ACCT1501 Notes
Introduction to Accounting
Financial Accounting
• Periodic financial statements that record financial position (BS) and performance (IS)
• Provision of info to ext decision markers (investors, creditors and customers)
Users of Financial Info
Users Purpose/type of info
Bankers To assess liquidity/solvency- likelihood of company meeting interest/principal payment on time
Suppliers To determine whether the company can pay for purchases on time Shareholders To decide whether to buy, sell or hold shares
Managers Decision making- planning, controlling and organising Board of directors To evaluate the CEO’s performance
ATO To monitor the correct payment of taxes
Employees/unions To assess job security by determining the ability of the company to pay wage/maintain employment and negotiate wages.
Accrual vs Cash Accounting
• Cash acc- records rev/exp when cash is received or paid
• Accrual acc- records rev/exp when the transaction occurs
Key Financial Statements
Balance sheet (statement of fin position)
• Records financial position at a point in time
• Financial position- financial resources and obligations at a point in time
• Structure:
o Heading provides company name, title and date (“as at…”) o Split up into assets, liabilities and shareholders’ equity
Income statement (profit and loss statement)
• Records financial performance over a certain period of time
• Financial performance- generation of new resources from day to day operations
Cash Flow Statement
• Cash flow statement explains the change in cash in the balance sheet
• Necessary because in an accrual system, revenues do not equal cash gained and expenses do not equal cash paid
• Structure:
o Operating activities: provision of g&s between customers, suppliers etc.
o Investing activities: acquisition or disposal of noncurrent assets, e.g. properties o Financing activities: change in size and composition of the financial structure Quality of financial information
• Relevance- information should help stakeholders make, confirm or correct predictions about the outcomes of past, present or future events
• Reliability (faithful representation)- numbers should measure the events neutrally, neither overstating nor understating their impact
• Materiality- assessing whether omission, misstatement or non-disclosure of a piece of info would affect the decisions of users of the accounting reports
• Generally accepted accounting principles (GAAP)- standard against which an accounting method or number can be judged
• Disclosure- financial statements should include notes and account descriptions to clarify which accounting methods have been followed
• Understandability- reports should be prepared for those with technical knowledge
• Comparability
• Verifiability- the numbers in the fin statements can be verified directly by looking at documentation or through direct observation (e.g. counting cash/inventory)
• Timeliness: providing information in time for the user to incorporate the information in their decisions.
Financial statement assumptions
• Accrual basis- accrual accounting used to record transactions
• Acc entity assumption- acc entity is separate and distinguishable from owners
• Acc period assumption- life of business divided into discrete time periods of equal length
• Monetary- transactions measured in common exchange which is constant (ignores inflation)
• Historical cost- assets are recorded at their original cost at purchase
• Going concern- assumes entity continues into foreseeable future (no intention to liquidate)
