Scribd
Upload
44 views55 pages

Basic Accounting Principles: The Financial Statements

This document provides an overview of basic accounting principles and concepts. It discusses the three main financial statements - the balance sheet, income statement, and statement of cash flows. It also covers accounting terms like assets, liabilities, equity, income and expenses. Additional topics include the accounting equation, double-entry accounting, cash versus accrual accounting, depreciation, and financial statement analysis tools like ratio analysis. The goal is to give students and business owners a foundational understanding of accounting and financial reporting.

Uploaded by

thella deva prasad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPS, PDF, TXT or read online on Scribd
44 views55 pages

Basic Accounting Principles: The Financial Statements

This document provides an overview of basic accounting principles and concepts. It discusses the three main financial statements - the balance sheet, income statement, and statement of cash flows. It also covers accounting terms like assets, liabilities, equity, income and expenses. Additional topics include the accounting equation, double-entry accounting, cash versus accrual accounting, depreciation, and financial statement analysis tools like ratio analysis. The goal is to give students and business owners a foundational understanding of accounting and financial reporting.

Uploaded by

thella deva prasad
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPS, PDF, TXT or read online on Scribd
You are on page 1/ 55

Basic Accounting

Principles
The Financial Statements
JOIN KHALID AZIZ
 ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
MODULE B, B.COM, BBA, MBA & PIPFA.
 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

 CONTACT:
 0322-3385752
 0312-2302870
 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.
JOIN KHALID AZIZ
 FRESH CLASSES FOR ICAP
 MODULE B…FINANCIAL ACCOUNTING.
 MODULE D…COST ACCOUNTING.
 REGISTER YOUR SELF NOW.
 COMPLETION OF SYLLABUS WITH
ACCENTUATE ON BASIC CONCEPTS
Accounting Terms
 Account
• A group of items having common
characteristics
 Types of Accounts
• Asset Liability
• Income Expense
• Equity
Chart of Accounts
 Listing of all of the accounts
used by a business
Asset Accounts
 Items of Value
 Characterized as current and

non-current
Liability Accounts
 Claims that others have against
the assets
 Have a known:

• Amount
• Date to be paid
• Person to whom payment owed
 Also current and non current
Equity Accounts
 Claims that the owner has
against the assets
 Sometimes called net worth

 Difference between value of

assets and liabilities


Income and Expense
Accounts
 Types of equity accounts

 Simple accounting systems


often only contain these
accounts
Double vs Single Entry
Accounting
 Single – One account entry for each
transaction
 Double – Two account entries for each
transaction
• One debit and one credit

 Hybrid systems
• May not match income with expenses
• May not distinguish cash, check, or
credit
Basic Accounting Equation

 Always maintained in double


entry accounting
 Assets will always equal

liabilities plus equity


Transactions
 Will be equal and offsetting
 Two types:

• Income & Expenses


• Transfers between accounts
Cash and Accrual
Accounting

 Refers to the timing of entries


into the accounting system
Cash Based Records
 Transactions are recorded when
cash is received or paid out
Accrual Based Records
 Transactions are recorded when
they take place
 Regardless of whether cash is

involved
Accrual Adjusted
Statements
 Cash based records are kept
throughout the year
 Non-Cash adjustments are made

to the cash based income


statement at the end of the year
Account Valuation
 Income Accounts
• Value received is recorded
 Expense Accounts
• Value paid is recorded
 Liability Accounts
• Value is dollar amount owed
Account Valuation
 Asset Accounts
• More difficult because they may not
be traded routinely
Asset Valuation
 Cost Basis
 Market Value Basis
Cost Basis Asset Valuation
 Original cost minus depreciation
 Must establish a depreciation
method
Market Basis Asset
Valuation
 Recorded as the price they could
bring if sold, less selling expenses
 Based on recent auctions,

appraisals, etc.
Depreciation
 Section II page 29, (FFSTF
Guidelines)
 Allocation of the expense that
reflects the “using up” of capital
assets employed by the business
 Conceptually, this is done over the
useful life of the asset in a
“systematic and rational” manner
Depreciation
 Allocation applied to original cost
minus salvage value
 Accelerated versus straight line
methods
• Example of difference between
management records and tax records
 Can overstate or understate true
income
Financial Reports
 Balance Sheet
 Income Statement

 Statement of Cash Flows

 Statement of Owner Equity


Balance Sheet
 Represents a financial situation at
a single point in time
 Has a date on it

 Broken down by:

• Type of Asset or liability


• Time or life of the account type
Balance Sheet
 Current Assets
• Cash and other assets that will be
converted into cash during one
operating cycle
 Non-Current Assets
• Those not expected to be converted
into cash in one operating cycle
JOIN KHALID AZIZ
 ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
MODULE B, B.COM, BBA, MBA & PIPFA.
 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

 CONTACT:
 0322-3385752
 0312-2302870
 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.
Balance Sheet
 Current Liabilities
• Debts that will come due within one
year from the balance sheet date
 Non-Current Liabilities
• Those debts due more that one
year from the balance sheet date
Balance Sheet
 Intermediate Assets and Liabilities
 Long term Assets and Liabilities
 Can use cost or market valuations or
both
 Supporting Schedules are very helpful
 Will need a balance sheet for
beginning and ending of accounting
period
Income Statement
 Summary of income and expenses
 Represents a period of time between
two balance sheets
 Explains the change in equity between
two balance sheets
 Can be divided into enterprise reports
 Can be cash or accrual
Beginning Balance Sheet Ending Balance Sheet

Assets Liabilities Assets Liabilities

Equity Equity

+/- Net Income


+/- Valuation Changes
- Family living withdrawals
+ Capital contributions
Income Statement
 Will have more than one profit
line
 Definition of Profit

• Financial profit is the net return to


business equity
Accrual Adjusted Income
Statement
 Cash incomes and expenses must be
adjusted by:
• Changes in non-cash assets
• Inventories
• Pre paid expenses
• Receivables
• Changes in non-cash liabilities
• Payables
• Accrued interest
Statement of Cash Flows
 Not the same as a cash flow plan
(Budget)
 Is a historical record of sources and
uses of funds
 Divisions of Statement:
• Cash from operating activities
• Cash from investing activities
• Cash from financing activities
Statement of Owner Equity
 Explains the change in owners equity
between two balances sheets
 Changes due to :
• Net income
• Change in inventory valuation
• Family living withdrawals
• Capital contributions
• Capital distributions
Financial Analysis
 All business owners should have a
basic set of financial statements
at their disposal and they should
know how to analyze and interpret
them.
Financial Analysis
 Two Objectives
• Measure financial condition of the
business
• Measure financial performance of
the business
Financial Analysis

 Horizontal Analysis
 Vertical Analysis

 Ratio Analysis
Horizontal Analysis
 Looks at trends in performance
and strength over time
• For example, percent change in net
income from year to year
Vertical Analysis
 Looks at within year events
rather than over time
• For example, interest expense as a
percent of total expenses
Ratio Analysis
 Allows for consistent comparison
of a single business over time as
well as comparison between
businesses
 Converts nominal dollar amounts
to a common basis
Source of data for Ratio
Analysis

 Balance Sheet
 Income Statement
Farm Financial Standards
Council (Five Criteria)
 Liquidity
 Solvency

 Profitability

 Financial Efficiency

 Repayment Capacity
Ratio Analysis
 16 different ratios commonly
used
 Each has limitations

 Proper interpretation is critical


Liquidity
 Ability of a business to pay
current liabilities as they come
due
Liquidity
 Current Ratio
• Current Assets/Current Liabilities
• Less than one is bad
 Working capital
• Current assets minus current
liabilities
• Negative number is bad
Solvency
 Ability of the firm to repay all of
its financial obligations
Solvency
 Debt to Asset Ratio
• Total liabilities/total assets
• Greater than one bad
 Equity to Asset Ratio
• Total equity/total assets
 Debt to Equity Ratio
• Leverage ratio
• Less than one better
Profitability
 Rate of return on assets
 Rate of return on equity

 Operating profit margin ratio


Financial Efficiency
 Measures the intensity with which
a business uses its assets to
generate gross revenues and the
effectiveness of production
Financial Efficiency
 Asset turnover ratio
 Operating expense ratio

 Depreciation ratio

 Interest expense ratio

 Net income from operations ratio


Repayment Capacity
 Measures the borrower’s ability
to repay term debts and capital
leases rather than financial
position or performance
Repayment Capacity
 Term debt and capital lease
coverage ratio
 Capital replacement and term

repayment margin
Cautions
 Measures are only as good as the
data used
 Methods must be consistent between
years and between operations
• Example – Asset valuation methods
 Measures ask the right questions but
do not provide the answers
JOIN KHALID AZIZ
 ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.
 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP
MODULE B, B.COM, BBA, MBA & PIPFA.
 COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.

 CONTACT:
 0322-3385752
 0312-2302870
 R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy