Financial Accounting
Preparatory Course
Bocconi University
a.y. 2023/24
Accounting
20352 - Financial Accounting Preparatory Course
Patrizia Tettamanzi
Department of Accounting, Via Roentgen, 1
5th Floor – Room A2FM01
Email: patrizia.tettamanzi@unibocconi.it
Office Hours: by email you can request an
appointment (online and/or at the office)
2
Accounting
Course goals
The course aims to prepare students, from other
graduate-level business courses, to an advanced
and relevant knowledge of the financial accounting
principles and tools. Upon completion of the course,
students are expected to understand the basics of:
• accounting terminology;
• how to generate accounting information and
prepare financial statements; and
• how to interpret the accounting information.
3
Accounting
Schedule
Blackboard Collaborate Ultra:
SS
1–2
3–4
5–6
7 -8
9 - 10
11 - 12
4
DATE
28/08
8.30 – 10.00
10.15 – 11.45
29/08
8.30 - 10.00
10.15 - 11.45
30/08
14.45 - 16.15
16.30 - 18.00
31/08
8.30 - 10.00
10.15 - 11.45
01/09
14.45 - 16.15
16.30 - 18.00
02/09
8.30 - 10.00
10.15 - 12.45
TOPICS
PROFESSOR
Accounting: purposes and tools / Accrual Accounting
and Adjusting Revenues and Expenses
Patrizia Tettamanzi
Accounting Equation and T–Accounting / Sales
Revenues and Accounts Receivable. Cost of Good Sold
and Inventory
Long Lived Assets and Bonds (Straight Line and
Effective Interest Amortization methods) / Equity and
Investments (Definitions and Common Stock
Transactions) / Exercise on T-Account, Ledger, FSs
Exercise Trial Balance and Financial Statements (IS and
BS) / Cash Flow Statement (and CFS Exercises)
Patrizia Tettamanzi
Patrizia Tettamanzi
Patrizia Tettamanzi
Exercise – IS – BS – CFS
Patrizia Tettamanzi
Analysing Financial Statements
Review exercises
Patrizia Tettamanzi
Accounting
Session 1
Accounting
Why is Accounting important?
6
Accounting
What is Accounting?
• Accounting is the information system that measures business
activities, processes that information into reports and
communicates the results to decision makers.
• Accounting provides much information that people use:
– to manage businesses;
– to evaluate businesses.
• to manage: for example, managers must decide what
merchandise to buy and sell, what types of assets to acquire for
use in the business, how to finance the company. Accounting
provides information useful to take the best decision.
• to evaluate: both managers and investors need accounting
information to evaluate if the company is able to reach its goals
or if it’s a profitable investment (in comparison to other
investments).
7
Accounting
What is Accounting?
“Accounting is the language of business.”
Collect → Process →
Report
?
measure record analyze
!
Information
Decision-Makers (Information Users)
A system that collects and processes financial information about an
organization and reports that information to decision makers.
8
Accounting
Accounting is useful for:
•
•
•
•
•
•
Individuals;
Managers;
Investors and Creditors;
Government Regulatory Agencies;
Taxing Authorities (businesses pay taxes on profits and assets);
Employees (to evaluate the ability to pay salaries and wages).
In short, Accounting is storytelling, told by narrators of varying
reliability: the goal is to get to the truth, but the path is often
convoluted. What do you make of it?
9
Accounting
Accounting is useful for different users
External Decision Makers
10
Internal Decision Makers
Accounting
Financial vs. Management Accounting
• Financial accounting provides information mostly to external
users.
• Its primary objective is to provide information useful for making
investment and lending decisions.
• Management
accounting
provides
mostly
confidential
information for internal decision makers (for example top
executives).
• There are very strong links between financial and management
accounting.
• In order to better understand the differences between financial
and management accounting we can think about a firm as an
INPUT-OUTPUT system.
11
Accounting
Financial vs. Management Accounting
• The firm needs economic resources (labor force, buildings,
cash,…). These are the inputs of its activity.
• The inputs acquired are then processed or transformed inside
the firm.
• The products of the firm (goods or services) represent the
outputs of its activity.
INPUTS
12
OUTPUTS
Accounting
Financial vs. Management Accounting
• When the firm buys its inputs and when it sells its products it
performs external transactions.
• When the firm transforms the inputs into outputs it performs
internal processes.
• While the external transactions are the object of financial
accounting, what happens inside the firm (that is its internal
processes) is the primary object of management accounting.
• So, we’ll focus our attention on external transactions while
dealing with financial accounting.
• You will learn about management accounting in a different
course.
13
Accounting
Financial vs. Management Accounting
Financial
Management
External
Reporting
Stakeholders
Internal
Reporting
Managers
Purpose
Financing/Tax/
Unions/...
Decision
Making
Output
Financial
Statements
Reports
Scope
Subjects
14
Accounting
Financial Statements
• The key product of financial accounting is the set of financial
statements: the documents that report financial information about a
business entity to decision makers.
• Financial statements tell us how well a business entity is performing in
terms of profits and losses and where it stands in financial terms.
• The most basic concept in accounting is the entity concept. An
accounting entity is an organization that stands apart as a separate
economic unit. From an accounting point of view, we need to sharply
separate each entity in order not to confuse its affairs with those of
other entities.
15
Accounting
Financial Statements
• In different words, when we prepare a set of financial statements, we
do it with reference to a specific entity, whose name is reported on the
top of each statement (show slide).
• There are three main forms of organizations:
– proprietorship, which has a single owner, personally liable for the debts
of the business;
– partnership, which has two or more owners called partners, personally
liable for the debts of the business;
– corporation, which has a lot of owners called stockholders or
shareholders, not personally liable of the debts of the company.
• For our purposes, we’ll refer to a generic “company”. When necessary,
we’ll distinguish among the different forms of business.
16
Accounting
Financial Statements
• The basic set of financial statements is composed of the following:
– Balance Sheet (or Statement of financial
position);
– Income Statement (or Profit & Loss, or
Statement of operations);
– Statement of Cash Flows.
• There are other statements (like, for example, the Statement of
retained earnings), but these are less important for our purposes.
• Each statement answers a different question about the company’s
performance and financial position.
17
Accounting
Financial Statements
• The Balance Sheet answers the questions:
– what are the company’s economic assets and who has
claims to them at a certain date (the end of the period)?
– What is the company’s financial position at a certain
date (the end of the period)?
• The Income Statement answers the question:
– how well did the company perform during the period?
• The Statement of Cash Flows answers the question:
– how much cash did the company generate and spend
during the period?
18
Accounting
Financial Statements
Balance Sheet
Financial position at a particular point in time:
• Assets
• Liabilities
• Owners’ Equity
Statement of
Cash Flows
The change of the cash balance In/outflows in three categories:
• Operating activities
• Investing activities
• Financing activities
19
Income Statement
Financial performance during an
accounting period measured as revenues
minus expenses
Statement of
Retained Earnings
The change of retained earnings:
+ net income
− dividends
Accounting
The Accounting Period
• For each statement we talk about a “period”. This is the
accounting period, that is the period of time depicted by
financial statements.
• Usually this period corresponds to the calendar year (01.0112.31).
• When the accounting year is different from the calendar year,
we talk about fiscal year.
• The accounting year chosen by each entity is reported on the
top of each statement.
20
Accounting
The four basic financial statements can be prepared at
any point in time such as:
▪ End of the year (for the year ended, annual reports);
▪ Quarterly (for the quarter ended, quarterly reports);
▪ Monthly (for the month ended, monthly reports).
The financial statement heading includes:
▪ Name of the entity (Company name);
▪ Title of the statement (e.g., Balance Sheet);
▪ Specific date of the statement (e.g., at December
31, 2018);
▪ Unit of measure (in millions of dollars).
21
Accounting
The Balance Sheet ( BS )
• The balance sheet gives a picture of the company’s financial position
at the end of an accounting period.
• It reports three main categories of items:
– Assets;
– Liabilities;
– Shareholders’ equity.
• Assets are the economic resources of a business that are expected to
be of benefit in the future (examples: cash, merchandise, buildings,
furniture, etc.).
• Liabilities are “outsider claims”, that is economic obligations (debts)
payable to outsiders (creditors) (example: a loan).
• Shareholders’ (or Owners’) Equity represents the “insider claims” to
the business resources. These are the assets held by the owners who
invested money in the firm.
22
Accounting
Balance Sheet
Assets
Cash
Short-Term Investments
Accounts Receivable
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term Investments
Equipment
Buildings
Land
Intangibles
The Balance Sheet is a
financial snapshot at a
specific point in time.
23
Elements of the
Balance Sheet
Liabilities
Accounts Payable
Accrued Expenses
Notes Payable
Taxes Payable
Unearned Revenue
Bonds Payable
Stockholders’ Equity
Common Stock
Retained Earnings
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1-23
Exhibit 1.2
Balance Sheet
EXPLANATION
LE-NATURE’S INC.
Balance Sheet
At December 31, 2015
(in millions of dollars)
Assets:
Cash
Accounts receivable
Inventories
Property, plant, and equipment
Total assets
Liabilities and stockholders’ equity:
Liabilities
Accounts payable
Notes payable to banks
Total liabilities
Stockholders’ equity
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
Name of the entity
Title of the statement
Specific date of the statement
Unit of measure
$ 10.6
6.6
51.2
459.0
$527.4
$ 26.0
381.7
407.7
55.7
64.0
119.7
$527.4
Resources controlled by the company
Amount of cash in the company’s bank accounts
Amounts owed by customers from prior sales
Ingredients and beverages ready for sale
Factories, production equipment, and land
Total amount of company’s resources
Sources of financing for company’s resources
Financing supplied by creditors
Amounts owed to suppliers for prior purchases
Amounts owed to banks on written debt contracts
Financing provided by stockholders
Amounts invested in the business by stockholders
Past earnings not distributed to stockholders
Total sources of financing for company’s resources
The notes are an integral part of these financial statements.
24
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1-24
The Accounting Equation
A = L + SE
Assets
Economic
Resources
Liabilities
Stockholders’
Equity
Sources of Financing for Resources
Stockholders’
Liabilities:
Equity:
from
from
Creditors
Stockholders
The balance sheet reports a company's assets, liabilities, and
stockholders' equity at a specific point in time.
25
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1-25
The Income Statement ( IS )
• The Income Statement reports the company’s revenues, expenses and
net earnings (or income) for the accounting period.
• In order to define revenues and expenses we need first to define net
earnings
• Net earnings represent the result of the business operations. It is the
amount earned by income-producing activities.
• Revenues are increases in net earnings deriving from sales of goods or
services to customers or clients
• Expenses are decreases in net earnings. They are the cost of doing
business, that is the cost of all the resources used to perform the
business’ activity.
• Net earnings = revenues - expenses
• If net earnings < 0, it is called net loss
26
Accounting
Income Statement
Revenues
Cash and promises received
from delivery of goods and
services.
Examples:
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue
The Income Statement is a
measure of performance of
the business.
27
Elements of the
Income
Statement
Expenses
Resources used to earn
period’s revenues.
Examples:
Cost of Goods Sold
Wages Expense
Rent Expense
Depreciation Expense
Insurance Expense
Repair Expense
Income Tax Expense
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
1-27
The Income Statement Equation
R - E = NI
Revenues
Expenses
Cash and promises
received from
delivery of goods
and services.
Resources
used to earn
period’s
revenues
Net Income
Revenues earned
minus expenses
incurred. Also called
“profit”, “net
earnings”, or “the
bottom line.”
If total expenses exceed total revenues, a net loss is reported.
28
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1-28
Exhibit 1.3
Income Statement
EXPLANATION
LE-NATURE’S INC.
Income Statement
For the Year Ended December 31, 2015
(in millions of dollars)
Revenues
Sales revenue
Expenses
Cost of goods sold
Selling, general, and administrative
expenses
Interest expense
Income before income taxes
Income tax expense
Net income
Name of the entity
Title of the statement
Accounting period
Unit of measure
$275.1
140.8
77.1
17.2
40.0
17.1
$ 22.9
Cash and promises received from sale of beverages
Cost to produce beverages sold
Other operating expenses (utilities, delivery costs, etc.)
Cost of using borrowed funds
Income taxes on period’s income before income taxes
Revenues earned minus expenses incurred
The notes are an integral part of these financial statements.
29
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1-29
Statement of Stockholders’ Equity (1 of 2)
Common Stock
Amounts invested in the
business by stockholders.
Beginning Common Stock
+ Stock Issuance
Ending Common Stock
Retained Earnings
Past earnings not distributed
to stockholders.
Elements of the
Statement of
Stockholders’
Equity
The Statement of
Stockholders’ Equity reports
the change in each
stockholders’ equity account
during the period.
Beginning Retained Earnings
+
Net Income
− Dividends declared
Ending Retained Earnings
30
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1-30
Exhibit 1.4
Statement of Stockholders’ Equity
EXPLANATION
LE-NATURE’S INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
(in millions of dollars)
Balance December 31, 2014
Net income for 2015
Dividends for 2015
Balance December 31, 2015
Name of the entity
Title of the statement
Accounting period
Unit of measure
Common
Stock
Retained
Earnings
$55.7
$43.1
22.9
(2.0)
$64.0
$55.7
Last period’s ending balances
Net income reported on the income statement
Dividends declared during the period
Ending balances on the balance sheet
The notes are an integral part of these financial statements.
31
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1-31
Statement of Cash Flows
+/- Cash Flows from Operating Activities (CFO)
+/- Cash Flows from Investing Activities (CFI)
+/- Cash Flows from Financing Activities (CFF)
Change in Cash
+
Beginning Cash Balance
Ending Cash Balance
/32
Note that each of the three cash flow
sources can be positive (net cash inflow)
or negative (net cash outflow)
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1-32
Statement of Stockholders’ Equity (2 of 2)
Cash Flows from Operating Activities
Cash collected from customers less cash paid for
operating expenses such as cash paid to
suppliers and employees.
Elements of the
Statement of
Cash Flows
Cash Flows from Investing Activities
Cash flows related to acquisition or sale of the
company’s plant and equipment and
investments.
Cash Flows from Financing Activities
Cash flows from the receipt or payment of
money to investors and creditors (except
suppliers)
The Statement of Cash Flows reports inflows and
outflows of cash during the accounting period.
33
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1-33
Exhibit 1.5
Statement of Cash Flows
EXPLANATION
LE-NATURE’S INC.
Statement of Cash Flows (Summary)
For the Year Ended December 31, 2015
(in millions of dollars)
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Net increase (decrease) in cash
Cash balance December 31, 2014
Cash balance December 31, 2015
$ 87.5
(125.5)
47.0
9.0
1.6
$ 10.6
Name of the entity
Title of the statement
Accounting period
Unit of measure
Cash flows directly related to earning income
Cash flows from purchase/sale of plant, equipment, & investments
Cash flows from investors and creditors
Change in cash during the period
Last period’s cash on the balance sheet
Ending cash on the balance sheet
The notes are an integral part of these financial statements.
34
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1-34
Relationship between Balance Sheet and
Income Statement
• The income statement reports net earnings (or net loss) as
difference between revenues and expenses.
• At the same time, net earnings (or net loss) is part of the
owners’ equity, since it represents the remuneration for the
investment they made in the firm.
• We can say that income statement gives details about the
increase (in case of net earnings) or decrease (in case of net
loss) in the owners’ equity due to the operations performed by
the company during an accounting period.
35
Accounting
Relationship between Balance Sheet,
Income Statement and Cash Flow
Statement of Stockholders’ Equity
Income Statement
Revenues
− Expenses
Net Income
$ 275.1
252.2
$ 22.9
Statement of Cash Flows
+/− Cash Flows from Operating
Activities
$ 87.5
+/− Cash Flows from Investing
Activities
(125.5)
+/− Cash Flows from Financing
Activities
47.0
Change in Cash
9.0
+ Cash at Beginning of Period
1.6
Cash at End of Period
$ 10.6
36
1
Beginning
+ Net Income
− Dividends
Ending
Common
Stock
$55.7
$55.7
Retained
Earnings
$43.1
22.9
(2.0)
$64.0
Balance Sheet
3
Cash
Other Assets
Total Assets
Liabilities
Common Stock
Retained Earnings
Total Liabilities &
Stockholders’ Equity
$ 10.6
516.8
$527.4
$407.7
55.7
64.0
2
$527.4
Accounting
The Notes
• Did you notice this sentence at the bottom of each financial
statement?
• All financial statements should be accompanied by notes that
provide the reader with supplemental information to help the
reader better understand the financial statements.
• The notes are also called footnotes.
37
Accounting
Financial Statements Format
Assets are listed on the balance sheet by ease of
conversion to cash.
Liabilities are listed by the maturity
(due date).
Place a single underline below the last item
in a group before a total or subtotal, and a
double underline below the group totals.
Include the monetary unit sign ($)
beside the first dollar amount in a group
of items and by group total
38
Accounting
Accounting Standards
Guides and rules that govern accounting practice, regarding
how financial statements are prepared and accounting
information is presented
• GAAP (Generally Accepted Accounting Principles)
• IFRS (International Financial Reporting Standards)
Prior to 1930’s, each company has self-defined financial
reporting practices. Thus, no uniform standard across
companies was in practice.
Why do we need accounting standards?
39
Accounting
Types of Business Entities
Sole Proprietorship: owned by a single individual
Partnership: owned by two or more individuals
Corporation: ownership represented by shares of stock that
can be bought and sold and operates separately from its owners
Advantages of a Corporation:
➢Stockholders have limited liability
➢Continuity of life
➢Ease in transferring ownership (stock)
➢Opportunity to raise large amounts of money by selling
shares of stock to a large number of people
Disadvantage of a Corporation:
➢Double taxation (income is taxed when earned and
again when distributed to stockholders as dividends)
40
Accounting
Quiz and Exercises
Determine if each of the following items “belongs” to the income statement or to the balance
sheet. Use “IS” for Income Statement, “BS” for Balance Sheet. If the item belongs to the
income statement, specify if it is a revenue (R) or an expense (E); if it is a balance sheet item,
indicate if it is an asset (A), a liability (L), or a portion of the owners’ equity (OE).
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
41
Items
Cash and cash equivalents
Dividends received
Dividends paid
Inventories
Trade payables
Investments in subsidiaries
Income taxes
Cost of goods sold
Goodwill
Bank loan
Interest expense
Net income of the current year
Property, Plant and equipment
Rent revenue
Leased assets
Provisions for risks and charges
Revaluation reserve
Trade receivables
Retained earnings
Depreciation / Amortization expense
IS
BS
Accounting
Suggested Bibliography
• P. Tettamanzi, G. Blandano & S. Goodman, BASIC
ACCOUNTING – How to Prepare and Analyze Financial
Statements, IPSOA, Last Edition, ISBN: 978-88-217-5060-1.
• M. Barber & S. Parry, Accounting and Finance for Managers: a
Business Decision-Making Approach, Kogan Page, 3rd Edition,
2021, ISBN: 978-1-78966-751-6.
42
Accounting