Financial Accounting PDF

Financial Accounting IFRS 5th Edition Weygandt Kimmel Chapter 1 Accounting in Action This slide deck contains animations. Please disable animations if they cause i...

Financial Accounting IFRS 5th Edition Weygandt Kimmel Chapter 1 Accounting in Action This slide deck contains animations. Please disable animations if they cause issues with your device. Copyright © John Wiley & Sons, Inc.  Accounting Activities There are three basic activities in accounting: 1. Identification, 2. Recording, and 3. Communicating economic events. Copyright © John Wiley & Sons, Inc. LO 1  Financial Information User Groups Internal: Managers who plan, organize, and run the business. o Rely on managerial accounting for decision-making. o Examples: Marketing, production, finance managers. External: Users outside of the organization. o Rely on financial accounting for decision-making. o Examples: Investors and creditors. Copyright © John Wiley & Sons, Inc. LO 1  Additional External Users Taxing authorities: Does the company comply with the tax laws? Regulatory agencies: Is the company operating within prescribed rules? Labor unions: Does the company have the ability to pay increased wages and benefits to union members? Copyright © John Wiley & Sons, Inc. LO 1 Data Analytics Data analytics involves analyzing data, often employing both software and statistics, to draw inferences. As both data access and analytical software improve, the use of data analytics to support decisions is becoming increasingly common at virtually all types of companies Copyright © John Wiley & Sons, Inc. LO 1 Types of Data Analytics Illustration 1.4: Four types of data analytics. Copyright © John Wiley & Sons, Inc. LO 1 Ethics in Financial Reporting Illustration 1.5: Steps in analyzing ethics cases and situations. Copyright © John Wiley & Sons, Inc. LO 2  Accounting Standards Ensure high-quality financial reporting. Primary accounting standard-setting bodies: International Accounting Standards Board (IASB) o Determines International Financial Reporting Standards (IFRS) o Used in more than 150 countries. Financial Accounting Standards Board (FASB) o Determines generally accepted accounting principles (GAAP). o Used by most companies in the U.S. Copyright © John Wiley & Sons, Inc. LO 2 Measurement Principles. IFRS generally uses one of two measurement principles, the historical cost principle or the fair value principle. Historical cost principle (or cost principle): dictates that companies record assets at their cost. This is true not only at the time the asset is purchased, but also over the time the asset is held. Purchasing price. Fair value principle: states that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability), value in use (present value of future cash flows), or current cost (replacement cost). Copyright © John Wiley & Sons, Inc. LO 2  Selecting Measurement Principles Selection of which principle to follow generally relates to trade-offs between relevance and faithful representation. Relevance means that financial information is capable of making a difference in a decision. Faithful representation means that the numbers and descriptions match what really existed or happened— they are factual. Copyright © John Wiley & Sons, Inc. LO 2  Assumptions Assumptions provide a foundation for the accounting process. Two main assumptions are the monetary unit assumption and the economic entity assumption. o Monetary unit assumption: requires that companies include in the accounting records only transaction data that can be expressed in money terms. o ABC Company hired 3 employees. o ABC Company Purchased a car and paid 10000$ cash. Copyright © John Wiley & Sons, Inc. LO 2  DO IT! 2: Building Blocks of Accounting Indicate whether each of the five statements presented below is true or false. If false, indicate how to correct the statement. 1. Ethics are the standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair. 2. The primary accounting standard-setting body headquartered in London is the International Accounting Standards Board (IASB). 3. An asset recorded using the historical cost basis results in recording assets at their cost. In later periods, however, the current value of the asset must be used if current value is higher than its cost. 4. Relevance means that financial information matches what really happened; the information is factual. 5. A business owner’s personal expenses must be separated from expenses of the business to comply with accounting’s economic entity assumption. Copyright © John Wiley & Sons, Inc. LO 2  DO IT! 2: Building Blocks of Accounting – Solution 1. True. 2. True. 3. False. Assets recorded using the historical cost basis are not adjusted in later periods to current value. They remain at their original cost. 4. False. Faithful representation means that financial information matches what really happened; the information is factual. 5. True. Copyright © John Wiley & Sons, Inc. LO 2 The Accounting Equation The Basic Accounting Equation Assets = Liabilities + Equity (4) Illustration 1.6: The basic accounting equation. Assets: resources a business owns. Cash. Inventory, equ, land …. Liabilities: claims against assets, i.e. existing debts and obligations. Equity: the ownership claim on a company’s total assets. Copyright © John Wiley & Sons, Inc. LO 3  Equity Share capital—ordinary: describes the amounts paid in by shareholders for the ordinary shares they purchase. This amount will be paid to invest. Revenues: are the gross increases in equity resulting from business activities entered into for the purpose of earning income. Revenues usually result in an increase in an asset. Expenses: are the cost of assets consumed or services used in the process of earning revenue. Utility exp. Salary exp rent … Dividends: are distribution of cash or other assets to Copyright © John Wiley & Sons, Inc. LO 3 Analyzing Business Transactions Accounting Information System: The system of collecting and processing transaction data and communicating financial information to decision-makers. The steps companies follow each period to record transactions and eventually prepare financial statements: Copyright © John Wiley & Sons, Inc. LO 4 Transaction (1). Investment by Shareholders. Assume: Ray and Barbara Neal decide to start a smartphone app development company that they incorporate as Softbyte SA. On September 1, 2025, they invest €15,000 cash in the business in exchange for €15,000 of ordinary shares. The ordinary shares indicates the ownership interest that the Neals have in Softbyte SA. Demonstrate: Basic and equation analysis of this transaction. Observe that the equality of the basic equation has been maintained. Note also that the source of the increase in equity (in this case, issued shares) is indicated. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (2). Purchase of Equipment for Cash. Assume: Softbyte SA purchases computer equipment (resources)assets. for €7,000 cash (Assets). Demonstrate: Basic and equation analysis of this transaction. This transaction results in an equal increase and decrease in total assets, though the composition of assets changes. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (3). Purchase of Supplies on Credit. Assume: Softbyte SA purchases headsets (and other computer accessories expected to last several months) for €1,600 from Mobile Solutions. Mobile Solutions agrees to allow Softbyte to pay this bill in October. This transaction is a purchase on account (a credit purchase). Demonstrate: Basic and equation analysis of this transaction. Assets increase because of the expected future benefits of using the headsets and computer accessories, and liabilities increase by the amount due Mobile Solutions. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (4). Services Performed for Cash. Assume: Softbyte SA receives €1,200 cash from customers for app development services it has performed. This transaction represents Softbyte’s principal revenue-producing activity. Recall that revenue increases equity. Demonstrate: Basic and equation analysis of this transaction. Recall that revenue increases equity. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (5). Purchase of Advertising on Credit. Assume: Softbyte SA receives a bill for €250 from Programming News for advertising on its website but postpones payment until a later date. Demonstrate: Basic and equation analysis of this transaction. The two sides of the equation still balance at €17,800. Retained Earnings decreases when Softbyte incurs the expense. Expenses do not have to be paid in cash at the time they are incurred. When Softbyte pays at a later date, the liability Accounts Payable will decrease and the asset Cash will decrease. The cost of advertising is an expense because Softbyte has used the benefits. Advertising Expense is included in determining net income. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (6). Services Performed for Cash & Credit. Assume: Softbyte SA performs €3,500 of app development services for customers. The company receives cash of €1,500 from customers, and it bills the balance of €2,000 on account. Demonstrate: Basic and equation analysis of this transaction. This transaction results in an equal increase in assets and equity. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (7). Payment of Expenses. Assume: Softbyte SA pays the following expenses in cash for September: office rent €600, salaries and wages of employees €900, and utilities €200. Demonstrate: Basic and equation analysis of this transaction. This transaction results in an equal decrease in assets and equity. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (8). Payment of Accounts Payable. Assume: Softbyte SA pays its €250 Programming News bill in cash. The company previously [in Transaction (5)] recorded the bill as an increase in Accounts Payable and a decrease in equity. Demonstrate: Basic and equation analysis of this transaction. Observe that the payment of a liability related to an expense that has previously been recorded does not affect equity. Softbyte recorded the expense [in Transaction (5)] and should not record it again. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (9). Receipt of Cash on Account. Assume: Softbyte SA receives €600 in cash from customers who had been billed for services [in Transaction (6)]. Demonstrate: Basic and equation analysis of this transaction. Transaction (9) does not change total assets, but it changes the composition of those assets. Note that the collection of an account receivable for services previously billed and recorded does not affect equity. Softbyte already recorded this revenue [in Transaction (6)] and should not record it again. Copyright © John Wiley & Sons, Inc. LO 4 Transaction (10). Dividends. Assume: The company pays a dividend of €1,300 in cash to Ray and Barbara Neal, the shareholders of Softbyte SA. This transaction results in an equal decrease in assets and equity. Demonstrate: Basic and equation analysis of this transaction. Total assets did not change, but the composition of those assets did. Note that the dividend reduces retained earnings, which is part of equity. Dividends are not expenses. Like shareholders’ investments, dividends are excluded in determining net income. Copyright © John Wiley & Sons, Inc. LO 4 Tabular Summary Illustration 1.10: Tabular summary of Softbyte SA transactions Copyright © John Wiley & Sons, Inc. LO 4  DO IT! 4: Tabular Analysis Transactions made by Virmari & Co., a public accounting firm in France, for the month of August are shown below. Prepare a tabular analysis which shows the effects of these transactions on the expanded accounting equation, similar to that shown in Illustration 1.10. 1. The company issued ordinary shares for €25,000 cash. 2. The company purchased €7,000 of office equipment on credit. 3. The company received €8,000 cash in exchange for services performed. 4. The company paid €850 for this month’s rent. 5. The company paid a dividend of €1,000 in cash to shareholders. Copyright © John Wiley & Sons, Inc. LO 4 DO IT! 4: Tabular Analysis – Solution Copyright © John Wiley & Sons, Inc. LO 4  Assets ===== laib + O/ E ABC Company has 3000$ as Assets. and the total laib is 1700$ ===what is the OE amount for ABC Company? A====L+ OE 3000= 1700+ OE OE= 1300 A= L+ OE 3000=1700+1300 3000=3000 Copyright © John Wiley & Sons, Inc.  Financial Statements 1. Income statement: presents the revenues and expenses and resulting net income or net loss for a specific period of time. 2. Retained earnings statement: summarizes the changes in retained earnings for a specific period of time. 3. Statement of financial position: reports the assets, liabilities, and equity of a company at a specific date. (Sometimes referred to as a balance sheet.) 4. Statement of cash flows: summarizes information about the cash inflows (receipts) and outflows (payments) for a specific period of time. 5. Comprehensive income statement: presents other comprehensive income items that are not included in the determination of net income in 1. Copyright © John Wiley & Sons, Inc. LO 5  Financial Statement Connections Income Statement Net income is computed first Retained Earnings Statement and is needed to determine the ending balance in retained earnings. Statement of Financial Position The ending balance in retained earnings is needed in preparing the statement of financial position. The cash shown on the Statement of Cash Flows statement of financial position is needed in preparing the Illustration 1.11: Financial statement of cash flows. statements and their interrelationships Copyright © John Wiley & Sons, Inc. LO 5  Income Statement The income statement lists revenues first, followed by expenses. Then, the statement shows net income (or net loss). Structure: The income statement lists revenues first, followed by expenses. Then, the statement shows net income (or net loss). When revenues exceed expenses, net income results. When expenses exceed revenues, a net loss results. The income statement Copyright © does John Wileynot include & Sons, Inc. investment LO 5  Retained Earnings Statement The information provided by this statement indicates the reasons why retained earnings increased or decreased during the period. If there is a net loss, it is deducted with dividends in the retained earnings statement. Structure: The first line of the statement shows the beginning retained earnings amount. Then add net income (or subtract net loss) and subtract dividends. The retained earnings ending balance is the final amount on the statement. Copyright © John Wiley & Sons, Inc. LO 5 Statement of Financial Position The statement of financial position is like a snapshot of the company’s financial condition at a specific moment in time (usually the month-end or year-end). Structure: Lists assets at the top, followed by equity and then liabilities. Total assets must equal total equity and liabilities. When two or more liabilities are involved, a customary way of listing is as shown in Illustration 1.12: Liabilities Notes payable €10,000 Accounts payable 63,000 Salaries and wages payable 18,000 Total liabilities €91,000 Illustration 1.12: Presentation of liabilities. Copyright © John Wiley & Sons, Inc. LO 5  Statement of Cash Flows The statement of cash flows provides information on the cash receipts and payments for a specific period of time. Structure: The statement of cash flows reports 1) the cash effects of a company’s operations during a period, 2) its investing activities, 3) its financing activities, 4) the net increase or decrease in cash during the period, and 5) the cash amount at the end of the period. Copyright © John Wiley & Sons, Inc. LO 5 Comprehensive Income Statement Other comprehensive income items are not part of net income but are considered important enough to be reported separately. This statement immediately follows the income statement. Illustration 1.13: Comprehensive income statement IFRS Alternative: IFRS allows an alternative statement format in which the information contained in the income statement and the comprehensive income statement are combined in a single statement, referred to as a statement of comprehensive income. Copyright © John Wiley & Sons, Inc. LO 5  Financial Accounting IFRS 5th Edition Weygandt Kimmel Chapter 2 The Recording Process This slide deck contains animations. Please disable animations if they cause issues with your device. Copyright © John Wiley & Sons, Inc.  Assets= cash, AR, inv, land -------each type of these assets is called an account. So in accounting we need to have a separate account for each element in asset, laib and OE. Copyright © John Wiley & Sons, Inc.  ABC Company purchased land and paid 20000 cash. Land ===assets====20000===DR. Increased. Cash====assets===20000=== decreased CR. Copyright © John Wiley & Sons, Inc.  Normal Balances - Assets and Liabilities Illustration 2.4: Normal balances─ assets and liabilities Asset accounts normally show debit balances. That is, debits to a specific asset account should exceed credits to that account. Liability accounts normally show credit balances. That is, credits to a liability account should exceed debits to that account. Copyright © John Wiley & Sons, Inc. LO 1  Normal Balance - Equity Share Capital—Ordinary. Illustration 2.6: Normal balance─ share capital─ ordinary Knowing the normal balance in an account may help you trace errors. Occasionally, though, an abnormal balance may be correct. The cash account, for example, will have a credit balance when a company has overdrawn its bank balance. Copyright © John Wiley & Sons, Inc. LO 1 Normal Balance - Dividends Dividends. Illustration 2.8: Debit and credit effect and normal balance─ dividends Dividends: A company’s distribution to its shareholders. The most common form of a distribution is a cash dividend. Dividends reduce the shareholders’ claims on retained earnings. Debits increase the Dividends account, and credits decrease it. Copyright © John Wiley & Sons, Inc. LO 1 Equity Relationships Illustration 2.11: Equity relationships Copyright © John Wiley & Sons, Inc. LO 1  Summary of Debit/Credit Rules Illustration 2.12: Summary of debit/credit rules Copyright © John Wiley & Sons, Inc. LO 1 The Recording Process Illustrated Illustration 2.13: The recording process Copyright © John Wiley & Sons, Inc. LO 2  The Journal Companies initially record transactions in chronological order. Thus, the journal is referred to as the book of original entry. The journal makes several significant contributions to the recording process: 1. It discloses in one place the complete effects of a transaction. 2. It provides a chronological record of transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared. Copyright © John Wiley & Sons, Inc. LO 2 Journalizing Assume: On September 1, Softbyte SA shareholders invested €15,000 cash in the corporation in exchange for ordinary shares, Demonstrate: How do you enter the transaction data in the journal? What is the Debit side for this transaction? What is the credit side for this transaction? Copyright © John Wiley & Sons, Inc. LO 2  Journalizing Illustration Illustration 2.14: Techniques of journalizing 1. Date of the transaction. 2. Debit account title. 3. Credit account title. 4. Brief explanation of the transaction. 5. Reference column, which is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the individual accounts. Copyright © John Wiley & Sons, Inc. LO 2  Simple and Compound Entries Simple entry: Involves one debit and one credit account. Compound entry: An entry that requires three or more accounts. The standard format requires that all debits be listed before the credits. Illustration 2.15: Compound journal entry Copyright © John Wiley & Sons, Inc. LO 2  DO IT! 2: Recording Business Activities As president and sole shareholder, Julie Loeng engaged in the following activities in establishing her beauty salon, Hair It Is. 1. Opened a bank account in the name of Hair It Is and deposited €20,000 of her own money in this account in exchange for ordinary shares. 2. Purchased equipment on account (to be paid in 30 days) for a total cost of €4,800. 3. Interviewed three applicants for the position of beautician. In what form (type of record) should Hair It Is record these three activities? Prepare the entries to record the transactions. Copyright © John Wiley & Sons, Inc. LO 2 DO IT! 2: Recording Business Activities– Solution Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows. Copyright © John Wiley & Sons, Inc. LO 2 The Ledger and Posting Ledger: The entire group of accounts maintained by a company. Provides the balance in each of the accounts as well as keeps track of changes in these balances. Companies may use various kinds of ledgers, but every company has a general ledger. Copyright © John Wiley & Sons, Inc. LO 3 The Ledger The General Ledger Illustration 2.16: The general ledger, which contains all of a company’s accounts Copyright © John Wiley & Sons, Inc. LO 3 Standard Form of Account Illustration 2.17: Three-column form of account This format is called the three-column form of account. It has three money columns—debit, credit, and balance. Copyright © John Wiley & Sons, Inc. LO 3 Posting Illustration 2.18: Posting a journal entry Copyright © John Wiley & Sons, Inc. LO 3  Chart of Accounts Illustration 2.19: Chart of accounts Copyright © John Wiley & Sons, Inc. LO 3 Chart of Accounts – Numbering Lists the accounts and the account numbers that identify their location in the ledger. Numbering system: Usually starts with the statement of financial position accounts and follows with the income statement accounts. Number of accounts: Depends on the amount of detail management desires. Companies leave gaps to permit the insertion of new accounts as needed during the life of the business. Copyright © John Wiley & Sons, Inc. LO 3 The Recording Process Illustrated October transactions of Yazici Advertising A.Ş. Accounting period: One month HELPFUL HINT Follow these steps: 1 - Determine what type of account is involved. 2 - Determine what items increased or decreased and by how much. 3 - Translate the increases and decreases into debits and credits. Copyright © John Wiley & Sons, Inc. LO 3  Investment of Cash Illustration 2.20: Investment of cash by shareholders Copyright © John Wiley & Sons, Inc. LO 3 Purchase of Office Equipment Illustration 2.21: Purchase of office equipment Copyright © John Wiley & Sons, Inc. LO 3 Receipt of Cash for Future Service Unearned Service Revenue is considered a liability even though the word payable is not used. Illustration 2.22: Receipt of cash for future service Copyright © John Wiley & Sons, Inc. LO 3  Payment of Monthly Rent Illustration 2.23: Payment of monthly rent Copyright © John Wiley & Sons, Inc. LO 3 Payment for Insurance Illustration 2.24: Payment for insurance Copyright © John Wiley & Sons, Inc. LO 3 Purchase of Supplies on Credit Illustration 2.25: Purchase of supplies on credit Copyright © John Wiley & Sons, Inc. LO 3  Hiring of Employees Illustration 2.26: Hiring of employees Copyright © John Wiley & Sons, Inc. LO 3 Declaration and Payment of Dividend Illustration 2.27: Declaration and payment of dividend Copyright © John Wiley & Sons, Inc. LO 3 Payment of Salaries Illustration 2.28: Payment of salaries Copyright © John Wiley & Sons, Inc. LO 3 Receipt of Cash for Services Illustration 2.29: Receipt of cash for services provided Copyright © John Wiley & Sons, Inc. LO 3 Summary Illustration of Journalizing and Posting Illustration 2.30: General journal entries Copyright © John Wiley & Sons, Inc. LO 3 Summary Illustration of General Ledger Illustration 2.31: General ledger Copyright © John Wiley & Sons, Inc. LO 3 DO IT! 3: Posting Como SpA recorded the following transactions in a general journal during the month of March: Post these entries to the Cash account of the general ledger to determine the ending balance in cash. The beginning balance in Cash on March 1 was €600. Copyright © John Wiley & Sons, Inc. LO 3 DO IT! 3: Posting – Solution Copyright © John Wiley & Sons, Inc. LO 3  The Trial Balance A list of accounts and their balances at a given time. Proves the mathematical equality of debits and credits after posting. Three steps of preparation: 1. List the account titles and their balances in the appropriate debit or credit column. 2. Total the debitCopyright and©credit John Wileycolumns. & Sons, Inc. LO 4 The Trial Balance Illustrated Illustration 2.32: A trial balance Copyright © John Wiley & Sons, Inc. LO 4 Limitations of a Trial Balance A trial balance may balance even when: 1 - a transaction not journalized. 2 - a correct journal entry not posted. 3 - a journal entry posted twice. 4 - Incorrect accounts used in journalizing or posting. 5 - Offsetting errors made in recording the amount of a transaction. ETHICS NOTE Error: Irregularity: The result of an unintentional mistake An intentional misstatement Neither ethical nor unethical Viewed as unethical Copyright © John Wiley & Sons, Inc. LO 4  Trial Balance - Locating Errors 1. Determine the amount of the difference between the two columns of the trial balance. 2. Take one of the commonly useful steps listed below: If the error is … Then … €1, €10, €100, or Re-add the trial balance columns and recompute the account €1,000: balances. Divisible by 2: Scan the trial balance to see whether a balance equal to half the error has been entered in the wrong column. Divisible by 9: Retrace the account balances on the trial balance to see whether they are incorrectly copied from the ledger. For example, €12 instead of €21, called a transposition error. Not divisible by 2 or 9: Scan the ledger to see whether an account balance in the amount of the error has been omitted from the trial balance, and scan the journal to see whether a posting of that amount has been omitted. Copyright © John Wiley & Sons, Inc. LO 4  Currency Signs and Underlining Currency Signs Do not appear in journals or ledgers. Typically used only in the trial balance and the financial statements. Shown only for the first item and the total in the column. Underlining A single line is placed under the column of figures to be added or subtracted. Totals are double-underlined. Copyright © John Wiley & Sons, Inc. LO 4 DO IT! 4: Trial Balance The following accounts come from the ledger of Bali Beach Supply at December 31, 2025. 157 Equipment R$88,000 311 Share Capital —Ordinary R$20,000 332 Dividends 8,000 212 Salaries and Wages Payable 2,000 201 Accounts Payable 22,000 200 Notes Payable (due in 3 19,000 Months) 726 Salaries and Wages 42,000 Expense 732 Utilities Expense 3,000 112 Accounts Receivable 4,000 130 Prepaid Insurance 6,000 400 Service Revenue 95,000 101 Cash 7,000 Prepare a trial balance in good form. Copyright © John Wiley & Sons, Inc. LO 4 DO IT! 4: Trial Balance – Solution Copyright © John Wiley & Sons, Inc. LO 4