Financial Accounting Review (Week 1)

Topics:
 Financial Accounting vs. Management Accounting
 Structures of Doing Business
 Financial Statements & Users
 The Accounting Formula & types of statements
o Income Statement
o Statement of Retained Earnings
o Balance Sheet
o Cash Flow Statement

Financial Accounting vs. Management Accounting

 Financial Accounting: Branch of accounting primarily focused on ________ reporting of past
happenings using specific rules/guidelines such as GAAP, ASPE, or IFRS.
 Management Accounting: Branch of accounting primarily focused on ________ reporting with a
future focus using customized approaches.

Financial Accounting Management Accounting

External Reporting Internal Reporting
Regulated Not regulated
Standardized For decision making
Comparability Customizable
Overall snapshot of Company More granular

Structures of Doing Business

Type of Business Proprietorship Partnership Corporation

Owner(s) Proprietor -One Partners – two or more Shareholders –

usually many

Personal liability of Proprietor is personally Partners are usually Shareholders are

owner(s) for business liable personally liable NOT personally liable
debts

Tax implications Pays personal taxes Partnership pays no Pays its own corporate
taxes and is a flow taxes and flow through
through entity and income is taxed at the
partners are taxed individual level
personally

ACCT 621 – Accounting for Managers – Week 1 Notes 1

Financial Statements & Users
Financial Statements: reports which provide details of an entity’s financial information, including what is
contained within the business and what the business is earning.

Users of Financial Statements

 Managers
 Investors and Creditors
 Individuals
 Government and Regulatory Bodies
 Non-for-profit organizations

The Accounting Formula & types of statements

Income Statement Covered in more detail in Week 1 of the Financial Accounting Micro-Credential
Course (FACC099)

 The Income Statement (also called the Statement of Income) reports a company’s revenues,
expenses, and resulting net income/loss over a specific period of time (ex. month, quarter,
year).
 Shows the “bottom line” – this is often considered the most important item in the financial
statements

The income calculation is as follows:

Net Profit/Loss = Revenues - Expenses

Revenue: Amount of money _______ through business activity, such as sales, services, or interest.

Expense: Amount of money _______ through business activity, such as salary, rent, or supplies.

ACCT 621 – Accounting for Managers – Week 1 Notes 2

Let’s try a simple income statement below:

UCW Bookstore
Income Statement
For the Years Ended December 31, 2023 and 2022

2023 2022
Revenues
Sales Revenue $472,500 $460,000
Service Revenue 253,500 210,000
Total Revenues _____ 670,000

Expenses
Operating expenses:
Cost of Goods Sold 200,000 175,000
Salary expense 300,000 275,000
Rent expense 100,000 100,000
Utilities expense 50,000 50,000
Depreciation expense 16,000 20,000
Total operating expenses _____ 620,000
Operating profit 50,000
Interest expense 15,000 24,000
Net Income before taxes 26,000
Income tax expense 10,000 6,000
Net Income $ . $20,000

When revenues are larger than expenses, there is a positive balance at the bottom of the income
statement, also called a profit. We see this in both years above.

When revenues are lower than expenses, there is a negative net balance at the bottom of the income
statement, also called a ________.

Let’s try some more questions:

Last year, Francine’s business generated $55,500 in service revenues. Her only expenses were $22,300 in
cost of sales and $25,200 in salary expense. Francine made a net ____________ of $_____________.

Alana is expecting last year’s revenue of $40,000 to grow by 7.5% this year. Additionally, she is expecting
her expenses of $38,000 to grow by 14%. Hence, she is projecting a net ____________ of $___________
this year.

ACCT 621 – Accounting for Managers – Week 1 Notes 3

This month, Will is expecting rent expense of $3,000, cost of goods sold expense of $1,800, salary
expense of $2,300, and utilities expense of $1,000. To generate a monthly profit of $2,000, Will must
generate $_____________ of sales revenue.

Statement of Retained Earnings Covered in more detail in Week 1 of the Financial Accounting
Micro-Credential Course (FACC099)

In the preparation of the two most commonly used financial statements (income statement and balance
sheet), another one is often helpful- the Statement of Retained Earnings (also known as the Statement
of Equity).
 It can be viewed as an intermediary step which takes the income or loss from the period just
ended and moves it to the Retained Earnings account on the Balance Sheet.
 Retained earnings is a portion of ___________ the Company has kept over a period of years
 __________ balance indicates revenues exceeded expenses
 Accumulated deficit indicates expenses have exceeded revenues
 Net income (or net loss) flows from the Income Statement to the Statement of Retained
Earnings
 How to calculate:
o Open with beginning retained earnings balance
 Adds net income (or subtracts net loss)
 Flows from the Income Statement
 Subtracts dividends
o Report ending retained earnings balance

Using the 2022 profit of $20,000 and 2023 profit of $35,000, let’s fill in the UCW Bookstore’s Statement
of Retained Earnings:

UCW Bookstore
Statement of Retained Earnings
For the Years Ended December 31, 2023 and 2022

2023 2022
Retained earnings:
Balance, beginning of year $114,000
Net income
Less: dividends and other
distributions to shareholders . 7,000 . . 4,000 .
Balance, end of year $ . .$ .

As its name implies, Retained Earnings are the accumulated profits and losses of a business over time
which have not been distributed as dividends to shareholders. We see above that dividends totaling
$4,000 and $7,000 were paid out in 2022 and 2023, respectively.

ACCT 621 – Accounting for Managers – Week 1 Notes 4

A (debit/credit) balance for Retained Earnings means that there is an accumulation of profits, while a
debit balance means that the losses (and payouts to shareholders) have outpaced earnings. We see that
there ended up being a positive, or credit, balance of $130,000 at the end of 2022 which ends up being
the beginning balance for 2023.

Let’s try some exercises:

At the start of the year, Ray had a positive Retained Earnings balance of $40,000. Assuming he earned
profits of $30,000 this year and paid out 10% of earnings as dividends to investors, his Retained Earnings
balance is a (positive / negative) one of $ . debit / credit.

Julia notes she currently has a debit Retained Earnings balance of $110,000. Assuming she expects to
earn profits of $50,000 this year and pay dividends totaling $10,000 to her investors, Julia will end up
with a (debit / credit) Retained Earnings balance of $ .
.

Balance Sheet Covered in more detail in Week 1 of the Financial Accounting Micro-Credential
Course (FACC099)

The Balance Sheet (also referred to as the Statement of Financial Position) is best described as a
statement which embodies the accounting equation:
Assets = Liabilities + Owner’s Equity

As the formula suggests, the total value of assets owned by a business MUST equal the value of the
liabilities and owner’s equity. Liabilities are often referred to as Debt and Owner’s Equity can be
shortened to Equity.

Assets: economic resources controlled by an entity that are expected to provide current/future benefit
to the business ex) cash, office supplies, merchandise inventory, land, machinery/equipment
 Current assets
o Expected to be converted to cash, sold or consumed in the next year or within he
business’s operating cycle (whichever is longer)
o Includes:
 Cash and cash equivalents
 Short-term investments
 A/R
 Inventory
 Prepaid expenses
 Non-current assets
o Will be held for longer than _____________
o Includes:
 Property, plant & equipment
 Land
 Buildings
 Equipment
 Intangible Assets

ACCT 621 – Accounting for Managers – Week 1 Notes 5

  Long-term investments

Liabilities/Debt: debts payable to outside parties such as creditors, suppliers, employees, governments
ex) accounts payable, notes payable, salaries payable, taxes payable
 Current liabilities
o Debts payable within the next __________ or within the business’s operating cycle
o Includes:
 Accounts payable
 Income taxes payable
 Accrued expenses payable
 Current maturities of long-term debt
 Non-current assets
o Debts payable more than _______ from balance sheet date
o Includes:
 Long-term notes payable
 Bonds payable

Owner’s equity/Equity: the amount of an entity’s assets which remain after the liabilities are subtracted
(can also be called net assets).
 Typically, it consists of:
o Common shares
o Retained earnings

Assets, at the top of the balance sheet, are debit accounts/balances, meaning they are debited when
increases are recorded. Conversely, they are credited when reduced.

The liabilities and equity accounts are credit accounts. Hence, a credit entry increases them, while a
debit entry decreases them.

ACCT 621 – Accounting for Managers – Week 1 Notes 6

 UCW Bookstore
Balance Sheet
December 31, 2023 and December 31, 2022

Assets
2023 2022
Current Assets:
Cash $200,000 $170,000
Accounts receivable 5,000 15,000
Inventory 440,000 430,000

Total current assets 615,000

Fixed Assets

Furniture 30,000 30,000

Accumulated Depreciation- Furniture (10,000) (8,000)
Furniture, net 22,000
Equipment 50,000 50,000

Accumulated Depreciation- Equipment (20,000) (6,000)

Equipment, net ________ 44,000
Total Assets $ .$ $681,000

Liabilities and Shareholders' Equity

Current Liabilities:
Accounts Payable 5,000 5,000
Long-Term Debt
Bank Loan 232,000 246,000
Total Liabilities 251,000
Shareholders' Equity
Common Shares 300,000
300,000
Retained Earnings 158,000 130,000
Total Shareholders' Equity ________ 430,000
Total Liabilities and Shareholders' Equity $ .

.
$681,000 .

ACCT 621 – Accounting for Managers – Week 1 Notes 7

Note that the Retained Earnings numbers on the year-end Balance Sheet reflect our earlier calculations
on the Statement of Retained Earnings (which reflected what was calculated on the Income Statement).

Let’s try some questions to reinforce the A = L + E concept:

In his business, Deep has equity of $54,000 and liabilities of $16,000. Hence, his assets must be worth
$_____________.

In her first month of business, Sheila transferred in a car worth $11,000, equipment worth $6,500, and
$18,000 cash. She took a bank loan to finance additional assets. Sheila’s assets total up to a net book
value of $44,700. Sheila’s bank loan was for $_____________.

Along with an accounts payable balance of $2,500 and bank loan of $13,000, Jamal has four assets in his
business:
 a car which was purchased for $18,000 and has an accumulated depreciation balance of $4,500
 a truck which was purchased for $23,000 and has an accumulated depreciation balance of
$6,000
 accounts receivable balance of $3,000
 cash balance of $6,700

Jamal’s equity is $________________.

Cash Flow Statement Covered in more detail in Week 1 of the Financial Accounting Micro-Credential
Course (FACC099)
 Measures cash receipts and cash payments
 Shows whether cash increased or decreased during the year
 Reports ending cash as shown on the balance sheet
 Categorizes into three types of activities:
o Operating activities
 Cash receipts and payments from selling goods and services
o Investing activities
 Purchasing & selling long-term assets
o Financing activities
 Issuing shares, paying dividends, borrowing, and repayment of borrowed funds

ACCT 621 – Accounting for Managers – Week 1 Notes 8

Summary of Financial Statements
Question
How well did the company perform
during the year?
Why did the Company’s retained
earnings change during the year?
What is the company’s financial
position at year-end?
How much cash did the company
generate and spend during the
year?
ACCT 621 – Accounting for Managers – Week 1 Notes
Financial Statement Answer
Income statement Revenues + gains
−Expenses + losses
Net income or (net loss)
Statement of retained Beginning retained earnings
earnings + Net Income
+Other comprehensive income
−Dividends
Ending retained earnings
Balance sheet Assets = Liabilities +
Owners’ equity
Statement of cash flows Operating cash flows
+/− Investing cash flows
+/− Financing cash flows
Increase(decrease) in cash
9