ACCT 201
FINANCIAL ACCOUNTING
LECTURE 1
Asst. Prof. Özlem OLGU
Room: 202
Tel No: 0212 338 1457
E-Mail: oolgu@ku.edu.tr
1
ACCOUNTING AND THE
BUSINESS ENVIRONMENT
Chapter 1
2
Chapter Objectives
1. Use accounting vocabulary
2. Apply accounting principles and concepts
3. Use the accounting equation
4. Analyse business transactions
5. Prepare financial statements
6. Evaluate business performance
7. Revision questions
3
O1:Use accounting vocabulary
Accounting...
is an information system that...
measures business activities,
processes information, and...
communicates financial information.
is called the language of business.
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Users of Accounting Information
Financial Acct
External users
make decisions
about the entity.
İnvestors,
creditors, govt
agencies
Managerial Acct
Internal users
make decisions
for the entity.
Managers,
partnerts etc.
5
The Authority Underlying
Accounting
Public Sector
(SEC)
Private Sector
(AICPA) (IMA)
Private Sector
(FASB)
GAAP
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Standards of Professional
Conduct
AICPA’s Code of
Professional
Conduct
Standards of
Ethical
Conduct of the
Institute of
Management
Accountants
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Types of Business Organizations
1. Proprietorships
2. Partnerships
3. Corporations
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1. Proprietorships: single owner
 What are some advantages?
– total undivided authority
– no restrictions on type of business – must
be legal
 What are some disadvantages?
– unlimited liability
– limitation on size – fund raising power
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2. Partnerships: more than 1 owner
 What are some advantages?
- better credit standing – possibly
– more brain power, but consultation with
partners required
 What are some disadvantages?
– unlimited personal liability for general
partners
– need for written partnership agreement
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3. Corporations: more than 2
owners or shareholders
 What are some advantages?
– separate legal existence
– limited liability of stockholders
– transferability of ownership relatively easy
 What are some disadvantages?
– taxes – possible double taxation
– extensive governmental regulation
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O 2: Apply Accounting Concepts
and Principles
1. GAAP
2. Entity concept
3. Reliability concept
4. Cost principle
5. Going concern principle
6. Stable monetary unit concept
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Generally Accepted
Accounting Principles (GAAP)
 What is the primary objective of financial
reporting?
To provide information useful
for making investment and
lending decisions
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The Entity Concept Example
 Assume that John decides to open up a gas
station and coffee shop.
 The gas station made $250,000 in profits,
while the coffee shop lost $50,000.
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The Entity Concept Example
 How much money did John make?
 At a first glance, we would assume that
John made $200,000.
 However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.
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The Reliability (Objectivity)
Principle
Information must
be reasonably
accurate.
Information must
be free from bias.
Information must
report what
actually
happened.
Individuals would
arrive at similar
conclusions using
same data.
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The Cost Principle
Assets and services
acquired
should be recorded
at their actual cost.
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The Going Concern Concept
The entity will continue
to operate in the future.
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Stable-Monetary-Unit Concept
The dollar’s purchasing
power is relatively
stable.
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IMPORTNAT!!!
O 3: Use the Accounting Equation
Assets
Economic
Resources
=
Liabilities + Owner’s Equity
Claims to
Economic
Resources
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What is an asset?
 It is something a company owns which has
–
–
–
–
future economic value.
land
building
equipment
goodwill
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What is a liability?
 It is something a company owes.
– money
– service – legal retainers
– product – magazines
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What is owner’s equity?
 It is what’s left of the assets after liabilities
have been deducted.
– the same as net assets
– the owner’s claim on the entity’s assets
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Transactions that Affect
Owner’s Equity
OWNER’S
EQUITY
INCREASES
OWNER’S EQUITY
DECREASES
Owner Withdrawals
from the Business
Owner Investments
in the Business
Owner’s Equity
Revenues
Expenses
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Revenues
 What are revenues?
 They are amounts received or to be
–
–
–
–
received from customers for sales of
products or services.
sales
performance of services
rent
interest
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Expenses
 What are expenses?
 They are amounts that have been paid or
–
–
–
–
will be paid later for costs that have been
incurred to earn revenue.
salaries and wages
utilities
supplies used
advertising
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O 4: Analyze Business Transactions
 What is a transaction?
 It is any event that both affects the financial
position of the business and can be reliably
recorded.
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Accounting for Business
Transactions: Example
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.
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Example Continues...
5 Gillen performs services, and the client
agrees to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which
she purchased $500 worth of supplies.
 What is the effect of these transactions on
the accounting equation?
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Accounting for Business Transactions
Assets
1) Cash
2) Cash
Land
3) Supplies
4) Cash
5) Receivable
6) Cash
7) Cash
Totals
+ $30,000
– 20,000
+ 20,000
+
500
+ 5,500
+ 3,000
– 3,300
–
300
+ $35,400
Owner’s
= Liabilities + Equity
+ $30,000
+ 500
+
+
–
– 300
+ 200
5,500
3,000
3,300
+ $35,200 30
Important Points:
 Notice that the equation always stays in
balance.
 Each transaction affects at least two
accounts, sometimes more.
 Some transactions affect only one side of
the equation; some affect both sides.
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O 5: Prepare Financial Statements
Financial Statements...
– are the final
product of the
accounting process.
– tell how the
business is performing
and where it stands.
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Financial Statements
1. income statement
2. statement of owner’s equity or retained
earnings
3. balance sheet
4. statement of cash flows
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O 6: Evaluate Business Performance
Income Statement
Revenue:
Fees earned
Expenses:
Salary expense
Utilities and telephone expense
Equipment rental expense
Office rent expense
Net income
$8,500
$1,200
400
600
1,100
3,300
$5,200
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Statement of Owner’s Equity
G. Gillen, capital, April 1, 20xx
Contribution of capital
Net income
Cash distributions
G. Gillen, capital, April 30, 20xx
$
0
30,000
$ 5,200
– 2,000
$33,200
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Balance Sheet
Assets
Cash
Accounts receivable
Supplies
Land
Total assets
$19,900
2,000
500
11,000
$ 33,400
Liabilities
Accounts payable
Owner’s equity,
G. Gillen, capital
Total liabilities and
owner’s equity
$
200
33,200
$33,400
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Statement Of Cash Flows
Cash flows from operating activities:
Cash receipts from services rendered
Cash payments:
Supplies
$ 300
Operating expenses
3,300
Net cash flows from
Operating activities
Cash flows from investing activities
Purchase and sale of land
$6,500
3,600
$2,900
($11,000)
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Statement Of Cash Flows
Cash Flows from Financing Activities:
Investment by Owner
Withdrawals
Net Cash Flows from
Financing Activities
Cash at Beginning of Year
Cash at End of the Year
$30,000
2,000
$28,000
0
$19,900
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Revision Questions:
QUESTION 1
A corporation with 2 stockholders goes
bankrupt owing $10,000. How much
does each stockholder owe the
creditors?
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Answer: $0.
The stockholders of a corporation have limited
liability, which means that stockholders are not
responsible for the debts of the corporation.
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QUESTION 2
Land was acquired for a future building
site at a cost of $80,000. An appraiser
placed its value at $85,000. Another
company offered to buy the land for cash
of $90,000. At what amount should land
be reported in the financial statements?
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Answer: $80,000.
The cost principle states that assets should be
recorded at their cost.
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QUESTION 3
The assumption that the entity will
remain in operation for the foreseeable
future is the:
A.
B.
C.
D.
Reliability principle
Entity concept
Going concern concept
Cost principle
Answer: C
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QUESTION 4
A basic principle of accounting that requires
activities of an entity be kept separate from
other organizations and individuals as a
separate economic unit is the
Reliability principle
Entity concept
Going concern concept
Cost principle
Answer: B
A.
B.
C.
D.
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QUESTION 5
Which of the following is a correct
expression of the accounting equation?
Assets = revenues + expenses
Assets = revenues - expenses
Assets = liabilities – owner’s equity
Assets = liabilities + owner’s equity
Answer: D
A.
B.
C.
D.
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QUESTION 6
If a company’s assets total $400 and
owner’s equity totals $300, how
much are total liabilities?
 Answer: $100.



The accounting equation is:
Assets = liabilities + owner’s equity
$400
= ?
+
$300
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QUESTION 7
Owner's equity can be described as
A.
B.
C.
D.
Creditors’ claims on total assets
Owner’s claim on total assets
Current obligations of the company
Economic resources of the company
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Answer: B
Assets = Liabilities + Owner’s Equity
Creditors’
claims to
assets
Owner’s
claims to
assets
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QUESTION 8
What is the effect on the accounting
equation if a company collects $50 of an
Accounts Receivable?
A.
B.
C.
D.
increases an asset $50; decreases an asset $50
decreases an asset $50; decreases a liability $50
increases an asset $50; decreases a liability $50
decreases a liability $50; increases owner's equity
$50
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Answer: A
When a company collects on an accounts
receivable, cash is increased. Accounts
receivable is decreased by the same amount
since customers owe the company less.
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QUESTION 9
What is the effect on the accounting
equation if a company pays the monthly
rent in cash?
A. Assets decrease and liabilities increase
B. Liabilities decrease and owner’s equity
decreases
C. Owner's equity increases and assets increase
D. Assets decrease and owner’s equity decreases
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1.
2.
Answer: D
Assets decrease: Cash is paid and
decreases.
Owner’s equity decreases: Costs incurred
to earn revenues decrease the owner’s
interest in the assets.
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QUESTION 10
The balance sheet reports:
A. Revenues and expenses on a specific date
B. Assets, liabilities, and owner’s equity for a specific
period
C. Changes in owner’s equity for a specific period
D. Assets, liabilities, and owner’s equity on a specific
date
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Answer: B
The balance sheet reports the amount of assets,
liabilities and owner’s equity on a specific
date.
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QUESTION 11
An income statement reports
A. Revenues and expenses on a specific date
B. Revenues and expenses for a specific
period of time
C. Changes in owner’s equity for a specific
period of time
D. Assets, liabilities, and owner’s equity on a
specific date
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Answer: B
The income statement presents revenues and
expenses of a company for a specific period of
time.
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QUESTION 12
Determine the amount of net income (loss)
given the following information:
Accounts payable…………….$ 700
Service revenue………………..900
Supplies expense………………300
Cash……………………………800
Salaries expense………………. 400
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Answer:
Service Revenue
Less Expenses:
Supplies expense
Salaries expense
Net income
$900
$300
400
700
$200
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QUESTION 13
At the beginning of the year, owner’s
equity was $100. The owner invested
$200 cash to the business during the year
and earned a net income of $600. The
owner also withdrew $500 during the
year. What was the balance in owner’s
equity at the end of the year?
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Answer:
Beginning owner’s equity
Add: Net income
Investment by owner
Subtotal
Less: Owner’s withdrawal
Ending owner’s equity
$100
600
200
$900
(500)
$400
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QUESTION 14
Presented below are balance sheet items
for Alt Co.
Accounts payable…………..$200
Accounts receivable……...…300
Cash………………………....100
Furniture……………………..500
Norris, capital……….……….300
Notes payable……………….400
Compute total assets
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Answer:
Cash
$100
Accounts receivable
300
Furniture
500
Total assets
$900
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QUESTION 15
Presented below are balance sheet items
for Alt Co.
Accounts payable………….. $200
Accounts receivable……...… 300
Cash……………………….... 100
Furniture…………………….. 500
Norris, capital……….………. 300
Notes payable………………. 400
Compute total liabilities
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Answer:
Accounts payable
$200
Notes payable
400
Total liabilities
$600
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