BSAD 221
Introductory Financial
Accounting
Donna Gunn, CA
Why do we have financial
statements?
Financial statements are the primary means of
communicating financial information to parties
outside the business organization.
Balance Sheet
Income Statement
Stakeholders
The Flow of Accounting
Information
1. People make decisions.
2. Business transactions occur.
3. Businesses report their results.
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Accounting System
Financial Accounting System
Managerial Accounting System
(preparation of four basic
financial statements).
(preparation of detailed plans,
forecasts and reports).
External Decision Makers
Internal Decision Makers
(investors, creditors,
suppliers, customers, etc.).
(managers throughout the
organization).
Income Statement Accounts
vs. Balance Sheet
Balance Sheet
Assets
What a
company
has
Liabilities
What a
company
owes
Income Statement
Revenues
Value of the goods
sold or services
provided
Expenses
Equity
Shareholder
Investments
Value of the items
used to create
revenues
Net Income :
Revenues – Expenses
Balance Sheet
Assets
Economic resources controlled by the entity as a result
of past transactions from which future economic
benefits may be obtained.
Liabilities
Debts or obligations of the entity that result from past
transactions.
Shareholder’s Equity
Amount of financing provided by owners of the
corporation and from earnings.
Balance Sheet –
Shareholders’ Equity
For a corporation, shareholders’ equity
is divided into two main categories.
Contributed
capital
the amount invested
in the corporation by its owners.
Retained
earnings
the amount earned
by income-producing activities and
kept for use in the business
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Balance Sheet
Basic Accounting Equation
Assets
= Liabilities + Shareholders’ Equity
Sources of Financing
Liabilities – from creditors
• Bank loans
• Accounts payable
Equity – from shareholders
Balance Sheet
1. Name of entity
2. Title of statement
3. Specific date (financial snapshot at a specific point
in time)
4. Unit measure (millions of dollars)
Income Statement Accounts
vs. Balance Sheet
Balance Sheet
Assets
What a
company
has
Liabilities
What a
company
owes
Income Statement
Revenues
Value of the goods
sold or services
provided
Expenses
Equity
Shareholder
Investments
Value of the items
used to create
revenues
Net Income :
Revenues – Expenses
Income Statement
Revenues
Earnings from the sale of goods or services.
Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received.
Expenses
Expenses are the dollar amount of resources used
up by the entity to earn revenues during a period.
An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.
Income Statement
When is the revenue earned?
$1,000 sale made
on May 25.
X
May 2011
Cash from sale
collected on June 10.
X
June 2011
Income Statement
When will the revenue from this
transaction be recognized?
$1,000 sale made
on May 25.
X
May 2011
Cash from sale
collected on June 10.
X
June 2011
$1,000 revenue
recognized in May
X
May 2011
June 2011
Income Statement
When will the expense for this
transaction be recognized?
Paid $75 cash on May 11
for newspaper ad.
X
May 2011
Ad appears
on June 8.
X
June 2011
Income Statement
When will the expense for this
transaction be recognized?
Paid $75 cash on May 11
for newspaper ad.
X
May 2011
Ad appears
on June 8.
X
June 2011
Advertising expense
recognized in June.
X
May 2011
June 2011
Income Statement
1. Name of entity
2. Title of statement
3. Specific date (Unlike the balance sheet, this
statement covers a specified period of time.)
4. Unit measure (in millions of dollars)
Statement of Retained
Earnings
Income of the corporation
Shareholders
Retained Earnings
Statement of Retained
Earnings
1. Name of entity
2. Title of statement
3. Specific date (like the income statement, this
statement covers a specified period of time.)
4. Unit measure (in millions of dollars)
Cash Flow Statement
The cash flow statement reports
the company’s cash inflows and
outflows from operating, investing,
and financing activities.
Income is
usually not equal
to the change
in cash for
the period.
Cash Flow Statement
1. Name of entity
2. Title of statement
3. Specific date (like the income statement and statement of
retained earnings, this statement covers a specified period of
time.)
4. Unit measure (in millions of dollars)
Notes
Notes provide supplemental information about
the financial condition of a company.
Three types . . .
Describe accounting rules applied.
Present additional detail about an item on
the financial statements.
Provide additional information about an
item not on the financial statements.
Relationships Among the
Financial Statements
Income Statement : Provides Net Income
Statement of Retained Earnings:
Adds net income to opening retained earnings
Balance Sheet:
Reports retained earnings
Cash Flow Statement:
Reports cash balance from balance sheet
How Accounting Standards
Are Set
Accountants follow professional guidelines.
The rules that govern accounting are called
GAAP
(generally accepted accounting principles).
GAAP
CICA Handbook: official source of GAAP;
sanctioned by federal and provincial
governments and the Canadian Securities
Administrators
Accounting Standards Board (AcSB)
 Public Sector Accounting Standards Board
 Emerging Issues Committee (EIC)
 International Accounting Standards Board (IASB)
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International Financial
Reporting Standards (IFRS)
As commerce becomes more global and
accounting more complex, the existence of
different GAAP in countries made comparisons
between companies almost impossible.
As a result, the International Accounting Standards
Board (IASB) was set up in 2001 to issue International
Financial Reporting Standards (IFRS). These are
being adopted in Canada (and around the world) as
generally accepted accounting principles.
1st year for reporting under IFRS-based standards will be 2011
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Conceptual Framework
Information must be useful for decision makers
Relevance
Comparability
Verifiability
Materiality
Faithful
Representation
Timeliness
Understandability
Cost
Financial Reporting Standards
Accounting Assumptions
• Entity assumption
• Going concern assumption
• Cost assumption
• Stable-monetary-unit assumption
Entity Assumption
Separate entity:
Transactions of the business entity are separate
from transactions of owners.
The Going Concern
Assumption
Going-concern (Continuity):
The entity is expected to continue its operations in
the near future.
The Cost Assumption
Cost Assumption:
Assets and services acquired should be recorded
at their actual (historical) cost
The Stable-Monetary-Unit
Assumption
Stable-Monetary-Unit :
The dollar’s purchasing power is relatively stable
Accounting Designations
Chartered Accountant = CA
Certified General Accountant = CGA
Certified Management Accountant = CMA
Certified Public Accountant = CPA*
(* in USA only)
Ethics, Reputation, and Legal
Liability
In Canada all Accounting Institutes
require that all members adhere to a
professional code of ethics.