Financial Accounting

Weygandt, Kimmel and Kieso

IFRS 3rd Edition
(04)2708-8787

2014


WEEK 12
CH 1

Accounting in Action

WEEK 35
CH 2

The Recording Process

WEEK 89

WEEK 67

CH 4

CH 3

Completing the
Accounting Cycle

Adjusting the Accounts

WEEK 10

Mid-Term Exam
35%


WEEK 1112
CH 5

Accounting for
Merchandising Operations

WEEK 1315
CH 6

Inventories
WEEK 1617

WEEK 18

Final Exam
35%

CH 7

Fraud, Internal Control,

and Cash

tku

35% 35%
30%

What is Accounting?
Accounting consists of three basic activities it identifies
(), records (), and communicates () the
economic events of an organization to interested users.

Identifying
Economic events
(transactions)

Recording
Record, classify
and summarize

Communicating
Prepare and analyze
accounting reports

Bookkeeping
() function

Financial Statements
()
6

Who Uses Accounting Data

Accounting is often called the language
of business ().
The purpose of financial information is to
provide inputs for decision making.
Two user groups: external users () and internal
users ().

Managerial
Accounting

Objectives of Financial Reporting

Objectives of Financial Reporting

(adverse selection)
George Akerlof
(Lemon Laws)

()

Ethics in Financial Reporting

The goal of accounting is to provide
useful information for decision.
For information to be useful, it must be
trusted. This demands ethics () in
accounting.

Standards of conduct by which ones actions are judged

as right or wrong, honest or dishonest, fair or not fair, are
ethics.
Effective financial reporting depends on sound ethical
behavior.

10

Ethics in Financial Reporting

In accounting, we frequently encounter ethical dilemmas
().
Time, job, client, personal and peer pressures can
complicate the process of ethical sensitivity and selection
among alternatives.
Steps in analyzing ethics cases and situations:

11

Accounting Standards

International
Accounting
Standard Board
(IASB)

International Financial Reporting

Standards (IFRS)

IFRS

Today, IFRSs are

used by listed
companies in over
115 jurisdictions.

12

Financial Reporting Concepts

Mixed up

Harmonization

Convergence

2013
IFRS

Adoption

(Taiwan-IFRSs)

13

Financial Reporting Concepts

Securities and
Exchange
Commission

delegates
power

(SEC)

Financial
Accounting
Standards Board
(FASB)

Generally
Accepted
Accounting
Principles
(GAAP)

The SEC enforces

the rules

The FASB
makes the rules

GAAP are
the rules
14

Measurement Principles

Relevance

Historical
Cost
Principle

Fair Value
Principle
Faithful
Representation

Companies record assets ()

at their cost. This is true not
only at the time the asset is
purchased, but also over the
time the asset is held.

Assets and liabilities ()

should be reported at fair value
(the price received to sell an
asset or settle a liability).
15

Assumptions
Monetary Unit

Requires that companies include in the accounting

records only transaction data that can be expressed in
money terms.
Excludes some relevant information, for example, the
health of the owner, quality of service and the morale of
employees.
10 5 2

2,000 3,000
4,000
43,000 $2,000 10 + $ 3,000 5 + $ 4,000 2
16

Assumptions
Economic Entity

Requires that activities of the entity be kept separate and

distinct from the activities of its owner and all other
economic entities.
Economic phenomenon
legal entity
A

> Legal form

1)

20
2)

17

Assumptions
Forms of Business Organization

Stockholders

Proprietorship

Partnership

Corporation

Separate legal entity

Limited liability
Transfer ownership
Unlimited life

18

The Basic Accounting Equation

Accounting equation () provides the
underlying framework for recording and summarizing
economic events.
Assets

Liabilities

(Assets)

Equity

()

19

The Basic Accounting Equation

10

(equity)
10 10
Assets
10

Liabilities
0

Equity
10

20

The Basic Accounting Equation

Assets

Liabilities

Equity

()

(Liabilities)

21

The Basic Accounting Equation

20
2020
()
()
20
30(10+20)20
10
Assets
30

Liabilities
20

Equity
10

22

The Basic Accounting Equation

Investment by
shareholders

Dividends
Equity

Revenues
INCREASE

Expenses
DECREASE

23

The Basic Accounting Equation

Investment by
shareholders

Dividends to
shareholders
Equity

Revenues

Investments by shareholders
represent the total amount
paid in by shareholders for the
ordinary shares they
purchase.

Expenses

The ownership claim on a

companys total assets.

24

The Basic Accounting Equation

Investment by
shareholders

Dividends to
shareholders
Equity

Revenues

Revenues result from business

activities entered into for the
purpose of earning income.
Sales, fees, services,
commissions, interest, dividends,
royalties, and rent.

Expenses

Expenses are the cost of

assets consumed or services
used in the process of earning
revenue.
Salaries expense, rent expense,
utilities expense, property tax
expense, etc.
25

The Basic Accounting Equation

Investment by
shareholders

Dividends to
shareholders
Equity

Revenues

Expenses

Dividends are the distribution of cash

or other assets to shareholders.
Dividends reduce retained earnings.
However, dividends are not expenses.

26

The Basic Accounting Equation

(net income)
(net loss)

Revenue

>

Expense

Net Income

Revenue

<

Expense

Net Loss

27

Using the Accounting Equation

Transactions () are a
businesss economic events recorded
by accountants. Transactions may be
external or internal.

An accounting transaction occur when financial position

(assets, liabilities or equity items) change ()
as a result of some economic event.
Each transaction has a dual effect on the accounting
equation.
Two or more items
can be affected
28

Using the Accounting Equation

Are the following events recorded in the accounting
records?
Purchase
computer.

Event

Criterion

Discuss
product
design with
customer.

Pay rent.

Is the financial position (assets, liabilities, or equity)

of the company changed?

Record/
Dont Record
29

Using the Accounting Equation

Assets =

Liabilities

Share CapitalOrdinary

Equity

Retained
Earnings

Revenue

Expense

- Dividends

30

Using the Accounting Equation

31

Transaction Analysis

Investment by Shareholders. Ray and Barbara Neal decides

to start a smartphone app development company that they
incorporate as Softbyte SA. On 9/1/2017, they invest 15,000
cash in exchange for 15,000 of ordinary shares.
Asset

Liabilities

Equity

Cash

Share Capital

+15,000

+15,000
Issued
Shares

32

Transaction Analysis

Purchase of Equipment for Cash. Softbyte SA purchases

computer equipment for 7,000 cash.
Asset
Cash

Equipment =

15,000

Equity
Share Capital
15,000

-7,000
8,000

Liabilities

+7,000
+

7,000

15,000

15,000

33

Transaction Analysis

Purchase of Supplies on Credit. Softbyte SA purchases for

1,600 headsets and other accessories expected to last
several months. The supplier allows Softbyte to pay this bill in
October.
Asset

Liabilities
Accounts
Cash + Supplier + Equipment =
Payable
8,000

+
+

7,000

16,600

Share Capital

15,000

+1,600
8,000 + 1,600 + 7,000

Equity

+1,600
=

1,600 +

15,000

16,600
34

Transaction Analysis

Services Provided for Cash. Softbyte SA receives 1,200

cash from customers for app development services it has
performed.
Asset

= Liabilities +

Equity

Accounts
Share Retained Earnings
Cash + Supplier + Equipment =
+
Capital + Rev. - Exp. - Div.
Payable
8,000

7,000

1,600

15,000

+1,200

+1,200

9,200 + 1,600 + 7,000

17,800

Service
Revenue

1,600 + 15,000 + 1,200

17,800

35

Transaction Analysis

Purchase of Advertising on Credit. Softbyte SA receives a

bill for 250 from the Programming News for advertising on its
website but postpones payment until a later date.
Asset

= Liabilities +

Equity

Accounts
Share Retained Earnings
Cash + Supplier + Equipment =
+
Capital + Rev. - Exp. - Div.
Payable
9,200 1,600

7,000

1,600

15,000

1,200

+250

-250

9,200 + 1,600 + 7,000 = 1,850 + 15,000 + 1,200 -250

17,800

17,800

Advertising
Expense

36

Transaction Analysis

Services Provided for Cash and Credit. Softbyte SA

provides 3,500 of services. The company receives cash of
1,500 from customers, and it bills the balance of 2,000 on
account.
Asset

= Liabilities +

Accounts
Share Retained Earnings
+
Payable
Capital + Rev. - Exp. - Div.

Accounts
Cash +
+ Supplier + Equipment
Receivable

9,200

1,850

+1,500

1,600

7,000

15,000

+2,000

10,700 + 2,000 + 1,600 + 7,000

Equity

1,200
+3,500

= 1,850

+ 15,000

+ 4,700

-250

Service
Revenue

21,300

21,300
37

Transaction Analysis

Payment of Expenses. Softbyte SA pays the following

expenses in cash for September: office rent 600, salaries and
wages of employees 900, and utilities 200.

Asset

= Liabilities +

Accounts
Cash +
+ Supplier + Equipment
Receivable
10,700

2,000

1,600

7,000

Accounts
Share Retained Earnings
+
Payable
Capital + Rev. - Exp. - Div.

1,850

15,000

-1,700

9,000 + 2,000 + 1,600 + 7,000

19,600

Equity

= 1,850

+ 15,000

4,700

250

Expenses

-600
-900
-200

+ 4,700

-1,950

19,600

38

Transaction Analysis

Payment of Accounts Payable. Softbyte SA pays its 250

Programming News bill in cash.
Asset

= Liabilities +

Share Retained Earnings

Accounts
+
Capital + Rev. - Exp. - Div.
Payable

Accounts
Cash +
+ Supplier + Equipment
Receivable

9,000

1,850

2,000

1,600

7,000

-250

Equity

15,000

4,700

1,950

+ 15,000

+ 4,700

-1,950

-250

8,750 + 2,000 + 1,600 + 7,000

19,350

= 1,600

19,350

39

Transaction Analysis

Receipt of Cash on Account. Softbyte SA receives 600 in

cash from customers who had been billed for services [in
Transaction (6)].
Asset

= Liabilities +

Equity

Accounts
Cash +
+ Supplier + Equipment
Receivable

Accounts
Share Retained Earnings
=
+
Payable
Capital + Rev. - Exp. - Div.

8,750

7,000

1,600

15,000

4,700

1,950

9,350 + 1,400 + 1,600 + 7,000

= 1,600

+ 15,000

+ 4,700

-1,950

+600

2,000

1,600

-600

19,350

19,350

40

Transaction Analysis

Dividends. The corporation pays a dividend of 1,300 in cash

to Ray and Barbara Neal, the shareholders of Softbyte SA.
Asset

= Liabilities +

Accounts
Cash +
+ Supplier + Equipment
Receivable
9,350

1,400

1,600

7,000

Equity

Share Retained Earnings

Accounts
+
Capital + Rev. - Exp. - Div.
Payable

1,600

15,000

4,700

1,950

-1,300

-1,300

8,050 + 1,400 + 1,600 +7,000

18,050

= 1,600

+ 15,000

+ 4,700

18,050

-1,950

-1,300

Dividends

41

EXERCISE 1-6

Selected transactions for Spring Cruises ASA are listed below.

1. Sold ordinary shares for cash to start business.
2. Paid monthly rent.
3. Purchased equipment on account.
4. Billed customers for services performed.
5. Paid dividends.
6. Received cash from customers billed in (4).
7. Incurred advertising expense on account.
8. Purchased additional equipment for cash.
9. Received cash from customers when service was performed.
Describe the effect of each transaction on assets, liabilities, and equity.

42

Financial Statements
Assets, liabilities, expenses and
revenues are of interest to user of
Accounting information. For business
purposes, it is customary to arrange
this information in the format of four
financial statements:
a.
b.
c.
d.

Performance
Income Statement
Statement of Financial Position
Retained Earnings Statement
Statement of Cash Flows

43

Income Statement
Reports success or profitability of the
companys operations over a specific
period of time ().
Summarizes all revenue and expenses
for period--month, quarter, or year.
If revenues exceed expenses, the result
is a net income. If expenses exceed
revenue, the result is a (net loss).
Dividends are payments to
the stockholders and are
not expenses.

Amounts received from

issuing stock or obtaining
loans are not revenues.
44

Retained Earnings Statement

Indicates amount paid out in dividends
and amount of net income or net loss for
period.
Shows changes in the retained earnings
() balance during period covered
by statement.
Ending retained earnings represents net income since
the inception of the business that has not been paid out
as dividends.
Beginning +
Balance

Net Income from

income statement

Dividends

Ending
Balance
45

Statement of Financial Position

Shows assets and claims to those assets at
a specific point in time (). These
claims are subdivided into two categories:
claims of the creditors (liabilities) and claims
of the owners (equity).
Assets and equities (liabilities and equity)
must balance.

Assets

Liabilities

Equity

46

Statement of Cash Flows

Provides information about cash
receipts and cash payments for
the accounting period.
Reports the cash effects of a
companys (1) operations ()
for a period of time.
Shows cash increases and decreases from (2) investing
() and (3) financing activities ().
Indicates increase or decrease in cash balance as well
as ending cash balance.

47

Financial Statements

Net income is
needed to
determine the
ending balance
in retained
earnings.

48

Financial Statements
The ending balance
in retained earnings
is needed in
preparing the
balance sheet

49

Financial Statements

The balance
sheet and income
statement are
needed to prepare
statement of cash
flows.

50

EXERCISE 1-12
The following information relates to Karen Weigel Co. Ltd. for the year 2017.
Retained earnings, January 1, 2017 48,000
Advertising expense
1,800
Dividends during 2017
5,000
Rent expense
10,400
Service revenue
62,500
Utilities expense
3,100
Salaries and wages expense
28,000
Other comprehensive income
400
Prepare (a) an income statement, (b) a comprehensive income statement,
and (c) a retained earnings statement.

51

52

53

EXERCISE 1-14
Bear Park Ltd., a camping ground in the Lake District, has compiled the
following financial information as of December 31, 2017.
Revenues during 2017camping fees
140,000
Revenues during 2017general store
47,000
Accounts payable
11,000
Cash on hand
20,000
Original cost of equipment
105,500
Fair value of equipment
140,000
Notes payable
60,000
Expenses during 2017
150,000
Supplies on hand
2,500
Share capitalordinary
20,000
Retained earnings
?
(a) Determine Bear Park's net income for 2017. (b) Prepare a statement of
financial position.
54

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