MGT120

Financial Accounting
 MGT120

Tutorials start on May 7

Test Dates: May 21 and June 6
Information about Tests
My Accounting Lab
Excel assignments
How to Get the Most out of the Course
Power point slides will be released on Saturday for the week’s class.

Tutorials - Students are encouraged to review the day’s lecture before the scheduled
tutorial.

Online quizzes on My Accounting Lab (MAL) – beginning Friday, May 10 at

11:59pm, an online quiz will appear on MAL. You will have until the following
Friday 11:59pm. You will have one attempt to complete the quiz. See course
outline for dates and chapters covered. Please note there are no extensions.

Power point slides will be released on Saturday for the week’s class.
Tutorials - Students are encouraged to review the day’s lecture before the scheduled
tutorial.

Excel assignments – the Excel assignments are designed to give you an introductory
knowledge of Excel and how to manipulate data (data analytics) which have become
common in the business workplace. Detailed instructions will be posted on Quercus.

Posted on Quercus:
Each class lecture
Practice multiple choice questions and problems including solutions
Practice bookkeeping problem

My Accounting Lab - Practice on as many questions as you want. Click under

“Study Plan” and choose “All Chapters”
The Financial Statements

Chapter 1
 Learning Objective 1

Explain why Accounting is the

Language of Business
 Accounting –
The Language of Business

Accounting is the information system that...

measures business activities,

processes data into reports, and

communicates results to decision makers.

 Accounting Language
Financial Statements:
Financial Statements are the business documents that
companies use to report the results of their activities to various
user groups. The system of accounting produces the following
statements:

Income
Statement Statement
of changes
in equity Balance
Sheet Statement of
Cash Flow
 Who Uses Accounting
Information?
Government
Individuals regulatory
agencies

Taxing
Managers
authorities

Investors and Non-profit

creditors organizations
How to Organize a Business

Proprietorships

Partnerships

Corporations
Corporations
Shareholders

Board of Directors

Chief Executive Officer,

Vice Presidents
 Learning Objective 2

Describe the purpose and explain

the elements of each
financial statement
 Financial Statements

They represent the company in financial terms.

Each one relates to a specific date or covers a
particular period. They include:

The Income Statement

The Statement of Changes in Equity
The Balance Sheet
The Cash Flow Statement
Statement of retained earnings
 Falk Consulting Inc.
Income Statement
For the Month Ended May 31, 20XX

Revenue:
Service revenue $10,950
Expenses:
Rent expense $1,500
Salary expense 1,400
Utilities expense 500
Total expenses 3,400
Net income $7,550
 Falk Consulting Inc.
Statement of Retained Earnings
(was used for a public co.; still used for a private co.)
for the month ending May 31, 20XX

Retained earnings, May 1, 20XX $ 0

Add: Net income for the month 7,550
7,550
Less: Dividends (2,500)
Retained earnings, May 31, 20XX $5,050
 Falk Consulting Inc.
Statement of Changes in Equity
(now required for a public enterprise)
for the month ending May 31, 20XX

Common shares Retained earnings Total Equity

Balance, May 1 0 0 0
Issued shares $70,000 $70,000
Net income $7,550 7,550
Dividends ______ (2,500) (2,500)
Balance, May 31 $70,000 $5,050 $75,050

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 Falk Consulting Inc.
Balance Sheet
May 31, 20XX
Assets Current Liabilities
Current assets Accounts Payable $ 250
Cash $ 21,600 Shareholders’ Equity
Accounts receivable 2,950 Common shares $70,000
Office supplies 750 Retained earnings 5,050
$ 25,300 Total shareholders’
Non-current assets equity $75,050
Land 50,000 Total liabilities &
Total assets $ 75,300 equity $75,300
 Falk Consulting Inc.
Cash Flow Statement
for the month ending May 31, 20XX
Operating Activities:
Cash received from customers +8,000
Cash paid to suppliers, salaries, etc. (3,900)
$ 4,100
Investing Activities:
Bought land (50,000)

Financing Activities:
Issued shares +70,000
Paid dividends (2,500) 67,500
Increase in cash 21,600
Cash at the beginning of the month -0-
Cash at end of the month $21,600
 Notes to the Financial Statements
• an integral part of the financial statements
• should be read carefully with the financial
statements.
• provide information on the accounting
policies used
Examples are policies used to account for
inventories and depreciation
 Financial Reporting
Responsibilities
Company management are responsible for preparing the
financial statements

Auditor’s responsibility is to gather evidence and decide

whether the information reported in the financial
statements complies with the applicable GAAP.

Auditor provides a signed report that states its opinion

on the fairness of the company’s financial statements
relative to GAAP.
 Question #1
Which financial statement covers a period of
time:

a. Balance sheet
b. Income statement
c. Statement of cash flow
d. Both b and c

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 The Accounting Equation

Assets = Liabilities and Shareholders’ Equity

What I own = Who supplied the resources:

Creditors and Owners
 The Accounting Equation

Assets = Liabilities and Shareholders’ Equity

Assets – are economic resources of a business

that are expected to produce future benefits

Examples include cash, accounts receivable,

office supplies, inventory, furniture, buildings
and land
 The Accounting Equation

Assets = Liabilities and Shareholders’ Equity

Liabilities – are economic claims or debts

payable to outsiders, called creditors

Examples include accounts payable, notes

payable, salary payable, interest payable, etc
 The Accounting Equation
Assets = Liabilities and Shareholders’ Equity

Shareholders’ equity – owners’ interests in the assets

of a corporation. Two main categories are:

Share capital – amounts contributed by shareholders in exchange

for shares

Retained earnings – amounts earned by profitable operations and

kept in the business. Components include revenue, expenses
and dividends
 The Accounting Equation:
Net income

Revenues are increases in retained

earnings from delivering goods
or services to customers.
Expenses are decreases in retained
earnings that result from operations.
Components of Retained Earnings

Revenues for
the period
–
Expenses for
the period
Start of End of
the period = the period
Beginning Net income Ending
+ Dividends
balance of (or Net loss) balance of
or – for the =
retained for the retained
– period
earnings period earnings
 Question #2
During the year, shareholders’ equity increased
from $30,000 to $40,000. The company
earned net income of $15,000. How much in
dividends were declared in the year?
a. $6,000
b. $0
c. $8,000
d. $5,000
 Learning Objective 3

Prepare financial statements

and analyze the relationships
among them.
Relationships Among the
Financial Statements

Income Statement – Net Income

Statement of Changes in Equity

- Changes in shares & retained earnings

Balance Sheet
- Report common shares &retained earnings

Cash Flow Statement

- Report cash balance from balance sheet
 Analyzing Financial Statements
1. Can the company sell its 1. Look at revenue on the
products and services? income statement
2. Is the company making 2. a) Gross profit
money? b) Operating income
c) Net income
3. What % of sales revenue 3. Net income/Sales revenue
ends up as profit? Examine the trend
4. Can the company collect its 4. Compare the % increase in
accounts receivable? accounts receivable to the %
increase in sales
 Analyzing Financial Statements
5. Can the company pay its 5. From the balance sheet,
compare
a) Current liabilities a. Current assets to Current
liabilities
b) Total liabilities b. Total assets to total
liabilities

6. Cash flow statement –

6. Where is the company’s operating activities should
cash coming from? How is provide the bulk of the
cash being used? company’s cash
 Question #3
Can the company pay its bills due within the
next year? Look at:

a. Cash and liabilities

b. Current assets and liabilities
c. Cash and current liabilities
d. Current assets and current liabilities
 Learning Objective 4

Explain and apply underlying

accounting concepts, assumptions
and principles
 Accounting’s Conceptual
Framework
Accountants follow professional guidelines found in
IFRS and ASPE.

The overall objective of accounting is to provide

financial information that is useful to investors
and creditors
 Conceptual Framework
Information must be useful for decision makers

Faithful
Relevance
Representation

Comparability Verifiability Timeliness Understandability

Cost

Financial Reporting Standards

 Tamarac Inc. – Income Statement for the years ended (in thousands)

Jan 28/X2 Jan 29/X1

Sales $3,266,090 $2,963,219
Cost of sales 1,965,171 1,801,935
Gross profit 1,300,919 1,161,284
General administrative & operating expenses 474,807 458,026
Depreciation & amortization 70,550 57,748
Operating income 755,562 645,510
Financing costs 39,877 33,083
Earnings before income taxes 715,685 612,427
Income taxes 196,275 166,791
Net earnings 519,410 445,636

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 Accounting Assumptions
The Separate Entity Assumption
The business is a separate economic unit

The Going-Concern Assumption

The entity will continue to operate in the foreseeable future

The Historical Cost Assumption

Assets should be recorded at their actual cost

The Stable Monetary Unit Assumption

Assumes the value of the currency is stable
 Question #4
The Historical cost assumption states that

a. The dollar’s purchasing power is relatively

stable
b. Data is verifiable and can be confirmed
c. Assets and services are recorded at their
actual cost
d. Assets and services are recorded at their
market value

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 Analyzing Financial Statements

Investors – which company to invest in?

Creditors – which customer will get a loan?

Managers – how well is the company doing?

Learning Objective 5

Ethically Evaluate
Business Decisions

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 Ethical Analysis
• Accountant’s goal is to make a decision that
fulfills their ethical responsibilities to every
party with a stake in the decision

• Need to apply relevant accounting standards

in a way that reports a faithful representation
of the company’s financial position and
operating performance

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Decision Framework for Making
Ethical Judgments
What is the issue?
Who are the stakeholders and what are the
consequences of the decisions to each?
What are the decision alternatives, and how do they
affect each stakeholder.
What decision alternative will you choose?

Copyright © 2015 Pearson Canada Inc.

Lawanda Hill, an accountant for Stainton Hardware Inc.
discovers that her supervisor, Drew Armor, made
several errors last year. Overall, the errors overstated
Stainton Hardware’s net income by 20%. It is not
clear whether the errors were deliberate or accidental.
What should Hill do?

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 Objective 6

Identify tools and technologies used in

accounting and business

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Tools used by accountants include:

Spreadsheets
Data analytics
Artificial intelligence (AI) and Machine learning
Robotic Process Automation (RPA)
Technology risks

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• P1-31A - p.47 Alexa Markowitz is a realtor. She buys and sells properties on her own, and she
also earns commission as an agent for buyers and sellers. She organized her business as a
corporation on March 16, 20XX. The business received $60,000 cash from Markowitz and issued
common shares in return. Consider the following facts as of March 31, 20XX:

a. Markowitz has $5,000 in her personal bank account and $14,000 in the business bank account.
b. Office supplies on hand at the real estate office total $1,000.
c. Markowitz’s business spent $25,000 for a ReMax franchise, which entitles her to represent
herself as an agent. ReMax is a national affiliation of independent real estate agents. This franchise
is a business asset.
d. The business owes $60,000 on a note payable for some undeveloped land acquired for a total
price of $110,000.
e. Markowitz owes $100,000 on a personal mortgage on her personal residence, which she
acquired in 2005 for a total price of $350,000.
f. Markowitz owes $1,800 on a personal charge account with Holt Renfrew.
g. Markowitz acquired business furniture for $10,000 on March 25. Of this amount, the business
owes $6,000 on accounts payable at March 31.

Required
a. Prepare the company’s balance sheet. Does it appear the company can pay its bills?
b. Why are some of the items not relevant to preparing the balance sheet?