform during the period? Revenues -Expenses Net income (loss) Income statement (Statement of operations or Statement of earnings) 2. Why did the company s retained earnings change during the period? Beginning R.E. +Net income (-loss) -Dividends Ending R.E. Statement of retained earnings (Statement of stockholders equity) 3. What is the company s financial position at the end of the period? Assets = Liabilities + Owners Equity Balance sheet (Statement of financial position) 4. How much cash did the company generate and spend during the period? Operating cash flows + Investing cash flow +Financing cash flow Increase (decrease) in cash during the period Statement of cash flows Presented by: Dr. Magdy Akladios 10
Income Statement INCOME STATEMENT The income statement (statement of earnings) reports the company s revenues, expenses, and net income or net loss for the period INCOME STATEMENT AIR & SEA TRAVEL, INC. Income Statement Month Ended April 30, 2001 Revenue: Service revenue $8,500 Expenses: Salary expense $1,200 Rent expense 1,100 U tilities 400 Total expenses 2,700 Net Income $5,800 Presented by: Dr. Magdy Akladios 11
INCOME STATEMENT Revenues are Increases in retained earnings from delivering goods or services to customers or clients Expenses are Decreases in retained earnings that result from operations INCOME STATEMENT Expenses include Cost of goods sold (cost of sales) The cost of the goods that a company sold to its customers Operating expenses The costs of operating the business INCOME STATEMENT Operating expenses Advertising The cost to promote the company s products Depreciation The expense of using company-owned buildings, equipment, and furniture Other operating expenses The costs of salaries, utilities, rent, and supplies Interest expense The cost of borrowed money Presented by: Dr. Magdy Akladios 12
STATEMENT OF RETAINED EARNINGS STATEMENT OF RETAINED EARNINGS The statement of retained earnings reports that portion of net income the company has retained, or kept for use in the business Net income increases retained earnings Dividends paid to stockholders decrease retained earnings STATEMENT OF RETAINED EARNINGS AIR & SEA TRAVEL, INC. Statement of Retained Earnings Month Ended April 30, 2001 Retained earnings, April 1, 2001 $ 0 Add: Net income for the month 5,800 $5,800 Less: Dividends (2,100) Retained Earnings, April 30, 2001 $3,700 Presented by: Dr. Magdy Akladios 13
BALANCE SHEET BALANCE SHEET The balance sheet (statement of financial position) reports the company s assets, liabilities, and owners equity BALANCE SHEET AIR & SEA TRAVEL, INC. Balance Sheet April 30, 2001 Assets Liabilities Cash $33,300 Accounts payable $ 100 Accounts receivable 2,000 Office supplies 500 Stockholders Equity Land 18,000 Common stock 50,000 Retained earnings 3,700 Total stockholders equity 53,700 Total liabilities and Total assets $53,800 stockholders equity $53,800 Presented by: Dr. Magdy Akladios 14
This image cannot currently be displayed. Accounting Principles ASSETS Current assets are Those assets which the company expects to convert to cash, sell, or consume during the next 12 months or within the business's normal operating cycle if longer than a year Current assets include Cash Accounts receivable Merchandise inventory Prepaid expenses ASSETS Long-term assets are Those assets which the company expects to hold longer then the next 12 months or the business s normal operating cycle if longer than one year Long-term assets include Property Equipment ASSETS Intangible assets are Those with no physical form Trademarks Patents Other assets are Those with small values which do not fall within any other standard asset category Presented by: Dr. Magdy Akladios 15
LIABILITIES Current liabilities are Debts payable within one year or within the business s normal operating cycle if longer than a year Current liabilities include Notes payable, short term Accounts payable Accrued expenses payable Income taxes payable LIABILITIES Long-term liabilities are Debts not payable within one year or within the business s normal operating cycle if longer than a year Long-term liabilities include Notes payable, long term Bonds payable OWNERS EQUITY Owners equity Represents the shareholders ownership of the assets of the business Owners equity of a corporation consists of Common stock Retained earnings Presented by: Dr. Magdy Akladios 16
STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS The statement of cash flows reports the company s cash inflows and outflows from operating, investing, and financing activities AIR & SEA TRAVEL, INC. Statement of Cash Flows Month Ended April 30, 2001 Cash flows from operating activities: Collections from customers $ 6,500 Payments to suppliers and employees (3,100) Net cash inflow from operating activities 3,400 Cash flows from investing activities: Acquisition of land $(40,000) Sale of land 22,000 Net cash outflow from investing activities (18,000) Cash flows from financing activities: Issuance (sale) of stock $ 50,000 Payment of dividends (2,100) Net cash inflow from financing activities 47,900 Net increase in cash $ 33,300 Cash balance, April 1, 2001 0 Cash balance, April 30, 2001 $ 33,300 Presented by: Dr. Magdy Akladios 17
STATEMENT OF CASH FLOWS Operating activities Companies operate by buying goods and services, which are sold to customers Investing Activities Companies invest in long-term assets that are used to run the business Financing Activities Companies finance themselves by issuing stock and borrowing money RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS AIR & SEA TRAVEL, INC. AIR & SEA TRAVEL, INC. Statement of Cash Flows Income Statement Month Ended April 30, 2001 Month Ended April 30, 2001 Cash flows from operating activities: Collections from customers $ 6,500 Revenue: Payments to suppliers and employees (3,100) Service revenue $8,500 Net cash inflow from operating activities 3,400 Cash flows from investing activities: Acquisition of land $(40,000) Expenses: Sale of land 22,000 Salary expense $1,200 Net cash outflow from investing activities (18,000) Rent expense 1,100 Cash flows from financing activities: Utilities 400 Issuance (sale) of stock $ 50,000 Total expenses 2,700 Payment of dividends (2,100) Net cash inflow from financing activities 47,900 Net Income $5,800 Net increase in cash $ 33,300 Cash balance, April 1, 2001 0 Cash balance, April 30, 2001 $ 33,300 AIR & SEA TRAVEL, INC. Balance Sheet AIR & SEA TRAVEL, INC. April 30, 2001 Statement of Retained Earnings Month Ended April 30, 2001 Assets Liabilities Cash $33,300 Accounts payable $ 100 Accounts receivable 2,000 Office supplies 500 Stockholders Equity Retained earnings, April 1, 2001 $ 0 Land 18,000 Common stock 50,000 Add: Net income for the month 5,800 Retained earnings 3,700 $5,800 Total stockholders equity 53,700 Less: Dividends (2,100) Total liabilities and Total assets $53,800 stockholders equity $53,800 Retained Earnings, April 30, 2001 $3,700 Presented by: Dr. Magdy Akladios 18