AC310

Principles of Accounting
I: Financial Accounting
Session 1:
Course Overview
Introduction To Financial Accounting
The Balance Sheet
Course Overview

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Purpose Of the Course

• The two courses Principles Of Accounting I & II familiarize students

with accounting as the language of business
• This course, Principles Of Accounting I:
• Provides an introduction to the key concepts and applications of financial
accounting
• Lays the groundwork for the second semester course Principles Of Accounting
II: Management Accounting

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Overview Of the Course Content
• Introduction: Why businesses need accounting and how they use it
Ses
sio • Recording accounting transactions to build a balance sheet
n1

• The basic issues in measuring income

Ses
sio • Preparing an income statement
n2

• The accounting regulatory framework

Ses
sio • Main recognition and measurement issues (depreciation, inventory valuation…) in the financial statements
n3

• The classification of cash from operating, investing, and financing activities

Ses
sio • Preparing and analyzing a cash flow statement
n4
• Key areas of ratio analysis: profitability, efficiency, liquidity, solvency
Ses
sio • Using basic ratio analysis to evaluate the financial position and performance of a business
n5

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"Flipped Learning" Format
• Each group is split into two subgroups
• Example: Group A is split into A1 and A2
• Each subgroup alternates face-to-face and distance learning
• In Session 1, Subgroup A1 is in class face-to-face, A2 at home in the distance
learning mode
• In Session 2, the roles are inversed, etc.
• Exception: Session 4 is 100% distance learning!!!

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Teaching Tools
• Each session is composed of the following elements:
• A lecture to provide a theoretical introduction to key concepts with examples
(either face-to-face or as a video on Moodle)
• Exercises to apply the concepts practically
• A quiz to check understanding and learning progress
• A book chapter in the primary reading by
Atrill, P and McLaney, E, Accounting and Finance: An Introduction, 9th edition [eBook
available]
• Additional selected readings posted on Moodle

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The Book (Primary Reading)
• The primary reading is:
Atrill, P and McLaney, E, Accounting and Finance: An Introduction, 9th edition
• The library has paper and eBook copies of this title and similar titles:
https://learning-center.rennes-sb.com/s.php?h=a7dfcca8bdbc75d37ee5d3caee
0ce84e
• You can also use the books by the same authors
“Accounting and Finance for Non-Specialists”
"Accounting : An Introduction"
• All these books contain the relevant chapters for this course (see next
slide)
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Relevant Core Book Chapters In the
Atrill/McLaney
• Introduction to accounting and finance ( Session 1)
• Measuring and reporting financial position ( Session 1)
• Measuring and reporting financial performance ( Sessions 2 & 3)
• Measuring and reporting cash flows ( Session 4)
• Analysing and interpreting financial statements ( Session 5)

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Methods Of Assessment
• Continuous assessment (30% of final grade):
• 4 online quizzes on Moodle
• To be done within one week after Sessions 2, 3, 4, and 5, respectively
• Final exam (70% of final grade)
• Two-hour, closed book exam (if sanitary conditions permit!!!) about the
whole course

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Learning Objectives Session 1
• After this lesson, you should be able to
• Explain how accounting information assists in making decisions
• Describe the components of the balance sheet
• Analyze business transactions and relate them to changes in the balance
sheet

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The Nature of Accounting

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Definition of Accounting
• Accounting is the process of identifying, recording, summarizing, and
reporting economic information for decision makers
• Accountants present this information in reports, for instance, financial
statements
Recorded and Summarized Communicated
Analyzed into to
Accountant’s
Analysis and Financial
Event Users
Recording Statements

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Decision Makers: The Users of
Accounting Information
• Financial Accounting provides information mainly for external decision makers:
• Shareholders of the company, i.e. the company's owners, want to assess how well its
management is performing to know whether to invest in the company or not.
• Trade contacts include suppliers who provide goods for the company on credit and
customers who purchase the goods or services provided by the company.
• Providers of financing to the company might include a bank which allows the company to
operate an overdraft, or provides longer-term finance by granting a loan.
• The taxation authorities want to know about business profits in order to assess the tax
payable by the company, including sales taxes.
• Employees of the company should have a right to information about the company's financial
situation, because their future careers and the size of their wages and salaries depend on it.
• Financial analysts and advisers need information for their clients or audience.
• Government and their agencies are interested in the allocation of resources and therefore in
the activities of business entities.
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Decision Makers: The Users of
Accounting Information (continued)
• Management Accounting provides information to internal decision
makers
• Top executives
• Department heads
• College deans
• Hospital administrators
• Other managers within the organizations

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Decision Makers: The Users of
Accounting Information (continued)

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The Annual Report
• The annual report is prepared by management and informs investors about the
company’s past performance and future prospects
• It has to comply and be made publicly available in accordance with the
accounting regulations of the country where the business operates
• The annual report includes
• The financial statements (essentially balance sheet, income statement, statement of cash
flows)
• A letter from corporate management
• Management discussion and analysis
• Footnotes explaining many elements of the financial statements in more detail
• The report of the independent auditors
• Other corporate information

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The Major Financial Statements
Balance
BalanceSheet
Sheet
Income
Income Statement
Statementof
of (or
(orstatement
statement
Statement
Statement Cash
CashFlows
Flows of
offinancial
financial
position)
position)

How well What is the financial

did the organization do during a condition of an
given period? organization on a
given day?
 Similar to a movie
Reports flows  Similar to a snapshot
Reports stocks 17
The Balance Sheet

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The Balance Sheet
• The balance sheet (also called the statement of financial position)
shows the financial status of a company at a particular instant in time
• The left side lists the resources of the firm
• The right side lists the claims against those resources
• In general, it is prepared annually; however, many companies also
publish quarterly financial statements
• It must be balanced, that is, the following equation must be true at
any time
Assets = Liabilities + Owners’ equity

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Balance Sheet Equation

Assets: Liabilities: Owner’s equity:

Economic resources
with probable future
= Economic obligations
to outsiders (e.g.,
+ Owner's residual
interest
benefits creditors)

Resources the firm owns and Funds used to acquire the

controls resources, giving a claim against
them
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 Exercise 1

Please do now Exercise 1. You’ll find the document Exercises on Moodle

in the section of Session 1.
You can check your answer after having finished the exercise by
referring to the document Solutions.

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Components Of the Balance Sheet
• Assets are economic resources that the company expects to help
generate future cash inflows or reduce or prevent future cash outflows,
for example:
• Current assets
• Cash and cash equivalents
• Accounts receivable (or trade receivables): assets that result from the sale of goods or
services on credit (on open account); they represent the amount the customer owes to the
company
• Inventories: stocks held by the company for the purpose of sale to customers
• Long-lived (non-current) assets
• Tangibles (equipment, computers, machines, vehicles, buildings, land,…)
• Intangibles (goodwill, patents, trademarks, licenses,…)
• Investments in other companies, other financial assets
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Components Of the Balance Sheet
(continued)
• Liabilities are economic obligations of the organization to outsiders
(creditors) that will have to be repaid or settled in the future, for
example:
• Current liabilities (to be paid within one year)
• Accounts payable (or trade payables): liabilities that result from a purchase of goods or
services on credit; the represent the amount the company owes to the supplier
• Long-term liabilities (to be paid beyond one year)
• Debt to a bank in the form of a note payable
• Bonds

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Components Of the Balance Sheet
(continued)
• Owners’ equity is the owners’ residual claim on the organization’s net
assets
• Its character differs between the three basic forms of ownership
structures (see next slide)

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Types Of Ownership
• Sole proprietorship – a business with a single owner
• Partnership – an organization that joins two or more individuals who
act as co-owners
• Corporation / limited company – a business organization that is
constituted as a separate legal entity form its owners who have only
limited liability

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Corporation
• Publicly owned corporation – A corporation owned by the public
through the sale of shares; it may have thousands of owners
• Privately owned corporation – A corporation owned by families or a
small group of shareholders; shares are not publicly sold
• Corporation stockholders have limited liability
• Creditors have claims against the corporation assets only, not the personal
assets of the owners

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Advantages and Disadvantages
of the Corporate Form
• Advantages: • Disadvantages:
• Limited liability • Unfavorable tax laws
• Easy transfer of ownership • Regulation
(shares)
• Ability to raise capital from
hundreds or thousands of
potential stockholders
• Continuity of existence
• Prestige

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Accounting Differences Among Legal
Forms
• Proprietorships and partnerships
• Owners’ equities are labeled capital
• Owners’ equities are recorded in the capital account
• Owners’ equity in corporations is called stockholders’ equity; it is
composed of:
1. Share capital (total initial and subsequent capital contributed by owners)
2. Retained earnings (the accumulated, non-distributed income or profit
resulting from ongoing business operations)

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Stockholders and the Board of
Directors
• Shareholders elect a board of directors to look out for their interests
• Members of a board often include CEOs and presidents of other
corporations; university presidents and professors; attorneys; and
community representatives
• The chairman of the board may also be the top manager, the chief
executive officer (CEO)

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Stockholders and the Board of
Directors
• The board’s duty is to ensure that managers act in the interest of
shareholders
• When boards do their duty in monitoring management, the corporate
form of organization is effective

Elect Appoint
Stockholders Board of Directors Managers

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Credibility of Accounting Information
and the Role of Auditing
• The separation of owners and managers creates potential problems in
getting truthful information about the performance of a company
• Shareholders must rely on managers to tell the truth
• The auditor examines the information that managers use to prepare
the financial statements and provides assurances about the credibility
of those statements

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Balance Sheet Transactions
• Every transaction of a company or entity affects the balance sheet
equation
• An entity is an organization that stands apart from other organizations and
individuals as a separate economic unit
• A transaction is any event that affects the financial position of an entity and
that can reliably recorded in monetary terms
• Each transaction has counterbalancing entries on the balance sheet, so that
the total assets always equal the total liabilities and owners’ equity

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Balance Sheet Transactions
(continued)
• Transactions are recorded in the organization’s accounts
• An account is a summary record of the changes in a particular asset, liability,
or owners’ equity item
• The account balance is the total of all entries to the account to date
• The double-entry accounting system records each transaction in at least two
accounts
• A compound entry affects more than two balance sheet accounts

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Balance Sheet Transactions
(continued)
• For each transaction, the accountant determines (transaction
analysis)
1. Which specific accounts are affected
2. Whether the account balances are increased or decreased
3. The amount of the change in each account balance

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 Balance Sheet Transactions:
EXAMPLE
On December 31, Mr Smith, an entrepreneur, creates a bicycle shop,
eWheels.

Transaction 1: Initial Investment of $400,000

(December 31, 20X2)
Assets = Liabilities + Owners’ Equity

Cash Smith, Capital

Transaction (1) + $400,000 = +$400,000

(Owner Investment)

The two accounts affected by this transaction are the cash account and
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the capital account. They increase by $400,000, respectively.
Balance Sheet Transactions:
EXAMPLE (continued)
Transaction 2: Loan of $100,000 from Bank
(January 2)
Assets = Liabilities + Owners’ Equity

Cash Note payable Smith, Capital

(1) + $400,000 = +$400,000

(2) + $100,000 = + $100,000
Bal. $500,000 = $100,000 $400,000
$500,000 $500,000

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 Balance Sheet Transactions :
EXAMPLE (continued)
Transaction 3: Acquire Merchandise Inventory
for Cash, $150,000 (January 3)
Assets = Liabilities + Owners’ Equity

Cash Merch. Inventory Note payable Smith, Capital

The Closing Bal. $500,000 = $100,000 $400,000

Balances at the (3) -150,000 +150,000 =
end of the
Bal. 350,000 150,000 = 100,000 400,000
accounting
period are used
to prepare the $500,000 $500,000
Balance Sheet

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Preparing the Balance Sheet :
EXAMPLE (continued)
eWheels Company
Balance Sheet January 3, 20X2

Assets Liabilities and Owners’ Equity

Cash $350,000 Liabilities (note payable) $100,000

Merch. Inventory 150,000 Smith, capital 400,000

Total assets $500,000 Total liabilities

and owners’ equity $500,000

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 Exercises 2, 3 & 4

Please do now Exercises 2, 3 & 4. Check your answers only after having
finished.

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End of Session 1
• To complement this session:
• Read the relevant chapters in the primary reading
• Introduction to accounting and finance
• Measuring and reporting financial position
• Do Quiz1 on Moodle (not graded)

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Next Session: Measuring and Reporting
Financial Performance (the Income Statement)
• In Session 1, we have learnt how to measure and report the financial
position of a company. In the next session, we will see how
companies create wealth through their ongoing business operations,
and how this wealth creation can be measured and reported.
• To prepare Session 2:
• Read the slides
• Read the relevant chapter in the primary reading
• Measuring and reporting financial position

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