ACT 2111: Introductory Financial

Accounting
Dr. Na LIU ([email protected])

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Course consultation

• Office location
❑ Room 607, Zhiren Building
• Office hours
❑ 15:30 – 17:30, Wednesday

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Course Structure

• Lecture
❑ 1 hour and 20 minutes/session
❑ 2 sessions/week
• Tutorial
❑ 50 minutes/session
❑ One session for each one or two weeks; Please
refer to the course syllabus file for detailed
schedule

Any changes would be notified through announcement.

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Assessment method

• McGraw-Hill Connect Online Assignment (20%)

❑ Weekly assignment
❑ Need to buy the Connect e-card from Bowen Book Store;
Please refer to the Connect Plus Registration file for more
details
• Two Quizzes (10%)
• Mid-term Exam (30%)
• Final Exam (40%)

More detailed information is included in the syllabus.

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Textbook
Financial Accounting,
Spiceland et al., 5th edition

For details on the purchase of

the e-book + Connect 1-
Semester Online Access,
please refer to the file
“ACT2111 - Connect Plus
Registration.pdf”.

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Chapter 1: A framework for financial
accounting

Lecture 1 & 2

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What we are going to cover

PART A: Accounting as a measurement/communication

process

PART B: Financial accounting information

PART C: Careers in Accounting

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Part A
ACCOUNTING AS A
MEASUREMENT/COMMUNICATION PROCESS

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Learning Objective 1

LO1 Describe the two primary functions of

financial accounting.

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What is Accounting?

• Accounting is the “language of business”. It is the

language companies use to tell their financial story
• Accounting is a system of maintaining records of a
company’s operations and communicating that
information to decision makers.

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Decisions People Make About Companies

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Financial Accounting

• Accounting information provided to external users is

referred to as financial accounting, which is the
focus of this course.
• The two functions of financial accounting are
❑ to measure business activities of a company, and
❑ to communicate those measurements to external
parties for decision-making purposes.
Accounting information for internal use is called managerial
accounting → future courses.

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Framework for Financial Accounting

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Learning Objective 2

LO2 Understand the business activities that

financial accounting measures.

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Business Structures

There are different structures for a business

• A corporation is a company that is legally separate from its
owners. The advantage of being legally separate is that the
责任有限公司
stockholders have limited liability.
• A sole proprietorship is a business owned by one person.
• A partnership is a business owned by two or more persons.
❑ Neither sole proprietorships nor partnerships offer limited liability.

The focus of this course is on “corporation”.

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 Business Activities

A business engages in three fundamental activities

• Financing activities: transactions the company has with
investors and creditors
• Investing activities: transactions involving the purchase
and sale of resources that are expected to benefit the
company for several years
• Operating activities: transactions that relate to the
primary operations of the company

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How to measure the business activities?
Question: What information would investors
and creditors be interested in knowing to
determine whether their investment in a
company was a good decision?

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Assets, Liabilities, and Stockholders’ Equity

The Accounting Equation

• Assets = resources of the company.

• Liabilities = creditors’ claims to resources.
• Stockholders’ equity = owners’ claims to resources
The accounting equation illustrates a fundamental model of
business valuation.

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 Revenues, Expenses, and Dividends
• Revenues are the amounts recognized when the
company sells products or provides services to
customers.
• Expenses are the costs of providing products and
services and other business activities during the
current period.
• Net income is the difference between revenues and
expenses. Other common names for net income
include earnings or profit.
• Dividends are distributions to stockholders, usually in
the form of cash payments. Dividends are not
expenses.
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 Business Activities and Their Measurement

The measurement role of accounting is to create a record of the activities of a

company. To make this possible, a company must maintain an accurate record of
its assets, liabilities, stockholders’ equity, revenues, expenses, and dividends.

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Concept Check 1
The resources of a company are referred to
as:
a. Liabilities
b. Revenues
c. Assets
d. Expenses

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Concept Check 2
The amounts recorded when the company
sells products or provides services to
customers are referred to as:
a. Liabilities
b. Revenues
c. Assets
d. Expenses

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 Exercise 1 (E1-1)
Match the transaction with the business activity

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 Exercise 2 (P1-2B)
Indicate whether the account is a) an asset, b) a liability, c) stockholders’
equity, d) a revenue, e) an expense, or f) a dividend

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Learning Objective 3

LO3 Determine how financial accounting

information is communicated through
financial statements.

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Communicating through Financial Statements

Financial statements are periodic reports

published by the company for the purpose of
providing information to external users.
• Primary financial statements
❑ Income statement
❑ Statement of stockholders’ equity
❑ Balance sheet
❑ Statement of cash flows

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Income Statement

• Reports the company’s revenues and

expenses over an interval of time
❑ If revenues > expenses, then net income
❑ If revenues < expenses, then net loss

Key Point: The income statement compares

revenues and expenses for the current period to
assess the company’s ability to earn a profit
from running its operations.

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Illustration: Income Statement for Eagle Soccer
Academy
EAGLE SOCCER ACADEMY
Income Statement
For the month ended December 31, 2021
Revenues
Service revenue $7,200
Expenses
Rent expense 500
Supplies expense 1,000
Salaries expense 3,100
Utilities expense 900
Interest expense 100
Other expenses 400
Total expenses 6,000
Net income $1,200

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Statement of Stockholders’ Equity

Summarizes the changes in stockholders’

equity over an interval of time

• Stockholders’ Equity
= Common Stock + Retained Earnings

External Company Internal

Source Value Source

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Illustration: Statement of Stockholders’ Equity for Eagle Soccer
Academy

EAGLE SOCCER ACADEMY

Statement of Stockholders’ Equity
For the month ended December 31, 2021
Total
Common Retained Stockholders’
Stock Earnings Equity
Beginning balance (Dec. 1) $ -0- $ -0- $ -0-
Issuance of common stock 25,000 25,000
Add: Net income for the period 1,200 1,200
Less: Dividends (200) (200)
Ending balance (Dec. 31) $25,000 $1,000 $26,000

*Beginning balances are zero only because this is the first month of operations for Eagle. Normally, beginning
balances for Common Stock and Retained Earnings equal ending balances from the previous period.

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Balance Sheet

Presents the financial position of the

company on a particular date

Financial position:
Resources = Claims to Resources

Liabilities &
Assets = Stockholders’ Equity

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Illustration: Balance Sheet for Eagle Soccer Academy
EAGLE SOCCER ACADEMY
Balance Sheet
December 31, 2021
Assets Liabilities
Cash $ 6,900 Accounts payable $ 2,300
Accounts receivable 2,700 Salaries payable 300
Supplies 1,300 Utilities payable 900
Equipment, net 23,600 Interest payable 100
Other assets 5,500 Notes payable 10,000
Other liabilities 400
Total liabilities 14,000
Stockholders’ Equity
Common stock 25,000
Retained earnings 1,000
Total stockholders’ equity 26,000
Total liabilities and
Total assets $40,000 stockholders’ equity $40,000
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Concept Check 3
Which of the following accounts would
appear in a company’s income statement?
a. Accounts Payable
b. Cash
c. Dividends
d. Rent Expense

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Concept Check 4
Which relationship is reflected in the
balance sheet?
a. Revenues − Expenses = Net income
b. Assets = Liabilities + Stockholders’ Equity
c. Assets − Liabilities = Net Income
d. Assets = Revenues + Dividends

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Statement of Cash Flows

Measures activities involving cash receipts and

cash payments over an interval of time

Operating Investing Financing

cash flows cash flows cash flows

cash transactions cash transactions cash transactions

involving revenue for the purchase with lenders
and expense and sale of investments and stockholders
activities and long-term assets
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Illustration: Statement of Cash Flows for Eagle
Soccer Academy
EAGLE SOCCER ACADEMY
Statement of Cash Flows
For the month ended December 31, 2021
Cash Flows from Operating Activities
Cash inflows:
From customers $ 4,900
Cash outflows:
For salaries (2,800)
For rent (6,000)
Net cash flows from operating activities $ (3,900)
Cash Flows from Investing Activities
Purchase equipment (24,000)
Net cash flows from investing activities (24,000)
Cash Flows from Financing Activities
Issue common stock 25,000
Borrow from bank 10,000
Pay dividends (200)
Net cash flows from financing activities 34,800
Net increase in cash 6,900
Cash at the beginning of the period -0-
Cash at the end of the period $ 6,900

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Concept Check 5
The cash collected from a customer would be
recorded as which type of activity in the
statement of cash flows?
a. Operating Activity
b. Business Activity
c. Investing Activity
d. Financing Activity

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 Illustration: Links among Financial Statements
EAGLE SOCCER ACADEMY
Income Statement EAGLE SOCCER ACADEMY
Revenues $7,200 Statement of Stockholders’ Equity
Expenses 6,000
Net Income $1,200
Total
[1] Common Retained Stockholders’
Stock Earnings Equity
[1] Notice that the amount of net
income in the income statement Beginning balance (Dec. 1) $ -0- $ -0- $ -0-
appears in the statement of Issuances 25,000
stockholders’ equity.
25,000
Add: Net income 1,200 1,200
[2] Notice that the ending balance in
the statement of stockholders’ Less: Dividends (200) (200)
equity reappears in the balance [2]
sheet.
Ending balance (Dec. 31) $25,000 $1,000 $26,000

EAGLE SOCCER ACADEMY EAGLE SOCCER ACADEMY

Balance Sheet Statement of Cash Flows
Cash $ 6,900 [3] Liabilities $14,000 Cash flows from operating activities $ (3,900)
Other assets 33,100 Stockholders’ equity 26,000 Cash flows from investing activities (24,000)
Total liabilities and Cash flows from financing activities 34,800
Total assets $40,000 stockholders’ equity $40,000 Net increase in cash 6,900
Cash at the beginning of the year -0-
[3] Notice that the amount of cash in the balance sheet reappears Cash at the end of the year $ 6,900
as the ending cash balance in the statement of cash flows.
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Key Point

All transactions that affect revenues or expenses

reported in the income statement ultimately
affect the balance sheet through the balance in
retained earnings.

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Other Information Reported to Outsiders

• The financial statements are a key component of a

company’s annual report.
• Two other important components of the annual
report are (1) management’s discussion and analysis
and (2) note disclosures to the financial statements.
• The management discussion and analysis (MD&A)
section typically includes management’s views on
significant events, trends, and uncertainties pertaining to
the company’s operations and resources.
• Note disclosures offer additional information either to
explain the information presented in the financial
statements or to provide information not included in the
financial statements.
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Learning Objective 4

LO4 Describe the role that financial accounting

plays in the decision-making process.

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 The role of accounting in decision making

• Accounting serves an important role in a prosperous

society by measuring economic activity and
communicating useful information to help investors and
credits make good decisions.
• The practice of accounting requires judgment and critical
thinking skills.

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A WeChat article

After a number of severe failures, a security analyst decided to

switch his job to be an auditor.

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Illustration: Relationship between Changes in Stock Prices and
Changes in Net Income over a 20-Year Period

*Amounts in this chart represent the investment growth based on the median stock return of each group each year. Companies
included in this analysis are all U.S. companies with listed stocks, which averages about 6,000 companies per year.

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Part B
FINANCIAL ACCOUNTING INFORMATION

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Learning Objective 5

LO5 Explain the term generally accepted

accounting principles (GAAP) and describe
the role of GAAP in financial accounting.

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Financial Accounting Standards
Make their
decisions based Financial
Investors on Accounting
& Information
Creditors
Should be based
on formal
standards

Generally Accepted Accounting Principles

(GAAP)

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Standard Setting Today

United States Global

Financial Accounting International Accounting

Standards Board (FASB) Standards Board (IASB)

Governed by the
Securities and Exchange
Commission (SEC)

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Key Point

The rules of financial accounting are called

Generally Accepted Accounting Principles
(GAAP). The Financial Accounting Standards
Board (FASB) is an independent, private
body that has primary responsibility for the
establishment of GAAP in the United States.

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 Importance of Auditors
Trained individuals hired by a company as an
independent party to express a professional opinion
of the extent to which financial statements are
prepared in compliance with GAAP and are free of
material misstatement.
Role of auditors

Help ensure that Play a major role in

management has in fact investors’ and creditors’
appropriately applied GAAP decisions by adding
in preparing the company’s credibility to the financial
financial statements. statements.

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Illustration: Excerpts from the Independent Auditor’s
Report of Dick’s Sporting Goods, Inc.
DICK’S SPORTING GOODS, INC.
Report of Independent Auditors
To the Board of Directors and Stockholders of
Dick’s Sporting Goods, Inc.
Pittsburgh, Pennsylvania

We have audited the accompanying consolidated balance sheets of Dick's Sporting

Goods, Inc., and subsidiaries (the "Company") as of January 28, 2017, and January 30,
2016, and the related consolidated statements of income, comprehensive income, changes
in stockholders' equity, and cash flows for each of the three years in the period ended
January 28, 2017. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial statements
based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Dick's Sporting Goods, Inc., and subsidiaries as of
January 28, 2017, and January 30, 2016, and the results of their operations and their cash
flows for each of the three years in the period ended January 28, 2017, in conformity with
accounting principles generally accepted in the United States of America.

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Objectives of Financial Accounting

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Concept Check 6
Auditors are independent parties that help:
a. To establish accounting rules in the U.S.
b. To ensure management has appropriately
prepared the company’s financial statements
c. Investors and creditors in their decisions by
adding credibility to the financial statements.
d. Both b. and c. are correct

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Part C
CAREERS IN ACCOUNTING

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Learning Objective 6

LO6 Identify career opportunities in accounting.

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Some of the Career Options in Accounting

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What we have covered

PART A: Accounting as a measurement/communication

process

PART B: Financial accounting information

PART C: Careers in Accounting

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