Week 1 & 2: Financial Accounting & the Business Environment

What is financial accounting?

an information system that measures business activities, processes information, and communicates financial information

What are the two types of users of financial information and what do they do?

• External users make decisions

  about the entity.

• Internal users make decisions

  for the entity.

What are some users of financial information? (8)

1. employees

2. trader creditors

3. customers

4. public

5. potential investors

6. loan providers

7. government

8. shareholders

What are the 2 branches of accounting and what are their focuses?

1. Financial Accounting – focuses on reporting information to external users.

2. Managerial Accounting – focuses on reporting information to internal users.

Name 5 accounting associations

1. American Institute of Certified Public Accountancy

   (AICPA)

2. Institute of Chartered Accountants of Jamaica

   (ICAJ)

3. Association of Chartered Certified Accountants

   (ACCA)

4. Institute of Internal Auditors (IIA)

5. Institute of Management Accountants (IMA)

Name 3 accounting qualifications

1. Certified Internal Auditor (US)

2. Certified Management Accountant (US)

3. Certified Public Accountant (US)/ Chartered Accountant (UK/Ja)

Name the 7 steps in an accounting system

1. collect

2. verify

3. analyze

4. record

5. classify

6. summarize

7. report

What are the 3 forms of business organizations?

1. sole proprietorship

2. partnership

3. corporation

Name 4 characteristics of a sole trader/proprietorship

• single owner called proprietor

• not required by law to make any of its financial information available to the public.

• low start up cost

• the owner is responsible for all the debts of the business (i.e. the owner’s liability is unlimited and therefore extends to his/her personal assets.

Name 4 examples of sole proprietorship

1. small retail store

2. attorney

3. doctor

4. accountant

Name 4 characteristics of a partnership

1. least common form of organization

2. owned by 2 or more persons

3. the owners ( each partners) are responsible for the debts of the business, i.e. the liability of a partner is unlimited and therefore extends to his/her personal belongings

4. no formal document required for formation.

Name 2 examples of partnerships

1. physicians

2. attorneys

Name 5 characteristics ofc corporation.

1. managed by a Board of Directors

2. owner’s risk is limited to their initial investment

3. owners are called stockholders / shareholders, allowed to sell some or all their shares to other investors at anytime.

4. legally and financially separate from its owners. Corporations can enter into contracts just like individuals.

5. pays taxes on its earnings

Name 2 formal documents of a corporation.

1. The Super Form” - Business Registration Form (BRF 1)

2. Articles of Incorporation

Name 6 things the Articles of Incorporation states

1. the name of organization

2. where company office will be located

3. the objective of the company

4. that the liability of the owners is limited if it is not to be unlimited; how the business plans to acquire financing

5. the rules drawn up to…

   • govern the internal workings of the company

   • regulate the holding of meetings

   • regulate the issue of capital

   • define powers and duties of directors, rights of the shareholders etc.

Name 3 types of businesses

1. service

2. manufacturing

3. merchasdising

What is a service business?

a business that provides a service

Name 3 examples of business services.

1. travel agent

2. catering

3. law firm

What is a manufacturing business?

a business that makes product to sell

Name 2 examples of manufacturing businesses.

1. automobile manufacturer

2. furniture makers

What is a merchandising business?

a business that buys products from another business and sells to customers

Name 3 examples of merchandising businesses

1. department store

2. pharmacy

3. supermarkets

What is external financial reporting?

it’s governed by an established body of standards and principles that are designed and carefully define what information a firm must disclose to outsiders

What does GAAP stand for?

Generally Accepted Accounting Principles

What is the GAAP?

accounting guidelines that govern how accountants measure, process, and communicate financial information

Who formulated the GAAP?

Financial Accounting Standards Board (FASB), for U.S. entities

What does the IASB stand for?

the International Accounting Standards Board

When did the IASB replace the IASC?

2001

What are the IASs?

International Accounting Standards - set of standards that can be used by all companies

When did Jamaica adopt IAS?

July 1, 2002

What is an audit?

a financial examination of the financial statements of an entity to determine whether these statements are true and fair

What does the IASB framework do? (3)

• describes the basic concepts by which the financial statements are prepared

• serves as a guide to the Board in developing accounting standards

• serves as a guide to resolving accounting issues that are not addressed directly in an IAS or IFRS

What are the roles of the IASB framework?

• defines the objective of the financial statement

• identifies the qualitative characteristics that make financial information useful.

• defines the basic elements of financial statements and the concepts for recognizing and measuring them in financial statements.

What are the characteristics of Accounting Information? (6)

• Understandability

• Relevance

- Timeliness

- Feedback value & predictive value

• Reliability

- Verifiability

- Representational Faithfulness

- Neutrality

• Comparability

• True and fair

• Benefits greater than cost

What are the 3 basic accounting elements that exist for every business entity?

1. assets

2. liabilities

3. owner’s equity

What are assets?

economic resources, expected to benefit the business in the future

Name 5 assets.

• Cash

• Accounts receivable

• Merchandise inventory

• Furniture

• Land

What is accounts receivable?

the money a business is owed by its customers for goods or services that have already been delivered but not yet paid for

What is the difference between current and non-current assets?

current assets are expected to be converted to cash or used up within one year while non-current assets are long-term resources (like property and equipment) held for more than a year to generate revenue

What are liabilities?

claims to the assets – economic obligations payable to an individual or organization outside the business

Name 6 liabilities

• accounts payable

• notes payable

• salary payable

• short term loans

• mortgages

• long term loans

What is accounts payable?

the money a business owes to its suppliers and vendors for goods or services received but not yet paid for

What is notes payable?

a formal contract between a borrower and a lender consisting of a written promise to repay a loan, typically with interest, by a future date

What is salary payable?

the amount of salaries a company owes to its employees for work performed but not yet paid

What is the difference between current and non-current liabilities?

current liabilities are obligations due within one year, while non-current liabilities are long-term obligations due in more than one year

What is the difference between your liabilities and your assets?

your liabilities are things you owe while your assets are things that you own

What is owner’s equity also known as?

capital

What is owner’s equity?

the claim of business owner to the assets of the business

What are the two ways for the owners to increase their claims to the assets of the business?

1. making contribution - putting more investment

2. earning contribution - profits

When accounts increase/decrease, what are the three scenarios we can have?

1. both decrease - eg. owner withdrawing money from business

2. both increase - eg. investing money in the business by owner

3. one increase, one decrease - eg. purchase of a building

We ____ assets & expenses to increase them.

debit

We____ assets & expenses to decrease them.

credit

We decrease our liabilities, capital and revenue by doing a ____.

debit

We increase our liabilities, capital and revenue by doing a ____.

credit

What are the two things that increase owner’s equity?

1. owner investments

2. revenue - money you make from the business sales

What are the two things that decrease owner’s equity?

1. owner withdrawals

2. expenses

What is the accounting equation?

assets = liabilities + owner’s equity

What does the income statement do?

summarizes a firm's revenues and expenses for a period of time

Revenue increases both ____ and _____.

assets & owners equity

What is revenue?

Amounts earned by delivering goods or services to customers

Name 4 types of revenue.

• Sales revenue

• Service revenue

• Interest revenue

• Dividend revenue

What are expenses?

costs that you have to pay to generate revenues

eg. UWI has to pay staff to make money from students

Name 4 types of expenses.

• salary expense

• rent expense

• utilities expense

• interest expense

Expenses ____ assets or ____ liabilities and ____ owner’s equity.

decrease, increase & reduce

If revenues exceed expenses, then the result is ______.

net income / net profit

If expenses exceed revenues, then the result is a _____.

net loss

What are withdrawals/drawings?

cash or other assets taken by the owner from the business for his/her personal use

What do drawings serve to do?

reduce owner’s equity

What is the expanded accounting formula?

Assets = Liabilities + (Owners Equity + (Revenues – Expenses) – Drawings)

Name 5 financial statements in order.

• Income Statement

• Statement of owner’s equity

• Balance Sheet

• Statement of Cash Flows

• Notes of the Financial Statements comprising a summary of accounting policies and other explanatory notes

What is a requirement of all financial statements?

must carry a heading

What does the heading of a financial statement include?

• name of the business

• title of the statement

• time period covered or the date of the statement

What is the income statement?

summary of an entity’s revenues, expenses, and net income or net loss for a specific period

What is the statement of owner’s equity?

summary of changes in an entity’s owner’s equity during a specific period

What is the owner’s equity equation?

Beginning owner’s equity

+ Owner’s investments

+ Net income

- Net loss

- Owner’s withdrawals

= Ending owner’s equity

What does the balance sheet do?

reports the entity’s assets, liabilities, and owner’s equity as of a specific date

What does IFRS stand for?

International Financial Reporting Standards

What does the IFRS require?

requires that an entity must normally present a classified balance sheet, separating current and non-current assets and liabilities

What does the statement of cash flows do?

reports cash receipts and cash payments during a period

What are the three categories of cash flows and what do they deal with?

• Operating activities—deal with a company's operations.

• Investing activities—deal with a company's long-term asset transactions/ investment.

• Financing activities—deal with a company's long-term debt activities and activities involving shareholders.

In regards to operating activities, what are examples of cash inflows?

• Cash received from sale of goods or services

• Interest received on loans made to outside entities

• Dividends received on investments made in the stock of other companies

In regards to operating activities, what are examples of cash outflows?

• Payment for the acquisition of inventory

• Payment to employees and government

• Payment of interest on loans

• Payment to other suppliers and other expenses

In regards to investing activities, what are examples of cash inflows?

• Proceeds from collections on loans made to borrowers

• Proceeds from the sale of P,P&E, intangibles and other productive assets

• Proceeds from the sale of investments in debt and equity securities

In regards to investing activities, what are examples of cash outflows?

• Loans made by the company to other parties

• Payment to acquire P,P&E - Property, Plant & Equipment

• Payment to acquire investment in debt and equity securities

In regards to financing activities, what are examples of cash inflows?

• Proceeds from issuance of stock or additional investment by owner

• Proceeds from loans e.g. mortgage, issuing bonds and other short-term and long-term loans

In regards to financing activities, what are examples of cash outflows?

• Payment of dividends to stockholders or withdrawals by the owner

• Repayment of the principal on loans

What do the notes to the financial statements do?

clarify and expand upon the material presented in the body of the statements

What is an example of notes to the financial statements?

a note which explains a company's inventory pricing policies or the methods used to depreciate fixed assets

Name 3 things to note about accounting for business transactions.

• 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