ACC100 Introductory Financial Accounting

1. ACC100Introductory Financial Accounting WELCOME!

2. Are you in the right course? Take ACC 110 and ACC 410 when you are an Accounting or Finance Major Take ACC 100 and ACC 406 When you Major in: Global Management Studies, Marketing, Law and Business, Entrepreneurship, Human Resources Management, and Economics majors Other Departments: Hospitality and Tourism, ITM, Retail, etc . . .

3. Instructor Introduction (3 minutes)

4. Course Outline/Schedule (10 minutes) • Outline Quiz! • Get into groups of NO MORE than 3 or 4 students • Once you have a group send up ONE of your members to get a Outline Quiz. • You have 10 minutes to complete the quiz! • Random students will be asked for their answers.

5. ACC100Introductory Financial Accounting Chapter 1 - Accounting Communication – An Introduction

6. Learning Objectives - Coverage LO 1, 2: Scan LO 3, 5: Understand LO 4: MASTER! NOTE the colour coding – SCAN is green, UNDERSTAND is grey/blue, MASTER is purple. This will be used throughout the course.

7. Learning Objectives LO1: Forms of business L02: Types of business activities LO3: Users of accounting and their needs LO4: Purpose of each financial statement, relationship among them and prepare a set of simple financial statements LO5: Assumptions made in preparing financial statements

8. Forms of Organizations Business • Sole proprietorship • Partnership • Corporation Sole Proprietorship: 1 owner, unlimited liability Partnership: 2 or more owners, unlimited liability Corporation: many owners, ownership based on shares, organized under province or federal government, limited liability LO1

9. When a business has unlimited liability: The owners can NOT lose more than the amount invested. The investors are NOT personally responsible for the debts and obligations of the company. The owner’s personal assets can NOT be taken if the company’s assets don’t cover all the debts. The amount the owners can lose is NOT limited in any way. LO1

10. Types of Business Activities Financing – raising funds Investing – buying land, building, equipment, etc. Operating – selling goods/services LO2

11. When a company sells their old equipment, it would be considered a(n): Operating activity Investing activity Financing activity Delivering activity LO2

12. Bank / Creditors Customers Current and Potential Owners Financial Analysts Suppliers Regulatory Agencies Competitors Internal and ExternalUsers of Accounting Information Rev. Canada Internal Users - Management LO3

13. Which of the following primarily uses accounting information to determine whether the company can pay its obligations? Shareholders Competitors Creditors Revenue Canada LO3

14. What is Accounting? A system & process for ... decisions ? decisions ? Identifying Economic Information about an Entity various users Measuring, Analyzing communicating Summarizing, Reporting How? Through financial statements! LO3

15. Financial Statements Are reports from management to the external users which summarize how the company performed during the period. They attempt to capture financial information about a company so users can make informed decisions. LO4

16. Financial Statements • Income Statement • Reports the results of operations for a specific period of time • revenues, expenses, net income • Statement of Retained Earnings • Reports the changes in retained earnings for a specific period of time • Net income, dividends LO4

17. Financial Statements • Balance Sheet • Reports the financial position at a specific date. • assets, liabilities, and shareholders’ equity • Cash Flow Statement • Reports the cash consequences of transactions by type of activity for a period of time • cash receipts and payments LO4

18. Overview of basic contents of F/S LO4

19. Income Statement to Statement of Retained Earnings LO4

20. Key Elements of Income / ‘Net Income’ REVENUES EXPENSES Def’n: outflows representing resources consumed in providing goods / services Principle: Matching – expenses s/b matched to the revenues they help to generate Examples: Cost-of goods sold Salaries & wages Amortization (depreciation) • Def’n: inflows in exchange for providing goods or services • Principle: Revenue Recognition – revenue should be recognized when earned (goods delivered, services performed) • Examples: • Sales • Fees, Commissions • Rent, Interest LO4

21. Statement of Retained Earnings from Income Statement to Balance Sheet (Equity section) LO4

22. Statement of Retained Earnings All the net income from prior years LESS All the dividends paid out in prior years It is the profit that is “retained” or kept within the business for future growth. LO4

23. Share Certificate Balance Sheet: A Snapshot of ‘Financial Position’ point in time ASSETS LIABILITIES + = OWNERS’ EQUITY (or Shareholders' Equity) “Basic Accounting Equation” LO4

24. LO 4 Balance Sheet Divided between short term and long term liabilities. Divided between short term and long term assests. from Statement of Retained Earnings LO4

25.  Important: The two sides of the Accounting Equation, represented by the Balance Sheet, MUST balance ! A = L + E “Basic Accounting Equation” LO4

26. Key Elements of Balance Sheet: ASSETS • Key characteristic: has future economic benefit • Attributes: • controlled (usually owned, but not necessarily) by the entity • may be tangible (e.g. physical item) or intangible (e.g. legal rights) • Examples: • Cash • Accounts Receivable • Inventories • Prepaid Expenses • Equipment • Buildings, property • Licenses, franchise rights, patents • Investment in other businesses LO4

27. Key Elements of Balance Sheet: LIABILITIES • Key Characteristic: owed to third parties (external) • Attributes: • Due at a future date • may be settled in cash, goods or services • Examples: • Accounts Payable • Accrued Liabilities • Salaries & Wages Payable • Taxes Payable • Loan Payable • Mortgage Payable LO4

28. Key Elements of Balance Sheet: EQUITIES (Owners’ Equity; Shareholders’ Equity) • Key Characteristic: belongs to owners (shareholders in case of corporation. • Attributes: • NOT equal to value / worth of an enterprise • paid out to shareholders most commonly as dividends OR retained in company for future economic growth • Made up of: • Share Capital (e.g. Common Shares) • Retained Earnings LO4

29. Cash Flow Statement • Indicates cash receipts and cash disbursements by the entity for the period; • organized (‘classified’) into 3 activities to Balance Sheet, Current Assets LO4

30. An entity’s Income Statement reports ... • the cash consequences of the entity’s transactions for a specific period of time • the results of operations for a specific period of time • the entity’s financial position at a specific date • revenues, expenses and the resulting profit (loss) for a point in time LO4

31. How are the financial statements interconnected ? • Income Statement to Balance Sheet to Cash Flow Statement to Statement of Retained Earnings • Income statement to Statement of Retained Earnings to Balance Sheets to Cash Flow Statement • Income Statement to Statement of Retained Earnings to Cash Flow Statement to Balance Sheet • Balance Sheet to Statement of Retained Earnings to Income Statement to Cash Flow Statement • I am still not sure about the connection between the statements. LO4

32. Exercise 1-12, page 31 Work with a partner and match the financial statements to the questions users want to have answered. You have 5 minutes. Then answer the M/C question on the next slide. Students will be asked for the remainder of the answers. LO4

33. Suppliers: How much does the company currently owe to its suppliers? • The user is most likely to find the answer by looking at the: • Income statement • Statement of Retained Earnings • Balance Sheet • Cash Flow Statement LO4

34. Preparing financial statements: Now that you have an understanding of why external users require financial statements (i.e., to make resource allocation decisions) you need to know how to produce the statements. A deep understanding of the format of financial statements will aid you in future chapters and in both the midterm and final exam. LO4

35. How to approach a F/S preparation question: Regardless of how the information is provided to you always start by reading the list of accounts and categorizing them into the different categories. Ask yourself: is this account an asset, liability, shareholders’ equity, revenue or expense accounts? Once you have that figured out preparing the F/S is simpler since each category only goes into one F/S. Let’s first see if you know which accounts go into which category. Answer the following three M/C questions. LO4

36. Inventory belongs in which category? • Revenue • Expenses • Assets • Liabilities • Shareholders’ equity LO4

37. Income tax payable belongs in which category? • Revenue • Expenses • Assets • Liabilities • Shareholders’ equity LO4

38. Cost of good sold belongs in which category? • Revenue • Expenses • Assets • Liabilities • Shareholders’ equity LO4

39. Problem 1-5, page 36 Categorize all the accounts into the correct categories. Use short forms such as A, L, SHE, R, X. (5 minutes) Preparean income statement, statement of retained earnings and balance sheet. (10 minutes) One M/C question on the amount of net income follows. LO4

40. What is the net income for Neptune Theatres Corp? • ($30,050) • $17,500 • $40,950 • $42,800 • Did not have time to finish/I’m lost! LO4

41.  Let’s go back to the accounting equation: The two sides of the Accounting Equation, represented by the Balance Sheet, MUST balance ! A = L + E “Basic Accounting Equation” LO4

42. Accounting Equation (Basic) A = L + E This equality is reflected in the Balance Sheet. Can also be viewed as: LO4

43. Which of the following is the correct way to re-arrange the Basic Accounting Equation? • Assets = Liabilities + Shareholders’ Equity • Shareholders’ Equity = Assets - Liabilities • Liabilities = Assets - Shareholders’ Equity • All of the above • None of the above LO4

44. Applying the Basic Accounting Equation – beginning of year: A = L + E We can use this equation for solve for unknowns; for e.g.... What is the ending amount of Shareholders’ Equity ? (Discuss with an elbow partner if necessary) LO4

45. Applying the Basic Accounting Equation - during the year: A = L + E If the equation works on balances at the beginning/end of the year then it has to work during the year too. Say we start the year as follows: What would be the ENDING of the year balance if, during the year, assets increased $250 by and liabilities decreased by $100? (Discuss with an elbow partner for 2 minutes. On the next slide is a M/C question to see if you can figure it out.) LO4

46. Repeating the information provided: At the beginning of the year, Assets = $1,000, Liabilities = $600 and Shareholders’ Equity = $400. During the year, Assets increased by $250 and Liabilities decreased by $100. The new balance of Shareholders’ Equity at the end of the year is ... • $150 • $350 • $750 • $1250 • Did not have time to finish / I’m lost. LO4

47. Applying the Basic Accounting Equation – missing information: A = L + E If we are only given some information it is important that we know into which category (A, L, E) the information goes: Say we start the year as follows: What would be the ENDING balance in shareholders’ equity if net income was $225 and dividend of $50 were paid? (Discuss with an elbow partner for 2 minutes. On the next slide is a M/C question to see if you can figure it out.) LO4

48. Repeating the information provided: At the beginning of the year, Assets = $1,000, Liabilities = $600 and Shareholders’ Equity = $400. What would be the ENDING balance in shareholders’ equity if net income was $225 and dividend of $50 were paid? • $175 • $675 • $275 • $575 • Did not have time to finish / I’m lost. LO4

49. Exercise 1-4, page 32 Work with a partner to answer each of the independent questions. Consider using the format we used on the previous examples. You have 7minutes. Three M/C questions follow. LO4

50. Exercise 1-4, Part (1): How much is Owner’s Equity at the end of the year? • $2,500 • $10,000 • $12,500 • $22,500 • Did not have time to finish/I’m lost! LO4