Week 1 Group Financial Accounting PDF

Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up ACCT1101 Introduction to Financial Accounting Week 1: Financial Statements and Business Decisions (Chp1)...

Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up ACCT1101 Introduction to Financial Accounting Week 1: Financial Statements and Business Decisions (Chp1) ACCT1101 Week 1 August 18, 2024 1 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Table of Contents 1 Course Outline 2 Understanding the Business 3 The Four Basic Financial Statements 4 Responsibilities For Accounting 5 Wrapping Up ACCT1101 Week 1 August 18, 2024 2 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Course Assessment Assessment tasks Lecture participation (5%) lecture is not recorded for this subject Tutorial participation (5%) 15 min grace period & option to skip one Assignments (5%) hand-written and submit as a single PDF Mid-term test (25%) closed-book; Chp1-4 & 6 Group project (10%) 5-6 members; form group by Oct 4; DDL Dec 4 Final exam (50%) closed-book; Chp7-9, 11-12 Additional information Late submission is not allowed Double hurdle requirement ACCT1101 Week 1 August 18, 2024 3 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Textbook Financial Accounting 11th Edition by Robert Libby, Patricia Libby, and Frank Hodge ACCT1101 Week 1 August 18, 2024 4 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Understanding the Business Our focus company, Le-Nature’s Inc, manufactures beverages such as bottled water. ACCT1101 Week 1 August 18, 2024 5 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Types of Business Entities 1 Sole Proprietorship: unincorporated business owned by a single individual. 2 Partnership: unincorporated business owned by two or more individuals. 3 Corporation: business incorporated under the laws of a particular state. Ownership is represented by shares of stock that can be bought and sold freely and operates separately from its owners. ACCT1101 Week 1 August 18, 2024 6 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Types of Business Entities Advantages of a Corporation Stockholders have limited liability. Continuity of life. Ease in transferring ownership (stock). Opportunity to raise large amounts of money by selling shares of stock to a large number of people. Disadvantage of a Corporation: May be subject to double taxation (income taxed when earned and again when distributed to stockholders as dividends). ACCT1101 Week 1 August 18, 2024 7 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Le-Nature’s Business Activities 1 Financing Activities: Raising funds from stockholders (e.g., PE/retail investors) and creditors (e.g., banks/bondholders). 2 Investing Activities: Buying items such as plant, property, and equipment used in production. 3 Operating Activities: Day-to-day process of purchasing raw tea and other ingredients from suppliers, manufacturing beverages, delivering them to customers, collecting cash from consumers, and paying suppliers. ACCT1101 Week 1 August 18, 2024 8 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Source of Financial Resources Both groups estimate Le-Nature’s future performance, in part, based on information in the company’s financial statements. Stockholders (own a portion of the company’s equity) Earn dividends Expect higher future stock prices Creditors (lend money to the company) Earn interests Receive principal ACCT1101 Week 1 August 18, 2024 9 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up The Accounting System and Decision-makers Accounting keeps track of economic activities and facilitates decision-making. External Decision Makers (the focus of this subject) Stockholders and creditors evaluate the company based on periodic financial statements and related disclosures. Internal Decision Makers (the focus of ACCT2105) Le-Nature’s managers need information about the company’s business activities to manage the operating, investing, and financing activities of the firm. ACCT1101 Week 1 August 18, 2024 10 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up The Four Basic Financial Statements An Overview 1 Balance Sheet – reports the economic resources it owns and the source of financing for these resources. 2 Income Statement – reports the ability to sell goods and the associated costs. 3 Statement of Stockholders’ Equity – reports the changes in stockholders’ equity. 4 Statement of Cash Flows – reports inflows and outflows of cash. 5 Notes are an integral part of these financial statements. ACCT1101 Week 1 August 18, 2024 11 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Financial Statement Time Period The four basic financial statements can be prepared at any point in time such as: End of the year (for the year ended, annual reports). Quarterly (for the quarter ended, quarterly reports). Monthly (for the month ended, monthly reports). The time period covered by the financial statements is called an accounting period. ACCT1101 Week 1 August 18, 2024 12 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Balance Sheet Balance Sheet is a financial snapshot at a specific point in time (i.e., end of the current accounting period). 1 Assets: Economic resources owned by the entity. 2 Liabilities and Equity: Sources of financing of the economic resources. ACCT1101 Week 1 August 18, 2024 13 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Balance Sheet ACCT1101 Week 1 August 18, 2024 14 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Balance Sheet Basic Accounting Equation The basic accounting equation refers to a company’s financial position: the economic resources that the company owns and the sources of financing for those resources. ACCT1101 Week 1 August 18, 2024 15 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Balance Sheet Interpreting the Balance Sheet Creditors and shareholders analyze assets to determine if the company has sufficient resources available to operate. Assets can be sold for cash if the company goes out of business. Creditors and shareholders are concerned about whether the company has sufficient sources of cash to pay its liabilities (debts). If a company does not pay its creditors, the creditors can force the sale of assets. Stockholders’ Equity is considered a protective “cushion” to creditors because the creditors’ claims legally come before those of the owners. If the company goes out of business and its assets are sold, the creditors are paid back before the shareholders receive any money. ACCT1101 Week 1 August 18, 2024 16 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Income Statement The Income Statement measures the business’s performance during the current accounting period. 1 Revenues: Cash and promises received from delivery of goods and services. 2 Expenses: Resources used to earn period’s revenues. ACCT1101 Week 1 August 18, 2024 17 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Income Statement ACCT1101 Week 1 August 18, 2024 18 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Income Statement The Income Statement Equation If total expenses exceed total revenues, a net loss is reported. ACCT1101 Week 1 August 18, 2024 19 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Income Statement Interpreting the Income Statement Investors and creditors closely monitor a firm’s net income because it indicates the firm’s ability to sell goods and services for more than they cost to produce and deliver. Investors buy stock when they believe that future earnings will improve and lead to dividends and the ability to sell their stock for more than they paid. Lenders rely on future earnings to provide the resources to repay loans. The income statement helps investors and creditors estimate the company’s future earnings. ACCT1101 Week 1 August 18, 2024 20 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Stockholders’ Equity The Statement of Stockholders’ Equity reports the change in each stockholders’ equity account during the current accounting period. 1 Common Stock: Amounts invested in the business by stockholders. 2 Retained Earnings: Past earnings not distributed to stockholders (and hence retained by the company). ACCT1101 Week 1 August 18, 2024 21 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Stockholders’ Equity ACCT1101 Week 1 August 18, 2024 22 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Stockholders’ Equity The Retained Earnings Equation For the change in Stock: Beginning Balance + Stock Issuance - Stock Repurchase = Ending Balance ACCT1101 Week 1 August 18, 2024 23 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Stockholders’ Equity Interpreting the Statement of Stockholders’ Equity Reinvestment of earnings, or retained earnings, is an important source of financing for companies. Creditors closely monitor a firm’s statement of stockholders’ equity because the company’s policy on dividend payments affects its ability to repay its debts. Every dollar the company pays to stockholders as a dividend is not available for use in paying back its debt. Investors examine retained earnings to determine whether the company is reinvesting a sufficient portion of earnings to support future growth. ACCT1101 Week 1 August 18, 2024 24 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Cash Flows The Statement of Cash Flows reports inflows and outflows of cash during the current accounting period. 1 Cash Flows from Operating Activities: Related to earning income e.g., cash collected from customers; cash paid to suppliers and employees. 2 Cash Flows from Investing Activities: Related to purchasing or selling the company’s plant, equipment, and investments. 3 Cash Flows from Financing Activities: Related to financing activities e.g., receipt or payment of money to investors and creditors (except suppliers). ACCT1101 Week 1 August 18, 2024 25 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Cash Flows ACCT1101 Week 1 August 18, 2024 26 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Cash Flows The Cash Flows Equation Note that each of the three cash flow sources can be positive (net cash inflow) or negative (net cash outflow). ACCT1101 Week 1 August 18, 2024 27 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Statement of Cash Flows Interpreting the Statement of Cash Flows The Operating Activities section is thought to be the most important because it indicates the company’s ability to generate cash from sales to meet its current cash needs. Analyze operating cash flow to check the company’s ability to: Pay back bank debt. Expand the company. Distribute cash dividends to shareholders. ACCT1101 Week 1 August 18, 2024 28 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Relationship Among Le-Nature’s Statements “Ending Cash Balance” in the Statement of Cash Flows = “Cash” in the Balance Sheet ACCT1101 Week 1 August 18, 2024 29 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Financial Statement Formats ACCT1101 Week 1 August 18, 2024 30 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Notes (or Footnotes) “The notes are an integral part of these financial statements.” Did you notice this sentence at the bottom of each financial statement? All financial statements should be accompanied by notes that provide the reader with supplemental information to help the reader better understand the financial statements. ACCT1101 Week 1 August 18, 2024 31 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Generally Accepted Accounting Principles For decision-makers to use the financial information prepared by Le-Nature effectively, they have to know: 1 The information conveyed by the statements and the measurement rules. 2 The numbers on the statements are correct. The rules that determine the content and measurement rules of the statements are called generally accepted accounting principles, or GAAP. ACCT1101 Week 1 August 18, 2024 32 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Standard Setters Since 2002, 144 jurisdictions have adopted International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB). Examples of jurisdictions requiring the use of IFRS: European Union and United Kingdom. Australia and New Zealand. Hong Kong S.A.R., Malaysia, and Republic of Korea. Canada and Mexico. Public companies in the U.S. must follow the US GAAP. Foreign companies whose stock is traded in the US can use IFRS. ACCT1101 Week 1 August 18, 2024 33 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Conceptual Framework The IFRS conceptual framework is a foundational document that provides the underlying principles and concepts used in the development of IFRS. It serves as a guide for the IASB in creating accounting standards that are coherent, consistent, and of high quality. ACCT1101 Week 1 August 18, 2024 34 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Conceptual Framework Objective of Financial Reporting Provide financial information that is useful to decision-makers. ACCT1101 Week 1 August 18, 2024 35 / 43  Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Conceptual Framework Qualitative Characteristics of Useful Financial Information Fundamental characteristics Relevance Materiality Faithful representation Enhancing characteristics Comparability Verifiability Timeliness Understandabiliy ACCT1101 Week 1 August 18, 2024 36 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Why is Accounting Standard Important to Managers and External Users? Companies incur the cost of preparing the financial statements and bear the major economic consequences of their publication, which include: Effects on the selling price of a company’s stock. Effects on the amount of bonuses received by managers and other employees. Loss of competitive information to other companies. Because of these and other concerns, changes in accounting standards are actively debated, political lobbying often takes place, and final rules are a compromise among the wishes of interested parties. ACCT1101 Week 1 August 18, 2024 37 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Ensuring the Accuracy of Financial Statements Returning to the case of Le-Nature... Shortly after the issuance of financial statements, Le-Nature worked with Wachovia Capital Markets from Wells Fargo Bank to borrow an additional $285 million from various lenders. Le-Nature’s financial statements presented a picture of a growth company with amazing future prospects. Reported revenues grew from $40 to $275 million (nearly 6 times) in six years. Reported net income rose by 24 times. ACCT1101 Week 1 August 18, 2024 38 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Ensuring the Accuracy of Financial Statements Several non-family-member stockholders suspected that the numbers were wrong and filed a lawsuit. Court records reveal a different story. Reported annual sales of $275 million were $32 million instead. Recorded cash balance of $10.6 million turned out to be $1.8 million. The balance sheet understated liabilities by $200 million. The CEO and his co-conspirators forged checks, invoices, and revenue and expense records to massively overstate revenues and profits. ACCT1101 Week 1 August 18, 2024 39 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Consequences of Unethical Behavior This was the largest fraud ever heard in the Federal District Court of Western Pennsylvania. The CEO of the company, Gregory Podlucky, gets 20 years in federal prison. The auditors who missed the fraud agreed to pay $50 million to the creditors. Wachovia Capital Markets, which marketed the loans, agreed to pay $80 million. ACCT1101 Week 1 August 18, 2024 40 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Responsibility and the Need for Controls Companies should take three important steps to assure investors that the company’s records are accurate: 1 Maintain a system of internal controls over the records and assets of the company. 2 Hire external independent auditor to audit the fairness of the financial statements. 3 Form a committee of the board of directors to oversee the integrity of these other safeguards. ACCT1101 Week 1 August 18, 2024 41 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up What is Accounting? The Perception? The Reality! ACCT1101 Week 1 August 18, 2024 42 / 43 Course Outline Understanding the Business The Four Basic Financial Statements Responsibilities For Accounting Wrapping Up Wrapping Up This week Business Activities Four Basic Financial Statements Accounting Standard and Fraud Next week Investing and Financing Decisions and the Accounting System (Chp2) ACCT1101 Week 1 August 18, 2024 43 / 43