Summary Accounting and Finance: an introduction 9th
edition
Chapter 1: Introduction to accounting and fnance
WHAT ARE ACCOUNTING AND FINANCE?
Accountnng =g concernedg =ithg collectnn,g analyzinng andg communicatnng fnancialg informaton.g
Financeg =g concernedg =ithg theg =aysg ing =hichg fundsg forg ag businessg areg raisedg andg invested.
WHO ARE THE USERS OF ACCOUNTING INFORMATION?
Maing usersg ofg fnancialg informatong relatnng tog ag business:
-g O=ners
-g Customers
-g Compettors
-g Employeesg andg theirg representatves
-g Government
-g Communityg representatves
-g Investmentg analysts
-g Suppliers
-g Lenders
-g Mananers
HOW USEFUL IS ACCOUNTING INFORMATION?
Evidence of the usefulness of accountnn
Whereg sharesg areg tradedg ong ag stockg exchanne,g theg impactg ofg accountnng informatong cang beg observed
andg measured.g
PROVIDING A SERVICE
Fundamentalg qualites:
-g Relevance
-g Faithfulg representaton
Relevanceg g Accountnng informatong shouldg beg capableg ofg infuencinng userg decisions.g Itg mustg helpg tog
predictg futureg events,g org tog helpg con frmg pastg events.g
Tog beg relevant,g accountnng informatong mustg crossg ag thresholdg ofg materiality.g Ang itemg ofg informatong
shouldg beg consideredg material,g org sinni fcant,g ifg itsg omissiong org misstatementg couldg alterg theg decisions
thatg usersg make.g
Faithfulg representatong g Accountnng informatong shouldg representg =hatg itg isg supposedg tog represent.
Tog dog so,g theg informatong providedg mustg refectg theg substanceg ofg =hatg hasg occurredg ratherg thang itsg
lenalg form.g
Tog provideg ag faithfulg representaton,g theg informatong providedg shouldg beg complete,g neutralg andg freeg
fromg error.g
FURTHER QUALITIES
-g Comparabilityg (overg tmeg org tog similarg businesses)
-g Veri fability
-g Timeliness
-g Understandability
,WEIGHING UP THE COSTS AND BENEFITS
Ing theory,g ag partcularg itemg ofg accountnng informatong shouldg onlyg beg producedg ifg theg costsg ofg
providinng itg areg lessg thang theg bene fts,g org value,g tog beg derivedg fromg itsg use.g
ACCOUNTING AS AN INFORMATION SYSTEM
Users,g bothg insideg andg outsideg theg business,g haveg tog makeg decisionsg concerninng theg allocatong ofg
scarceg resources.g Tog ensureg thatg theseg resourcesg areg efcientlyg allocated,g usersg ofeng needg fnancialg
informatong ong =hichg tog baseg decisions.g
Featuresg thatg accountnng informatong systemsg shouldg have:
-g Identfyinng andg capturinng relevantg informaton
-g Recordinn,g ing ag systematcg =ay,g theg informatong collected
-g Analyzinng andg interpretnng theg informatong collected
-g Reportnng theg informatong ing ag mannerg thatg suitsg theg needsg ofg users.g
MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING
Mananementg accountnng =g meetg theg accountnng needsg ofg mananers.
Financialg accountnng =g meetg theg accountnng needsg forg everyoneg exceptg mananers.g
THE CHANGING FACE OF ACCOUNTING
Variousg reasonsg =hyg theg environmentg =ithing =hichg businessesg operateg hasg becomeg increasinnlyg
turbulentg andg compettve:
-g Theg increasinng sophistcatong ofg customers
-g Theg availabilityg ofg rapidg andg sophistcatedg formsg ofg informatong andg communicaton
-g Theg developmentg ofg ag nlobalg economyg =hereg natonalg frontersg becomeg lessg important
-g Rapidg channedg ing technolony
-g Theg derenulatong ofg domestcg markets
-g Increasinng pressureg fromg o=nersg (shareholders)g forg compettveg economicg returns
-g Theg increasinng volatlityg ofg fnancialg markets
WHAT IS THE PURPOSE OF A BUSINESS?
No=,g theg customerg isg theg kinn.g
,WHAT KINDS OF BUSINESS OWNERSHIP EXIST?
-g Soleg proprietorship
-g Partnership
-g Limitedg company
Sole proprietorship
-g Ang individualg isg theg soleg o=nerg ofg ag business.
-g Easyg tog setg up.g Nog formalg proceduresg areg requiredg andg operatonsg cang ofeng commenceg
immediately.
-g Businessg =illg ceaseg ong theg deathg ofg theg o=ner
-g Nog lenalg requirementg tog produceg accountnng informaton.g
-g Unlimitedg liability.g
Partnership
-g T=og org moreg individualsg carryg ong ag businessg tonetherg =ithg theg intentong ofg makinng ag pro ft.
-g Easyg tog setg up.g Nog formalg proceduresg areg required.
-g Contractsg =ithg thirdg partesg mustg beg enteredg intog ing theg nameg ofg individualg partners.
Limited company
-g Numberg ofg individualsg =hog subscribeg capitalg andg becomeg theg o=nersg mayg beg unlimited.
-g Liabilityg ofg theg o=nersg isg limited.
-g Ing manyg cases,g theg o=nersg areg notg involvedg ing theg day-to-dayg runninng ofg theg business.
-g Tog setg up,g documentsg ofg incorporatong mustg beg prepared.g Also,g ag frame=orkg ofg renulatonsg exists.
Limitedg liabilityg partnershipg (LLP):g normalg partnershipg insteadg thatg theg LLPg isg responsibleg forg anyg
debtsg incurred.
HOW ARE BUSINESSES ORGANIZED?
Theg boardg ofg directorsg isg charnedg =ithg threeg majorg tasks:
-g Setnng theg overallg directong andg stratenyg forg theg business.
-g Monitorinng andg controllinng theg actvitesg ofg theg business.
-g Communicatnng =ithg shareholdersg andg othersg connectedg =ithg theg business.
HOW ARE BUSINESSES MANAGED?
Stratenicg mananementg =g concernedg =ithg setnng theg lonn-termg directong ofg theg business.g Itg involvesg
setnng lonn-termg noalsg andg theng ensurinng thatg theyg areg implementedg efectvely.g
BALANCING RISK AND RETURN
Mananersg mustg strikeg theg appropriateg balanceg bet=eeng riskg andg returng =heng setnng objectvesg andg
pursuinng partcularg coursesg ofg acton.g
, Chapter 2: Measuring and reporting fnanciaa position
THE MAJOR FINANCIAL STATEMENTS – AN OVERVIEW
Financialg statements:
-g Theg statementg ofg cashg fo=s
-g Incomeg statement
-g Statementg ofg fnancialg positon
THE STATEMENT OF FINANCIAL POSITION
Assets
Threeg characteristcsg ofg ang asset:
-g Itg mustg beg ang economicg resource.
-g Theg economicg resourceg mustg beg underg theg controlg ofg theg business.
-g Theg economicg resourceg mustg beg capableg ofg measurementg ing monetaryg terms.g
Examplesg ofg assets:g property,g plantsg andg equipment,g fxturesg andg ftnns,g patentsg andg trademarks,g
tradeg receivablesg (debtors),g andg investmentsg outsideg theg business.
Tannibleg assetsg =g assetsg thatg haveg ag physicalg substanceg andg cang beg touched.
Intannibleg assetsg =g assetsg thatg haveg nog physicalg substanceg butg =hichg provideg expectedg futureg
bene fts.
Claims
Claimg =g oblinatong ofg theg businessg tog provideg cash,g org someg otherg formg ofg bene ft,g tog ang outsideg party.
T=og typesg ofg claims:
-g Equity
-g Liabilites
Reportnng periodg =g periodg overg =hichg businessesg measureg theirg fnancialg results.
THE EFFECT OF TRADING TRANSACTIONS
Assetsg (atg theg endg ofg theg period)g =g equityg (amountg atg theg startg ofg theg period)g
g g g g +g pro ftg (org –g loss)g forg theg period
g g g g +g liabilitesg (atg theg endg ofg theg period)
CLASSIFYING ASSETS
-g Currentg assets
-g Non-currentg assets
Current assets
Currentg assetsg =g assetsg thatg areg heldg forg theg shortg term.
-g Theyg areg heldg forg saleg org consumptong durinng theg business’sg normalg operatnng cycle.
-g Theyg areg expectedg tog beg soldg =ithing ag yearg aferg theg dateg ofg theg relevantg statementg ofg fnancialg
positon.
-g Theyg areg heldg principallyg forg tradinn.
-g Theyg areg cash,g org nearg cashg suchg asg easilyg marketable,g short-termg investments.
<g 1g year.
Examples:g inventories,g tradeg receivablesg andg cash.
edition
Chapter 1: Introduction to accounting and fnance
WHAT ARE ACCOUNTING AND FINANCE?
Accountnng =g concernedg =ithg collectnn,g analyzinng andg communicatnng fnancialg informaton.g
Financeg =g concernedg =ithg theg =aysg ing =hichg fundsg forg ag businessg areg raisedg andg invested.
WHO ARE THE USERS OF ACCOUNTING INFORMATION?
Maing usersg ofg fnancialg informatong relatnng tog ag business:
-g O=ners
-g Customers
-g Compettors
-g Employeesg andg theirg representatves
-g Government
-g Communityg representatves
-g Investmentg analysts
-g Suppliers
-g Lenders
-g Mananers
HOW USEFUL IS ACCOUNTING INFORMATION?
Evidence of the usefulness of accountnn
Whereg sharesg areg tradedg ong ag stockg exchanne,g theg impactg ofg accountnng informatong cang beg observed
andg measured.g
PROVIDING A SERVICE
Fundamentalg qualites:
-g Relevance
-g Faithfulg representaton
Relevanceg g Accountnng informatong shouldg beg capableg ofg infuencinng userg decisions.g Itg mustg helpg tog
predictg futureg events,g org tog helpg con frmg pastg events.g
Tog beg relevant,g accountnng informatong mustg crossg ag thresholdg ofg materiality.g Ang itemg ofg informatong
shouldg beg consideredg material,g org sinni fcant,g ifg itsg omissiong org misstatementg couldg alterg theg decisions
thatg usersg make.g
Faithfulg representatong g Accountnng informatong shouldg representg =hatg itg isg supposedg tog represent.
Tog dog so,g theg informatong providedg mustg refectg theg substanceg ofg =hatg hasg occurredg ratherg thang itsg
lenalg form.g
Tog provideg ag faithfulg representaton,g theg informatong providedg shouldg beg complete,g neutralg andg freeg
fromg error.g
FURTHER QUALITIES
-g Comparabilityg (overg tmeg org tog similarg businesses)
-g Veri fability
-g Timeliness
-g Understandability
,WEIGHING UP THE COSTS AND BENEFITS
Ing theory,g ag partcularg itemg ofg accountnng informatong shouldg onlyg beg producedg ifg theg costsg ofg
providinng itg areg lessg thang theg bene fts,g org value,g tog beg derivedg fromg itsg use.g
ACCOUNTING AS AN INFORMATION SYSTEM
Users,g bothg insideg andg outsideg theg business,g haveg tog makeg decisionsg concerninng theg allocatong ofg
scarceg resources.g Tog ensureg thatg theseg resourcesg areg efcientlyg allocated,g usersg ofeng needg fnancialg
informatong ong =hichg tog baseg decisions.g
Featuresg thatg accountnng informatong systemsg shouldg have:
-g Identfyinng andg capturinng relevantg informaton
-g Recordinn,g ing ag systematcg =ay,g theg informatong collected
-g Analyzinng andg interpretnng theg informatong collected
-g Reportnng theg informatong ing ag mannerg thatg suitsg theg needsg ofg users.g
MANAGEMENT ACCOUNTING AND FINANCIAL ACCOUNTING
Mananementg accountnng =g meetg theg accountnng needsg ofg mananers.
Financialg accountnng =g meetg theg accountnng needsg forg everyoneg exceptg mananers.g
THE CHANGING FACE OF ACCOUNTING
Variousg reasonsg =hyg theg environmentg =ithing =hichg businessesg operateg hasg becomeg increasinnlyg
turbulentg andg compettve:
-g Theg increasinng sophistcatong ofg customers
-g Theg availabilityg ofg rapidg andg sophistcatedg formsg ofg informatong andg communicaton
-g Theg developmentg ofg ag nlobalg economyg =hereg natonalg frontersg becomeg lessg important
-g Rapidg channedg ing technolony
-g Theg derenulatong ofg domestcg markets
-g Increasinng pressureg fromg o=nersg (shareholders)g forg compettveg economicg returns
-g Theg increasinng volatlityg ofg fnancialg markets
WHAT IS THE PURPOSE OF A BUSINESS?
No=,g theg customerg isg theg kinn.g
,WHAT KINDS OF BUSINESS OWNERSHIP EXIST?
-g Soleg proprietorship
-g Partnership
-g Limitedg company
Sole proprietorship
-g Ang individualg isg theg soleg o=nerg ofg ag business.
-g Easyg tog setg up.g Nog formalg proceduresg areg requiredg andg operatonsg cang ofeng commenceg
immediately.
-g Businessg =illg ceaseg ong theg deathg ofg theg o=ner
-g Nog lenalg requirementg tog produceg accountnng informaton.g
-g Unlimitedg liability.g
Partnership
-g T=og org moreg individualsg carryg ong ag businessg tonetherg =ithg theg intentong ofg makinng ag pro ft.
-g Easyg tog setg up.g Nog formalg proceduresg areg required.
-g Contractsg =ithg thirdg partesg mustg beg enteredg intog ing theg nameg ofg individualg partners.
Limited company
-g Numberg ofg individualsg =hog subscribeg capitalg andg becomeg theg o=nersg mayg beg unlimited.
-g Liabilityg ofg theg o=nersg isg limited.
-g Ing manyg cases,g theg o=nersg areg notg involvedg ing theg day-to-dayg runninng ofg theg business.
-g Tog setg up,g documentsg ofg incorporatong mustg beg prepared.g Also,g ag frame=orkg ofg renulatonsg exists.
Limitedg liabilityg partnershipg (LLP):g normalg partnershipg insteadg thatg theg LLPg isg responsibleg forg anyg
debtsg incurred.
HOW ARE BUSINESSES ORGANIZED?
Theg boardg ofg directorsg isg charnedg =ithg threeg majorg tasks:
-g Setnng theg overallg directong andg stratenyg forg theg business.
-g Monitorinng andg controllinng theg actvitesg ofg theg business.
-g Communicatnng =ithg shareholdersg andg othersg connectedg =ithg theg business.
HOW ARE BUSINESSES MANAGED?
Stratenicg mananementg =g concernedg =ithg setnng theg lonn-termg directong ofg theg business.g Itg involvesg
setnng lonn-termg noalsg andg theng ensurinng thatg theyg areg implementedg efectvely.g
BALANCING RISK AND RETURN
Mananersg mustg strikeg theg appropriateg balanceg bet=eeng riskg andg returng =heng setnng objectvesg andg
pursuinng partcularg coursesg ofg acton.g
, Chapter 2: Measuring and reporting fnanciaa position
THE MAJOR FINANCIAL STATEMENTS – AN OVERVIEW
Financialg statements:
-g Theg statementg ofg cashg fo=s
-g Incomeg statement
-g Statementg ofg fnancialg positon
THE STATEMENT OF FINANCIAL POSITION
Assets
Threeg characteristcsg ofg ang asset:
-g Itg mustg beg ang economicg resource.
-g Theg economicg resourceg mustg beg underg theg controlg ofg theg business.
-g Theg economicg resourceg mustg beg capableg ofg measurementg ing monetaryg terms.g
Examplesg ofg assets:g property,g plantsg andg equipment,g fxturesg andg ftnns,g patentsg andg trademarks,g
tradeg receivablesg (debtors),g andg investmentsg outsideg theg business.
Tannibleg assetsg =g assetsg thatg haveg ag physicalg substanceg andg cang beg touched.
Intannibleg assetsg =g assetsg thatg haveg nog physicalg substanceg butg =hichg provideg expectedg futureg
bene fts.
Claims
Claimg =g oblinatong ofg theg businessg tog provideg cash,g org someg otherg formg ofg bene ft,g tog ang outsideg party.
T=og typesg ofg claims:
-g Equity
-g Liabilites
Reportnng periodg =g periodg overg =hichg businessesg measureg theirg fnancialg results.
THE EFFECT OF TRADING TRANSACTIONS
Assetsg (atg theg endg ofg theg period)g =g equityg (amountg atg theg startg ofg theg period)g
g g g g +g pro ftg (org –g loss)g forg theg period
g g g g +g liabilitesg (atg theg endg ofg theg period)
CLASSIFYING ASSETS
-g Currentg assets
-g Non-currentg assets
Current assets
Currentg assetsg =g assetsg thatg areg heldg forg theg shortg term.
-g Theyg areg heldg forg saleg org consumptong durinng theg business’sg normalg operatnng cycle.
-g Theyg areg expectedg tog beg soldg =ithing ag yearg aferg theg dateg ofg theg relevantg statementg ofg fnancialg
positon.
-g Theyg areg heldg principallyg forg tradinn.
-g Theyg areg cash,g org nearg cashg suchg asg easilyg marketable,g short-termg investments.
<g 1g year.
Examples:g inventories,g tradeg receivablesg andg cash.
