Chapter 8 Accounting

• The topic is Chapter 8 Accounting
• The topic learning outcomes are to understand the use of accounting information, identify elements of an income statement, understand items in the balance sheet, and the key items in the Cash Flow Statement

Contents and Structure

• The main goal of financial reporting is to give useful info to investors, creditors, and other interested parties through financial statements
• Accounting info is supposed to help shareholders and stakeholders predict future cash flow amounts, timing, and uncertainty
• Financial statements will show details about economic resources and claims to those resources

Recap of Last Lesson

• Marketing Mix: Product, Price, Promotion, Place
• Product includes different classes of products, the product life cycle, product mix and product line
• Consumer decision making process
• Price includes different pricing strategies
• Promotion includes the promotion mix and the pull and push strategy
• Place includes Distribution strategies

Teaching Contents

• Outline and explain the roles of accounting and financing in a business
• Understanding the basic concepts of financial statements, accounting cycle

The Nature of Accounting

• Accounting involves recording, measuring, and interpreting financial information
• This information is used to make business decisions

Internal Uses of Accounting

• Management

External Uses of Accounting

• Stockholders
• Potential Investors
• Government Agencies
• Lenders (Banks)
• Suppliers

Uses for Accounting Information

• Internal uses include managerial accounting, cash flow, and budgeting
• External uses include reporting financial performance to outsiders, filing income taxes, obtaining credit, and reporting to stockholders

Internal Accounting Information

• Management uses accounting information to plan and set goals, organize, lead and motivate, and control

External Accounting Information

• Stockholders and Potential Investors use accounting information to evaluate the soundness of investments
• Government Agencies use accounting information to confirm tax liabilities and payroll deductions, and to approve new issues of stocks and bonds
• Lenders use accounting information to decide about capital for new ventures
• Suppliers use accounting information to provide raw materials

Areas of Accounting

• Managerial Accounting: Accounting used to provide information and analysis to company managers to assist them in decision-making, like cost accounting and controlling
• Financial Accounting: Deals with external users of a company's financial information, like owners, prospective owners, creditors, unions, customers, suppliers, and government agencies

Understanding Key Financial Statements

• A financial statement is a summary of all transactions that happened over a specific period
• Key financial statements include the Income Statement (Profit and Loss Statement), Balance Sheet, and Cash Flow Statement

Financial Statements - Balance Sheet

• Shows a firm's assets, liabilities, and owners' equity at a specific point in time
• Illustrates the financial position of a business at a fixed date

Balance Sheet Equation

• Assets - Liabilities = Owners' Equity (Capital)

Assets

• Assets are any economic resource expected to benefit a firm or individual who owns it
• Assets are things of value that a firm owns

Types of Assets

• Fixed Assets: Assets with a long-term use or value, like land, buildings, and equipment, not intended for resale
• Current Assets: Items that convert into cash within one year, like inventory, cash, and debtors
• Intangible Assets: Items of value like patents and copyrights with no real physical form

Liabilities

• A liability is debt owed by a firm to an outside organization or individual
• Current Liability: Debt that must be paid within a year, e.g., Accounts payable
• Long-term Liability: Debt due after a year

Owner's Equity

• Owner's equity is the net worth of an individual or business
• It is calculated as assets minus liabilities.

Financial Statements - Income Statement

• Shows an organization's profitability over a period of time, like a month, quarter, or year

Key Items in the Income Statement

• Revenue: Funds that flow into a business from the sales of goods or services
• Cost of goods sold: The total cost of obtaining materials for making the products sold by a firm during a year
• Gross Profit: How much the firm earned by buying or selling merchandise
• Operating Expenses: Costs incurred in operating a business, such as rent, utilities, and salaries
• Net income: Profit or loss over a specific period after subtracting all costs and expenses, including taxes

Income Statement (cont)

• Revenue
• Cost of goods sold
• Gross Profit
• Operating Expenses
• Net income before taxes
• Taxes
• Net income or loss

Tan's Flowers - Income Statement December 31, 2004

• Revenues:
  • Gross Sales: Rm 250,000
  • Less: Sales discount 10,000
  • Net Sales: Rm 240,000
• Cost of Goods Sold: (Rm 100,000)
• Gross Profit: Rm 140,000
• Operating expenses:
  • Selling Expenses 30,000
  • General & Admin. 40,000
  • *Depreciation 8,000
  • Other expenses 12,000
  • Total Operating Expenses (Rm 90,000)
• Net income before taxes Rm 50,000
• (Rm
• e) Net Income Rm 39,000

Statement of Cash Flow

• Describes a firm's yearly cash receipts and cash payment related to a firm's major activities and records the inflow and outflow of cash over a period of time
• The purpose of the cash flow statement is to provide information on a firm's liquidity.
• It does not include the amount of future incoming and outgoing cash
• Operations: cash transactions linked to a the business

Cash Flow Statement (cont)

• Investments: cash used in or provided by the firm's investment activities to buy new equipment, buildings or short-term assets such as marketable securities
• Financing: cash raised from issuance of new debt or equity capital

Budgeting

• A budget is a financial plan that sets forth for the future and describes how it will use its resources to meet its goals

Review Questions

• Discuss uses of accounting information for internal and external users
• Explain the differences between Managerial Accounting and Financial Accounting
• Advise on key financial statements needed for any organization
• Note the difference between Fixed, Current Assets, Assets and Liabilities, Income Statement
• List and explain what is cashflow statement
• Discuss the use of budget in an organisation

Summary of Main Points

• Uses of Accounting Information
• User of Accounting Information
• Managerial vs Financial Accounting
• Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• The use of Budget