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Roshayani Arshad, et al. (2007), Financial Accounting An Introduction, 3rd Edition, Malaysia, McGraw Hill. Chapter 1: Introduction to Accounting Chapter 2: Basic Framework of Accounting
Topic 1
Conceptual Framework
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What is Accounting?
Accounting can be defined as the process of ______________________________________ information to permit informed judgments and ___________ by users of the information. Vs. Book-keeping involves only the recording of data. Accountants might used the information obtained from book-keeping for accounting purpose.
What is Accounting?
Flows of Accounting process
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Purpose of Accounting
To ________________________ about business organisations to various interested parties __________________. Accounting information is used by:
1. External users, e.g. investors, government, creditors, taxing authorities, general public 2. Internal users, e.g. managers, business owners, shareholders
Looking at the examples above, how do you think we can differentiate external users from internal users? 6 UTAR/FHBM1214/Topic1
Internal Users
1.Government & taxing authorities
1.Owner
2. Manager
2.Investors
Business Stakeholders
A business stakeholder is a person or entity having an interest in the economic performance of the business.
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3.Shareholder
External Users 8
Owner
To decide whether expand, continue or close down the business. Question asked by Owner: Should I close down the business if my Company incurred losses for the past 3 years?
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Manager
To make decision on the operations of a firm Question asked by Manager: Is it possible to change the operation from labour intensive to machinery intensive?
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Shareholder
To buy, remain or sell out the shares.
Employees
To determine ability to pay salaries and other employment benefits, job security and career prospects
. .
Question asked by shareholder: How much dividend I could get this year?
Question asked by employees: How much bonus I could get by the end of the year?
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External Users
2.Investors
3.Labor Unions
Do the business follows the business act? Question asked by Taxing authorities: How much tax to charge a business?
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Investor
To evaluate how much profit they can expect to obtain from their investment.
Labour unions
Bargains with the employer on behalf of union members (employees) and negotiates labor contracts with employers. Question asked by labour unions: Is the Company paying wages below market value to the labours?
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Creditors / Bankers
To determine borrowers ability to meet scheduled payments by evaluating borrowers financial position and prediction of future operations. Question asked by Creditors / Bankers: Will the Company able to make loan repayment when mature?
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User
2. Did the company earn a satisfactory income? 3. Do we need to borrow in the near future? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price that we should set for our products so that the Company's net income can be maximised? 6. Will the company be able to pay its short-term debts?
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Nature of a Business
A business is an organisation in which basic resources (inputs) are assembled and processed to provide goods or services (outputs) to customers. Objective of most businesses to _______ _________ (difference between revenue and cost/expenses). Some businesses operate with an objective other than to maximise profits.
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Types of Businesses
Manufacturing Business
Product
Cars, automotive parts Computer chips Jet aircraft Athletic shoes and apparel Beverages Stereos and television
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Types of Businesses
Merchandising Business
Product
Types of Businesses
Service Business
Product Product
General merchandise Toys Music & video records Beauty & health products Internet books, music, video retailer
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Advantages
Ease in organizing Low cost of organizing Disadvantages Limited source of financial resources Unlimited liability
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Joes
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Advantages More financial resources. Additional management skills. Disadvantage Unlimited liability.
Advantage The ability to obtain large amounts of resources by issuing shares. Disadvantage Double taxation.
J & M, Bhd.
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Partnership
Owned by two or more persons. Often retail and service-type businesses Generally unlimited personal liability Partnership agreement
Corporation
Ownership divided into shares of stock Separate legal entity organized under state corporation law Limited liability
HOW to record?
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Matched
Bills incurred during 44 1/1/06 31/12/06
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Since the box of paper clips is not a material item, the box will be charged as an expense in a period it was bought.
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Accounting reports, called financial statements, provide summarized information to the owner.
Financial Statements
Income statement A summary of the revenue and expenses for a specific period of time. Balance sheet (a.k.a. Statement of financial position) A list of the assets, liabilities, and owners equity as of a specific date. Statement of cash flows A summary of the cash receipts and disbursements for a specific period of time.
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Summary
Ledger
Income Statement
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Trial Balance
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What is Accounting?
Types of business
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Form of Business
1. 2. 3. 4. 5. 6.
Accounting Concepts
7. 8. 9. 10. 11. 12.
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Lecture Exercise
1. Valuing closing stock at cost is an application of which concept? a. Prudence b. Consistency c. Historical cost d. Money measurement 2. Which of the following statements is not true? The going concern concept can be ignored if ______. a. business closure is in the near future b. the business is likely to fail in the forthcoming accounting period c. parts of the business are likely to face closure d. similar firms also have chosen to ignore the concept
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3. Including private costs incurred in running a car as business costs would violate the concept of: a. b. c. d. Historical cost Going concern Consistency Business entity
4. Combining the activities of Mei Ling and Mills Sdn would violate the a. b. c. d. Cost principle. Business entity Monetary unit assumption. Consistency principle.
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5. A business organized as a separate legal entity under state law having ownership divided into shares of stock is a a. proprietorship. b. partnership. c. corporation d. sole proprietorship.
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The End
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