Introduction to Financial Accounting PDF

INTRODUCTION TO FINANCIAL ACCOUNTING 1 WHY FINANCIAL INFORMATION IS IMPORTANT? Financial information is necessary for decision making. In order to make informed/good decisions, one should understand the past and present performance of corporations....

INTRODUCTION TO FINANCIAL ACCOUNTING 1 WHY FINANCIAL INFORMATION IS IMPORTANT? Financial information is necessary for decision making. In order to make informed/good decisions, one should understand the past and present performance of corporations. 2 WHAT IS ACCOUNTING? It is the language of business. It is the process of identifying, measuring and communicating economic information about organizations. 3 WHY ACCOUNTING? The main objective of accounting is to provide useful information to various users (service activity). Economic information is necessary for decision making. The need for a formalized type of bookkeeping and reporting results from complex business transactions. 4  ICEBREAKER When someone has a medical condition, who are the users of medical information? The patient, the doctor, the nurses, the laboratory technicians, the pharmacists, the x-ray technicians, the health insurance specialists, the physical therapists Similarly, who are the users of financial information?  ICEBREAKER POSSIBLE ANSWERS Similarly, who are the users of financial information? Management and staff employees from companies, Investors, the Securities and Exchange Commission (SEC) for public companies, the Internal Revenue Service (IRS), Vendors, Customers, Lenders (Banks) and Creditors, Credit Rating Organizations, Financial Analysts, Labor Unions (who negotiate for employees) FUNDAMENTAL ACCOUNTING EQUATION FINANCIAL STATEMENTS (LES ETATS DE SYNTHÈSE ) Are a codified way of reporting and presenting economic information about a company. Focus on presenting information especially useful (e.g., profitability) or information for specific groups (e.g., investors). Describe the organization’s financial health and performance in a condensed and highly informative way. Excellent starting point for comparisons. FINANCIAL STATEMENTS The four basic financial statements... Statement of Cash Flows Statement of Retained Earnings Balance Sheet Income Statement 9 BALANCE SHEET (BILAN) The balance sheet presents the financial status of a company at a point in time. Its first section shows a company’s assets (Actif). The other two sections show how these assets have been financed (Passif). 10 THE BALANCE SHEET HEADING Sweetie CORP. Balance Sheet at December 31, 2020 (in thousands of dollars) 1. Name of entity (the separate-entity assumption) 2. Title of statement 3. Specific date (financial snapshot at a specific point in time) 4. Unit measure (thousands of dollars) 11  Sweetie Corp. Balance Sheet Dec 31, 2020 Assets Cash $ 1,200 Accounts receivable 600 Inventory 500 Land 4,000 Building 1,000 Equipment 2,500 Total assets $9,800 12  Sweetie Corp. Balance Sheet Dec 31, 2020 Liabilities and Stockholders’ Equity Liabilities: Accounts payable $ 800 Salaries and wages payable 700 Notes payable 3,000 Total liabilities $4,500 Stockholders’ equity: Capital stock $ 3,000 Retained earnings 2,300 Total stockholders’ equity $5,300 Total Liabilities and Stockholders’ Equity $ 9,800 ASSETS (EXAMPLES) Cash Accounts Receivable Inventory Property and Equipment 14 HOW ARE ASSETS FINANCED? Only three possible ways:  By the owners/investors through an investment.  By creditors of the company (suppliers, bankers)  By self-generated wealth = income. Why differentiate between owners and creditors?  LIABILITIES AND EQUITY Creditors have the legal right to claim the amounts due, whereas investors do not. What a company owes to creditors = Liabilities (or debt). What a company owes to its owners = Equity, (not a debt). STOCKHOLDER’S EQUITY Arises from two ways: Capital Stock: ownership in a corporation in the form of a certificate. Retained (reinvested) Earnings: earnings that have not been paid out in dividends. It is the amount of income earned less dividends distributed. 17 INCOME STATEMENT (Compte des Produits et Charges) The income statement measures the profitability of a company over a period of time. It reports the income (i.e., increase in wealth) over a period of time. Income = Revenues - Expenses  REVENUES AND EXPENSES Expenses: Outflow or Revenues: Inflow of assets the using up of assets received in exchange for as a result of the major goods or services provided or central operation of to customers as part of the business. major or central operations of the business.  Sweetie Corp. Income Statement For the Year Ended Dec 31, 2020 Revenues – Expenses = Net Income Revenues Revenues $10,000 Expenses: Salaries and wages $2,200 Water, gas, and electricity 1,000 Insurance Expenses 900 Interest 500 Income taxes 1,400 Total expenses 6,000 Net Income Net income $4,000 STATEMENT OF RETAINED EARNINGS (ÉTAT DES BÉNÉFICES NON RÉPARTIS)  This statement explains the change in retained earnings during the period.  Retained Earnings represents the accumulated earnings (net income) of a corporation less the amount paid in dividends to stockholders.  Dividends are distributions of the net income of a business to its owners.  Sweetie Corp. Statement of Retained Earnings For the Year Ended Dec 31, 2020 Retained earnings, beginning of the year $ 0 Add: Net income for the year 4,000 Deduct: Dividends for the year (1,700) Retained earnings, end of the year $ 2,300 22  RELATIONSHIPS AMONG FINANCIAL STATEMENTS Income Statement for 2020 Revenues $ 10,000 Less: Expenses (6,000) Net income $ 4,000 Statement of Retained Earnings for 2020 Beginning balance, retained earnings $ 0 Add: Net income 4,000 Deduct: Cash dividends (1,700) Ending balance, retained earnings $2,300 Balance Sheets 2020 2019 Total assets $9,800 $ 0 Liabilities 4,500 0 Capital stock 3,000 0 Retained earnings 2,300 0 Total liabilities and stockholders’ equity $9,800 $ 0 INTRO TO FINANCIAL ACCOUNTING 24