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ACCT 201 FINANCIAL ACCOUNTING

LECTURE 1

Asst. Prof. Özlem OLGU

Room: 202

Tel No: 0212 338 1457

E-Mail: oolgu@ku.edu.tr

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ACCOUNTING AND THEBUSINESS

ENVIRONMENTChapter 1

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Chapter Objectives

1. Use accounting vocabulary

2. Apply accounting principles and concepts

3. Use the accounting equation

4. Analyse business transactions

5. Prepare financial statements

6. Evaluate business performance

7. Revision questions

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is an information system that...

measures business activities,

processes information, and...

communicates financial information.

O1:Use accounting vocabulary Accounting...

is called the language of business.

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External usersmake decisionsabout the entity.

Internal usersmake decisionsfor the entity.

Users of Accounting Information

Financial Acct Managerial Acct

İnvestors, creditors, govt

agencies

Managers, partnerts etc.

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Public Sector(SEC)

Private Sector(FASB)

Private Sector(AICPA) (IMA)

GAAP

The Authority Underlying Accounting

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AICPA’s Code ofProfessional

Conduct

Standards ofEthical

Conduct of theInstitute of

ManagementAccountants

Standards of Professional Conduct

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1. Proprietorships

2. Partnerships

3. Corporations

Types of Business Organizations

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1. Proprietorships: single owner

What are some advantages?– total undivided authority– no restrictions on type of business – must

be legal What are some disadvantages?– unlimited liability– limitation on size – fund raising power

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2. Partnerships: more than 1 owner

What are some advantages?- better credit standing – possibly– more brain power, but consultation with

partners required What are some disadvantages?– unlimited personal liability for general

partners– need for written partnership agreement

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3. Corporations: more than 2 owners or shareholders What are some advantages?– separate legal existence– limited liability of stockholders– transferability of ownership relatively easy What are some disadvantages?– taxes – possible double taxation– extensive governmental regulation

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O 2: Apply Accounting Concepts and Principles

1. GAAP

2. Entity concept

3. Reliability concept

4. Cost principle

5. Going concern principle

6. Stable monetary unit concept

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To provide information usefulfor making investment and

lending decisions

Generally AcceptedAccounting Principles (GAAP) What is the primary objective of financial

reporting?

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The Entity Concept Example

Assume that John decides to open up a gas station and coffee shop.

The gas station made $250,000 in profits, while the coffee shop lost $50,000.

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The Entity Concept Example

How much money did John make? At a first glance, we would assume that

John made $200,000. However, by applying the entity concept we

realize that the gas station made $250,000 while the coffee shop lost $50,000.

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Information mustbe reasonably

accurate.

Information mustbe free from bias.

Information must report what

actually happened.

Individuals wouldarrive at similar

conclusions usingsame data.

The Reliability (Objectivity) Principle

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Assets and servicesacquired

should be recordedat their actual cost.

The Cost Principle

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The entity will continueto operate in the future.

The Going Concern Concept

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The dollar’s purchasingpower is relatively

stable.

Stable-Monetary-Unit Concept

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EconomicResources

Claims toEconomicResources

IMPORTNAT!!!O 3: Use the Accounting Equation

Assets = Liabilities + Owner’s Equity

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What is an asset?

It is something a company owns which has future economic value.

– land– building– equipment– goodwill

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What is a liability?

It is something a company owes.– money– service – legal retainers– product – magazines

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What is owner’s equity?

It is what’s left of the assets after liabilities have been deducted.

– the same as net assets– the owner’s claim on the entity’s assets

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Transactions that AffectOwner’s Equity

OWNER’S EQUITY

INCREASES

OWNER’S EQUITYDECREASES

Owner Investmentsin the Business

Revenues Expenses

Owner Withdrawalsfrom the Business

Owner’s Equity

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Revenues

What are revenues? They are amounts received or to be received

from customers for sales of products or services.

– sales– performance of services– rent– interest

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Expenses

What are expenses? They are amounts that have been paid or will

be paid later for costs that have been incurred to earn revenue.

– salaries and wages– utilities– supplies used– advertising

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O 4: Analyze Business Transactions

What is a transaction? It is any event that both affects the financial

position of the business and can be reliably recorded.

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Accounting for Business Transactions: Example1 Gay Gillen invests $30,000 to begin Gay

Gillen eTravel.2 Gillen purchases an office location, paying

$20,000 in cash.3 She buys office supplies, agreeing to pay

$500 in 30 days.4 She earns and collects $5,500 revenues.

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Example Continues...

5 Gillen performs services, and the client agrees to pay $3,000 within one month.

6 During the month, she pays $3,300 for expenses incurred.

7 Gillen pays $300 to the store from which she purchased $500 worth of supplies.

What is the effect of these transactions on the accounting equation?

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Owner’s Assets = Liabilities + Equity

1) Cash + $30,000 + $30,0002) Cash – 20,000

Land + 20,0003) Supplies + 500 + 5004) Cash + 5,500 + 5,5005) Receivable + 3,000 + 3,0006) Cash – 3,300 – 3,3007) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200

Accounting for Business Transactions

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Important Points:

Notice that the equation always stays in balance.

Each transaction affects at least two accounts, sometimes more.

Some transactions affect only one side of the equation; some affect both sides.

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O 5: Prepare Financial Statements

Financial Statements...

– are the finalproduct of the

accounting process.

– tell how thebusiness is performing

and where it stands.

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Financial Statements

1. income statement

2. statement of owner’s equity or retained earnings

3. balance sheet

4. statement of cash flows

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O 6: Evaluate Business Performance

Income StatementRevenue:

Fees earned $8,500Expenses:

Salary expense $1,200

Utilities and telephone expense 400

Equipment rental expense 600

Office rent expense 1,100 3,300

Net income $5,200

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G. Gillen, capital, April 1, 20xx $ 0Contribution of capital 30,000Net income $ 5,200Cash distributions – 2,000G. Gillen, capital, April 30, 20xx $33,200

Statement of Owner’s Equity

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Balance Sheet

Assets

Cash $19,900

Accounts receivable 2,000

Supplies 500

Land 11,000

Total assets $ 33,400

Liabilities

Accounts payable $ 200

Owner’s equity,

G. Gillen, capital 33,200

Total liabilities and

owner’s equity $33,400

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Statement Of Cash Flows

Cash flows from operating activities:Cash receipts from services rendered $6,500Cash payments:

Supplies $ 300Operating expenses 3,300 3,600

Net cash flows fromOperating activities $2,900Cash flows from investing activitiesPurchase and sale of land ($11,000)

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Cash Flows from Financing Activities:

Investment by Owner $30,000

Withdrawals 2,000

Net Cash Flows from

Financing Activities $28,000

Cash at Beginning of Year 0

Cash at End of the Year $19,900

Statement Of Cash Flows

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A corporation with 2 stockholders goes bankrupt owing $10,000. How much does each stockholder owe the creditors?

Revision Questions: QUESTION 1

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Answer: $0.

The stockholders of a corporation have limited liability, which means that stockholders are not responsible for the debts of the corporation.

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Land was acquired for a future building site at a cost of $80,000. An appraiser placed its value at $85,000. Another company offered to buy the land for cash of $90,000. At what amount should land be reported in the financial statements?

QUESTION 2

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Answer: $80,000.

The cost principle states that assets should be recorded at their cost.

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The assumption that the entity will remain in operation for the foreseeable

future is the: A. Reliability principle B. Entity conceptC. Going concern conceptD. Cost principle

QUESTION 3

Answer: C

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A basic principle of accounting that requires activities of an entity be kept separate from other organizations and individuals as a separate economic unit is the

A. Reliability principle B. Entity conceptC. Going concern conceptD. Cost principleAnswer: B

QUESTION 4

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Which of the following is a correct

expression of the accounting equation?

A. Assets = revenues + expensesB. Assets = revenues - expensesC. Assets = liabilities – owner’s equityD. Assets = liabilities + owner’s equityAnswer: D

QUESTION 5

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If a company’s assets total $400 and owner’s equity totals $300, how much are total liabilities?

QUESTION 6

Answer: $100. The accounting equation is: Assets = liabilities + owner’s equity $400 = ? + $300

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Owner's equity can be described as

A. Creditors’ claims on total assetsB. Owner’s claim on total assetsC. Current obligations of the companyD. Economic resources of the company

QUESTION 7

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Answer: B

Creditors’claims to

assets

Assets = Liabilities + Owner’s Equity

Owner’sclaims to

assets

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What is the effect on the accounting equation if a company collects $50 of an Accounts Receivable?

A. increases an asset $50; decreases an asset $50B. decreases an asset $50; decreases a liability $50C. increases an asset $50; decreases a liability $50D. decreases a liability $50; increases owner's equity $50

QUESTION 8

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Answer: A

When a company collects on an accounts receivable, cash is increased. Accounts receivable is decreased by the same amount since customers owe the company less.

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What is the effect on the accounting equation if a company pays the monthly

rent in cash? A. Assets decrease and liabilities increase

B. Liabilities decrease and owner’s equity decreases

C. Owner's equity increases and assets increase

D. Assets decrease and owner’s equity decreases

QUESTION 9

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Answer: D

1. Assets decrease: Cash is paid and decreases.

2. Owner’s equity decreases: Costs incurred to earn revenues decrease the owner’s interest in the assets.

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The balance sheet reports:

A. Revenues and expenses on a specific date

B. Assets, liabilities, and owner’s equity for a specific period

C. Changes in owner’s equity for a specific period

D. Assets, liabilities, and owner’s equity on a specific date

QUESTION 10

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Answer: BThe balance sheet reports the amount of assets, liabilities and owner’s equity on a specific date.

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An income statement reports

A. Revenues and expenses on a specific dateB. Revenues and expenses for a specific period of timeC. Changes in owner’s equity for a specific period of timeD. Assets, liabilities, and owner’s equity on a specific date

QUESTION 11

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Answer: BThe income statement presents revenues and expenses of a company for a specific period of time.

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Determine the amount of net income (loss) given the following information:

Accounts payable…………….$ 700Service revenue………………..900Supplies expense………………300Cash……………………………800Salaries expense……………….400

QUESTION 12

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Answer:Service Revenue $900Less Expenses:

Supplies expense $300 Salaries expense 400 700

Net income $200

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At the beginning of the year, owner’s equity was $100. The owner invested $200 cash to the business during the year and earned a net income of $600. The owner also withdrew $500 during the year. What was the balance in owner’s equity at the end of the year?

QUESTION 13

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Answer:

Beginning owner’s equity $100

Add: Net income 600

Investment by owner 200

Subtotal $900

Less: Owner’s withdrawal (500)

Ending owner’s equity $400

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Presented below are balance sheet items for Alt Co.

Accounts payable…………..$200Accounts receivable……...…300Cash………………………....100Furniture……………………..500Norris, capital……….……….300Notes payable……………….400

Compute total assets

QUESTION 14

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Answer:

Cash $100

Accounts receivable 300

Furniture500

Total assets $900

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Presented below are balance sheet items for Alt Co.

Accounts payable………….. $200Accounts receivable……...… 300Cash……………………….... 100Furniture…………………….. 500Norris, capital……….………. 300Notes payable………………. 400

Compute total liabilities

QUESTION 15

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Answer:

Accounts payable $200

Notes payable 400

Total liabilities $600