GDBA 532

Class 1:
Chapter 1 Introduction of Accounting
Chapter 2 Financial Statements

Yijing Jiang
yijing.jiang@concordia.ca, Office MB14-315
Office hours: by appointment
Chapter 1 Introduction of
Accounting

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Learning Objective:

Describe the role of accounting.

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Role of Accounting

• Accounting is often said to be the

language of business.
• Who are the users?

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Users of Accounting

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Role of Financial Accounting

• Financial accounting provides

information about the financial
position and changes in business.

• But how much new information

does financial accounting provide
(esp. to external users)?

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 Role of Financial Accounting
• Financial accounting provides external
users a limited amount of new information
about the financial position and changes in
business.
• Why do we still need financial information?
– Valuation
– Contracting (e.g., debt, compensation)

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 Role of Managerial Accounting
• Managerial accounting measures, analyzes,
and reports information to internal users to
facilitate strategic decisions, e.g.,:
– Identify problems and uncertainties;
– Make predictions about the future;
– Decide on alternatives;
– Evaluate performance.

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Financial Accounting VS
Managerial Accounting

Financial Accounting: Managerial Accounting:

To communicate with For internal decision making,
external users planning, directing, and
controlling

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Chapter 2 Financial Statements

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Learning Objective 1:

Understand basic financial

statements.
Balance Sheet
Income Statement
Statement of Cash Flow
Statement of Changes in Equity

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* (Balance sheet = statement of financial position)
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The Balance Sheet
• Assets:
– Current assets: assets that are expected to be converted into
cash or used up within one year (or the operating cycle, if longer).
– Non-current assets: assets that are expected to provide
economic benefit for more than one year (beyond the operating
cycle).
• Liabilities:
– Current liabilities: short-term debts that are expected
to be paid within one year.
– Non-current liabilities: obligations that are expected
to be settled over a period longer than one year.
• Shareholders’ Equity: in simple terms, what is would
remain for the shareholders if all the company’s debts
were paid off with its assets.
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Basic Financial Statements

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 Assets = Liabilities + Owners’ Equity

When a company starts up $0 = $0 + $0

it has no assets, no
liabilities and no owners’
equity

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Transaction #1:
The owners invest $25,000 in the company.
Assets = Liabilities + Owners’ Equity

Before $0 = $0 + $0

Transaction #1 + $25,000 = $0 + + $25,000

After $25,000 = $0 + $25,000

• The essence of the double entry book-keeping system:

you cannot acquire an asset without acquiring an
equal and opposite claim.

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 Transaction #2:
The company borrowed $10,000 from a bank.

Assets = Liabilities + Owners’ Equity

Before $25,000 = $0 + $25,000

Transaction + $10,000 = + $10,000 + $0

After $35,000 = $10,000 + $25,000

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Transaction #3:
The company bought inventory for $8,000, paid in cash.

Assets = Liabilities + Owners’ Equity

Before $35,000 = $10,000 + $25,000

Transaction + $8,000 = $0 + $0
- $8,000

After $35,000 = $10,000 + $25,000

An asset (inventory: $8,000) has been acquired and an asset (cash

$8,000) has been surrendered. There is no net effect on the total
asset value, but its components have been changed.
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Transaction #4:
The company bought inventory on credit at a cost of $5,000.
Assets = Liabilities + Owners’ Equity

Before $35,000 = $10,000 + $25,000

Transaction + $5,000 = + $5,000 + $0

After $40,000 = $15,000 + $25,000

Transaction #4 is very similar to transaction #3: in both cases

inventory was acquired. In both cases the inventory was valued at
its cost (t3 = $8,000; t4 = $5,000).

In t3 the matching entry was an $8,000 reduction in the asset cash.

In t4 the matching entry was a $5,000 increase in liabilities.

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Basic Financial Statements

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Basic Financial Statements

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Transactions in slides 16 – 19:
Effects on cash
Transaction #1:
Transaction #1:
The owners invest $25,000 in the company. • Cash + $25,000
Transaction #2:
Transaction #2:
The company borrowed $10,000 from a bank. • Cash: + $10,000
Transaction #3:
Transaction #3:
The company bought inventory for $8,000, paid • Cash: - $8,000
in cash.
Transaction #4:
Transaction #4: • Cash: 0 (no cash inflow or
The company bought inventory on credit at a
outflow)
cost of $5,000.

After transactions #1 to 4:
• Statement of cash flows: cash ending balance of $27,000.

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Basic Financial Statements

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Relation Among the Balance Sheet, Income Statement, and Statement of Cash Flow

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Learning Objective 2:

Understand financial reporting

framework.

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 Financial Accounting Standard
Setting
• Standard-setting bodies

• International Accounting Standards

Board (IASB, for IFRS)

• Financial Accounting Standards Board

(FASB, for US GAAP)

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 Financial Accounting Standard
Setting
Reporting Elements

Qualitative Characteristics

Objective
To Provide Financial Information
Useful in Making Decisions about
Providing Resources to the Entity

 Relevance*  Comparability, Verifiability,

 Faithful Representation Timeliness,
Understandability

 Performance  Financial Position

o Income o Assets
o Expenses o Liabilities
o Capital Maintenance Adjustments o Equity
o Past Cash Flows

o Reporting
Constraint Ele
 Cost (cost/benefit considerations)

Underlying Assumption
 Accrual Basis
 Going Concern IASB framework (IFRS)
*Materiality is an aspect of relevance.
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 IFRS Conceptual Framework
• Objective: to provide financial information
useful to investors, lenders, creditors for
making investment decisions

• Qualitative characteristics
• Relevance
• Materiality

• Faithful representation (vs. Reliability in

FASB)
• Complete
• Neutral (vs. Conservatism in FASB)
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• Free from error
 IFRS Conceptual Framework
• Qualitative characteristics (cont.)
• Additional (enhancing) characteristics
• Comparability
• Verifiability
• Timeliness
• Understandability

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IFRS Conceptual Framework
• Underlying assumptions
• Accrual basis (instead of cash basis)
Financial effects are recorded when
transactions occur (subject to criteria),
instead of when cash is paid/received.

• Going concern
Assumes that a business will
continue operating in the future, unless
there is substantial evidence to the
contrary.
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Next Week:

• Chapter 3 The Income Statement

• Case discussion: Mountain Musical Theatre
Company

Assignment deadline: Sunday, Jan 21, 23:59

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