Financial Accounting: Objectives and Statements

• Financial accounting records, summarizes, and reports a company's financial transactions.
• Financial accounting results in financial statements for external users.

Objectives of Financial Accounting

• Financial accounting systematically records business transactions.
• Financial accounting ascertains the business's financial performance (profitability).
• Financial accounting determines the financial position (assets, liabilities, and equity) of the business.
• Financial accounting provides financial information to stakeholders (investors, creditors, management).
• Financial accounting complies with legal requirements.

Key Financial Statements

• The Income Statement (Profit and Loss Statement) reports financial performance over time, showing revenues, expenses, and net income (or net loss).
• The Balance Sheet reports assets, liabilities, and equity at a specific time, following the accounting equation: Assets = Liabilities + Equity.
• The Statement of Cash Flows reports cash movement, categorized into operating, investing, and financing activities.

Accounting Standards

• Accounting standards are authoritative guidelines for financial reporting, ensuring uniformity and comparability.
• Examples include standards from the IASB (International Accounting Standards Board) and local GAAP (Generally Accepted Accounting Principles).

Key Accounting Concepts

• Accrual Accounting recognizes revenue when earned and expenses when incurred, regardless of cash flow.
• The Going Concern concept assumes the business will continue operating.
• The Matching Principle requires recognizing expenses in the same period as related revenues.
• Conservatism recognizes probable losses and only realized gains.
• Materiality means only significant information must be disclosed.

Cost Accounting

• Cost accounting determines and controls costs for producing goods or services.
• Cost accounting aids in cost management and decision-making.

Elements of Cost

• Direct Materials are raw materials integral to the finished product, easily traced to it.
• Direct Labor covers wages for workers converting raw materials to finished goods.
• Overhead (Indirect Costs) includes costs beyond direct materials and labor, such as factory rent, utilities, and equipment depreciation.

Costing Methods

• Job Order Costing is for unique products, accumulating costs per job or batch.
• Process Costing is for large quantities of similar products, averaging costs over total units.

Marginal Costing

• Marginal Costing considers only variable costs to find the cost of a product.
• Fixed costs are period costs and excluded from inventory cost.
• Contribution Margin is the difference between sales revenue and variable costs.
• Contribution margin helps cover fixed costs and generate profit.

Standard Costing

• Standard Costing predetermines costs based on expected quantities and prices.
• Variance Analysis compares actual to standard costs to analyze variances.
• Favorable variances mean actual costs are below standard; unfavorable means they're higher.

Budgeting

• Budgeting creates a future financial plan.
• Budgets include those for sales, production, and cash flow.

Types of Budgets

• A Sales Budget forecasts expected sales revenue.
• A Production Budget determines the quantity of goods for sales demand and inventory levels.
• A Cash Budget projects cash inflows and outflows.
• A Master Budget is a comprehensive set of budgets.

Ratio Analysis

• Ratio Analysis calculates and interprets financial ratios to assess a company's health and performance.

Types of Ratios

• Liquidity Ratios measure the ability to meet short-term obligations, like the current and quick ratios.
• Profitability Ratios measure the ability to generate profits, like gross profit margin, net profit margin, and return on equity.
• Solvency Ratios measure the ability to meet long-term obligations, like the debt-to-equity ratio and times interest earned ratio.
• Activity Ratios measure asset efficiency, like inventory turnover and accounts receivable turnover.

Depreciation

• Depreciation systematically allocates the cost of a tangible asset over its life.

Methods of Depreciation

• The Straight-Line Method allocates equal depreciation each year.
• The Written Down Value (WDV) Method applies a constant rate to the asset's book value annually.
• The Units of Production Method allocates depreciation based on asset usage or output.

Inventory Valuation

• Inventory is goods held for sale.

Inventory Costing Methods

• First-In, First-Out (FIFO) assumes the first units purchased are sold first.
• Last-In, First-Out (LIFO) assumes the last units purchased are sold first (not permitted under IFRS).
• The Weighted-Average Method calculates a weighted-average cost based on the total cost of goods divided by the total units available.

Partnership Accounting

• A partnership is two or more people co-owning a business and sharing profits/losses.

Key Aspects of Partnership Accounting

• A Partnership Agreement outlines terms like capital contributions, profit/loss sharing, and responsibilities.
• A Profit and Loss Appropriation Account distributes net profit/loss among partners.
• Admitting a New Partner requires capital account adjustments and goodwill/bonus determination.
• Partner Retirement requires settling the retiring partner's capital account and determining goodwill/bonus.
• Partnership Dissolution involves winding up, selling assets, and distributing proceeds to creditors and partners.

Company Accounts

• A company is a separate legal entity from its owners (shareholders).

Key Aspects of Company Accounting

• Share Capital is raised by issuing shares, including equity and preference shares.
• Reserves and Surplus are retained profits, including general reserve, retained earnings, and other reserves.
• Dividends are profit distributions, as cash or stock dividends.
• Shares can be issued at par, premium, or discount (though issuing at a discount is restricted).
• Share Forfeiture occurs when shareholders don't pay the full amount due.
• Preference Share Redemption repays preference shareholders their capital.
• Share Buyback repurchases outstanding shares.

Auditing

• Auditing is an independent examination of financial statements for fairness according to accounting standards.
• Types of audits include Statutory Audit and Internal Audit.