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ACCT 201

FINANCIAL ACCOUNTING

LECTURE 1
Asst. Prof. zlem OLGU
Room: 202
Tel No: 0212 338 1457
E-Mail: oolgu@ku.edu.tr

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ACCOUNTING AND THE
BUSINESS
ENVIRONMENT
Chapter 1

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Chapter Objectives
1. Use accounting vocabulary
2. Apply accounting principles and concepts
3. Use the accounting equation
4. Analyse business transactions
5. Prepare financial statements
6. Evaluate business performance
7. Revision questions
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O1:Use accounting vocabulary
Accounting...
is an information system that...
measures business activities,
processes information, and...

communicates financial information.


is called the language of business.

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Users of Accounting Information

Financial Acct Managerial Acct

External users Internal users


make decisions make decisions
about the entity. for the entity.

nvestors, Managers,
creditors, govt partnerts etc.
agencies 5
The Authority Underlying
Accounting
Public Sector
(SEC)

Private Sector Private Sector


(AICPA) (IMA) (FASB)

GAAP
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Standards of Professional
Conduct

Standards of
Ethical
AICPAs Code of
Conduct of the
Professional
Institute of
Conduct
Management
Accountants

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Types of Business Organizations

1. Proprietorships

2. Partnerships

3. Corporations

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1. Proprietorships: single owner
What are some advantages?
total undivided authority
no restrictions on type of business must
be legal
What are some disadvantages?
unlimited liability
limitation on size fund raising power

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2. Partnerships: more than 1 owner
What are some advantages?
- better credit standing possibly
more brain power, but consultation with
partners required
What are some disadvantages?
unlimited personal liability for general
partners
need for written partnership agreement
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3. Corporations: more than 2
owners or shareholders
What are some advantages?
separate legal existence
limited liability of stockholders
transferability of ownership relatively easy
What are some disadvantages?
taxes possible double taxation
extensive governmental regulation
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O 2: Apply Accounting Concepts
and Principles
1. GAAP
2. Entity concept
3. Reliability concept
4. Cost principle
5. Going concern principle
6. Stable monetary unit concept

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Generally Accepted
Accounting Principles (GAAP)
What is the primary objective of financial
reporting?

To provide information useful


for making investment and
lending decisions

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The Entity Concept Example
Assume that John decides to open up a gas
station and coffee shop.
The gas station made $250,000 in profits,
while the coffee shop lost $50,000.

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The Entity Concept Example
How much money did John make?
At a first glance, we would assume that
John made $200,000.
However, by applying the entity concept we
realize that the gas station made $250,000
while the coffee shop lost $50,000.

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The Reliability (Objectivity)
Principle

Information must Information must


be reasonably be free from bias.
accurate.

Information must Individuals would


report what arrive at similar
actually conclusions using
happened. same data.
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The Cost Principle

Assets and services


acquired
should be recorded
at their actual cost.

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The Going Concern Concept

The entity will continue


to operate in the future.

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Stable-Monetary-Unit Concept

The dollars purchasing


power is relatively
stable.

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IMPORTNAT!!!
O 3: Use the Accounting Equation

Assets = Liabilities + Owners Equity

Economic Claims to
Resources Economic
Resources
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What is an asset?
It is something a company owns which has
future economic value.
land
building
equipment
goodwill

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What is a liability?
It is something a company owes.
money
service legal retainers
product magazines

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What is owners equity?
It is whats left of the assets after liabilities
have been deducted.
the same as net assets
the owners claim on the entitys assets

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Transactions that Affect
Owners Equity
OWNERS
EQUITY OWNERS EQUITY
INCREASES DECREASES

Owner Investments Owner Withdrawals


in the Business from the Business

Owners Equity

Revenues Expenses
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Revenues
What are revenues?
They are amounts received or to be received
from customers for sales of products or services.
sales
performance of services
rent
interest

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Expenses
What are expenses?
They are amounts that have been paid or will be
paid later for costs that have been incurred to
earn revenue.
salaries and wages
utilities
supplies used
advertising
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O 4: Analyze Business Transactions

What is a transaction?
It is any event that both affects the financial
position of the business and can be reliably
recorded.

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Accounting for Business
Transactions: Example
1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.
2 Gillen purchases an office location, paying
$20,000 in cash.
3 She buys office supplies, agreeing to pay
$500 in 30 days.
4 She earns and collects $5,500 revenues.

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Example Continues...
5 Gillen performs services, and the client agrees
to pay $3,000 within one month.
6 During the month, she pays $3,300 for
expenses incurred.
7 Gillen pays $300 to the store from which she
purchased $500 worth of supplies.
What is the effect of these transactions on the
accounting equation?
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Accounting for Business Transactions
Owners
Assets = Liabilities + Equity
1) Cash + $30,000 + $30,000
2) Cash 20,000
Land + 20,000
3) Supplies + 500 + 500
4) Cash + 5,500 + 5,500
5) Receivable + 3,000 + 3,000
6) Cash 3,300 3,300
7) Cash 300 300
Totals + $35,400 + 200 + $35,20030
Important Points:
Notice that the equation always stays in
balance.
Each transaction affects at least two
accounts, sometimes more.
Some transactions affect only one side of
the equation; some affect both sides.

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O 5: Prepare Financial Statements
Financial Statements...
are the final
product of the
accounting process.

tell how the


business is performing
and where it stands.
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Financial Statements
1. income statement
2. statement of owners equity or retained
earnings
3. balance sheet
4. statement of cash flows

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O 6: Evaluate Business Performance

Income
Revenue:
Statement
Fees earned $8,500 Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200

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Statement of Owners Equity

G. Gillen, capital, April 1, 20xx $ 0


Contribution of capital 30,000
Net income $ 5,200
Cash distributions 2,000
G. Gillen, capital, April 30, 20xx $33,200

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Balance Sheet

Assets Liabilities
Cash $19,900 Accounts payable $ 200
Accounts receivable 2,000 Owners equity,
Supplies 500 G. Gillen, capital 33,200
Land 11,000 Total liabilities and
Total assets $ 33,400 owners equity $33,400

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Statement Of Cash Flows

Cash flows from operating activities:


Cash receipts from services rendered $6,500
Cash payments:
Supplies $ 300
Operating expenses 3,300 3,600
Net cash flows from
Operating activities $2,900
Cash flows from investing activities
Purchase and sale of land ($11,000)

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Statement Of Cash Flows

Cash Flows from Financing Activities:


Investment by Owner $30,000
Withdrawals 2,000
Net Cash Flows from
Financing Activities $28,000
Cash at Beginning of Year 0
Cash at End of the Year $19,900

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Revision Questions:
QUESTION 1

A corporation with 2 stockholders goes


bankrupt owing $10,000. How much
does each stockholder owe the
creditors?

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Answer: $0.
The stockholders of a corporation have limited
liability, which means that stockholders are not
responsible for the debts of the corporation.

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QUESTION 2

Land was acquired for a future building


site at a cost of $80,000. An appraiser
placed its value at $85,000. Another
company offered to buy the land for cash
of $90,000. At what amount should land
be reported in the financial statements?
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Answer: $80,000.
The cost principle states that assets should be
recorded at their cost.

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QUESTION 3

The assumption that the entity will


remain in operation for the foreseeable
future is the:
A. Reliability principle
B. Entity concept
C. Going concern concept
D. Cost principle
Answer: C 43
QUESTION 4

A basic principle of accounting that requires


activities of an entity be kept separate from
other organizations and individuals as a
separate economic
A. Reliability unit is the
principle
B. Entity concept
C. Going concern concept
D. Cost principle
Answer: B
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QUESTION 5

Which of the following is a correct


expression of the accounting equation?
A. Assets = revenues + expenses
B. Assets = revenues - expenses
C. Assets = liabilities owners equity
D. Assets = liabilities + owners equity
Answer: D
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QUESTION 6

If a companys assets total $400 and


owners equity totals $300, how
much are total liabilities?
Answer: $100.
The accounting equation is:
Assets = liabilities + owners equity
$400 = ? + $300
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QUESTION 7

Owner's equity can be described as

A. Creditors claims on total assets


B. Owners claim on total assets
C. Current obligations of the company
D. Economic resources of the company

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Answer: B
Assets = Liabilities + Owners Equity

Creditors Owners
claims to claims to
assets assets

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QUESTION 8

What is the effect on the accounting


equation if a company collects $50 of an
Accounts Receivable?
A. increases an asset $50; decreases an asset $50
B. decreases an asset $50; decreases a liability $50
C. increases an asset $50; decreases a liability $50
D. decreases a liability $50; increases owner's equity $5

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Answer: A
When a company collects on an accounts
receivable, cash is increased. Accounts
receivable is decreased by the same amount since
customers owe the company less.

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QUESTION 9

What is the effect on the accounting


equation if a company pays the monthly
rent in cash?
A. Assets decrease and liabilities increase
B. Liabilities decrease and owners equity decreases
C. Owner's equity increases and assets increase
D. Assets decrease and owners equity decreases

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Answer: D
1. Assets decrease: Cash is paid and decreases.
2. Owners equity decreases: Costs incurred to
earn revenues decrease the owners interest
in the assets.

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QUESTION 10

The balance sheet reports:


A. Revenues and expenses on a specific date
B. Assets, liabilities, and owners equity for a specific
period
C. Changes in owners equity for a specific period
D. Assets, liabilities, and owners equity on a specific
date

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Answer: B
The balance sheet reports the amount of assets,
liabilities and owners equity on a specific date.

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QUESTION 11

An income statement reports


A. Revenues and expenses on a specific date
B. Revenues and expenses for a specific period of time
C. Changes in owners equity for a specific period of time
D. Assets, liabilities, and owners equity on a specific date

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Answer: B
The income statement presents revenues and
expenses of a company for a specific period of time.

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QUESTION 12

Determine the amount of net income (loss)


given the following information:
Accounts payable.$ 700
Service revenue..900
Supplies expense300
Cash800
Salaries expense. 400
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Answer:
Service Revenue $900
Less Expenses:
Supplies expense $300
Salaries expense 400700
Net income $200

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QUESTION 13

At the beginning of the year, owners


equity was $100. The owner invested
$200 cash to the business during the year
and earned a net income of $600. The
owner also withdrew $500 during the
year. What was the balance in owners
equity at the end of the year?
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Answer:
Beginning owners equity $100
Add: Net income 600
Investment by owner 200
Subtotal $900
Less: Owners withdrawal (500)
Ending owners equity $400

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QUESTION 14

Presented below are balance sheet items


for Alt Co.
Accounts payable..$200
Accounts receivable...300
Cash....100
Furniture..500
Norris, capital..300
Notes payable.400 61
Compute total assets
Answer:
Cash $100
Accounts receivable 300
Furniture 500
Total assets $900

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QUESTION 15

Presented below are balance sheet items


for Alt Co.
Accounts payable.. $200
Accounts receivable... 300
Cash.... 100
Furniture.. 500
Norris, capital.. 300
Notes payable. 400 63
Answer:
Accounts payable $200
Notes payable 400
Total liabilities $600

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