Financial Accounting Lectures

Financial Accounting Lectures
Compiled By: Dr Maha Ramadan

LECTURE ONE
Introduction to Accounting
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Importance of Accounting
Accounting is an information and measurement system that identifies,

records, and communicates an organization’s business activities.
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2
Learning Objective C1: Explain the purpose and importance of accounting.
Accounting
Accounting and
and Capital
Capital Allocation
Allocation
Resources are limited. Efficient use of resources often

determines whether a business thrives.
Illustration 1-1
Capital Allocation Process
Financial
Users Capital Allocation
Reporting
Information to help Investors, creditors, The process of
users with capital and other users determining how and
allocation decisions. at what cost money
is allocated among
competing interests.
LO 2 Explain how accounting assists in the efficient use of scare resources.

The Accounting System
Financial and Managerial
Accounting: Seven Key Differences
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on
versus relevance objectivity and verifiability relevance
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focus on
companywide reports segment reports
6. Rules Must follow GAAP / IFRS Not bound by GAAP / IFRS
and prescribed formats or any prescribed format
7. Requirement Mandatory for Not
external reports Mandatory
The Accounting Equation
The balance sheet reports a company's assets, liabilities, and

stockholders' equity at a specific point in time.
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Business Transaction and Accounting
The Accounting Equation:
Assets = Liabilities + Equity
Expanded Accounting Equation:
Learning Objective A1: Define and interpret the accounting equation and each of its components. 7
Accounting Principles
Revenue Recognition Principle
Measurement Principle
1. Recognize revenue when goods
(Cost Principle)
or services are provided to
Accounting information is based on customers and
actual cost. Actual cost is
considered objective. 2. at an amount expected to be
received from the customer.
Expense Recognition Principle

Full Disclosure Principle
(Matching Principle)
A company should report material
A company records its expenses
information that could have a
incurred to generate the revenue
significant effect on investors
reported.
Learning Objective C2: Describe the importance of ethics and GAAP.

1-8
Business Transaction and Accounting
The Accounting Equation:
Assets = Liabilities + Equity
Expanded Accounting Equation:
Learning Objective A1: Define and interpret the accounting equation and each of its components. 9
Learning Objective
Analyze business transactions

using the accounting equation.
10
Transaction 1: Investment by Owner
Chas Taylor invests $30,000 cash to start a

business named Fast Foward.
The accounts involved are:
1. Cash (asset) ↑
2. C. Taylor, Capital (equity) ↑
11
Learning Objective P1: Analyze business transactions using the accounting equation.
Accounting Equation 1
Chas Taylor invests $30,000 cash to start the
business, Fast Foward.
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12
Transaction 2: Purchase Supplies for
Cash
Company purchased supplies by paying $2,500
cash.
(1) Cash (asset) ↓
(2) Supplies (asset) ↑
13
Company purchased supplies by paying $2,500
cash.

14
Transaction 3: Purchase Equipment
for Cash
Purchased equipment for $26,000 cash.

(2) Equipment (asset) ↑
15
Purchased equipment for $26,000 cash.
16
Transaction 4: Purchase Supplies on
Credit
Purchased supplies of $7,100 on credit.

(1) Supplies (asset) ↑
(2) Accounts Payable (liability) ↑
17
Purchased supplies of $7,100 on credit.

18
Transaction Analysis: Revenues, Expenses
and Withdrawals
Now, let’s look at transactions involving
revenues, expenses and withdrawals.
19
Transaction 5: Provide Services for Cash
Provided consulting services to a customer and

received $4,200 cash right away.

(1) Cash (asset) ↑
(2) Revenues (equity) ↑
20
Provided consulting services to a customer and
received $4,200 cash right away.
21
Transaction 6 and 7: Payment of
Expenses in Cash
Paid rent of $1,000 and salaries of $700 to employees.

(2) Rent expense ↑ (equity) ↓
(3) Salaries expense ↑ (equity) ↓
Remember that the balance in the Expense accounts actually increase. But, total un en
Equity decreases, because expenses reduce equity. begi end
22
Accounting Equation 6 and 7
Paid rent of $1,000 and salaries of $700 to employees.

23
Provided consulting services of $1,600 and rents facilities for
$300 to a customer for credit.

24
Transaction 9: Receipt of Cash from
Accounts Receivable
Client in transaction 8 pays $1,900 for consulting services.

(1) Cash (asset) ↑
(2) Accounts receivable (asset) ↓
25
Client in transaction 8 pays $1,900 for consulting services.

26
Transaction 10: Payment of Accounts
Payable
Fast Forward pays $900 as partial payment for supplies
purchased in transaction 4.

(2) Accounts payable (liability) ↓
27
FastForward pays $900 as partial payment for supplies
purchased in transaction 4.
28
Transaction 11: Withdrawal of Cash by
Owner
Owner withdraws $200 cash for personal use.
(2) C. Taylor, Withdrawals ↑ (equity) ↓
Remember that the Withdrawals account actually increases

(just like our Expense accounts).
But, total Equity decreases because withdrawals cause equity
to go down!!
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Owner withdraws $200 cash for personal use.
30
Summary of Transactions
Exhibit 1.9
31
The Income Statement Equation
If total expenses exceed total revenues, a net loss is reported.
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Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses and computes net income or loss over a period of
time.
2. Statement of owner’s equity— explains changes in equity
from owner investments and net income (or loss) and from
any withdrawals over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows — identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
33
Learning Objective P2: Identify and prepare basic financial statements and explain how they interrelate.
Exhibit 1.6
Relationships Among Le-Nature’s Statements
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FINANCIAL STATEMENTS
PROFIT AND LOSS STATEMENT

COMPREHENSIVE INCOME
STATEMENT
STOCKHOLDERS’ EQUITY
STATEMENT
STATEMENT OF FINANCIAL
POSITION
CASH FLOWS STATEMENT
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LO 4-1
The Income Statement, Comprehensive

Income
Income Statement (Profit Reports a company’s profit
and Loss Statement or during a particular reporting
Statement of Earnings) period
Comprehensive Income Includes a few types of gains and

(other comprehensive losses excluded from the Income
income) Statement
Statement of Cash Flows Provides information about

cash receipts and cash
payments
04-02
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First: Income Statement
Usefulness
Evaluate past performance.
Predicting future performance.
Help assess the risk or uncertainty

of achieving future cash flows.
LO 1 Understand the uses and limitations of an income statement.

Income Statement
Limitations
Companies omit items that cannot
be measured reliably.
Income is affected by the

accounting methods employed.
Income measurement involves

judgment.
LO 1 Understand the uses and limitations of an income statement.

Income Measurement
Two main components of accounting income:

Revenues (gains)
Expenses (losses)
LO 4-1
Income from Continuing Operations:

Revenues and Expenses
Reports the revenues, expenses, gains, and losses that have
occurred during the reporting period.
Revenues
• Inflows of resources resulting from providing goods or
services to customers.
Expenses
• Outflows of resources incurred while generating revenue.
• Represent the costs of providing goods and services.
04-0
40
Income Statement
Elements of the Income Statement
Revenues Expenses
Sales Revenue Cost of Goods Sold
Fee Revenue Wages Expense
Interest Revenue Rent Expense
Rent Revenue Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
LO 4-1
Income from Continuing Operations: Gains

and Losses
Gains and Losses
• Increases or decreases in equity from peripheral or
incidental transactions of an entity.
Example:
Gains and losses can arise when a company sells
investments or property, plant, and equipment for an
amount that differs from their recorded amount.
04-0
42
LO 4-1
Multiple Step Income Statement
04-0
43
LO4-4
Discontinued Operations
• Disposal of component(s) that represents a strategic

shift that has, or will have, a major effect on a
company’s operations and financial results
• Reported separately, below income from continuing
operations
Discontinued operations,
Discontinued operations, net
net of of
$xx$xx
taxtax (expense)/
(expense)/ benefit
benefit
INCOME STATEMENT REPORTING
A component of an entity that either has been disposed of, or
is classified as held-for-sale, and:
1. Represents a major line of business or geographical area of
operations, or
2. Is part of a single, co-coordinated plan to dispose of a

major line of business or geographical area of operations,
or
3. Is a subsidiary acquired exclusively with a view to resell.
LO 5
Concept Check √
The Trident Corporation’s results for the year ended December 31, 2016,
include the following material items:
Sales revenue $8,200,000
Cost of goods sold 4,800,000
Selling and administrative expenses 2,000,000
Gain on sale of investments 300,000
Loss on discontinued operations 1,200,000
Restructuring costs 280,000
Trident Corporation’s income from continuing operations before income

taxes for 2016 is:
a. $1,120,000.
b. $ 220,000.
c. $1,700,000.
d. $1,420,000.
$8,200,000 – 4,800,000 -2,000,000 + 300,000 – 280,000 = $1,420,000
INCOME STATEMENT REPORTING
Companies report as discontinued operations
1. (in a separate income statement category) the gain or loss
from disposal of a component of a business.
2. The results of operations of a component that has been or

will be disposed of separately from continuing operations.
3. The effects of discontinued operations net of tax as a

separate category, after continuing operations.
LO 5
LO 4-1
Multiple Step: Income Statement
04-0
48
LO 4-4
Reporting Discontinued Operations—

When the Component Has Been Sold
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LO 4-4
Discontinued Operations Example—
Component Has Been Sold
Income from continuing operations $20,000,000

Discontinued operations:
Loss from operations of discontinued component $(2,000,000)
(including gain on disposal of $3,000,000)
Income tax benefit ($2,000,000 × 25%) 500,000
Loss on discontinued operations (1,500,000)

Net income $18,500,000
04-50
LO 4-4
Reporting Discontinued Operations—When the

Component Is Held for Sale

LO 4-4
Discontinued Operations Example—

Component Held for Sale
Income from continuing operations $20,000,000

Discontinued operations:
Loss from operations of discontinued component $(8,000,000)
(including impairment loss of $3,000,000)
Income tax benefit ($8,000,000 × 25%) 2,000,000
Loss on discontinued operations (6,000,000)

Net income $14,000,000
04-52
OTHER REPORTING ISSUES
Retained Earnings
Increase Decrease
 Net income  Net loss
 Change in accounting  Dividends
principle  Change in accounting
 Prior period principles
adjustments  Prior period
adjustments
LO 8
Reconciliation of Retained Earnings
Reported as part of the Statement of Stockholders’
Equity or combined with the Income Statement
Beginning of year balance of retained earnings
+/-Prior period adjustments (net of tax)
= Beginning balance as adjusted
+ Net income → I.S (current)
– Dividends → (current year)
= End-of-year balance of retained earnings
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Chapter 4, Slide #54
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OTHER REPORTING ISSUES
Example: Retained Earnings
LO 8
Comprehensive Income Statement
All changes in equity during a period except those
resulting from investments by owners and
distributions to owners.
Comprehensive Net Other Comprehensive
 +
Income Income Income
Includes:
 all revenues and gains, expenses and losses
reported in net income, and
 all gains and losses that bypass net income but
affect stockholders’ equity.
Special Reporting Issues
Comprehensive Income
Income Statement (in thousands) Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000
Unrealized gains and
Operating expenses:
Selling expenses 10,000
losses on available-
Administrative expenses 43,000 for-sale securities.
Total operating expense 53,000 Translation gains and
Income from operations 83,000
losses on foreign
Other revenue (expense):
Interest revenue 17,000
currency.
Interest expense (21,000) Plus others
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in
Net income $ 55,000 Stockholders’ Equity
LO 8 Explain how to report other comprehensive income.

Comprehensive
Income
Net Income
Income Statement (in thousands)
Other Comprehensive
Sales
Cost of goods sold
$ 285,000
149,000 + Income
Gross profit 136,000
Operating expenses:
 Unrealized gains and
Selling expenses 10,000 losses on non-trading
Administrative expenses 43,000 equity securities.
Total operating expense 53,000  Translation gains and
Income from operations 83,000
Other revenue (expense):
losses on foreign
Interest revenue 17,000 currency.
Interest expense (21,000)  Plus others
Total other (4,000)
Income before taxes 79,000
Income tax expense 24,000 Reported in Equity
Net income $ 55,000
Slide
4-58
LO 9
LO4-6
Flexibility in Reporting
Information in the income statement and other
comprehensive income items can be presented as:
Single, continuous Two separate, but

statement of consecutive
comprehensive income statements
Statement of Income Statement of

comprehensive statement comprehensive
income income
Comprehensive
Income
One Statement Approach ILLUSTRATION 4-21
One Statement Format:
Advantage –
does not require
the creation of a
new financial
statement.
Disadvantage -
net income buried
as a subtotal on
the statement.
Slide
4-60
LO 9
LO 4-6
Comprehensive Income as a
Separate Statement
04-61
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Statement of
Stockholders’ equity
Elements of the Statement of
Stockholders’ Equity
Paid in capital Retained Earnings Accumulated

Capital Stock Other
Comprehensive
+Additional Paid in Beginning Retained
Income
Capital Earnings
+Net Income
-Dividends
Ending Retained
Earnings
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LO 4-6
Third: Statement of
Stockholder’s Equity
Paid in Capital Accumulated
Retained Treasury Other
Capital Additional Earnings Stock Comprehensive
Stock paid in [-] Income
Capital
Balance, Dec 483 45,672 42,212 (20,022) (975)

2016 =1/1/2017
Stock Issued 9 1852
Net Income 4,228
Less: Dividends (2082)
Treasury Stock (759)
purchase
OCI (81)
Balance, Dec 492 47,524 44358 (20781) (1056)
2017
04-63
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LO 4-6
Shareholders’ Equity—AstroNova, Inc
04-64
LO 4-6
Relationship between Net Income and

Other Comprehensive Income—First Alternative
(The investment is sold)
• Consider a $10 million net-of-tax gain on a sold security.

• If reported as part of net income, the gain adds to the
cumulative balance of retained earnings.
04-65
LO 4-6
Relationship between Net Income and

Other Comprehensive Income—Second Alternative
(The Company is still holding the investments)
• Consider a $10 million net-of-tax gain.

• If reported as part of other comprehensive income (in
case a security is not sold for ex), the gain adds to the
balance of accumulated other comprehensive income.
04-66
Fourth: STATEMENT OF FINANCIAL POSITION (Balance Sheet)
Statement of financial position, also referred to as the

balance sheet:
1. Reports assets, liabilities, and equity at a specific date.
2. Provides information about resources, obligations to

creditors, and equity in net resources.
3. Helps in predicting amounts, timing, and uncertainty of

future cash flows.
LO 1
Balance Sheet
Elements of the Balance Sheet
Assets Liabilities
Cash Accounts Payable
Short-Term Investment Accrued Expenses
Accounts Receivable Notes Payable
Notes Receivable Taxes Payable
Inventory (to be sold) Unearned Revenue
Supplies Bonds Payable
Prepaid Expenses
Long-Term Investments
Stockholders’ Equity
Equipment
Common Stock
Buildings
Retained Earnings
Land
Intangibles
LO 3-1
Forth: Statement of Financial Position

Usefulness: Helps to provide information about:
• Liquidity—the ability of a company to convert its
assets to cash.
• Long-term solvency—whether a company will be
able to pay all its liabilities including its long-term
liabilities.
• Financial flexibility—the ability of a company to
alter cash flows in order to take advantage of
unexpected investment opportunities and needs.
03-069
STATEMENT OF FINANCIAL POSITION
Limitations
 Most assets and liabilities are reported at historical
cost.
 Use of judgments and estimates.
 Many items of financial value
are omitted.
LO 1
LO 3-1
Classification of Elements within a
Balance Sheet
The diagram below shows the relationship among assets,
liabilities, and shareholders’ equity, often referred to as
the accounting equation. Included in the illustration are
the subclassifications of each element.
Assets = Liabilities + Shareholders’ Equity
1. Current assets 1. Current liabilities 1. Paid-in capital
2. Long-term assets 2. Long-term liabilities 2. Retained earnings
03-071
CLASSIFICATION IN THE STATEMENT
Statement of Financial Position Format
 IFRS does not specify the order or format of the

items in the statement.
 Two general forms:
► Account form
● Assets on left side
● Equity and liabilities on right side
► Report form
LO 3
Statement of
Financial
Position Format
Report Form lists
the
sections one above
the other.
ILLUSTRATION 5-17
Classified Report-Form
Statement of Financial
Position
LO 3
Balance Sheet - Format
Account Form Illustration 5-16
LO 3 Prepare a classified balance sheet using the report and account formats.
LO 21-2
Current Assets
1-Cash, Cash Equivalents, and Restricted Cash
• Cash equivalents.
• No differentiation between cash and cash equivalent

investments.
• Similarly, cash set aside for designated purposes is also part of
the reported cash balance.
• Company must establish a policy regarding which short-term,
highly liquid investments it classifies as cash equivalents.
Should be disclosed in the notes to the statement.
21-075
LO3-2
Classification of Elements: Assets
A. CURRENT ASSETS
2-Short-Term Investments
• Investments in stock and debt securities of other
corporations
• That the company has the ability and intent to sell
within the next 12 months or operating cycle,
whichever is longer
Held to Trading Securities

Maturity securities available for sale
Balance Sheet – “Current Assets”
Short-Term Investments
Portfolios Type Valuation Classification
Held-to- Amortized Current or

Debt
Maturity Cost Noncurrent
Trading Debt or Equity Fair Value Current
Available- Current or
Debt or Equity Fair Value
for-Sale Noncurrent
LO 2 Identify the major classifications of the balance sheet.

LO3-2
CURRENT ASSETS
3- Receivables:
Accounts Receivable
• Result from the sale of goods or services on credit
• Often referred to as trade receivables
• Nontrade receivables result from loans by the
company
Notes receivable
• Supported by a formal agreement or note
that specifies payment terms
LO3-2
CURRENT ASSETS
4-Inventories
Finished Work in Raw

goods process materials
Inventories Disclosure—Intel Corp.
LO3-2
CURRENT ASSETS
5-Prepaid Expenses
• Represent assets recorded when expenses are paid
in advance creating benefits beyond the current
period
• Current or noncurrent depends on when its
benefits will be realized
Examples
Prepaid rent and prepaid insurance
LO3-2
Concept Check √
Current assets include cash and all other assets

expected to become cash or be consumed:
a. Within one year.

b. Within one operating cycle.
c. Within one year or one operating cycle,
whichever is shorter.
d. Within one year or one operating cycle,
whichever is longer.
B. Non-Current Assets
Generally consists of:
 Long-term Investments
 Property, Plant, and Equipment
 Intangibles Assets
 Other Assets
LO 2
1-Long-term Investments
1. Securities (bonds, ordinary shares, or long-term notes
(Debt securities are held to maturity and are recorded at
cost)).
2. Tangible assets not currently used in operations (land held

for speculation).
3. Special funds (sinking fund, pension fund, or plant

expansion fund).(Cash set aside for special purpose)
4. Non-consolidated subsidiaries or associated companies.
5. Cash surrender value of insurance policies
LO 2
Long-Term Investments ILLUSTRATION 5-17

Position
LO 2
Balance Sheet – “Noncurrent Assets”
Long-Term
Investments Investments:
Invesment in ABC bonds 321,657
Investment in UC Inc. 253,980
Notes receivable 150,000
Land held for speculation 550,000
Sinking fund 225,000
Nonconsolidated Pension fund 653,798
Subsidiaries or Cash surrender value 84,321
Investment in Uncon. Sub. 457,836
Affiliated Total investments 2,696,592
Companies Property, Plant, and Equip.
Building 1,375,778
Land 975,000

2-Property, Plant, and Equipment

Tangible long-lived assets used in the regular operations of
the business.
 Physical property such as land, buildings, machinery,
furniture, tools, and wasting resources (minerals).
 With the exception of land, a company either depreciates
(e.g., buildings) or depletes (e.g., oil reserves) these
assets.
LO 2
Property, Plant, and Equipment ILLUSTRATION 5-17

Position
LO 2
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are assets of a durable

nature. Other terms commonly used are plant assets and
fixed assets.
Includes:
► “Used in operations” and not
 Land,
for resale.  Building structures (offices,
► Long-term in nature and factories, warehouses), and
Equipment (machinery, furniture,
usually depreciated. tools).
► Possess physical substance.
LO 1
ACQUISITION OF PROPERTY, PLANT,
AND EQUIPMENT (PP&E)
Historical cost measures the cash or cash equivalent price of

obtaining the asset and bringing it to the location and condition
necessary for its intended use.
In general, costs include:

1. Purchase price, including import duties and non-refundable
purchase taxes, less trade discounts and rebates.
2. Costs attributable to bringing the asset to the location and
condition necessary for it to be used in a manner intended
by the company.
LO 2
DEPRECIATION—COST ALLOCATION
Methods of Depreciation
The profession requires the method employed be “systematic
and rational.” Methods used include:
1. Activity method (units of use or production).

2. Straight-line method.
3. Diminishing (accelerated)-charge methods:
a) Sum-of-the-years’-digits.
b) Declining-balance method.
LO 3
LO3-2
Concept Check √
Which of the following is most likely to be reported as

a noncurrent asset:
a. Accounts receivable
b. Buildings
c. Prepaid rent
d. Inventories
Buildings generally benefit the company for several years.

The other items listed above are generally realized as
cash or consumed within one year.
Balance Sheet – “Noncurrent Assets”
Balance Sheet (in thousands)
3-Intangibles Current assets
Cash $ 285,000
Lack physical Accumulated depreciation (975,000)
substance and are not Total PP&E 2,170,386
financial instruments. Intangibles
Goodwill 2,000,000
Limited life Patents 177,000
intangibles amortized. Trademark 40,000
Franchises 125,000
Indefinite-life Copyright 55,000
intangibles tested for Total intangibles 2,397,000
Other assets
impairment.
Prepaid pension costs 133,000
Deferred income tax 40,000
Total other 173,000

Types
Types of
of Intangibles
Intangibles
Goodwill
Only recorded when an entire business is purchased

because goodwill cannot be separated from the
business as a whole.
Goodwill is recorded as the excess of ...
purchase price over the FMV of the identifiable
net assets acquired.
Internally created goodwill should not be capitalized.
LO 5 Explain the conceptual issues related to goodwill.

Balance Sheet
C. Current Current liabilities
Liabilities Notes payable $ 233,450
“Obligations that a Accounts payable 131,800
company reasonably Accrued compensation 43,000
Unearned revenue 17,000
expects to liquidate
Income tax payable 23,400
either through the use Current maturities LT debt 121,000
of current assets or the Total current liabilities 569,650
Long-term liabilities
creation of other
Long-term debt 979,500
current liabilities.” Obligations capital lease 345,800
Deferred income taxes 77,909
Total long-term liabilities 1,403,209
Stockholders' equity

LO3-3
Classification of Elements: Liabilities
CURRENT LIABILITIES
• Obligations expected to be satisfied through the use of
current assets or the creation of other current liabilities
• Expected to be satisfied within one year or the
operating cycle, whichever is longer
Examples
Accounts and notes payable
Deferred revenues
Accrued liabilities
Current maturities of long-term debt
LO3-3
CURRENT LIABILITIES
ACCOUNTS PAYABLE
• Obligations to suppliers of merchandise or services
purchased on account
• Payment usually due in 30 to 60 days
NOTES PAYABLE
• Written promises to pay cash at some future date
• Usually require the payment of explicit interest in
addition to the original obligation amount
LO3-3

CURRENT LIABILITIES
DEFERRED REVENUES (unearned revenues)
• Represent cash received from a customer for goods or
services to be provided in a future period
Example
Purchase of a gift card
ACCRUED LIABILITIES
• Represent obligations created when expenses have been
incurred but will not be paid until a subsequent reporting
period
Examples
Accrued salaries payable, accrued interest payable, and
accrued taxes payable
LO3-3
CURRENT LIABILITIES
CURRENT MATURITIES OF LONG-TERM DEBT
Example
A $1,000,000 note payable requiring $100,000 in
principal payments to be made in each of the next 10
years
$1,000,000
$900,000 $100,000
Long-term liability Current liability
Examples
Long-term notes, loans, mortgages, bonds payable, and
long-term debt payable in installments
Balance Sheet
D. Long-Term Current liabilities
Liabilities Notes payable $ 233,450
“Obligations that a Accounts payable 131,800
company does not Accrued compensation 43,000
Unearned revenue 17,000
reasonably expect to Income tax payable 23,400
liquidate within the Current maturities LT debt 121,000
normal operating cycle.” Total current liabilities 569,650
Long-term liabilities
Long-term debt 979,500
All covenants and Obligations capital lease 345,800
restrictions must be Deferred income taxes 77,909
disclosed. Total long-term liabilities 1,403,209
Stockholders' equity

Balance Sheet
E. Owners’ Equity
Three parts,
(1) Capital Stock and Additional Paid-In Capital,
(2) Retained Earnings
(3) Other equity components such as accumulated
other comprehensive (loss) income

LO 3-3
Shareholders’ Equity—Nike, Inc.

May 31, May 31,
2017 2016
($ in millions)
Shareholders’ equity:
Common stock (1,643 and 1,682 shares outstanding) $ 3 $ 3
Additional paid-in capital 8,638 7,786
Retained earnings 3,979 4,151
Accumulated other comprehensive income (213) 318
Total stockholders’ equity $12,407 $12,258
03-
101
Balance Sheet Classification Exercise
Account Classification
(a) Investment in preferred stock (a) Current asset/Investment
(b) Treasury stock (b) Stockholders’ Equity
(c) Common stock (c) Stockholders’ Equity
(d) Cash dividends payable (d) Current liability
(e) Accumulated depreciation (e) Contra-asset
(f) Interest payable (f) Current liability
(g) Deficit (g) Stockholders’ Equity
(h) Trading securities (h) Current asset
(i) Unearned revenue (i) Current liability
LO4-7
Fifth: Statement of Cash Flows
• Provides information about the cash receipts and

cash disbursements of an enterprise that occurred
during a period
• Cash refers to cash plus cash equivalents presented

for each period
• Helpful in assessing future profitability, liquidity,

and long-term solvency
Elements of the Statement of Cash
Flows
Cash Flows from Operating Activities

Cash Flows from Investing Activities
Cash Flows from Financing Activities
+/
-
Note that each of the three cash flow
sources can be positive (net cash inflow) or
negative (net cash outflow).
The Statement of Cash Flows
Illustration 5-25
LO 4-8
Direct and Indirect Methods of Reporting

LO 4-8
Contrasting the Direct and Indirect Methods of

Presenting Cash Flows from Operating Activities
04-107
LO 4-8
Direct Method of Presenting Cash Flows from

Operating Activities
*Service revenue of $100 thousand, less increase of

$12 thousand in accounts receivable.
**General and administrative expense of $32
thousand, less increase of $7 thousand in accrued
liabilities, plus increase of $4 thousand in prepaid
insurance.
***Income tax expense of $15 thousand, less increase
of $5 thousand in income taxes payable.
04-108
Adjustments for Changes in Current Assets and
Current Liabilities: Table
Use this table when adjusting Net Income to

Operating Cash Flows.
Learning Objective P2: Compute cash flows from operating activities using the indirect method.
109
Adjustments for Changes in Current Assets and
Current Liabilities
• Decreases in current assets are added to net income.

• Increases in current assets are subtracted from net income.
• Increases in current liabilities are added to net income.
• Decreases in current liabilities are subtracted from net income.

110
Summary of Adjustments for Indirect
Method: Part 2
Common adjustments to net income when computing net cash
provided or used by operating activities under the indirect
method:
Exhibit 16.12

111
LO 4-8
Indirect Method of Presenting Cash Flows from

Operating Activities
04-112
LO 4-8
Investing Activities
Inflows and outflows of cash related to the acquisition and
disposition of:
1. Long-lived assets used in the operations of the business.
2. Investment assets.
• Purchase and sale of inventory are not investing activities.
Cash Outflows Cash Inflows

• Purchase of long-lived • The sale of long-lived assets used in
assets used in the business. the business.
• Purchase of investment • The sale of investment securities.
securities like stocks and • The collection of a nontrade
bonds of other entities. receivable (excluding the collection
• Loans to other entities. of interest, which is an operating
activity).
04-113
LO 4-8
Financing Activities
Inflows and outflows of cash related to external financing of the
company with:
1. Owners.
2. Creditors.
Cash Inflows Cash Outflows

• From owners when shares • To owners in the form of
are sold to them. dividends or other distributions.
• From creditors when cash • To owners for the reacquisition of
is borrowed through notes, shares previously sold.
loans, mortgages, and • To creditors as repayment of the
bonds. principal amounts of debt
(excluding trade payables that
relate to operating activities).
04-114
LO 4-8
Statement of Cash Flows—Investing and

Financing Activities
04-115
LO 4-8
Noncash Investing and Financing Activities
• Activities that do not involve cash flows at all.

• Reported on the face of the statement of cash
flows or in a disclosure note.
Example:
Acquisition of equipment (an investing activity)
by simultaneously issuing either a long-term note
payable or equity securities (a financing activity)
to the seller of the equipment.
04-116
LO 21-9
International Financial Reporting Standards

21-117
LO3-6
Auditors’ Report
• Provides the final statement user with an

independent and professional opinion about:
– Fairness of the representations in the financial statements
– Effectiveness of internal controls
– Whether or not the financial statements are in conformity
with generally accepted accounting principles
– Financial statements that “present fairly” the financial position
prompt an unqualified opinion
• Sometimes circumstances cause the auditors’ report
to include an explanatory paragraph in addition to the
standard wording, even though the report is
unqualified
LO3-6
Auditors’ Report
• Calls attention to problems that might exist

in the financial statements
– Qualified opinion—contains an exception to the
standard unqualified opinion
– Adverse opinion—results from (a)
nonconformity with GAAP and (b) inadequate
disclosures
– Disclaimer—results from limitation or restriction
of the scope of the examination
– Assess firm’s ability to continue as a going concern

Financial Accounting Lectures

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Financial Accounting Lectures

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Financial Accounting Lectures

Compiled By: Dr Maha Ramadan

Accounting is an information and measurement system that identifies,

Resources are limited. Efficient use of resources often

LO 2 Explain how accounting assists in the efficient use of scare resources.

The balance sheet reports a company's assets, liabilities, and

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Expanded Accounting Equation:

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Expense Recognition Principle

Learning Objective C2: Describe the importance of ethics and GAAP.

Expanded Accounting Equation:

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Analyze business transactions

Chas Taylor invests $30,000 cash to start a

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The accounts involved are:

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The accounts involved are:

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Provided consulting services to a customer and

The accounts involved are:

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The accounts involved are:

Equity decreases, because expenses reduce equity. begi end

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The accounts involved are:

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The accounts involved are:

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Remember that the Withdrawals account actually increases

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If total expenses exceed total revenues, a net loss is reported.

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PROFIT AND LOSS STATEMENT

The Income Statement, Comprehensive

Comprehensive Income Includes a few types of gains and

Statement of Cash Flows Provides information about

Evaluate past performance.

Predicting future performance.

Help assess the risk or uncertainty

LO 1 Understand the uses and limitations of an income statement.

Income is affected by the

Income measurement involves

LO 1 Understand the uses and limitations of an income statement.

Two main components of accounting income:

Income from Continuing Operations:

Income from Continuing Operations: Gains

Multiple Step Income Statement

• Disposal of component(s) that represents a strategic

2. Is part of a single, co-coordinated plan to dispose of a

3. Is a subsidiary acquired exclusively with a view to resell.

Trident Corporation’s income from continuing operations before income

2. The results of operations of a component that has been or

3. The effects of discontinued operations net of tax as a

Multiple Step: Income Statement

Reporting Discontinued Operations—

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Income from continuing operations $20,000,000

Income tax benefit ($2,000,000 × 25%) 500,000

Loss on discontinued operations (1,500,000)