Oriantation

Financial Accounting Lecture Notes

Prepared by Dr. Emad Zaher
Assistant Professor of Accounting
MGM611

Chapter 1: Introduction to Financial Accounting

Learning Outcomes

  • LO 1: Identify the origins of Accounting.

  • LO 2: Explain the different forms of business ownership.

  • LO 3: State the main reasons for studying Accounting.

  • LO 4: Describe activities and different users of Accounting information.

  • LO 5: Explain GAAP and the role of standards-setting bodies.

  • LO 6: Compare Financial Accounting with Managerial Accounting.

The Origins of Accounting

  • The origins of Accounting are generally attributed to Luka Pacioli, an Italian mathematician, in 1494.

  • He developed the Double Entry System which includes:

    • Debit

    • Credit

    • Borrower

    • Lender

Forms of Business Ownership

Types

  1. Proprietorship

    • Owned by one person

    • Owner is often the manager/operator

    • Owner receives all profits and suffers all losses

    • Owner is personally liable for all debts

  2. Partnership

    • Owned by two or more persons

    • Commonly found in retail and service-type businesses

    • General personal liability is unlimited

  3. Corporation

    • Owned by shareholders

    • Generally viewed as a separate legal entity organized under state corporation law

    • Offers Limited Liability to its owners

Why Do We Study Accounting?

  1. To know the business's profit and loss.

  2. To understand the business financial position.

  3. To examine changes in owner’s capital.

  4. To assess the business cash position.

Users of Accounting Information

External Users

  • Competitors

  • Shareholders

  • Tax Authorities

  • External Auditors

  • Lenders (Banks)

Internal Users

  • Managers

  • Employees

  • Internal Auditors

  • Budget Officers

Questions Asked by External Users

  • Is the company earning satisfactory income?

  • How does the company compare in size and profitability with its competitors?

  • Will the company be able to pay its debts as they come due?

  • What do we do if they catch us?

Questions Asked by Internal Users

  • Is cash sufficient to pay bills?

  • What is the cost of manufacturing each unit of product?

  • Can we afford to give employees pay raises this year?

  • Which product line is the most profitable?

Generally Accepted Accounting Principles (GAAP)

  • GAAP refers to standards that are generally accepted and universally practiced; these standards dictate how to report economic events.

Standard-Setting Bodies

  • Financial Accounting Standards Board (FASB)

  • International Accounting Standards Board (IASB)

The Structure of the IASB

  • Monitoring Board

    • Approves and oversees trustees

  • IFRS Foundation

    • Consists of 22 trustees who appoint, oversee, and raise funds

  • Board

    • Comprises a maximum of 16 members (including 3 part-time)

    • Responsible for setting the technical agenda and approving standards, exposure drafts, and interpretations

  • IFRS Advisory Council

    • Composed of approximately 40 members

  • IFRS Interpretations Committee

    • Consists of 14 members

    • Provides guidance on the application of IFRS standards

Comparing Financial Accounting and Managerial Accounting

Feature

Financial Accounting

Managerial Accounting

Primary Users

External users: shareholders, creditors, regulators

Internal users: officers and managers

Frequency of Reports

Financial statements prepared quarterly and annually

Internal reports can be produced as frequently as needed

Purpose of Reports

General-purpose financial statements

Decision-making reports tailored for internal use

Focus/Emphasis

Past-oriented

Future-oriented

Verification Process

Subject to independent audits according to IFRS & US GAAP

Typically, no independent audits are required

Required Textbook

  • Financial Accounting IFRS Edition, by John Wiley & Sons, Inc.

Topics Covered

  • Accounting cycle & Financial Statements

  • Investing and Financing Decisions

  • Operating Decisions and the Income Statement

  • Communicating and Interpreting Accounting Information

  • Cost of Goods Sold and Inventory

  • Property, Plant, and Equipment and Natural Resources

  • Reporting and Interpreting Liabilities

  • Financial Statements Analysis

Module Learning Outcomes

  • This course will enable students to combine practical and theoretical knowledge of Financial Accounting.

  • Students will emerge as active learners and develop an awareness of emerging trends in Financial Accounting.

  • The course will equip students with decision-making skills in financial analysis contexts.

  • Students will acquire the ability to identify and analyze Financial Accounting problems and opportunities in real-life situations.

Conclusion

Thank You!