Session 1

Introduction to Financial Accounting

Week 1

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Module name Management Accounting and Management Control
Module code AC11
Lecture Part1 : Management Accounting

Introduction to financial accounting : presentation of financial statements

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Introduction to managerial accounting (cost concepts and cost qualification)
2 comparison with financial accounting

Cost behaviors/ Variable cost & cost drivers / Patterns of variability / Fixed costs /
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Mixed costs

Cost Volume Profit Analysis, Break-even point, margin of safety

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Marginal costing and direct and indirect cost
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6 Indirect costs allocation and cost allocation base 2

Lecture 1 Outline

Learning Objectives (LO)

L O 1 What is Accounting? What is Financial Accounting?

L O 2 Who are users of Financial Accounting information?
L O 3 State the accounting equation
L O 4 Describe the financial statements.

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LO1: What is Accounting? What is Financial Accounting?

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Definition of Financial Accounting

Financial accounting is a specific branch of accounting involving a process of recording,

summarizing, and reporting the myriad of transactions resulting from business

operations over a period of time.

These transactions are summarized in the preparation of financial statements, including

the balance sheet, income statement and cash flow statement, that record the

company's operating performance over a specified period.

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In addition to FA, What (branches) of Accounting ?

TAX

FINANCIAL ACCOUNTING

MANAGERIAL

Management Control - MIM

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LO2: Who are the Users of those Financial Statements ?

Mainly External Users

Investors/
Shareholders

Creditors/ Lenders

Suppliers
States

Customers

Trade Unions
Elaborate in next slide 7
 Who Uses Accounting Data
External Users elaborate
Investors, current investors (called shareholders), must be able to
assess the current financial situation of the company. Depending on
the analysis of the Financial Statements he will keep, sell, his shares
or buy more.

Lenders, mainly Banks want to know the current financial situation of

the company to analyse its ability to repay in the future. They also
want to know if the company can offer certain guarantees, such as
buildings or equipment in the event of corporate bankruptcy, which
will enable lenders to recover their funds.

Suppliers and customers have to consider whether the company’s

financial situation is sound if they wish to engage in a long-term
relationship.

The state, the government uses financial information to assess tax

collection, the trade union uses financial information to assess the
financial health of the industry.

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LO 2
 Financial information meet certain quality criteria

• Financial Informations :

⮚ Is comparable over time and between companies

⮚ Ensures relative objectivity

⮚ Ensures reliable informations

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Exercise on LO1 and LO2:
What is the goal of FA and what are the quality criteria of FA?

The main objective of FINANCIAL ACCOUNTING is to

provide i (to external users such as s or
lenders) which is useful for D . In order to achieve
this goal, the financial information has to meet certain
quality criteria which are: comparability O ,
comparability B , relative O (free
from bias) and R . In order to assure this last
criteria the financial information is verified during an
external A .
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Exercise on LO1 and LO2:
What is the goal of FA and what are the quality criteria of FA?
The main objective of FINANCIAL ACCOUNTING is to provide
information to external users such as SHAREHOLDERS or lenders
which is useful for DECISION MAKING. In order to achieve this
objective the financial information has to meet certain quality
criteria which are: comparability OVER TIME, comparability
BETWEEN COMPANIES, relative OBJECTIVITY (free from bias) and
RELIABILITY. In order to assure this last criteria the financial
information is verified during an external AUDIT.

End of part 1
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Session 1 part 2
Introduction to Financial Accounting
The accounting equation

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 LO3 State the Accounting Equation

Assets = Liabilities + Equity

Basic Accounting Equation
• Provides the underlying framework for recording and summarizing
economic events during the daily operation of a company.
• Assets must equal the sum of liabilities and stockholders’ equity.
• The 3 variables can be moved around like an algebraic expression:
A=L+E, A=E+L, A-L=E, E=A-L
• If a business is liquidated, claims of creditors (liabilities) must be paid
before ownership claims (stockholders’ equity).

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LO 4 AC11, FA & MA, Lecture 1 of FA
Basic Accounting Equation
Assets

Assets = Liabilities + Equity

Assets
• Resources a business owns.
• Provide future services or benefits.
• Examples: Cash, Supplies, Equipment, etc.

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LO 4 AC11, FA & MA, Lecture 1 of FA
Basic Accounting Equation
Liabilities

Assets = Liabilities + Equity

Liabilities
Claims against assets (debts and obligations).
Creditors (party to whom money is owed).
Examples: Accounts payable, notes payable, salaries and
wages payable, sales and real estate taxes payable, etc.

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LO 4 AC11, FA & MA, Lecture 1 of FA
 Basic Accounting Equation
Stockholders’ Equity

Assets = Liabilities + Equity

Equity
Ownership claim on total assets.
Equity=Assets-Liabilities
Meaning owners of the company will get back whatever assets
remaining after paying off all the debts, in the situation of
company closure (bankruptcy)
End of part 2

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LO 4 AC11, FA & MA, Lecture 1 of FA
Session 1 part 3
Introduction to Financial Accounting
The Financial Statements
Balance Sheet

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LO4: The Financial Statements

 Balance Sheet (another name: statement of Financial Position)

 Income Statement (another name: profit and loss statement)

 Cash Flow Statements

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The balance sheet shows the financial position of the company
on a given date

EQUITY
EQUITY= 70
= 70
FIXED ASSETS
=120
ASSETS = 210 LONG TERM
LIABILITIES
=100 LIABILITIES = 140

CURRENT ASSETS
= 90 CURRENT LIABILITIES
=40

ASSETS = EQUITY + LIABILITIES

What where what a firm owned came from
Owned => owner’s invest or borrowed (owed) 19
 A simple balance sheet example (always in balance
LHS=RHS, A=E+L and hence known as balance sheet)
Mini Cooper Company
Balance Sheet
As at December 31, 2022
ASSETS EQUITY AND LIABILITIES
A. Fixed assets
 Property 60 E. Equity 70
 Plant and Equipment 40

 Brand 20 L. Non current Liabilities 100

A. Current Assets Financial debt
 Inventory 50 L. Current Liabilities:
Account Payables 40
 Account Receivables 40

Total Assets 210 Total Equity + Liabilities 210

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What kind of information can you find in a balance sheet?
 Assets
 Fixed assets: lands, building, brands (an example of intangible fixed asset),
equipment
 Current assets: cash, accounts receivables (money you should receive
from your customer), inventories
 Equity
 Shareholder’s Equity, retained earnings (R/E)
• End of year R/E = Beginning of year R/E + net income - dividend
 Liabilities
 Long and short term debts from bank
 Account payables (money you should pay to supplier, to government; tax,
to whoever that you owe money)
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End of part 3
Session 1 part 4
Introduction to Financial Accounting
The Financial Statements
Income Statement

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 Sheridan Inc.
The Income Statement Income Statement for year 2020
Revenues:

the income statement shows the Sales revenue 1 748 000 €

Rent revenue 368 000 €
company's performance in terms of Total Revenue/sales/ Turn-over 2 116 000 €
income or loss for a given period. Operational Expenses

Here, an example with Sheridan Inc 1.Cost of goods sold (CoGS) 782 000 €
Gross Margin = Revenues - CoGS 1 334 000 €
Other Operational Expenses:

You surely have heard about this key 2.staff expenses 253 400 €
3.advertising expenses 58 000 €
performance indicator (KPI): 4.Energy expenses 95 700 €
5.other general expenses 89 700 €
Total other operational expenses 496 800 €
EBIT = Revenues-operational Expenses 837 200 €
EBIT (operational income)
=Earnings before interest and tax
Interest expense 200 €
Income before tax 837 000 €
Income Tax 37 000 €
Net Income/ (Loss) 800 000 €

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The Income Statement
 Prepared for a business entity
 Prepared for a period of time (Yearly Jan 1 to Dec 31, quarterly, or semi-
annually, depending on the needs of information of the business)
 Included
• Revenues earned for the period
• Expenses incurred during the period
EBIT = Operational Earning
Net Income = total Revenues – total Expenses
Net Income Margin = Net Income ÷ Revenues (it is a
measure of profitability, Convert the figure to a
percentage by multiplying it by 100.)
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Income Statement : Vocabulary

• Revenues : Sales, Turnover

• Expenses

• EBIT = Earnings before Interests and taxes

• Net Income: Earnings, Profit/ loss, Bottom line (bottom line of the
income Statement)

• Income Statement: Profit and Loss Statement (P&L), Statement of

financial performance

End of part 4 25
Session 1 part 5
Introduction to Financial Accounting
The Financial Statements
Cash Flow Statement

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 The Cash Flow Statement
 Prepared for a business entity
 Prepared for a period of time (Year, terms
or months depending of the size of the
business)
 shows how much cash is generated and
used during a given time period
 Includes:
 Cash flows from operating activities
 Cash flows from investing activities
 Cash flows from financing activities

Total Cash Flows (Net changes)

+ Beginning Cash Balance
= Ending Cash Balance
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What are Operating activities ?

 Cash Inflows from Operating activities

• Cash received from customers for sales of goods or services
• Cash received from interest and dividends
• Cash received for other operating activities

 Cash outflows from Operating activities

• Cash paid to suppliers of goods ans services
• Cash paid to employees
• Cash paid for interest
• Cash paid for income taxes

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What are financing activities ?

 Cash Inflows from financing activities

• Cash received from creditors from long-term and short-term borrowings

• Cash received from investors (owners)

 Cash outflows from financing activities

• Cash paid to creditors to repay long-term and short-term borrowings (does not
included interest paid)

• Cash paid to investors (owners)

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What are Investing activities ?

 Cash Outflows from investing activities

• Cash paid to acquire investments, plant or other assets

• Cash loaned to others (borrowers)

 Cash Inflows from investing activities

• Cash received from selling investments, plants or other assets

• Cash received from borrowers for payment on loans

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Notes to Financial Statements are the additional explanations at
the end of all Financial Statements
What are Financial Statement Notes?
Financial statement notes are the supplemental notes that are included with
the published financial statements of a company. The notes are used to
explain the assumptions used to prepare the numbers, the computation in
the financial statements, as well as the accounting policies adopted by the
company. They help different types of users, such as financial analysts and
investors, to interpret all the numbers added to the financial statements.

Therefore, in addition to Balance Sheet, Income Statement and Cash Flow

Statement, Notes to Financial Statement is one of the 4 constuitents; an integral
part of financial statements (it makes and is a component part of a full set of
financial statements).

(you can think of NOTES to Financial Statements as the appendix to a chapter of your book)
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 An Example of a “Note to Financial Statements”
Amazon.com, Note 1 description of business.
There are many other notes explaining details computation of other data.
The face of the financial statements shows only the final total of the computation.
Users can find the details of computation by referring to the “Notes to Financial Statements”

This is only one

of the many
notes to
Financial
statements of
Amazon.com

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Exercise on financial statements components and elements:
In which part of the financial statements (balance sheet, income statement, cash flow
statement, or notes) can you find the following information?

a) Information regarding the methods applied to calculate the numbers in the income
statement: Ans:

b) The amount of cash flow used for investments during one period: Ans:

c) The level of debt of the company: Ans:

d) The performance of the company for a given period: Ans:

e) The profit of the company for a given period: Ans:

f) The cash flow generated by the operations of the company during one period: Ans:

g) The way how funds that the company raised are used: Ans:

h) The amount of cash flow provided by financing activities of the company during
one period: Ans: 33
Exercise on financial statements components and elements:
In which part of the financial statements (balance sheet,
income statement, cash flow statement, or notes) can you find
the following information?
a) Information regarding the methods applied to calculate the
numbers in the income statement: NOTES
b) The amount of cash flow used for investments during one
period: CASH FLOW STATEMENT
c) The level of debt of the company: BALANCE SHEET
d) The performance of the company for a given period:
INCOME STATEMENT
e) The profit of the company for a given period: INCOME
STATEMENT
f) The cash flow generated by the operations of the company
during one period: CASH FLOW STATEMENT
g) The way how funds, capital, that the company raised are
used: BALANCE SHEET
h) The amount of cash flow provided by financing activities of
the company during one period: CASH FLOW STATEMENT

END OF LECTURE 1 SLIDES 34