Financial Accounting 1 – Midterm
Lecture 1: Introduction
Learning objectives:
1. Explain what accounting is
2. Explain how corporations use accounting
3. State the accounting equation and its components
4. Explain who uses accounting information
5. Describe the different financial statements
6. Analyse the effects of business transactions on the accounting equation
Accounting consists of three basic activities identifying, recording and communicating an
organisation’s economic events to interested users.
Organizations refer to companies, non-profit organizations and government organisations.
Let’s zoom in on companies. There are three types of companies
1. (sole) Proprietorships one owner who makes the decisions
2. Partnerships multiple owners who make the decisions
3. Corporations Management makes the decisions, and owners influence power through
shares.
Users refer to people and organisations who use the data to make economic decisions. There are two
types of users:
1. Internal users; managers, controllers
2. External users; investors, creditors, loan agencies, labour unions
Financial accounting focuses on external users. Information is communicated through the financial
statement with the objective ‘’to provide financial information that is useful to users in making
decisions related to providing resources to the entity.’’
Information is useful when it is
1. Relevant: predictive value, confirmative value and material
2. Faithfully represented: complete, neutral and free from error
Under IFRS, the following principles and assumptions are used to ensure the achievement of the
objective.
1. Monetary unit assumption: all items should be expressed in monetary terms, such as euros
or dollars
2. Money entity assumption; the financial statement should be reported about the corporation
3. Measurement principles; regarding how the amount should be measured:
a. Historical costs principle: what you have paid to acquire the item
b. Fair value principle: what the item is currently worth
As mentioned before, financial information is communicated through financial statements. There are
five financial statements;
, 1. Statement of financial position (balance sheet)
2. Income statement
3. Statement of (other) comprehensive income
4. Statement of cash flows
5. Retained earnings statement.
These statements are all connected to each other, as shown below.
Balance sheet Income statement
Assets Liabilities
- Current assets - Current liabilities Revenues
- Non-current - Non-current liabilities - Expenses
assets Net Income or net loss
Equity:
- Share capital
- Retained earnings Statement of (other)
comprehensive income
Net income
+ other comprehensive income
Comprehensive income
Statement of Cash flows
Beginning cash
Statement of retained earnings
+ cash inflows
- cash outflows Beginning of retained earning
Ending cash + Net income
- Dividends
Ending retained earnings
The accounting equation: Assets – Liabilities = Equity
When Δ Assets = Δ Labilities, equity remains the same
When Δ Assets > Δ Labilities, equity increases
When Δ Assets < Δ Labilities, equity decrease
Changes in equity are caused by:
1. Revenue: increases equity
2. Expenses: decreases equity
3. Transactions with owners:
a. Issuing shares increases equity
b. Paying dividends decreases equity
Lecture 1: Introduction
Learning objectives:
1. Explain what accounting is
2. Explain how corporations use accounting
3. State the accounting equation and its components
4. Explain who uses accounting information
5. Describe the different financial statements
6. Analyse the effects of business transactions on the accounting equation
Accounting consists of three basic activities identifying, recording and communicating an
organisation’s economic events to interested users.
Organizations refer to companies, non-profit organizations and government organisations.
Let’s zoom in on companies. There are three types of companies
1. (sole) Proprietorships one owner who makes the decisions
2. Partnerships multiple owners who make the decisions
3. Corporations Management makes the decisions, and owners influence power through
shares.
Users refer to people and organisations who use the data to make economic decisions. There are two
types of users:
1. Internal users; managers, controllers
2. External users; investors, creditors, loan agencies, labour unions
Financial accounting focuses on external users. Information is communicated through the financial
statement with the objective ‘’to provide financial information that is useful to users in making
decisions related to providing resources to the entity.’’
Information is useful when it is
1. Relevant: predictive value, confirmative value and material
2. Faithfully represented: complete, neutral and free from error
Under IFRS, the following principles and assumptions are used to ensure the achievement of the
objective.
1. Monetary unit assumption: all items should be expressed in monetary terms, such as euros
or dollars
2. Money entity assumption; the financial statement should be reported about the corporation
3. Measurement principles; regarding how the amount should be measured:
a. Historical costs principle: what you have paid to acquire the item
b. Fair value principle: what the item is currently worth
As mentioned before, financial information is communicated through financial statements. There are
five financial statements;
, 1. Statement of financial position (balance sheet)
2. Income statement
3. Statement of (other) comprehensive income
4. Statement of cash flows
5. Retained earnings statement.
These statements are all connected to each other, as shown below.
Balance sheet Income statement
Assets Liabilities
- Current assets - Current liabilities Revenues
- Non-current - Non-current liabilities - Expenses
assets Net Income or net loss
Equity:
- Share capital
- Retained earnings Statement of (other)
comprehensive income
Net income
+ other comprehensive income
Comprehensive income
Statement of Cash flows
Beginning cash
Statement of retained earnings
+ cash inflows
- cash outflows Beginning of retained earning
Ending cash + Net income
- Dividends
Ending retained earnings
The accounting equation: Assets – Liabilities = Equity
When Δ Assets = Δ Labilities, equity remains the same
When Δ Assets > Δ Labilities, equity increases
When Δ Assets < Δ Labilities, equity decrease
Changes in equity are caused by:
1. Revenue: increases equity
2. Expenses: decreases equity
3. Transactions with owners:
a. Issuing shares increases equity
b. Paying dividends decreases equity
