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Financial Accounting Instructor: Xiaoxi Li 李晓蹊 , Assistant Professor

Course time & venue: Tuesday, 18:30-20:55, 1 区 - 教四 -

203

Textbook: Financial Accounting (7ed), Libby, Libby, and Short, McGraw-Hill/Irwin.  

Office hour: C-151 at 亮胜楼 (by appointment)

Contact: xli_whu@163.com

Course webpage: https://xiaoxili.weebly.com/acct-2017-fall.html

Grades: Assignments (0.25)+ Midterm Exam (0.25) + Final Exam (0.5)

Teaching Assistant ：赵晓慧 (Q: 857013089) 、刘雨桑 (Q: 790149162)

Course Schedule: see the Course Syllabus

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Chapter 1: Overview of Financial Reporting

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Class objectives

Be familiar with the four basic financial statements (the

purpose, info content, structures, key elements, and the

relation among them)

Understand the balance sheet equation, income statement equation, retained earnings equation and cash flow equation

Be able to identify the users of accounting information

Understand the players in accounting information

communication process

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What is accounting-historical perspective

©Sudipta Basu, 2009 Conservatism Research: Historical Development and Future Prospects

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What is accounting?-the new era

Fra Luca Pacioli was born during 1445

in Sansepolcro, Tuscany. He was a

mathematician and friend of Leonardo da Vinci. He wrote and taught in many

fields including mathematics, theology,

architecture, games, military strategy and

commerce. In 1494, Pacioli published

his famous book "Summa de Arithmetica, Geometria, Proportioni et Proportionalita" (The Collected

Knowledge of Arithmetic, Geometry,

Proportion and Proportionality).

Luca Pacioli,

Father of Accounting

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Summa de arithmetica, geometria. Proportioni et proportion

alita (Venice 1494, Fra Luca Pacioli), a textbook for use in the schools of Northern Italy. It was a synthesis of the

mathematical knowledge of his time and contained the first printed work on

algebra written in the vernacular (i.e., the spoken language of the day). It is also

notable for including the first published description of the bookkeeping method

that Venetian merchants used during the Italian Renaissance, known as the 

double-entry accounting system. The system he published included most of the

accounting cycle as we know it today. He described the use of journals and

ledgers, and warned that a person should not go to sleep at night until the debits

equaled the credits. His ledger had accounts for assets (including receivables and

inventories), liabilities, capital, income, and expenses — the account categories

that are reported on an organization's balance sheet and income statement,

respectively. He demonstrated year-end closing entries and proposed that a 

trial balance be used to prove a balanced ledger. He is widely considered the

"Father of Accounting". Additionally, his treatise touches on a wide range of

related topics from accounting ethics to cost accounting. He introduced the 

Rule of 72, using an approximation of 100*ln 2 more than 100 years before 

Napier and Briggs. ----------- from wikipedia.

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What is accounting?

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What is accounting?

Financial accounting: (* focus of this course)

Provide information primarily to external decision makers Investors, creditors, customers, suppliers, employees etc.

Managerial accounting Provide information to internal decision makers (e.g. managers)

To make better investment decisions

For performance evaluation purpose

Tax accounting Provide information to the tax authorities

Legal to prepare separate books for tax and financial purpose.

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The Accounting System (for Business Operations)

Collects and processes

financial information

Reports

information

to decision

makers

Managers

(internal

decision

makers)

Investors

and

Creditors

(external

decision

makers)

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What is a financial report like?

Where to find financial reports? Corporate websites: investor relation

http://www.lenovo.com/ww/lenovo/annual_interim_report.html

http://content.dell.com/us/en/corp/investor-financial-reporting.aspx

Data service from exchanges or regulators: Hong Kong HKEx: http://www.hkexnews.hk/index.htm

US SEC Edgar: http://www.sec.gov/edgar.shtml

Finance websites Hong Kong: http://www.irasia.com/index.htm

US:

http://finance.google.com

http://finance.yahoo.com

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Annual Reports

For privately held companies, annual reports

are simple documents that include:

1. Four basic financial statements.

2. Related notes (footnotes).

3. Report of independent accountants (auditor’s

opinion) if the statements are audited.

For privately held companies, annual reports

are simple documents that include:

1. Four basic financial statements.

2. Related notes (footnotes).

3. Report of independent accountants (auditor’s

opinion) if the statements are audited.

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Annual Reports

For public companies, annual reports are

elaborate due to SEC reporting

requirements:

1. A Nonfinancial Section A letter to the stockholders, a description of

management’s philosophy, products, successes,

etc.

2. A Financial Section See next slide for a detailed listing . . .

For public companies, annual reports are

elaborate due to SEC reporting

requirements:

1. A Nonfinancial Section A letter to the stockholders, a description of

management’s philosophy, products, successes,

etc.

2. A Financial Section See next slide for a detailed listing . . .

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Annual Reports

1. Summarized financial data for 5- or 10-years.

2. Management Discussion and Analysis (MD&A).

3. The four basic financial statements.

4. Notes (footnotes).

5. Independent Accountant’s Report and the Management

Certification.

1. Summarized financial data for 5- or 10-years.

2. Management Discussion and Analysis (MD&A).

3. The four basic financial statements.

4. Notes (footnotes).

5. Independent Accountant’s Report and the Management

Certification.

6. Recent stock price information.

7. Summaries of the unaudited quarterly financial data.

8. Lists of directors and officers of the company and relevant addresses.

6. Recent stock price information.

7. Summaries of the unaudited quarterly financial data.

8. Lists of directors and officers of the company and relevant addresses.

Click

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Quarterly/interim Reports

Usually begin with short letter to stockholders

Condensed unaudited income statement and balance sheet for

the quarter.

Often, cash flow statement and statement of stockholders’

equity are omitted. Some notes to the financial statements also

may be omitted.

Usually begin with short letter to stockholders

Condensed unaudited income statement and balance sheet for

the quarter.

Often, cash flow statement and statement of stockholders’

equity are omitted. Some notes to the financial statements also

may be omitted.

Click

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The Four Basic Financial Statements

The financial position

of an entity at a

given point

in time

Balance Sheet

(Statement of

Financial Position)

The performance (change

in the financial position)

of an entity

during a given period

Income

statement

Statement of

Retained Earnings

Statement

of Cash flow

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The Balance Sheet

The Balance sheet reports the financial position of an entity at a

particular point in time. Also Called Statement of Financial

Position.

Snapshot of what companies own (assets) and where did it come

from (liabilities & shareholders’ equity)

Why balance sheet information is important?

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Maxidrive Corp.: some background

Manufacturer of a PC disk driver.

Financed from Exeter Investors (as stockholders) and

American Bank (as creditors).

The financial statements provided by Maxidrive Corp.

proved to have a variety of problems (fraud), resulting in a

great loss for both Exeter Investors and American Bank

(based on a realistic story).

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Structure of Balance Sheet

Asset: resources owned by

the company, of probable

future economic beneits

Liabiliies: debts or

obligaions that the irm

must pay in future

Shareholders’ equity:

inancing provided by the

owner, residual value of

the company

1. Name of entity

2. Title of statement

3. Specific date

4. Unit of measure

MAXIDRIVE CORP.

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The Balance Sheet

Assets

Cash

Short-Term Investment

Accounts Receivable

Notes Receivable

Inventory Long-Term Investments

Equipment

Buildings

Land

Intangibles

Assets

Cash

Short-Term Investment

Accounts Receivable

Notes Receivable

Inventory

Long-Term Investments

EquipmentBuildings

Land

Intangibles

Liabilities

Accounts Payable

Notes Payable

Taxes Payable

Bonds Payable

Liabilities

Accounts Payable

Notes Payable

Taxes Payable

Bonds Payable

Stockholders’ Equity

Contributed Capital

Retained Earnings

Stockholders’ Equity

Contributed Capital

Retained Earnings

Typical Account Titles

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Resources

( 物 )

Claims /

Obligaions

（权）

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The Balance Sheet Equation

Assets

Economic resources with probable future economic benefits resulting from past transactions

Liabilities

Probable future economic sacrifices arising from past transactions (debts or obligations)

=

Owners’

Equity

Owners’ residual interest +

Current

assets

Long-term

assets

Tangible

assets Intangible

Assets

（无形资产）

Current

Liabilities

Long-term

Liabilities

Accounts

Payable

Notes

Payable

Contributed

Capital

Retained

Earnings

Must always balance !!!

Common stock

Addl Paid-in CapitalInvestmts

Bonds

Contingencies （意外开支）

Leases（租赁）

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Why the Balance Sheet is important?

(A.1) Assets provide a basis for judging whether the company has sufficient

resources available to operate (both Exeter and AB);

(A.2) Assets are also important because they can be sold for cash in even that

Maxidrive Corp. went out of business (both Exeter and AB);

(D.1) Concern on sufficient source of cash to pay its Debts (Exeter);

(D.2) Existing creditors share the claim against Maxidrive’s assets (AB);

(SE.1) Creditors consider stockholders’ equity as a protective “cushion” for

them* (AB).

----------------------------------------------------------------------------------

Note*: creditors’ claims legally come before those of owners.

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Exercise: Prepare Balance Sheet A WHU graduate started a business of selling lunch boxes called Luo-Jia Catering

Inc. She started her business on January 1, 2017 by investing RMB ￥ 7,500 in capital

stock. At the end of June, 2017, Luo-Jia Catering Inc. has the following Balance

Sheet account balances:

Accounts Payable 570

Accounts Receivable 750

Capital Stock 7,500

Cash 3,480

Retained Earnings 1,800

Supplies 5,640

Required: Prepare a balance sheet at 6/30/2017. Show that it illustrates the basic

accounting equation.

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Solution: Balance Sheet

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The Income Statement

The income statement reports the measure of performance of

a business, revenues less expenses during a period of time. Also

called: Statement of income

Statement of earnings

Statement of operation

Revenues come from the sale of goods or services to customers

Expenses represent resources used up by the entity to earn

revenues during a period.

Why income statement information is important?

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Structure of the Income Statement

1. Name of entity

2. Title of statement

3. Specific period of time

4. Unit of measure

I/S equaion:

Revenues- Expenses

= Net Income

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Why income statement is important?

Concerns on the ability to generate earnings by selling

products and services out of the cost (of production and

delivering).

Important for both investors and creditors since the continuing earnings would imply the growth of the

company’s value (stock price), cash for dividends, and

resources for repaying the loans.

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Exercise: prepare income statement Over the six months ending on June 30, 2017, Luo-Jia Catering Inc. has the

following Income Statement account balances:

Rental Expense 500

Salary Expense 1,000

Sales Revenue 6,500

Cost of Goods Sold 3,000

Required: Prepare an income statement for the six months ending 6/30/2017.

Show how it illustrates the income statement equation.

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Solution: Income statement

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Statement of Retained Earnings

Statement of Retained Earnings reports how net

income and the distribution of dividends affected the

financial position of the company during the

accounting period.

Retained Earning: re-investment.

Why the statement of retained earnings is important?

Beginning Retained Earning

Plus: Net Income

Less: Dividends

Ending Retained Earnings

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Structure of the Statement of Retained

Earnings

Retained Earnings Equation:

Beg. RE + NI – Dividends = End. RE

1. Name of entity

2. Title of statement

3. Specific period of time

4. Unit of measure

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Why the statement of RS is important?

Reinvestment of earnings is an important source of

financing for Maxidrive Corp. ( = > 1/3 )

The corporation’s dividend policy influences (1) its ability to

repay loans; (2) the reinvestment of earnings that supports future growth.

 

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Exercise: prepare a statement of retained

earnings At June 2017, Luo-Jia Catering Inc. Paid $200 in dividends, prepare a

statement of retained earnings for the six months ending on 6/30/2011.

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The Statement of Cash Flows

Because

revenues reported

do not always equal

cash collected. . .

. . . and expenses

reported do not

always equal

cash paid . . .

net income is

usually not equal

to the change

in cash for

the period.

The Statement of Cash Flows reports inflows and outflows of cash

during the accounting period in the categories of operating,

investing and financing.

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The Structure of the Statement of Cash Flows

• SCF equation:

CFO + CFI + CFF

= Change in

Cash

1. Name of entity

2. Title of statement

3. Specific period of

time

4. Unit of measure

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In-Class exercise E1-14 Preparing a Statement of Cash Flows

Worcestershire Manufacturing Corporation is preparing the annual

financial statements for the stockholders. A statement of cash flows must

be prepared. The following data on cash flows were developed for the

entire year ended December 31, 2014: cash collections from sales,

$270,000; cash expended for operating expenses, $175,000; sale of

unissued Worcestershire stock for cash, $30,000; cash dividends declared

and paid to stockholders during the year, $18,000; and payments on long-

term notes payable, $80,000. During the year, a tract of land held as an

investment was sold for $25,000 cash (which was the same price that

Worcestershire had paid for the land in 2013), and $48,000 cash was

expended for two new machines. The machines were used in the factory.

The beginning-of-the-year cash balance was $63,000.

Required:

Prepare the statement of cash flows for 2014. Follow the format illustrated

in the chapter.

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In-class exercise

E1-14 Preparing a Statement of Cash Flows

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60

Relation Among the Statements

(sequence of compiling statements)

Cash + Other assets = Liab + (Cont. Capital + Retained Earnings)

ΔCash + ΔOther Assets = ΔLiab + (ΔCont.Capital + ΔRE)

I/S: Revenue – Expense = Net Income

SRE: Beg. RE + NI – Dividends = End. RE

ΔRE = NI – Dividends

SCF: CFO + CFI + CFF = ΔCash

ΔX means (Xt – Xt-1 )

B/S: Assets = Liabilities + Stockholders’ Equity

流量

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Relationships Among the Statements

1. Net income from the income statement results

in an increase in ending retained earnings on

the statement of retained earnings.

Income Statement

Revenues $ 37,436 Statement of Retained Earnings

Expenses 34,136

Beginning retained earnings $ 6,805

Net income $ 3,300 Net income 3,300

Dividends (1,000)

Ending retained earnings $ 9,105

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Relationships Among the Statements

2. Ending retained earnings from the statement of

retained earnings is one of the two components of stockholders’ equity on the balance sheet.

Statement of Retained Earnings Balance Sheet

Beginning retained earnings $ 6,805 Cash $ 4,895

Net income 3,300 Other assets 22,366

Dividends (1,000) Total assets $ 27,261

Ending retained earnings $ 9,105 Liabiliies $ 16,156

Contributed Capital 2,000

Retained earnings 9,105

Total liabiliies and equity $ 27,261

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Relationships Among the Statements

3. The change in cash on the statement of cash

lows is added to the beginning-of-year balance

in cash to arrive at end-of-year cash on the

balance sheet.

Statement of Cash Flows Balance Sheet

Cash lows from operaing aciviies $ 1,069 Cash $ 4,895

Cash lows from invesing aciviies (1,625) Other assets 22,366

Cash lows from inancing aciviies 400 Total assets $ 27,261

Change in cash $ (156) Liabiliies $ 16,156

Beginning cash balance 5,051 Contributed Capital 2,000

Ending cash balance $ 4,895 Retained earnings 9,105

Total liabiliies and equity $ 27,261

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Relation among the statements: Dell Inc. case

Check the following:

Income Statement and statement of Retained Earnings

Retained Earnings and Balance Sheet

Statement of Cash Flows and Balance Sheet

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Footnotes

Footnotes provide supplemental information about the financial

condition and results of operations of the company.

Generally speaking, three types of notes: Description of the accounting rules (as above)

Additional detail about a line on the financial statements (e.g. inventories)

Additional financial disclosures about items not listed in the financial

statements (e.g. capital lease)

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Who are involved in financial reporting process

RegulatorsStandard Setting and VerificationSFC, HKICPA, IASB, 证监会 ...

RegulatorsStandard Setting and VerificationSFC, HKICPA, IASB, 证监会 ...

ManagementPrimary ResponsibilityCFO, CEO, Accounting Staff

ManagementPrimary ResponsibilityCFO, CEO, Accounting Staff

Auditors (CPAs)Verification

Auditors (CPAs)Verification

Board of DirectorsOversightAudit Committee (Independent directors)

Board of DirectorsOversightAudit Committee (Independent directors)

Primary responsibility for financial statement preparation

lies with management

IFRSHK/U.S./China

Engagement

Standards

SFC: Securities

and Futures

Commission

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To ensure the accuracy of the company’s

financial information, management:

Maintains a system of controls.

Hires outside independent auditors.

Forms a board of directors to review these two

safeguards.

Management Responsibility

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Independent Auditors

Examining the financial reports to ensure

compliance with GAAP/IFRS.

Examining the underlying transactions incorporated into the financial statements.

Expressing an opinion as to the fairness of

presentation of financial information.

Independent auditors have responsibilities

that extend to the general public.

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P1-1: Prepare an Income Statement, Statement

of Retain Earnings, and Balance Sheet

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P1-1: Prepare an Income Statement, Statement

of Retain Earnings, and Balance Sheet

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What we will learn this semester?

Chapter 2:

Invesing &

inancing

decisions &

Balance

sheet

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What we will learn this semester?

Chapter 3:

Operaing

decisions and

the income

statement

Chapter 4:

Adjustments,

Financial

Statement, and

the quality of

earnings

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What we will learn this semester?

Chapter 6: Report and

interpret sales revenue,

receivables and cash

Chapter 7: report and

interpret COGS (costs of

goods sold) and inventory

Chapter 8: Property, plant,

and equipment; natural

resources; and intangibles

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What we will learn this semester?

Chapter 9 &10: Reporing

and interpreing liabiliies

and bond

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What we will learn this semester?

Chapter 11: Reporing and

interpreing owners’ equity

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What we will learn this semester?

Chapter 13:

Statement of

Cash Flows

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Analogies between accounting and physics

Equations

Measure something in some unit

In accounting: economic transaction/activities: dollar

In physics: temperature °C

time: s/min/h

dynamics: newton

electricity: watt

E MC2

A L SE

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1-2-3-4-5 in accounting

1 basic equation: A=L+SE ( with some derivations)

2 purposes: internal & external uses

3 activities: operating, investing and financing

4 statements: B/S, I/S, SRE, SCF

5 major players: regulators, CPAs, BoD, Management, Regulators and Investors/Creditors

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Review problems and preparation for next

class

Practice problems after class E1-3,5,8,9,12; P1-2; AP1-1; CP1-4

Rearrange the consolidated balance sheet in Lenovo annual report

so that it is presented in the same format as Dell; Illustrate the

balance sheet equations for the two companies.

Prepare for the next class Read chapter 2

Try the following problems: E2-18, P2-3,4