ACCT 102
Financial
Accounting
Management
Accounting
Overview of F/S
Cost Accounting
(Chap 1,2,3,4)
(Chap 18,19,20)
Operating activities
(Chap 5,6,9,10,11)
Cost-Volume-Profit Analysis
(Chap 22)
Financing activities
Operating Budgets
(Chap 13,14)
(Chap 23)
Investing activities
Capital Budgets
(Chap 10,15)
(Chap 25)
Cash Flows Statement
Managerial Decision
(Chap 16)
(Chap 25)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Chapter
1
McGraw-Hill/Irwin
Accounting in
Business
© The McGraw-Hill Companies, Inc., 2005
Learning objectives







1. Why accounting?
2. What is accounting?
3. Ethics in accounting
4. Accounting model / Accounting equation
5. Transaction analysis and recording
6. Financial Statement
7. Decision analysis: ROE & ROA
• Case: Coca Cola, Pepsi & Cadbury Schweppes
McGraw-Hill/Irwin
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1. Why accounting?
Related parties of a business
External Users
•Lenders
•Consumer Groups
•Shareholders •External Auditors
•Governments •Customers
McGraw-Hill/Irwin
Internal Users
•Marketing
Managers
•Purchasing
Managers
•Production
Managers
•HR Managers
© The McGraw-Hill Companies, Inc., 2005
2. What is accounting





McGraw-Hill/Irwin
Language of business
Help users to make better decision
Information and measurement system
To identify, record, and communicate
business activities
Provide relevant, reliable, and
comparable information
© The McGraw-Hill Companies, Inc., 2005
2. What is accounting
is a
Accounting
system that
Identifies
Records
information
Relevant
that is
Communicates
Reliable
Comparable
McGraw-Hill/Irwin
to help users make
better decisions.
© The McGraw-Hill Companies, Inc., 2005
2. What is accounting
 Identifying
Business
Activities
McGraw-Hill/Irwin
 Recording
Business
Activities

Communicating
Business
Activities
© The McGraw-Hill Companies, Inc., 2005
Financial and Managerial accounting
External Users
Internal Users
Financial accounting provides
external users with financial
statements.
Managerial accounting provides
information needs for internal
decision makers.
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3. Ethics in Accounting
Ethics
Beliefs that
distinguish
right from
wrong
McGraw-Hill/Irwin
Accepted
standards of
good and bad
behavior
© The McGraw-Hill Companies, Inc., 2005
Accounting Scandals
 Accounting frauds in current years
•
•
•
•
Enron (2001)
Worldcom (2002)
Parmalat (2003)
AIG (2005)
 Parties pay dearly for the fraud
• Enron
• Managers
– CFO 10 year in prison (Jan,14,2004)
– CAO 7 years in prison (Dec,28,2005)
– Chairman maximum 45 years in prison (May,25,2006)
– CEO maximum 185 years in prison (May,25,2006)
• Investors
– Stock Price $90 on Aug,2000
– Less than $1 on Nov,28,2001
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4. Accounting principles
 General principles:
• basic assumptions, concepts, and guidelines for
preparing financial statements.
 Specific principles:
• detailed rules used in reporting business
transactions and events.
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GAAP
Financial accounting practice is governed by
concepts and rules known as generally accepted
accounting principles (GAAP).
Relevant
Information
Affects the decision of
its users.
Reliable Information
Is trusted by
users.
Comparable
Information
Is helpful in contrasting
organizations.
McGraw-Hill/Irwin
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FASB and SEC
Financial Accounting
Standards Board is the private
group that sets both broad and
specific principles.
The Securities and Exchange Commission is
the government group that establishes
reporting requirements for companies that
issue stock to the public.
McGraw-Hill/Irwin
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Setting Accounting Principles
 Hong Kong:
• Hong Kong Institute of Certified Public
Accountants (HKICPA)
 China
• Ministry of Finance People’s Republic of China
 International Accounting Standard Board
(IASB)
• International Financial Reporting Standards
(IFRS)
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Principles of Accounting
Objectivity Principle
Accounting information is
supported by independent,
unbiased evidence.
Now
McGraw-Hill/Irwin
Cost Principle
Accounting information is
based on actual cost.
Future
Going-Concern Principle
Reflects assumption that the
business will continue operating
instead of being closed or sold.
© The McGraw-Hill Companies, Inc., 2005
Principles of Accounting
Monetary Unit Principle
Express transactions and events in
monetary, or money, units.
Revenue Recognition Principle
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash
received plus cash value of items
received.
Business Entity Principle
A business is accounted for
separately from other business
entities, including its owner.
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Business Entity Forms
Proprietorship
McGraw-Hill/Irwin
Partnership
Corporation
© The McGraw-Hill Companies, Inc., 2005
Exh.
1.8
Characteristics of Businesses
Characteristics
Proprietorship Partnership Corporation
Business entity
yes
yes
yes
Legal entity
no
no
yes
Limited liability
no*
no*
yes
Unlimited life
no
no
yes
Business taxed
no
no
yes
One owner allowed
yes
no
yes
McGraw-Hill/Irwin
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Corporation
Owners of a corporation are called
shareholders (or stockholders).
When a corporation issues only
one class of stock, we call it
common stock (or capital stock).
McGraw-Hill/Irwin
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4. Accounting Equation
Assets
=
Liabilities
+
負債＋
所有者權益
資產
Assets
McGraw-Hill/Irwin
Equity
Liabilities
& Equity
© The McGraw-Hill Companies, Inc., 2005
Accounting Equation
 Assets
• Resources with future benefits that are owned or
controlled by a company.
 Liabilities
• Source of fund from creditors
• What a company owes its creditors of future products
or services.
 Equity
• Source of fund from owners
• The claims of its owners
McGraw-Hill/Irwin
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Assets:
Resources owned or controlled by a business
Cash
Accounts
Receivable
Vehicles
Store
Supplies
McGraw-Hill/Irwin
Resources
owned or
controlled
by a
company
Notes
Receivable
Land
Buildings
Equipment
© The McGraw-Hill Companies, Inc., 2005
Liabilities:
creditors’ claim on assets.
Accounts
Payable
Notes
Payable
Creditors’
claims on
assets
Taxes
Payable
McGraw-Hill/Irwin
Wages
Payable
© The McGraw-Hill Companies, Inc., 2005
Equity:
the owner’s claim on assets.
Owner
Withdrawals
Owner
Investments
Owner’s
claims
on
assets
Revenues
McGraw-Hill/Irwin
Expenses
© The McGraw-Hill Companies, Inc., 2005
Expanded Accounting Equation
=
Assets
Owner
Capital
McGraw-Hill/Irwin
_
Liabilities
Owner
Withdrawals
+
+
Revenues
Equity
_
Expenses
© The McGraw-Hill Companies, Inc., 2005
Expanded Accounting Equation
 Revenues: gross increase in equity from a
company’s earnings activities.
 Expenses: the cost of assets or services used
to earn revenue. Expenses decrease owner’s
equity.
 Owner investments: the assets an owner puts
into the company.
 Owner withdrawals: the assets take away from
the company for personal use.
McGraw-Hill/Irwin
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5. Transaction Analysis
The accounting equation must remain in
balance after each transaction.
Assets
McGraw-Hill/Irwin
=
Liabilities
+
Equity
© The McGraw-Hill Companies, Inc., 2005
Transactions
1. J. Scott, the owner, contributed $20,000 cash to start
the Scott Company.
2. Purchased supplies paying $1,000 cash.
3. Purchased equipment for $15,000 cash.
4. Purchased Supplies of $200 and Equipment of $1,000
on account.
5. Borrowed $4,000 from 1st American Bank.
6. Rendered consulting services receiving $3,000 cash.
7. Paid salaries of $800 to employees.
8. J. Scott withdrew $500 from the business for personal
use.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 1
J. Scott, the owner, contributed $20,000
cash to start the business.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Capital (equity)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 1
J. Scott, the owner, contributed $20,000
cash to start the business.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
$ 20,000 $
-
$ 20,000
McGraw-Hill/Irwin
$
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
© The McGraw-Hill Companies, Inc., 2005
Transaction 2
Purchased supplies paying $1,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 2
Purchased supplies paying $1,000
cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
$ 19,000 $ 1,000 $
$ 20,000
McGraw-Hill/Irwin
-
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
© The McGraw-Hill Companies, Inc., 2005
Transaction 3
Purchased equipment for $15,000
cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 3
Purchased equipment for $15,000
cash.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
$
4,000 $ 1,000 $
$ 20,000
McGraw-Hill/Irwin
15,000
Liabilities
Accounts
Notes
Payable Payable
$
=
-
$
-
$
20,000
+
Equity
J. Scott,
Capital
$ 20,000
$ 20,000
© The McGraw-Hill Companies, Inc., 2005
Transaction 4
Purchased Supplies of $200 and
Equipment of $1,000 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Equipment (asset)
(3) Accounts Payable (liability)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 4
Purchased Supplies of $200 and
Equipment of $1,000 on account.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
$
4,000 $ 1,200 $
$ 21,200
McGraw-Hill/Irwin
Liabilities
Accounts
Notes
Payable Payable
+
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
16,000
$ 1,200 $
=
$
-
$ 20,000
21,200
© The McGraw-Hill Companies, Inc., 2005
Transaction 5
Borrowed $4,000 from 1st American
Bank.
The accounts involved are:
(1) Cash (asset)
(2) Notes payable (liability)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 5
Borrowed $4,000 from 1st American
Bank.
Assets
=
Cash
Supplies Equipment
(1) $ 20,000
(2)
(1,000) $ 1,000
(3)
(15,000)
$ 15,000
(4)
200
1,000
(5)
4,000
$ 8,000 $ 1,200 $ 16,000
$ 25,200
McGraw-Hill/Irwin
Liabilities
Accounts
Notes
Payable Payable
+
Equity
J. Scott,
Capital
$ 20,000
$ 1,200
=
$
$ 1,200 $
4,000
4,000
$
25,200
$ 20,000
© The McGraw-Hill Companies, Inc., 2005
Transaction Analysis
The balances so far appear below. Note that the
Balance Sheet Equation is still in balance.
Assets
=
Cash Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
$ 8,000 $ 1,200 $
$ 25,200
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital
$ 20,000
$
$ 20,000
1,200 $
4,000
$ 25,200
Now let’s look at transactions involving
revenue, expenses and withdrawals. © The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
Transaction 6
Rendered consulting services
receiving $3,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 6
Rendered consulting services
receiving $3,000 cash.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
$ 11,000 $
1,200 $
$ 28,200
McGraw-Hill/Irwin
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue
$ 20,000
$ 3,000
$ 1,200 $
$ 20,000 $ 3,000
4,000
$ 28,200
© The McGraw-Hill Companies, Inc., 2005
Transaction 7
Paid salaries of $800 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Salaries expense (equity)
Remember that the balance in the salaries
expense account actually increases.
But, equity actually decreases because
expenses reduce equity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 7
Paid salaries of $800 to employees.
Assets
=
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
$ 10,200 $
1,200 $
$ 27,400
16,000
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
J. Scott,
Capital Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$ 1,200 $
$ 20,000 $ 3,000 $
4,000
(800)
$ 27,400
Remember that expenses decrease equity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 8
J. Scott withdrew $500 from the
business for personal use.
The accounts involved are:
(1) Cash (asset)
(2) J. Scott, Withdrawals (equity)
Remember that the balance in the J. Scott,
Withdrawals account actually increases.
But, equity actually decreases because
withdrawals reduce equity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Transaction 8
J. Scott withdrew $500 from the
business for personal use.
Assets
=
Accounts Notes
Payable Payable
$ 1,200 $ 4,000
Cash
Supplies Equipment
Bal. $ 8,000 $ 1,200 $ 16,000
(6)
3,000
(7)
(800)
(8)
(500)
$ 9,700 $ 1,200 $ 16,000
$ 26,900
Liabilities
$ 1,200 $
=
4,000
+
Equity
J. Scott,
J. Scott,
Capital Withdrawal Revenue Expenses
$ 20,000
$ 3,000
$
(800)
$
(500)
$ 20,000 $
(500) $ 3,000 $
(800)
$ 26,900
Remember that withdrawals decrease equity.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
5. Financial Statements
Let’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Scott Company
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
$
3,000
$
800
2,200
Net income is the
difference
between
Revenues and
Expenses.
The income statement describes a
company’s revenues and expenses
along with the resulting net income or
loss over a period of time due to
earnings activities.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Scott Company
Income Statement
For Month Ended December 31, 2004
Revenues:
Consulting revenue
Expenses:
Salaries expense
Net income
The Statement of
Owner’s Equity
explains changes
in equity from net
income (or net
loss) and from
owner investments
and withdrawals for
a period of time.
McGraw-Hill/Irwin
$
3,000
$
800
2,200
The net income
of $2,200
increases
Scott’s capital
by $2,200.
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004 $
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004 $
20,000
2,200
500
21,700
© The McGraw-Hill Companies, Inc., 2005
The Balance Sheet
describes a
company’s
financial position
at a point in time.
Scott Company
Statement of Owner's Equity
For Month Ended December 31, 2004
J. Scott, Capital, Dec. 1, 2004
Plus: Investment by owner
Net income
Less: Withdrawals
J. Scott, Capital, Dec. 31, 2004
$
$
20,000
2,200
500
21,700
Scott Company
Balance Sheet
December 31, 2004
Assets
$
Cash
Supplies
Equipment
Total assets
McGraw-Hill/Irwin
$
9,700
1,200
16,000
26,900
Liabilities & Equity
Accounts payable
$
Notes payable
Total liabilities
J. Scott, Capital
Total liabilities and equity $
1,200
4,000
5,200
21,700
26,900
© The McGraw-Hill Companies, Inc., 2005
Scott Company
Statement of Cash Flows
For Month Ended December 31, 2004
Cash flows from operating activities:
Cash received from clients
$ 3,000
Purchase of supplies
(1,000)
Cash paid to employees
(800)
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of equipment
(15,000)
Net cash used in investing activities
Cash flows from financing activities:
Investment by owner
20,000
Borrowed at bank
4,000
Withdrawal by owner
(500)
Net cash provided by financing activities
Net increase in cash
Cash balance, December 1, 2004
Cash balance, December 31, 2004
$
1,200
(15,000)
$
$
23,500
9,700
9,700
The Statement of Cash Flows identifies cash
inflows and cash outflows over a period
of time.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
6. Decision analysis
- Return on Equity (ROE) & Return on Assets (ROA)
ROE = Net income ÷ Average Shareholder’s Equity
ROE is used by investors to evaluate
the attractiveness of investment
objects.
ROE evaluates efficiency of
management using owner’ s capital to
add value for owner
Comparison:
with competitor
with prior period
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
6. Decision analysis
- Return on Equity (ROE) & Return on Assets (ROA)
ROA = Net income ÷ Average total assets
ROA is viewed as an indicator of
operating efficiency.
ROA evaluates operating efficiency of
management using assets
Comparison:
with competitor
with prior period
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Return on Assets (ROE & ROA)
- Beverage Industry
1. Industry Background
•
•
Objective: strong brands of beverage
Key success factor: Marketing, especially branding
2. Key players:
•
•
•
Coca Cola Company
Pepsi Inc.
Cadbury Schweppes Public Ltd. Co.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Return on Assets (ROE)
- CoCa Cola, Pepsi, & Cadbury Schweppes
ROE
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
KO
30.18%
32.29%
33.58%
26.33%
38.38%
23.12%
27.14%
45.07%
61.63%
57.01%
PEP
29.24%
33.08%
33.31%
33.01%
32.76%
30.14%
30.87%
29.89%
31.60%
17.35%
CSG
14.71%
13.01%
10.13%
15.43%
13.58%
22.45%
20.52%
22.40%
2003
2005
Industry
ROE is used by investors to evaluate the
attractiveness of investment objects.
Return on Equity
70.00%
60.00%
ROE
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
1995
1996
1997
1998
1999
2000
2001
2002
2004
2006
Year
McGraw-Hill/Irwin
KO
PEP
CSG
© The
McGraw-Hill
Companies, Inc., 2005
Return on Assets (ROA)
- CoCa Cola, Pepsi, & Cadbury Schweppes
ROA
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
KO
16.01%
16.47%
16.76%
12.97%
18.30%
10.26%
11.93%
19.61%
25.03%
21.67%
PEP
13.66%
15.80%
14.62%
13.28%
13.30%
12.16%
10.20%
9.32%
10.14%
10.37%
CSG
5.43%
4.24%
3.56%
6.36%
5.67%
9.59%
7.84%
8.18%
Industry
ROA evaluates operating efficiency
of management using assets
Return on Total Assets
30.00%
25.00%
ROA
20.00%
15.00%
10.00%
5.00%
0.00%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
KO
McGraw-Hill/Irwin
PEP
CSG
© The McGraw-Hill Companies, Inc., 2005