10/25/2022

Introduction to

Financial Accounting (KET301E)

Instructor: Tran Thi Phuong Thao (PhD)

Email: [email protected]
Mobile phone: 0936.447.452

COURSE LEARNING OUTCOMES

- CLO1: Understand the basic accounting concepts, assumptions, and principles, and how
they are applied in recording and reporting economic transactions of a business;
- CLO2: Understand the elements of each financial statement which are assets, liabilities,
equity, revenue, expense and dividend;
- CLO3: Understand the accounting cycle and how a business transaction is recorded and
communicated to users through financial statements
-CLO4: Develop knowledge of inventory, fraud and internal control, allowance and bad
debts, and accounting for long-lived assets.
- CLO5: Be able to prepare financial statements and analyze financial statements through
ratio analysis for financial analysis purpose.
- CLO6: Being able to read, research and apply accounting concepts and principles into
practice
- CLO7: Prepare financial statements, which are the balance sheet, income statement,
cash flows statement and retained earning statement;
- CLO8: Compute financial ratios to analyze financial statements
- CLO9: Have an approriate professional attitude in accounting profession, which are
serious, careful, hardworking and faithful;
- CLO10: Have an appropriate respect towards the professional ethics in accounting and
auditing profession that would leads to an appropriate behavior in an ethical dilemma;

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MATERIALS
1. Textbook
• Jerry J. Weygandt; Paul D. Kimmel; and Donald E.
Kieso, 2019, Financial accounting with IFRS, 4th
edition, John Wiley & Sons, Inc.
• 2. Other reference books
• ACCA, 2022-2023 ACCA Paper F1, Study Text,
Accountant in business, BPP Learning Media.
• ACCA, 2022-2023 ACCA Paper F3, Study Text,
Accountant in business, BPP Learning Media
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COURSE SCHEDULE
• Chapter 1: Accounting in action
• Chapter 2: The recording process
• Chapter 3: Adjusting the accounts
• Chapter 4: Completing the accounting cycle
• Chapter 5: Accounting for Merchandising operations
• Chapter 6: Inventory
• Chapter 7: Fraud, internal control and cash
• Chapter 8: Accounting for receivables
• Chapter 9: Plant assets, Natural resources, and Intangible
assets
• Chapter 14: Statement of cash flows

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ASSESSMENT
Assessment
No Value Characteristics
items
1. Attendance 10% • Students achieve less than 75% class attendance and
participation will not be able to attend final exam.
• For some eligible reasons, students must inform and
receive permission from the instructor prior to each class.
• Fulfill all assigned tasks of the course.
2. Midterm 30% • In 40- 60 minutes, MCQs and short answer questions
Exam • Students who actively participate in the lecture will
(Covers receive up to 1 bonus point. A bonus point will be added
chapter 1-4) to your mid-term mark based on the instructor’s decision.
3. Final Exam 60% • In 60-90 minutes, MCQs and long questions
(Chapter 5-
14)
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Financial Accounting
IFRS 4th Edition
Weygandt ● Kimmel ● Kieso

Chapter 1

Accounting in Action

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Chapter Preview

Good decision-making depends on good information.

Whatever your pursuits or occupation, the need for financial
information is inescapable. You cannot earn a living, spend money,
buy on credit, make an investment, or pay taxes without receiving,
using, or dispensing financial information. Good decision-making
depends on good information.

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Chapter Outline

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Learning Objective 1
Identify the activities and users
associated with accounting.

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Accounting Activities and Users

Three Activities

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Accounting Activities and Users

Internal Users

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Accounting Activities and Users

External Users (1/2)

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Accounting Activities and Users

External Users (2/2)

Taxing authorities: Does the company comply with the tax laws?
Regulatory agencies: Is the company operating within prescribed rules?
Labor unions: Does the company have the ability to pay increased wages and
benefits to union members?

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Fields of accounting

Accounting can be divided in 2 fields: financial accounting and

managerial accounting depending on users of information.
- Managerial accounting is concerned with providing economic and
financial information to managers and other internal users
- Financial accounting is concerned with communicating
information about business to external users through financial
statements.

1-14

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Comparing Managerial and Financial

Accounting

1-15 LO 1

DO IT! Basic Concepts

ACTION PLAN
• Review the basic concepts discussed.
• Develop an understanding of the key terms used.

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Learning Objective 2
Explain the building blocks of
accounting: ethics, principles, and
assumptions.

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The Building Blocks of Accounting

Ethics in Financial Reporting
Ethics is an important issue in effective financial reporting. It helps to develop
investors’ faith in reliability of financial reports.

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The Building Blocks of Accounting

Accounting Standards
Ensure high-quality financial reporting.

Primary accounting standard-setting bodies:

At global level: International Accounting Standards Board (IASB)
• Determines International Financial Reporting Standards (IFRS)
• Used in 130 countries
At country level: Financial Accounting Standards Board (FASB) and
other equivalent authorities.
• Determines generally accepted accounting principles (GAAP)
• Used by most companies in the U.S.

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IFRS Standards are required or permitted for listings by foreign

companies

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The Building Blocks of Accounting

Measurement Principles
IFRS generally uses one of two measurement principles, the historical cost
principle or the fair value principle.

Historical cost principle (or cost principle): dictates that 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.

Fair value principle: states that assets and liabilities should be

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

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The Building Blocks of Accounting

Selecting Measurement Principles
Selection of which principle to follow generally relates to trade-offs between
relevance and faithful representation.

Relevance means that financial information is capable of making a

difference in a decision.
Faithful representation means that the numbers and descriptions
match what really existed or happened—they are factual.

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The Building Blocks of Accounting

Assumptions
Assumptions provide a foundation for the accounting process. Two main
assumptions are the monetary unit assumption and the economic entity
assumption.

Monetary unit assumption: requires that companies include in the

accounting records only transaction data that can be expressed in
money terms.
Economic Entity Assumption: requires that the activities of the
entity be kept separate and distinct from the activities of its owner
and all other economic entities. Typical entity forms are
proprietorship, partnership, corporation.

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Forms of Business Organization

LO 1 Describe the primary forms of business organization.

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DO IT! Building Blocks of Accounting

ACTION PLAN
• Review the discussion of ethics and financial reporting standards.
• Develop an understanding of the key terms used.
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Learning Objective 3
State the accounting equation, and
define its components.

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The Accounting Equation

The Basic Accounting Equation

Assets: - Resources a business owns.

- Provide future services or benefits
- Example: Cash, Supplies, Equipment, etc.
Liabilities: - Claims against assets.
- Example: Accounts payable, Notes payable, salaries and
wages payable, taxes payable etc.
Equity: - The ownership claim on a company’s total assets.
- Ordinary Share capital (Common stock) and retained earnings
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Example:
You established a clothes shop on 1 Jan, 20X8. On 1 Jan X8, you contributed
VND 60 million in cash. During Jan, the following transactions have occurred:

1. Deposited VND 50 million to the bank.

2. Purchased some clothes for VND 40 million by bank transfer

3. Borrowed VND 20 million from some friends.

4. Purchased VND 15 million equipment such as hangers, wardrobes, etc by

cash.

5. Pay VND 5 million for a friend.

Requirements: List all the assets, liabilities, and equity of the shop after each
transaction.

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Statement of financial position

December 31, 2021
Assets Liabilities

Land Long term debt

Building Unearned Revenue
Equipment Note payables
Prepaid insurance Salary and wages payable
Supplies Accounts payable
Inventory Equity
Account receivable
Cash
Common stock
Retained earnings

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The Accounting Equation

Illustration 1-6

When the stockholders invest in the corporation, the total amount paid
in by stockholders for the shares they purchase is called Ordinary
share capital (Common stock) – a part of stockholders’ equity.
Retained earnings is another component of stockholders’ equity.
Closing RE = Opening RE + RE of this period
Closing RE = Opening RE + Revenues – Expenses - Dividends
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The Accounting Equation

Revenues: are the gross increases in equity resulting from business activities
entered into for the purpose of earning income.
Common revenue: sales, services, fees, commissions, interest, dividends, royalties,
and rent.
Expenses: are the cost of assets consumed or services used in the process of
earning revenue.
Common expenses: salaries expense, rent expense, utilities expense, tax expense,
etc.
Dividends: are distribution of cash or other assets to shareholders. They are not an
expense.
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On 1st Jan X8, Charles and Keith set up a clothes store. They
invested $5,000 USD in the store. During the 1st quarter, the
store has conducted following transactions:
1. Purchased some clothes for $5,000 cash
2. Sold all the above clothes for $6,000 cash
3. Purchased some new clothes for $6,000 cash
4. The weather was hotter than last year, they sold the
purchased new clothes for $4,500 cash to get the money
back.
Requirement: List all the asset and capital of the store
after each transaction
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Learning Objective 4
Analyze the effects of business
transactions on the accounting
equation.

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Analyzing Business Transactions

Accounting Information System:
The system of collecting and processing transaction data and
communicating financial information to decision-makers.

The steps companies follow each period to record transactions and eventually prepare
financial statements:

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Analyzing Business Transactions

Identifying Accounting Transactions

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Analyzing Business Transactions

Expanding the Balance Sheet Equation for analysis

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Transaction (1). Investment by Shareholders.

Assume: Ray and Barbara Neal decide to start a smartphone app
development company that they incorporate as Softbyte SA. On September 1,
2020, they invest €15,000 cash in the business in exchange for €15,000 of
ordinary shares. The ordinary shares indicates the ownership interest that the
Neals have in Softbyte SA.
Demonstrate: Basic and equation analysis of this transaction.

Observe that the equality of the basic equation has been maintained. Note also that the
source of the increase in equity (in this case, issued shares) is indicated.

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Transaction(2). Purchase of Equipment for Cash.

Assume: Softbyte SA purchases computer equipment for €7,000 cash.
Demonstrate: Basic and equation analysis of this transaction.

This transaction results in an equal increase and decrease in total assets, though
the composition of assets changes.

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Transaction(3). Purchase of Supplies on Credit.

Assume: Softbyte SA purchases headsets (and other computer accessories expected
to last several months) for €1,600 from Mobile Solutions. Mobile Solutions agrees to
allow Softbyte to pay this bill in October. This transaction is a purchase on account (a
credit purchase).
Demonstrate: Basic and equation analysis of this transaction.

Assets increase because of the expected future benefits of using the headsets and computer accessories, and
liabilities increase by the amount due Mobile Solutions.

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Transaction (4). Services Performed for Cash.

Assume: Softbyte SA receives €1,200 cash from customers for app
development services it has performed. This transaction represents Softbyte’s
principal revenue-producing activity. Recall that revenue increases equity.
Demonstrate: Basic and equation analysis of this transaction.

Recall that revenue increases equity.

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Transaction (5). Purchase of Advertising on Credit.

Assume: Softbyte SA receives a bill for €250 from Programming News for
advertising on its website but postpones payment until a later date.
Demonstrate: Basic and equation analysis of this transaction.

The two sides of the equation still balance at €17,800. Retained Earnings decreases when Softbyte incurs the expense.
Expenses do not have to be paid in cash at the time they are incurred.

When Softbyte pays at a later date, the liability Accounts Payable will decrease and the asset Cash will decrease [see
Transaction (8)]. The cost of advertising is an expense (rather than an asset) because Softbyte has used the benefits.
Advertising Expense is included in determining net income.

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Transaction (6).
Services Performed for Cash & Credit.
Assume: Softbyte SA performs €3,500 of app development services for
customers. The company receives cash of €1,500 from customers, and it bills
the balance of €2,000 on account.
Demonstrate: Basic and equation analysis of this transaction.

This transaction results in an equal increase in assets and equity.

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Transaction (7). Payment of Expenses.

Assume: Softbyte SA pays the following expenses in cash for September:
office rent €600, salaries and wages of employees €900, and utilities €200.
Demonstrate: Basic and equation analysis of this transaction.

This transaction results in an equal decrease in assets and equity.

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Transaction (8). Payment of Accounts Payable.

Assume: Softbyte SA pays its €250 Programming News bill in cash. The
company previously [in Transaction (5)] recorded the bill as an increase in
Accounts Payable and a decrease in equity.
Demonstrate: Basic and equation analysis of this transaction.

Observe that the payment of a liability related to an expense that has previously been recorded does not affect equity.
Softbyte recorded the expense [in Transaction (5)] and should not record it again.

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Transaction (9). Receipt of Cash on Account.

Assume: Softbyte SA receives €600 in cash from customers who had been
billed for services [in Transaction (6)].
Demonstrate: Basic and equation analysis of this transaction.

Transaction (9) does not change total assets, but it changes the composition of those assets.

Note that the collection of an account receivable for services previously billed and recorded does not affect equity.
Softbyte already recorded this revenue [in Transaction (6)] and should not record it again.

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Transaction (10). Dividends.

Assume: The company pays a dividend of €1,300 in cash to Ray and Barbara
Neal, the shareholders of Softbyte SA. This transaction results in an equal
decrease in assets and equity.
Demonstrate: Basic and equation analysis of this transaction.

Transaction (9) does not change total assets, but it changes the composition of those assets.

Note that the dividend reduces retained earnings, which is part of equity. Dividends are not expenses.
Like shareholders’ investments, dividends are excluded in determining net income.

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Analyzing Business Transactions

Softbyte SA: Tabular Analysis of Transactions

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Analyzing Business Transactions

Key Points
1. Each transaction must be analyzed in terms of its effect on:
a. The three components of the basic accounting equation.
b. Specific types (kinds) of items within each component.
2. The two sides of the equation must always be equal.
3. The Share Capital—Ordinary and Retained Earnings columns
indicate the causes of each change in the shareholders’ claim
on assets.

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DO IT! Tabular Analysis

ACTION PLAN
• Analyze the effects of each transaction on the accounting equation.
• Use appropriate category names (not descriptions).
• Keep the accounting equation in balance.

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Learning Objective 5
Describe the five financial statements
and how they are prepared.

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Financial Statements
Companies prepare five financial statements from the summarized accounting data.

1. Income statement: presents the revenues and expenses and resulting net
income or net loss for a specific period of time.
2. Retained earnings statement: summarizes the changes in retained earnings
for a specific period of time.
3. Statement of financial position: reports the assets, liabilities, and equity of
a company at a specific date. (Sometimes referred to as a balance sheet.)
4. Statement of cash flows: summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
5. Comprehensive income statement: presents other comprehensive income
items that are not included in the determination of net income in 1.

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Financial Statement Connections

Income Statement

Net income is computed first

and is needed to determine
Retained Earnings Statement the ending balance in retained
earnings.

Statement of Financial Position The ending balance in

retained earnings is needed in
preparing the statement of
financial position.

The cash shown on the

Statement of Cash Flows statement of financial position
is needed in preparing the
statement of cash flows.

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Financial Statements
Income Statement
The income statement lists revenues first, followed by expenses.
Then, the statement shows net income (or net loss).

Structure:
• The income statement lists revenues first, followed by expenses.
• Then, the statement shows net income (or net loss).
• When revenues exceed expenses, net income results.
• When expenses exceed revenues, a net loss results.
• The income statement does not include investment and dividend
transactions between the shareholders and the business in
measuring net income.

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Financial Statements
Retained Earnings Statement
The information provided by this statement indicates the reasons why
retained earnings increased or decreased during the period. If there is
a net loss, it is deducted with dividends in the retained earnings
statement.
Structure:
• The first line of the statement shows the beginning retained
earnings amount.
• Then add net income (or subtract net loss) and subtract
dividends.
• The retained earnings ending balance is the final amount on the
statement.

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Financial Statements
Statement of Financial Position
The statement of financial position is like a snapshot of the company’s
financial condition at a specific moment in time (usually the month-end or
year-end).

Structure:
Lists assets at the top, followed by equity and then liabilities.
Total assets must equal total equity and liabilities.
When two or more liabilities are involved, a customary way of listing is as
shown as follows:

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Financial Statements
Statement of Cash Flows
The statement of cash flows provides information on the cash
receipts and payments for a specific period of time.
Structure:
The statement of cash flows reports
(1) the cash effects of a company’s operations during a period,
(2) its investing activities,
(3) its financing activities,
(4) the net increase or decrease in cash during the period, and
(5) the cash amount at the end of the period.

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Financial Statements
Comprehensive Income Statement
Other comprehensive income items are not part of net income but are
considered important enough to be reported separately.
This statement immediately follows the income statement.

IFRS Alternative:
IFRS allows an alternative statement format in which the
information contained in the income statement and the
comprehensive income statement are combined in a single
statement, referred to as a statement of comprehensive income.

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DO IT! Financial Statement Items

ACTION PLAN
• Remember the basic accounting equation: assets must equal liabilities plus equity.
• Review previous financial statements to determine how total assets, net income,
and equity are computed.

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Career Opportunities in Accounting

Why is accounting such a popular major and career choice?

Public Accounting
Individuals in public accounting offer expert service to the general public, in much the same
way that doctors serve patients and lawyers serve clients.
Choices: Auditing, taxation, management consulting

Private Accounting
Individuals in private accounting are employees of for-profit companies and not-for-profit
organizations.
Choices: Cost accounting, budgeting, accounting information system design and support,
tax planning and preparation, internal auditing

Governmental Accounting
Choices: Tax authorities, local governments, law enforcement agencies, company
regulators, accounting educators at public colleges and universities

Forensic Accounting
Choices: Investigate theft and fraud using accounting, auditing, and investigative skills

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