ACCT 111: FINANCIAL ACCOUNTING

 Dr Lim Chee Yeow, Associate Professor of Accounting

 Office: Room 4014, School of Accountancy

 Tel: (65) 6828-1997

 Fax: (65) 6828-0600

 Email: cheeyeowlim@smu.edu.sg

 Consultation: Tuesday and Wednesday, 2pm to 4pm or by

appointment

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 ACCT 111: FINANCIAL ACCOUNTING
 Main texts:
 Harrison, Horngren, Thomas and Suwardy (2014), Financial
Accounting: International Financial Reporting Standards, 9th edition,
Pearson
 Suwardy (2010), Understanding Financial Statements : A Cash-Based
Approach
 Course materials and announcement at https://elearn.smu.edu.sg/
Assessment (details in course outline)

 Class Participation 5%
 Quizzes 10%
 Mid-term test 15%
 Individual accounting assignment 20%
 Final Examination 50%
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COURSE OUTLINE
1. Conceptual framework and Financial Statements
(Chapter 1)
2. Recording Business Transactions (Chapter 2)
3. Accrual Accounting (Chapter 3)
4. Presentation of Financial Statements (Chapter 4)
5. Internal Control, Cash and receivables (Chapter 5)
6. Inventory and Merchandizing Operations (Chapter
6)
7. PPE and intangibles (Chapter 7)
8. Liabilities (Chapter 9)
9. Shareholders’ equity (Chapter 10)
10. The statement of cash flows (Chapter 11)
11. Financial Statement Analysis (Chapter 12) 3
Week Beg on Topic Quiz/Test Coverage
1 6 Jan Conceptual framework and Presentation
of Financial Statements
2 13 Jan Recording Business Transactions Quiz 1
3 20 Jan Accrual Accounting Quiz 2
4 27 Jan Internal Control, Cash and receivables Quiz 3
5 3 Feb Inventory and Merchandizing Operations Quiz 4
6 10 Feb PPE and Intangibles Quiz 5
7 17 Feb Financial Statement Analysis Quiz 6
8 24 Feb Term Break
9 3 Mar Liabilities (1)
10 10 Mar Liabilities (2) Mid term Week 1-6
11 17 Mar Stockholder’s Equity Quiz 7
12 24 Mar Cash flow statement Quiz 8
13 31 Mar Review and synthesis
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 SESSION 01:
CONCEPTUAL FRAMEWORK AND
PRESENTATION OF FINANCIAL STATEMENTS
(HHTS CHP 1 AND 4)

 Users and Regulators of Accounting Information

 Basic Accounting Concepts & Principles

 Accounting Equations and Introduction to Financial

Statements
 Presentations of financial statements

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WHAT IS ACCOUNTING USED FOR?
Language of Business:
Measure and Translate Business/Economic
Transactions into Information and Reports
usable by decision makers

Decision Makers:
 Owners/Investors
 Managers
 Creditors
 Government Agencies (e.g. Tax
Authority, Regulators) 6
 Individuals
16 July 2013 ST

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16 July 2013 ST

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9
WHICH STOCK WOULD YOU PICK?
21 May 2013

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ANNUAL REPORTS AS A COMMUNICATION
TOOL

 Top source of information for shareholders,

lenders, potential investors etc.
 Provide information about the company from
company visions, goals to financial information
and changes in strategy.
 Substance over form

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TYPICAL STRUCTURE OF AN ANNUAL REPORT

Analysis and
Corporate
commentarie
information
s

Other
statements Financial
or statements
disclosures 12
CORPORATE INFORMATION

• Short history of company

• Members of board of directors and key
management personnel
• Organization structure
• Awards and accolades
• Key markets and products
• Operating Statistics and financial highlights

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ANALYSIS AND COMMENTARIES

14
OTHER STATEMENTS AND DISCLOSURE

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FINANCIAL STATEMENTS
 Acknowledgement of responsibility for preparing
financial statements by management
 Auditor’s report

 3 types of opinions:
 Unqualified
 Qualified
 Adverse

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Complete set of financial statements
Statement of Statement of Statement
financial comprehensive of changes
position income in equity

Statement of
Notes
cash flows

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Where else can we find information about the company?

PROPER LABELING OF FINANCIAL STATEMENTS

Name of reporting entity

If consolidated or individual entity’s

account

Date of the end of reporting period

Presentation currency used

Level of rounding
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COMPARATIVE INFORMATION AND
CONSISTENCY OF PRESENTATION
 Numbers from previous periods must be disclosed
 Minimum 2 years of information
 Under certain situations, 3 ears
 Comparatives made in narrative and descriptive
information
 Firms are expected to maintain presentation and
classification of items period to period

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TYPES OF ACCOUNTING
Financial Managerial
 Provides information  Provides information
for external users for internal users –
 Investors managers
 Creditors  Includes:
 Government  Budgets
 The public  Forecasts

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 FORMS OF BUSINESS ORGANIZATION
Proprietorship Partnership Corporation
Proprietor –One owner Partners – two or more owners Shareholders – generally
many owners
Common business form *Not a taxpaying entity *Formed under state law
for small retails stores -Income passes through -Legally distinct from its
and professional service to partners owners
providers * Governed by an agreement * Double taxation
* Mutual agency -Corp income is taxed
-Each partner can act on -S/Hs taxed on distr of
behalf of the entity earnings (dividends)
* S/Hs elect Board of
Directors
-Set policy and appoint
officers
Proprietor is personally General partners are Shareholders are NOT
liable personally liable; limited personally liable
partners are not 21
INTERNATIONAL FINANCIAL STANDARDS
• Historically, different countries use their own
accounting standards.
▫ Difficult for investors to compare companies that operate in
different countries
• The IASB has developed international standards
(IFRS)
▫ In the past, U.S. considered its GAAP to be the strongest
set of standards
• In November 2008, the SEC announced it will require
all U.S. public companies to adopt IFRS
• Convergence or Harmonisation project has been
ongoing between US GAAP and IFRS
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CONVERGENCE OF US GAAP AND IFRS?
 Recollections on standards setting, convergence and Crisis:
An interview with former FASB chair Robert H. Herz.
February 2011, The CPA Journal

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 GOVERNING BODIES & ACCOUNTING PROFESSION
Regulatory bodies ensure firms comply with rules / regulations:
Accounting Standards Boards
 Singapore: Accounting Standards Council (www.asc.gov.sg),
Accounting & Corporate Regulatory Authority www.acra.gov.sg
 U.S: Financial Accounting Standards Board (www.fasb.org)
 IASB: International Accounting Standards Board www.ifrs.org

Stock/Securities Exchanges
 Singapore: Singapore Exchange (www.sgx.com.sg)
 U.S: Securities & Exchange Commission (www.sec.gov)
Professional Accounting Bodies
 Singapore: ICPAS (www.icpas.org.sg)
 U.S: AICPA (www.aicpa.org)
 Australia: CPA Australia (www.cpaaustralia.com.au)
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Conceptual Framework of Accounting

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 QUALITATIVE CHARACTERISTICS
Fundamental characteristics
 Relevance:
 Accounting info is relevant if it makes a difference in a
decision
 Relevant info helps users forecast future events
(predictive value), or it confirms or corrects prior
expectations (feedback value)
 For example, the predictive value of the income
statement is enhanced if unusual, abnormal and
infrequent items of income or expense are separately
disclosed
 Faithful representation: information must represent
faithfully the transactions and other events it either
purports to represent or could be reasonably expected to26
represent (“as it is”)
 ENHANCING CHARACTERISTICS
 Comparability
 Comparability means that the information should be
comparable with accounting information about other
enterprises
 Consistency over time means that the same accounting
principles and methods should be used from year to year
within a company

 Verifiability
 Verifiability means that different knowledgeable and
independent observers could reach consensus, although not
necessarily complete agreement, that a particular depiction
is a faithful representation.
 Verifiability helps to assure users that information
represents faithfully the economic phenomena it purports to
represent. 27
 ENHANCING CHARACTERISTICS
 Timeliness
 Timeliness means that information is available to decision-
makers in time to be capable of influencing their decisions.
 Understandability
 Classifying, characterising and presenting information
clearly and concisely makes it understandable.
 While some phenomena are inherently complex and cannot
be made easy to understand, to exclude such information
would make financial reports incomplete and potentially
misleading.
 Financial reports are prepared for users who have a
reasonable knowledge of business and economic activities
and who review and analyse the information with diligence.

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CONSTRAINTS
 Benefits vs Costs
 Cost:

 Direct costs:
Cost of data collection, processing,

verifying and disseminating

information
 Indirect costs:
Proprietary in nature

 Will benefits>cost?
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ASSUMPTIONS

Accrual Accounting
•Transactions and other events are
recognized when they occur
Going- concern assumption
•Entity will continue to exist
indefinitely 30
ACCOUNTING EQUATION ELEMENTS

Assets • Economic resources

• Produce future benefits

Liabilities • Present obligations

• Result in an outflow of economic benefits

Equity • Represents shareholders’ residual claim to the

entity’s assets

Income • Increases in economic benefits during an

accounting period

Expenses • Decreases in economic benefits during an

accounting period
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 Accounting Equation
Assets = Liabilities + Equity

Liabilities
$600
Assets
$1,000
Equity
$400

32
Double entry accounting records transactions in a way that
always maintain the equality of the basic accounting equation
Total Revenue and Gain – Total Expenses
and Losses = Net Income (or Loss)

Total Total
Revenue Net
Expenses
and Gains Income
and
(or Loss)
Losses
$1,000 $200
$800

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(Undistributed) net income is part of equity

THE FINANCIAL STATEMENTS

Statement of
Income
Changes in
Statement
Equity

Statement of
Balance Sheet
Cash Flows
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THE INCOME STATEMENT
 part of Statement of Comprehensive Income
 Reports two main categories
 Revenues and gains
 Expenses and losses

 Shows the “bottom line”

 Net income or net loss for the period

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 ABC Corporation
Income Statement
Financial Year Ended December 31
Net sales $$,$$$
Other income $$,$$$
Total income $$,$$$
Cost of sales $$,$$$
Gross margin $$,$$$
Selling, general and administrative expenses $$,$$$
Depreciation, amortization and provisions $$,$$$
Non-recurring income and expenses $$,$$$
Earnings before interest and tax $$,$$$
Finance costs $$,$$$
Income tax $$,$$$
Other income items $$,$$$ 36
Net Income $$,$$$
 Comprehensive Income
Net Income $ 12,100,000
Other Comprehensive Income (Loss):

Foreign currency translation

adjustment loss, net of 40% tax (3,900,000)
Revaluation of fixed assets 500,000
Unrealized gains on investment
securities, net of 40% tax 4,200,000

Total Other Comprehensive

Income (Loss) 800,000

Comprehensive Income $ 12,900,000

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PRESENTATION OF STATEMENT OF COMPREHENSIVE INCOME
 An entity shall present all items of income and
expense recognised in a period

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EXAMPLE OF SINGLE VERSUS SEPARATE SCI

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FINANCIAL STATEMENT FORMAT
Income Statement

 Nature of expense
 Expenses aggregated together according to their nature
 No Cost of Sales line

 Function of expense
 Classify expenses as part of cost of sales, marketing
costs, distribution costs, administrative costs, or other
functional groupings.

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Nature
I/S SAMPLES: RSH LIMITED

41
Function

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STATEMENT OF CHANGES IN EQUITY
 The Statement of Changes in Equity shows a
company’s transactions with its owners.
 Net income (or net loss) flows from the Income
Statement to the Statement of Changes in
Equity.

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 ABC Corporation
Statement of Changes in Equity
For the year ending December 31, 2010
Shareholder equity as of December 31, 2009 $$,$$$
Plus: Net income $$,$$$
Less: Dividends $$,$$$
Reclassifications and other reserves $$,$$$
Shareholder equity as of December 31, 2010 $$,$$$

44
THE BALANCE SHEET
 Also called the Statement of Financial Position
 Reports
 Assets
 Liabilities
 Shareholders’ equity

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ASSETS ON THE BALANCE SHEET
Current Non-current

 Expected to be converted to  Will be held longer than

cash, sold or consumed in one year
the next 12 months or  Include
within the business’  Property, plant and
operating cycle equipment
 Include  Land
 Cash  Buildings
 Short-term investments  Computers
 Receivables (or debtors)  Equipment
 Inventory
 Intangibles
 Long-term investments 46
 Prepaid expenses
LIABILITIES ON THE BALANCE SHEET
Current Non-current

 Obligations or debts  Debts payable more than

payable in the one year or one year from balance
within the business’s sheet date
operating cycle  Include
 Include  Long-term notes payable
 Accounts payable  Bonds payable
 Taxes payable
 Short-term notes payable
 Salaries/wages payable
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SHAREHOLDERS’ EQUITY ON THE
BALANCE SHEET
 Represents shareholders ownership of the
business assets
 Consists of:
 Paid-in capital (sometimes labeled Share Capital or
simply, Capital)
 Additional paid-in capital (depends on jurisdictions)
 Retained earnings
 Reserves (which includes other comprehensive
income)

48
 The Components of Retained Earnings
Revenues for
the period

minus

Expenses for
the period

equals
Plus
Beginning or Ending
minus Net Income minus equals
Balance of Dividends for Balance of
(or Net Loss)
Retained the period Retained
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for the period
Earnings Earnings
 ABC Corporation
Balance Sheet
December 31, 2010
Assets Liabilities and Shareholders' Equity
Cash and cash equivalents Accounts payable
Trade receivables Taxes payable
Inventories Total current liabilities
Other current assets Long-term debt
Total current assets Total liabilities
Property and Equipment Share capital
Common stock
Less: accumulated depreciation Additional paid-in capital
Net Property and Equipment Retained earnings
Other assets Total shareholders' equity
Total assets Total liabilities & shareholders' equity

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THE STATEMENT OF CASH FLOWS
 Measures cash receipts and cash payments
 Fourth required financial statement

 Categorizes into three types of activities:

 Operating
 Investing
 Financing

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CASH FLOW CATEGORIES

Operating
• Cash receipts and payments from selling
goods and services
Investing
• Purchasing & selling long-term assets

Financing
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• Issuing stockand
Issuing shares and borrowing
borrowing
 CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 MARCH 2010

S$ Mil
Net cash inflow from operating activities 5,328.8
Net cash outflow from investing activities (2,179.2)
Net cash outflow from financing activities (2,634.4)
Net increase/(decrease) in cash and cash equivalents 515.2
Cash and cash equivalents at beginning of year 1,075.8
Cash and cash equivalents at end of year 1,591.0

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RELATIONSHIPS BETWEEN FINANCIAL STATEMENTS
Income Statement
For the year ended December 31, 2010
Revenues $$$,$$$
Expenses ($$,$$$)
Net income $$,$$$

Statement of Changes in Equity

For the year ended December 31, 2010

Beginning equity
$$$,$$$
Net income
$$,$$$
Cash dividends
($$,$$$)
Ending equity $$,$$$
Balance Sheet
December 31, 2010

Assets
$$$,$$$
Liabilities
$$$,$$$
54
Shareholders’ equity: $$$,$$$

Total liabilities and equity $$$,$$$

 Balance Sheet
December 31, 2010
Assets $$$,$$$
Cash $$,$$$
Liabilities $$$,$$$
Shareholders’ equity:
Share capital $$$,$$$
Retained earnings $$$,$$$
Total liabilities and equity $$$,$$$

Statement of Cash Flows

For the year ended December 31, 2010
Cash flows from operating activities $$$,$$$
Cash flows from investing activities $$,$$$
Cash flows from financing activities $$,$$$
Net cash flows $$,$$$
55
Cash balance, December 31, 2009 $$,$$$
Cash balance, December 31, 2010 $$,$$$
 EVALUATING A COMPANY
Question/Decision
Can the company sell its products or
services?
What are the main income measures
to watch for trends?
What percentage of sales revenue
ends up as profit?
Can the company collects its
receivables?
Can the company pay its liabilities?
Where is the company’s cash coming
from?
What to look for
Sale revenue
Increasing or Decreasing?
Gross profit
Operating income and Net income
Divide net income by sales revenue
Compare change in receivables to
change in sales
Compare assets to liabilities
Observe the line items on the cash
flow statement
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ETHICS IN BUSINESS AND ACCOUNTING DECISIONS

 Which options are most honest, open, and

truthful?
 Which options create the greatest good for the
greatest number of stakeholders?
 Which options result in treating others as I would
want to be treated?

57
 EARNINGS MANAGEMENT
 Incentiveto manage earnings
 Over-report: meeting earnings
expectations, loan covenants, earning-
based compensation
 Under-report: negotiations with
suppliers/trade unions, trade protection,
“big bath”
 Whilst normally are in the context of I/S,
Balance sheets and Cash Flow Statements
can be “managed” too…
58
 Exercise (1)
Facebook is expanding into Ireland. The
company must decide where to locate and how
to finance the expansion. Identify the financial
statement where these decision makers can
find the following information about Facebook,
Inc. In some cases, more than one statement
will report the needed data.

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 EXERCISE (1)
(a) Share capital (h) Revenue
(b) Income tax payable (I) Cash spent to acquire the
building
(c) Dividends (j) Selling, general &
administrative expenses
(d) Income tax expense (k) Adjustments to reconcile net
income to net cash by
operations
(e) Ending balance of retained (l) Ending cash balance
earnings
(f) Total assets (m) Current liabilities
(g) Long-term debt (n) Net income

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 EXERCISES (2)
Ellen Samuel Banking Company has these items at Dec 31, 2013:
Total revenue $ 37.8 Investment assets $169.6
Receivables 0.9 Property & equipment 1.9
Current liabilities 151.1 Other expenses 6.9
Share capital 14 Retained earnings, beginning 8.6
Interest expense 0.8 Retained earnings, ending ?
Salary expense 17.7 Cash 2.1
Long-term liabilities 2.8 Other assets 14.4

Requirements:
1. Prepare the balance sheet as at Dec 31, 2013. Use the
accounting equation to compute ending retained earnings.
2. Prepare the income statement for year end Dec 31, 2013
3. What does the balance sheet report – financial position or
operation results? Which financial statement reports the other
information?
4. How much dividends was paid during year ended Dec 31, 2013?
HOME WORK
 E1-18A (p 38)
 P1-62B (p 48)

 P1 -64B (p 48-49)

 P1-65B (p 49)

 P1-66B (p 49-50)

 Decision cases 1 & 2 (p. 52-53)

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End of Session 1

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