Accounting for Executives

1. Accounting for Executives Week 1 Lecture Hours: 2.5 hours 5/11/2010 (Fri)

2. Lecturer – Harris H.K. Lui MBA (Accounting and Finance), ACCA, LLB (China Law) Email address: hklui2007@yahoo.com.hk

3. Course Aims • The module is intended for aspiring managers with little or no formal financial training or experience, whose present and future positions will affect the acquisition and use of business resources. • This module looks at the financial aspects of managing business resources. • The module will help students to understand the basic terminology, concepts and techniques that underpin both financial and management accounting. • This module is designed to improve students’ understanding and use of financial information.

4. Examination Style Time Allowed 2 hours • 4 Compulsory Questions on the following areas – • Budgeting • Prepare financial statements, i.e. income statement and balance sheet • Accounting ratios and interpretation • Cost-volume-profit Analysis • Variance analysis

5. Syllabus Content • Introduction to accounting and finance • The role of accounting in business. • Who needs to use accounting information. • The distinction between financial accounting and management accounting. • Basic concepts and terms underpinning accounting information. • The regulatory framework.

6. Syllabus Content • Recording and reporting business activity • The accounting equation. • Recording business transactions in ledger accounts. • Function of profit and loss accounts and balance sheets. • Why adjustments are made to figures in the accounts. • Simple profit and loss accounts and balance sheets for a small business. • Using computerised systems. • How to deal with assets, stocks and bad debts when recording and reporting accounting information.

7. Syllabus Content • Using financial information to manage business resources – an introduction • Why cash management is important to an organisation. • Cash flow budgets. • The working capital cycle. • How cost information can assist managers in planning and controlling the use of business resources. • Costs including variable and fixed costs. • Breakeven analysis in simple situations.

8. Syllabus Content • An introduction to the construction and use of budgets in managing business resources • Preparing budgets. • Using budgets to control business resources.

9. Chapter 1 Introduction of Accounting Equation and Common Forms of Financial Statements

10. Complete Set of Financial Statements • A complete set of financial statements includes the following components under HKAS 1: • Balance sheet (statement of financial position) • Income statement (statement of comprehensive income) • Statement of cash flows • Statement of changes in equity • accounting policies and explanatory notes

11. CHEUNG KONG (HOLDINGS) LIMITED– Consolidated profit and loss account

12. CHEUNG KONG (HOLDINGS) LIMITED- Consolidated Balance Sheet

13. CHEUNG KONG (HOLDINGS) LIMITED– Consolidated statement of changes in equity

14. CHEUNG KONG (HOLDINGS) LIMITED– Consolidated statement of cash flows

15. The accounting equation Resources in the Biz = Resources supplied by the owner (e.g.Capital invested) The amount of the resources supplied by the owner(s) is called capital. The actual resources that are in the business are called assets. Asset= Capital

16. The accounting equation It is common for the owner to obtain loans or other people’s resources to acquire some of the assets, then these loans is named as liabilities. Asset = Capital + Liabilities

17. Assets: Land and Building Motor Vehicles Furniture and Fixtures Investment Properties Stock Debtors Prepayments Bank and Cash Petty Cash Types of Accounts Capital: Capital Ordinary Shares Preference Shares Liabilities: Long-term loan Debentures Trade Creditors Utility Creditors (e.g. water service, electricity) Accruals

18. Non-current vs Current Asset Non-current assets are those assets which are bought for extended use within the business rather than for trade/ sale. (e.g. Land and Building, Motor Vehicles, Furniture and Fixtures) Current assets are those assets which within a short period of time will change their form. (e.g. Stock, Debtors, Prepayments, Bank and Cash Petty Cash)

19. Double entry system for assets, liabilities and capital Title of account Debit side Credit side Assets a/c Debit, Credit Liabilities a/c Credit, Debit Capital a/c Credit, Debit

20. Example Chris Black started a business with $100,000 and save the money into HSB Bank on 1 Aug 200X. DR. CR. HSB BANK 100,000 CAPITAL 100,000 HSB Bank

21. Example Capital

22. Characteristics of Accounting Equation • The accounting equation has the following important characteristics: • The value of the assets is the same as the value of the liabilities. • Both sides of the equation are of equal value, i.e. they balance. • The assets of a business must come from somewhere; in fact, they are financed by the liabilities of the business in this case the owner’s investment. • The application of the business entity concept distinguishes the owner and the business and thus the business incurs a liability back to the owner of the invested capital

23. Example (con’t) Chris further borrow £150,000 from the bank as the resources of the company. This bank loan is a liability of the business, but at the same time the asset has increased by £150,000. The financial position of the business can now be represented in the accounting equation as follows: Dr. Cr. Bank 150,000 Long-term liabilities/ Loan 150,000

24. Example (con’t) Chris Black carried out the following transactions during the first week of trading. He: 1 Purchased a motor vehicle for £15,000 paying by cheque. 2 Withdrew £1,000 from the bank for use as cash float. 3 Purchased shop premises for £60,000 paying by cheque.

26. Example (con’t) Transaction 1 £100,000 (owner) + £150,000 (debt) = £235,000 (bank) £15,000 (vehicle) £100,000 (owner) + £150,000 (liabilities) = £250,000 (assets) Transaction 2 £100,000 (owner) + £150,000 (debt) = £234,000 (bank) + £15,000 (vehicle) + £1,000(cash) £100,000 (owner) £150,000 (liabilities) = £250,000 (assets) Transaction 3 £100,000 (owner) + £150,000 (debt) = £174,000 (bank) + £60,000 (premises) + £15,000 (vehicle) + £1,000 (cash) £100,000 (owner) + £150,000 (liabilities) = £250,000 (assets) Note that following all these transactions the accounting equation is still in balance.

27. Capital The initial cash put in by the owner is called the capital. Capital is a liability of the business to the owner. The size and value of this initial capital may increase over the life of the business. The capital can increase in at least two ways: 1 The owner can put in more of their own money into the business. The new funds increase the capital of the business. 2 The business itself can generate additional capital by selling goods or services at a profit. This profit is earned on behalf of the owner by the business. The profit belongs to the owner and, provided it is not taken out of the business by the owner, will increase the capital element of the accounting equation. These profits are called retained profits.

28. Liabilities Liabilities are the debts of the business. They represent what the business owes to external parties other than the owner. The external liabilities or obligations, called the creditors of a business, may be classified according to the time period within which they have to be settled. Thus there are: • Long-term liabilities: Liabilities which fall due for payment after one year or longer. • Current liabilities: Liabilities which fall due for payment within one year, including that part of the long-tem loans due for repayment within one year.

29. Example (con’t)

30. Intangible assets Assets that are not physically exist, the owner of it can derived economic benefits from the use of it. Example • Patents where the governments grants the patent owner the exclusive right for a period of years to produce and sell an invention such as a mini music system, personal disc assistant (PDA). • Trademarks or brand names are the distinctive identifications by which customers recognise a product or service, for example the logos of Heinz, Coca Cola or AOL.

31. Balance Sheet (Statement of Financial Position) The balance sheet (or statement of financial position) is a development of the accounting equation. The balance sheet has the primary purpose of reporting the financial position of an organisation at a single point in time. Recall the accounting equation we have learnt:- Fixed assets+ Current assets - Current liabilities –Long Term liabilities = Initial capital + Retained profits

32. Pro forma XXX Company Balance Sheet as at 31-Dec-200X Fixed Assets £ £ £ Premises X,XXX Vehicles X,XXX X,XXX Current Assets Bank XX,XXX Cash XX,XXX XX,XXX Less: Current liabilities (X,XXX) Net Current Assets Less: Long-term liabilities Bank loan (XX,XXX) X,XXX XXX,XXX Capital XXX,XXX Add: Retained Profits (or Less: Accumulated loss) XX,XXX XXX,XXX

33. Example (con’t) Chris Black Balance Sheet as at the end of week 1 Non-current Assets £ £ £ Premises Vehicles Current Assets Bank Cash Less: Current liabilities Net current assets Less: Long-term liabilities Bank loan ( ) Capital Add: Retained Profits

34. Stock and Trading Profit Chris Black buys and sells computers. Computers are the goods the business buys with the intention of reselling. These are called stocks. In order to start, Chris Black decides in week 2 of trading to purchase £50,000 of computers on credit. This activity does not generate any profit as the transaction is only increasing the current asset stock and creating a creditor, or current liability, of £50,000. Dr. Cr. Stock 50,000 Creditors/ Trade payables 50,000 After entering the above transaction into the book of Chris the revised balance sheet should appears as:

35. Example (con’t)

36. Example (con’t) During the third week of trading Chris Black’s computers, which cost £10,000, were sold for £14,000. The customers all paid by cheque. The profit Chris made: Sales - Cost of Goods Sold = Profit £14,000 - £10,000 = £ 4,000 Stock decreased by £10,000 Bank increased by £14,000 Retained Profit increased by £4,000

38. Trade on credit During week 4, Chris sells computers costing £6,000 for £11,000 but the customer was granted 30 days credit. He further paid wages £500 by cheque. Profit on this transaction £11,000 - £6,000 = £5,000 New retained profits £4,000 + £5,000 = £9,000 The wages paid reduce the profits by £500 Retained profits = £9,000 - £500 = £ 8,500 Other affected account balance: Stock decreased by £6,000 Bank decreased by £500 Debtors Increased by £11,000

40. Trading Account Profit and Loss Account Profit and Loss Account (Income Statement) Pro forma Chris Black Trading ,Profit and Loss Account for the month ended 31-Jan-200X £ £ Sales X,XXX Less: Cost of goods Sold Opening Stock XXX Add: Purchases XXX Less: Closing Stock (XXX) Cost of goods sold (XXX) Gross Profit X,XXX Less: Expenses Wages XXX Electricity XXX Insurance XXX Rent and rates XXX XXX Net profit X,XXX

41. Example (con’t) Chris Black Trading ,Profit and Loss Account for the month ended 31-Jan-200X £ £ Sales Less: Cost of goods Sold Opening Stock Add: Purchases Less: Closing Stock ( ) Cost of goods sold ( ) Gross Profit Less: Expenses Net profit