ACC 203
Financial Accounting
ACC 203
Financial Accounting
Instructor: Dr. Lockard
Office Hepburn 101
Office Hours
Tues & Thurs 1:20 – 2:20 PM
or by appointment.
Phone (office) (315) 229-5057
Economic Department FAX (607) 777-2681
email alockard@stlawu.edu
Textbook
• Financial Accounting textbooks are all pretty
much the same.
• They generally cost close to $200
• I have posted a free PDF files of a Financial
Accounting textbook on the T drive and on
Canvas.
• You’re welcome.
The syllabus for this course is posted in
Canvas.
Read it.
We will both be bound by it.
How grades are calculated:
Quizzes
Homework
Midterm 1
Midterm 2
Final Exam
5%
10 %
30 %
25 %
30 %
We will have two midterm exams and
a final exam.
Quizzes
Homework
Midterm 1
Midterm 2
Final Exam
5%
10 %
30 %
25 %
30 %
Exam questions may be similar to
those in the homework.
Homework
• Most homework is in the form of an excel file.
• You should use the functions of excel to do the
math for you.
• Prospective employers tell us that the ability
to use excel is a skill that his highly sought in
prospective employees.
Homework
• Assignments are posted in Canvas
• They are to be submitted via Canvas
– Homework file names should “[last name] HW
01”, etc.
• What if you turn it in late?
– Grade will be lowered 10 points AN HOUR!
• What if it is late because of circumstances truly beyond your
control?
– You need to negotiate that BEFORE it is due
– It is much, much better to ask for permission than forgiveness
The assignment is due in
5 minutes and it is not
loading correctly in
Canvas!!!
What can I do?
Send a readable file as an
attachment to my email so I can open
it by time it is due. Note that if I can’t
open the file, you are no better off.
OR turn in a hard copy in class. (Print
all worksheets)
Then get down to IT and find out what
went wrong. Remember who you
talked to at IT. I will ask you that.
Attendance and Quizzes
• There will be a quiz every class.
• Quizzes can not be made up, regardless of why
they might be missed.
• I will drop some quizzes at the end of the
semester.
• To get credit for taking a quiz, a student must
remain in class until the end of the period unless
he has made arrangements with me beforehand.
• Therefore, the quiz policy is an implicit
attendance policy.
What are the quizzes on?
• The basic concepts that every accounting
student MUST know.
How quizzes are administered.
• Quizzes will be distributed face down at the
beginning of class.
• All students will turn the quiz face up when
instructed to.
• All students will look no where other than at their
own quiz paper while it is face up.
• Students turn their quiz face down when they are
done.
• Quizzes are passed in face down.
Are ethics in accounting important?
• How much can
accounting decisions
affect a business’s
reported profitability?
• What might result from
creative accounting?
Are ethics in your classwork important?
Students are prohibited from representing someone
else’s work as their own, or assisting another student in
doing so.
About me:
• I keep strange hours
• I go off-line in the early afternoon, and
come back on-line in the wee hours of the
night.
https://www.youtube.com/watch?v=h
WK6ilRTGig
The History of Accounting
CC 4:15
The idea of Accounting:
Accounting is known as the language
of business.
Accounting is essential for running a business. Businesses make
profits by providing goods and services that people want. Both
the businesses and the customers benefit.
All forms of businesses must do bookkeeping.
We call that accounting.
That is what this course is about.
This is Financial Accounting.
Managerial Accounting is offered in the Spring.
Financial Accounting is backward looking.
It tells us precisely what happened.
Financial Accounting provides
information for external users.
What would these external users want
to know about a company? Why?
• Investors
• Creditors
• Tax collectors
• Customers
The external users will compare the
financial statements of many firms.
For comparisons between firms to be possible, all
firms must represent information in the same format.
Some numbers in the Income Statement are shown in
parentheses. What does that mean?
In accounting, negative numbers
are shown in parentheses.
Examples: (58,473)
($10,000)
All accountants preparing statements for
external users must follow the same rules.
Accounting is known as the language
of business.
It is important that everyone use the same syntax.
In this country the accounting rules we
follow are known as GAAP.
• Generally Accepted Accounting Practices.
– Here, “generally” means “universally.”
• GAAP are established by the FASB.
– Financial Accounting Standards Board.
• Many other countries use IFRS.
– That includes Canada and Europe.
– International Financial Reporting Standards.
– IFRS are established by the IASB.
• International Accounting Standards Board.
• These standards are gradually converging.
In the United States, the accounting
rules are GAAP.
In Canada, and much of the rest of the world,
the accounting rules are IFRS.
What can happen if accountants don’t
follow the rules?
The accounting Process:
•
•
•
•
Identifies information
Records information
Summarizes information
Reports information to decision-makers
Financial Statements we will prepare:
•
•
•
•
•
Balance sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows
Statement of Shareholders’ equity
We must distinguish between Stock
and Flow concepts.
How much water is behind Hoover Dam?
That refers to a stock.
We must distinguish between Stock
and Flow concepts.
How much water is behind Hoover Dam?
At what time?
We must distinguish between Stock
and Flow concepts.
How much water is released from the
Owyhee Dam? That refers to a flow.
We must distinguish between Stock
and Flow concepts.
How much water is released from the
Owyhee Dam? Over what period of time?
Financial Statements we will prepare:
• Balance sheet (stock)
– Date must always be specified.
• Income Statement (flow)
– Time period must always be specified.
• Statement of Retained Earnings (flow)
– Time period must always be specified.
• Statement of Cash Flows (flow)
– Time period must always be specified.
• Statement of Shareholders’ equity (stock)
– Date must always be specified.
Financial Statements
The Income Statement
• Reports the profitability of a business
organization for a stated period of
time.
– Revenues are defined as the inflow of
assets resulting from the sale of
products or the rendering of services to
customers.
– Expenses are the costs incurred to
produce revenues.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
Retained Earnings
• A company's earnings are either:
–Used to pay expenses,
–Distributed to the owners as dividends,
–Or Retained.
Financial Statements
Continued
The Statement of Retained Earnings
• Reports the changes in retained earnings
that occurred between two balance sheet
dates.
– Net income increases retained earnings.
– Net loss decreases retained earnings
– Dividends (distributions of income to owners)
reduce retained earnings.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
Financial Statements
Continued
The Balance Sheet
• Reflects a firm’s solvency as of a specific
moment in time.
– Assets are things of value that are owned by a
business.
– Liabilities are the debts owed by a firm.
– Stockholders’ equity is the share of the business that
the stockholders (shareholders) own outright
• Equity is equal to total assets minus total liabilities.
Financial Statements
Continued
The Statement of Cash Flows
• Shows the cash inflows and cash outflows
from operating activities, investing activities,
and financing activities for a stated period of
time.
– Operating activities generally include the cash
effects of transactions and other events that enter
into the determination of net income.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
Statement of Cash Flows
Continued
– Investing activities generally include transactions
involving the acquisition or disposal of long-term
(noncurrent) assets such as land, buildings, and
equipment.
– Financing activities generally include the cash
effects of transactions and other events involving
creditors and owners (stockholders).
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
What kind of plant is this?
ALOE
The Accounting Equation:
Assets = Liabilities + Owner’s Equity
A = L + OE
The Accounting Equation:
Assets = Liabilities + Owner’s Equity
• Assets are resources that we expect will generate
future cash inflows.
• Liabilities are obligations to outsiders, or claims
against assets.
• Owner’s equity is the Owner’s claims on assets.
The Accounting Equation:
Is this more intuitive?
Owner’s Equity = Assets - Liabilities
The Financial Accounting Process
• The Accounting Equation:
ASSETS = LIABILITIES + STOCKHOLDERS’ EQUITY
– As a business engages in economic activity, the
dollar amounts and the composition of its
assets, liabilities, and stockholder’s equity
change, but the equality of the basic equation
always holds.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
The Accounting Equation:
We will find reasons for putting assets
on the left and Liabilities and owner’s
equity on the right.
Assets = Liabilities + Owner’s Equity
A = L + OE
Assets = Liabilities + Owner’s Equity
• The Accounting Equation must always hold true.
• Therefore all financial transactions involve two
entries.
– Can you see why?
• Thus giving rise to double-entry bookkeeping.
Balance sheet transactions:
• An event that effects the financial position of
a business entity is a balance sheet
transaction.
• It will necessarily involve two entries.
Some sample balance sheet
transactions:
Biwheels Company
Date
Transaction
1/2/2013 Mr. Lopez invests $400,000 of his own money in the company.
1/2/2013 BiWheels borrows $100,000 from Chase Bank.
1/3/2013 BiWheels Acquires Store equipment for $15,000 cash.
1/4/2013 BiWheels Acquires bicycles from Trek for $120,000 cash.
1/5/2013 BiWheels buys bicycle parts on credit for $4000 from Shimano.
1/6/2013 Biwheels buys bicycles from Schwinn for $30,000. $10,000 down,
the balance due in 60 days.
1/7/2013 Biwheels sells a display case at cost($1,000) to another business.
1/8/2013 Biwheels returns 4 bicycles ($200 each) to Schwinn.
1/10/2013 Biwheels pays $4,000 to Shimano.
1/12/2013 Lopez pays $35,000 by check to remodel his house.
Assets = Liabilities + Owner’s Equity
Balance sheet transactions:
• Our Accounting Equation has only three
accounts:
1. Assets
2. Liabilities
3. Owner’s equity
• We’ll need others, like:
– Cash
– Merchandise Inventory
– Store Equipment
– Notes payable
– Accounts payable
When we enter balance sheet
transactions we need to consider:
• Which accounts are affected?
• Are those accounts increased or decreased?
• By how much?
The Balance sheet is one of the most important
financial statements we will work with this semester.
The other most important one is the Income Statement
Revenue
- Expenses
= Income
We’ll see this in the exercise Tuesday.
Revenue
- Expenses
= Income
Heads Up!
• Homework due Thursday
– It is posted in Canvas and on the T drive
– It should be submitted via Canvas
Business firms come in a variety of forms
• Proprietorships
– A firm owned by an individual.
• The most common form of firm.
– Advantages
• Easy to form and dissolve.
• Decision-making is streamlined.
– Disadvantages
• Proprietorships have unlimited liability. That can be a problem.
• They may have difficultly raising large amounts of capital.
• The firm cannot outlive the proprietor.
Business firms come in a variety of forms
• Partnerships
– A firm owned by two or more individuals.
– Advantages
• Easy to form and dissolve.
• Different partners may have different specialized skills.
– Disadvantages
• Each partner has unlimited liability.
• One partner’s incompetence or dishonesty can ruin the others.
Business firms come in a variety of forms
• Corporations
– Organizations owned by shareholders
• The corporation is a “legal person” for some purposes.
• Most of what we consume is produced by a relatively small number of
corporations.
– Advantages
• Limited liability. Shareholders can lose no more than their initial
investment.
• Relatively easy to raise large amounts of capital.
• Corporations persist after the death of shareholders.
– Disadvantages
•
•
•
•
Complex to organize, operate and dissolve.
They are subject to double taxation.
The corporation and the shareholders are both taxed on the same profits.
They are subject to a variety of principal-agent problems.
Different forms of ownership:
• Sole proprietors
o Assets = Liabilities + Owner’s equity
• Partnerships
o Assets = Liabilities + Owners’ equity
• Corporations
o Assets = Liabilities + Shareholders’ equity
Shareholders’ equity =
Stockholders’ equity =
Paid-in capital
• Paid in capital is often divided into two
categories:
 Common stock at par value
 Paid-in capital in excess of par value
Some states require firms to assign a
par value to their shares.
It’s pretty meaningless, but it is reflected in the balance sheet.
We’ll get to the different kinds of stock
in chapter 12.
Who’s in charge?
• For Sole Proprietorships and Partnerships, the
owners are the managers.
• For Corporations, the shareholders elect the
Board of Directors, who appoint managers.
Management of corporations is sometimes
subject to Principal-Agent problems.
• Agents are supposed to act in the interest of
principals.
• In a corporation, managers are agents, and
the shareholders are the principals.
• Sometimes the managers act in their own best
interest, instead of for shareholders.
Management of corporations is sometimes
subject to Principal-Agent problems.
What might unscrupulous managers do?
• They may try to make
companies appear more
profitable than they really
are.
• They do that by “cooking
the books,” that is, by
dishonestly manipulating
the financial statements we
will discuss in this class.
How might we try to keep managers
honest?
• By auditing their financial statements.
– That adds credibility to financial statements.
• Only CPAs (Certified Public Accountants) may
offer official opinions regarding the validity of
financial statements.
• Auditors do not prepare financial statements,
they only evaluate them.
02
Activities Performed by Business
Organizations:
• Service companies
– Provide services for a fee.
• Merchandising companies
– Purchase goods that are ready for sale and then
resell them to customers.
• Manufacturing companies
– Buy materials, convert them into products, and then
sell the products to other companies or to final
customers.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
The Primary Objectives of Every
Business are:
• Solvency
– The ability to pay debts as they become due.
• Profitability
– The ability to generate income.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
The Financial Accounting Process
• Transactions provide much of the raw data
entered in the accounting process. Some
underlying assumptions or concepts used by
the accountant in recording business
transactions include:
– Business Entity – The business is assumed to have
an existence separate from its owners, creditors,
employees, and other interested parties.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
The Financial Accounting Process
Continued
– Money Measurement – Economic activity is
initially recorded and reported in terms of a
common unit of measurement, such as the dollar.
– Cost – Most assets are recorded at their
acquisition cost measured in terms of money paid.
– Continuity (Going-concern) – Unless strong
evidence exists to the contrary, the accountant
assumes the entity will continue operations into
the indefinite future.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
No longer a going concern
The Financial Accounting Process
Continued
– Periodicity – An entity’s life can be subdivided into
time periods for purposes of reporting its
economic activities.
• Transaction Analysis
– A summary of transactions format is used to
summarize activity and provide a basis for
preparation of the income statement and balance
sheet.
Financial Accounting: A Business Perspective 10e Copyright © 2013
Hermanson Edwards Williams
How does one get to be a CPA?
• There are a variety of requirements.
• CPAs may pass a certain number of college
courses in accounting.
• They must pass a 4 part, 14 hour examination.
• The pass rate for each part is less than 50%
• Less than 20% of candidates pass the entire
exam on the first try.
NY State requirements to become a CPA:
http://www.accountingedu.org/new-york-cpa.html
Careers in Accounting
• Accountants may be private or public.
• Public accountants offer services to the public
for a fee.
• Private accountants work for companies,
government agencies or non-profit
organizations.
• Accountants can rise to the highest levels of
management at a company.
Jobs in Accounting:
Accommodations for disabilities:
If you have a disability and need accommodations please be sure to contact the
Disability and Accessibility Services Office (x5537) right away so they can help
you get the accommodations you require. For more specific information visit the
DASO website https://www.stlawu.edu/student-accessibility-services