Assignment 1st_528_Financial Accouting

7/30/2019 Assignment 1st_528_Financial Accouting

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Department of Business AdministrationBlock No. 13, Sector H-8,Allama Iqbal Open University, Islamabad.

Financial Accounting (528)

Assignment No. 02

Submitted to:Mr. Attiqur Rehman

House No. A-64/4, Lane No. 02,Lalarukh, WAH CANTT(0300-513 5164)

Submitted by:

Muhammad Hammad ManzoorMBA (HRM) 1st Semester

Roll No. 508195394

508, 5th Floor, Continental Trade Centre (CTC)

Block 08, Clifton, KARACHI

(0321-584 2326, 0322-555 5901)


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Financial Accouting (528)

Q. No. 01 Write Shot notes on the following:

a) Cost Principle b) Internal Control

c) Cash Flow Statement d) Retained Earning

e) Shot Term Investment

Answer:

a) Cost Principle

The Cost Principleis the general concept that you should only record an asset,liability, or equity investment at its original acquisition cost. The principle is widelyused to record transactions, partially because it is easiest to use the original

purchase price as an objective and verifiable evidence of value.

Explanation

The obvious problem with the cost principle is that the historical cost of an asset,liability, or equity investment is simply what it was worth on the acquisition date; itmay have changed significantly since that time. In fact, if a company were to sell itsassets, the sale price might bear little relationship to the amounts recorded on itsbalance sheet. Thus, the cost principle yields results that may no longer be relevant,and so of all the accounting principles, it has been the most seriously in question.

The cost principle is not applicable to financial investments, where accountants are

required to record them at their fair values at the end of each reporting period.

Using the cost principle for short-term assets and liabilities is the most justifiable,since an entity will not have possession of them long enough for their values tochange markedly.

The cost principle is less applicable to long-term assets and liabilities. Thoughdepreciation, amortization, and impairment charges are used to bring them intoapproximate alignment with their fair values over time, the cost principle leaveslittle room to revalue these items upward. If a balance sheet is heavily weightedtowards long-term assets, as is the case in a capital-intensive industry, then there is

a greater risk that the balance sheet will not accurately reflect the actual values ofthe assets recorded on it.

The cost principle implies that you should not revalue an asset, even if its value hasclearly appreciated over time. This is not entirely the case under Generally Accepted

Accounting Principles, which allows some adjustments to fair value. The costprinciple is even less applicable under International Financial Reporting Standards,

2By: M. Hammad Manzoor, MBA HRM-I, 508, 5th Floor, Continental Trade Centre (CTC), Clifton 08,

Karachi. (Roll No. 508195394)


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which not only permits revaluation to fair value, but also allows you to reverse animpairment charge if an asset subsequently appreciates in value.

Under the cost principle, long-term assets are recorded at historical cost anddepreciated as the items age or the company uses up the value of the asset. This

usage is recorded as depreciation on the accounting ledgers; original long-term assetvalues are netted against the total depreciation to determine the assets salvagevalue. The cost principle uses an assets salvage value as the future market value ofthe item. When a company sells long-term assets, any monetary difference above orbelow the salvage value is recognized as a gain or loss on the companys accountingbooks. Balance sheet liabilities are recorded in a similar fashion using the cost

principle.

Short-term liabilities, such as accounts payable or credit lines, are recorded athistorical cost since this represents the value of goods or services received by thecompany. Long-term investments or equity securities have traditionally been

recorded at historical cost under the cost principle. Changes in accounting rules,mostly from the mark-to-market accounting principles, changed the way companieswere recording certain financial investment instruments. Mark-to-market accountingrequires companies to re-value the historical cost of financial securities to currentmarket values.

Re-valuing financial securities occurs at specific intervals during the accountingcycle; companies must write off or increase the value of these financial instruments.Mark-to-market accounting creates a significant change in the cost principle ofaccounting. Companies are now forced to recognize gains and losses prior to selling

financial securities, changing the value or wealth stated on the companys balance

sheet.




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b) Internal Control

In accounting and auditing, internal controlis defined as a process effected byan organization's structure, work and authority flows, people and management

information systems, designed to help the organization accomplish specific goals orobjectives. It is a means by which an organization's resources are directed,

monitored, and measured. It plays an important role in preventing and detecting

fraud and protecting the organization's resources, both physical (e.g., machinery and

property) and intangible (e.g., reputation or intellectual property such as

trademarks).

There are many definitions of internal control, as it affects the variousconstituencies (stakeholders) of an organization in various ways and at differentlevels of aggregation.

Under the COSO Internal Control-Integrated Framework, a widely-used framework innot only the United States but around the world, internal control is broadly definedas a process, effected by an entity's board of directors, management, and other

personnel, designed to provide reasonable assurance regarding the achievement ofobjectives in the following categories: a) Effectiveness and efficiency of operations;b) Reliability of financial reporting; and c) Compliance with laws and regulations.

COSO defines internal control as having five components:

1. Control Environment-sets the tone for the organization, influencing the

control consciousness of its people. It is the foundation for all othercomponents of internal control.

2. Risk Assessment-the identification and analysis of relevant risks to theachievement of objectives, forming a basis for how the risks should bemanaged

3. Information and Communication-systems or processes that support theidentification, capture, and exchange of information in a form and time

frame that enable people to carry out their responsibilities4. Control Activities-the policies and procedures that help ensure

management directives are carried out.5. Monitoring-processes used to assess the quality of internal control

performance over time.

The COSO definition relates to the aggregate control system of the organization,which is composed of many individual control procedures.

Discrete control procedures, or controls are defined by the SEC as: "a specific set ofpolicies, procedures, and activities designed to meet an objective. A control mayexist within a designated function or activity in a process. A controls impact...may




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be entity-wide or specific to an account balance, class of transactions or application.Controls have unique characteristics for example, they can be: automated ormanual; reconciliations; segregation of duties; review and approval authorizations;safeguarding and accountability of assets; preventing or detecting error or fraud.Controls within a process may consist of financial reporting controls and operational

controls (that is, those designed to achieve operational objectives).

Internal control is the process designed to ensure reliable financial reporting,effective and efficient operations, and compliance with applicable laws and

regulations. Safeguarding assets against theft and unauthorized use, acquisition, or

disposal is also part of internal control.

Control environment. The management style and the expectations of upper-levelmanagers, particularly their control policies, determine the control environment. Aneffective control environment helps ensure that established policies and procedures

are followed. The control environment includes independent oversight provided by aboard of directors and, in publicly held companies, by an audit committee;management's integrity, ethical values, and philosophy; a defined organizationalstructure with competent and trustworthy employees; and the assignment ofauthority and responsibility.

Control activities. Control activities are the specific policies and proceduresmanagement uses to achieve its objectives. The most important control activitiesinvolve segregation of duties, proper authorization of transactions and activities,adequate documents and records, physical control over assets and records, andindependent checks on performance. A short description of each of these control

activities appears below.

Segregation of duties requires that different individuals be assignedresponsibility for different elements of related activities, particularly thoseinvolving authorization, custody, or recordkeeping. For example, the same

person who is responsible for an asset's recordkeeping should not be responsible for physical control of that asset Having different indi viduals performthese functions creates a system of checks and balances.

Proper authorization of transactions and activities helps ensure that allcompany activities adhere to established guide lines unless responsiblemanagers authorize another course of action. For example, a fixed price list

may serve as an official authorization of price for a large sales staff. Inaddition, there may be a control to allow a sales manager to authorize reasonable deviations from the price list.

Adequate documents and records provide evidence that financial statementsare accurate. Controls designed to ensure adequate recordkeeping include thecreation of invoices and other documents that are easy to use and sufficientlyinforma tive; the use of prenumbered, consecutive documents; and the timely

preparation of documents.




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Physical control over assets and records helps protect the company's assets.These control activities may include elec tronic or mechanical controls (suchas a safe, employee ID cards, fences, cash registers, fireproof files, and locks)or computer-related controls dealing with access privileges or establishedbackup and recovery procedures.

c) Cash Flow Statement

In financial accounting, a cash flow statement, also known as statement of cashflows or funds flow statement, is a financial statement that shows how changes inbalance sheet accounts and income affect cash and cash equivalents, and breaks theanalysis down to operating, investing, and financing activities. Essentially, the cash

flow statement is concerned with the flow of cash in and cash out of the business.The statement captures both the current operating results and the accompanyingchanges in the balance sheet. As an analytical tool, the statement of cash flows isuseful in determining the short-term viability of a company, particularly its abilityto pay bills. International Accounting Standard 7 (IAS 7), is the International

Accounting Standard that deals with cash flow statements.

People and groups interested in cash flow statements include:

Accounting personnel, who need to know whether the organization will beable to cover payroll and other immediate expenses

Potential lenders or creditors, who want a clear picture of a company's abilityto repay

Potential investors, who need to judge whether the company is financiallysound

Potential employees or contractors, who need to know whether the companywill be able to afford compensation

Purpose of Cash Flow Statement

The cash flow statement was previously known as theflow of Cash statement. Thecash flow statement reflects a firm's liquidity.

The balance sheet is a snapshot of a firm's financial resources and obligations at asingle point in time, and the income statement summarizes a firm's financialtransactions over an interval of time. These two financial statements reflect theaccrual basis accounting used by firms to match revenues with the expensesassociated with generating those revenues. The cash flow statement includes onlyinflows and outflows of cash and cash equivalents; it excludes transactions that donot directly affect cash receipts and payments. These non-cash transactions includedepreciation or write-offs on bad debts or credit losses to name a few. The cash flowstatement is a cash basis report on three types of financial activities: operating




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activities, investing activities, and financing activities. Non-cash activities areusually reported in footnotes.

Structure of Cash Flow Statement

The cash flow statement is intended to

1. provide information on a firm's liquidity and solvency and its ability to changecash flows in future circumstances

2. provide additional information for evaluating changes in assets, liabilities andequity

3. improve the comparability of different firms' operating performance byeliminating the effects of different accounting methods

4. indicate the amount, timing and probability of future cash flows

The cash flow statement has been adopted as a standard financial statement because

it eliminates allocations, which might be derived from different accounting methods,such as various timeframes for depreciating fixed assets.

d) Retained Earnings:The percentage of net earnings not paid out as dividends, but retained by the

company to be reinvested in its core business or to pay debt. It is recorded under

shareholders' equity on the balance sheet.

The formula calculates retained earnings by adding net income to (or subtracting any

net losses from) beginning retained earnings and subtracting any dividends paid to

shareholders:




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Also known as the "retention ratio" or "retained surplus".

Explanation Retained Earnings:

When a company generates a profit, management has one of two choices: They can

either pay it out to shareholders as a cash dividend, or retain the earnings and

reinvest them in the business.

When the executives decide that earnings should be retained, they have to accountfor them on the balance sheet under shareholder equity. This allows investors to seehow much money has been put into the business over the years. Once you learn toread the income statement, you can use the retained earnings figure to make adecision on how wisely management is deploying and investing the shareholders'money. If you notice a company is plowing all of its earnings back into itself and isn'texperiencing exceptionally high growth, you can be sure that the stock holders wouldbe better served if the board of directors declared a dividend.

Ultimately, the goal for any successful management is to create $1 in market value

for every $1 of retained earnings.

Retained Earnings Examples from Real Companies

Let's look at an example of retained earnings on the balance sheet:

Microsoft has retained $18.9 billion in earning over the years. It has over 2.5times that amount in stockholder equity ($47.29 billion), no debt, and earnedover 12.57% on its equity last year. Obviously, the company is using theshareholder's money very effectively. With a market cap of $314 billion, thesoftware giant has done an amazing job.

Lear Corporation is a company that creates automotive interiors and electricalcomponents for everyone from General Motors to BWM. As of 2001, thecompany had retained over $1 billion in earnings and had a negative tangibleasset value of $1.67 billion dollars! It had a return on equity of 2.16%, which isless than a passbook savings account. The company is astronomically priced at79.01 times earnings and has a market cap of $2.67 billion. In other words:Shareholders have reinvested a billion dollars of their money back into the




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company and what have they gotten? They owe $1.67 billion.1 That is a badinvestment.

The Lear example deserves a closer look. It is immediately apparent that shareholderswould have been better off had the company paid out its earnings as dividends.

Unfortunately, the economics of the company are so bad had the profits been paidout, the business probably would have gone bankrupt. The earnings are reinvested ata sub par rate of return. An investor would earn more on the earnings by putting themin a CD or money market fund then by reinvesting them into the business.

E) Short Term Investment:

A short term investment fund is a fund that earns you a return on your money in ashort period of time, such as one to ten years. This is different than retirementinvesting, and it can be a challenge to find short team, high yield investments. Goodshort term investments will have a high interest rate, allowing you to earnsubstantial money immediately.

The Need for Short Term Investments

You might need short term investments if you have a pressing need coming up in thenear future. If, for example, you might need to have a down payment for a house orcar in a year or two, you could make use out of short term investment options. Also,you might use this type of fund in replacement of a traditional savings account,because you will earn a higher rate of return. Some even choose to use short terminvestment funds to supplement their retirement income.

How to Use Short Term Investments

If you are interested in short term investments, talk to your financial advisor. He or

she can tell you what the best short term investment opportunity you can use will

be. Then, invest your money, and leave it alone. Allow it to gain interest for the

course of the investment period. When the fund comes to term, you will have earned

interest on the money you invested.

Decide what amount of your total income you are willing to invest in your fund. Most

people are comfortable with investing around ten percent of their total income.Then, choose the investment to use. It is best to take the amount and invest it into

one particular investment. Your long term investments are where diversification is

helpful.




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Q. No. 02- A trial balance and supplementary information needed

for adjustments at September 30 are shown for Cinemax stage &

Theatre. The company follows a policy of adjusting and closing its

accounts at the end of each month.

CINEMAX STAGE & THEATRE

Trial Balance

September 30, 1994

Cash Rs. 17,500Prepaid film rental 65,000Land 75,000Building 210,000Accumulated depreciation building Rs.6,125Equipment 90,000Accumulated depreciation

equipment

7,500

Notes payable 200,000Accounts payable 8,500Unearned admission revenue 5,200Capital 200,925Drawings 10,500Admission revenue 68,750Salaries expenses 21,250Light and power expense 7,750

Rs.497,000 Rs.497,000

Other Data:a. Film rental expense for the month is Rs.42,275, all of which had been paid in

advance.b. The building is being depreciated over a period of 10 years.c. The equipment is being depreciated over a period of 5 years.d. No entry has yet been made to record interest payable of Rs.1,800.e. No entry has yet been made to record the admission revenue earned during the month

amounting to Rs.3,650.f. Salaries earned by the employees but not recorded Rs.3,750.

Prepare Adjusting entries, Income Statement and Balance sheet for month

ended September 30, 1994.




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Q. 3(a) Concord Products uses a perpetual inventory system. On January1, the Inventory account had a balance of 84,500. During thefirst few days of January the following transactions occurred.

Jan. 2 Purchased merchandise on credit from Smith Companyfor 9,200

Jan. 3 Sold merchandise for cash 22,000. The cost of thismerchandise was 14,300.

(a) Prepare entries in general from to record the abovetransactions.

(b) What was the balance of the inventory account at the closeof business January 31?




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Q. No. 3 (b) Distinguish perpetual inventory system from periodicinventory system.

Answer.

There are a number of significant differences between the periodic and perpetual

inventory systems. As you may recall, the periodic system relies upon an occasional

physical count of the inventory to determine the ending inventory balance and the

cost of goods sold, while the perpetual system keeps continual track of inventory

balances. The key differences between the two systems are:

Accounts. Under the perpetual system, there are continual updates to eitherthe general ledger or inventory journal as inventory-related transactions occur.Conversely, under a periodic inventory system, there is no cost of goods soldaccount entry at all in an accounting period until such time as there is aphysical count, which is then used to derive the cost of goods sold.

Computer systems. It is impossible to manually maintain the records for aperpetual inventory system, since there may be thousands of transactions atthe unit level in every accounting period. Conversely, the simplicity of aperiodic inventory system allows for the use of manual record keeping for verysmall inventories.

Cost of goods sold. Under the perpetual system, there are continualupdates to the cost of goods sold account as each sale is made. Conversely,

under the periodic inventory system, the cost of goods sold is calculated in alump sum at the end of the reporting period, by adding total purchases to thebeginning inventory and subtracting ending inventory.

Cycle counting. It is impossible to use cycle counting under a periodicinventory system, since there is no way to obtain accurate inventory counts inreal time (which are used as a baseline for cycle counts).

Purchases. Under the perpetual system, inventory purchases are recorded ineither the raw materials inventory account or merchandise account (dependingon the nature of the purchase), while there is also a unit-count entry into theindividual record that is kept for each inventory item. Conversely, under aperiodic inventory system, all purchases are recorded into a purchases assetaccount, and there are no individual inventory records to which any unit-countinformation could be added.




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Transaction investigations. It is nearly impossible to track through theaccounting records under a periodic inventory system to determine why aninventory-related error of any kind occurred, since the information isaggregated at a very high level. Conversely, such investigations are mucheasier in a perpetual inventory system, where all transactions are available in

detail at the individual unit level.

This list makes it clear that the perpetual inventory system is vastly superior to theperiodic inventory system. The only case where a periodic system might make sense iswhen the amount of inventory is very small, and where you can visually review itwithout any particular need for more detailed inventory records.

Tabulated below the major differences between Periodic Inventory System andPerpetual Inventory System:



Periodic Inventory System Perpetual Inventory System

Inventory account andcost of goods sold arenon-existent until the

physical count at theend of the year.

Account and the balance ofcosts of goods sold andinventory account exist allthe time.

Purchases account isused to record

purchases.

No individual purchasesaccount but the purchasesare recorded in theInventory Account.

Purchase Return accountis used to recordPurchases Returnsaccount.

No individual PurchaseReturns account but the

purchases return arerecorded in the Inventory

Account.


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Periodic Inventory System Perpetual Inventory System

Cost of goods sold or cost ofsale is computed from the

ending inventory figure

Record cost of goods sold/costof sale inventory is reduced

when there is a sale.

For goods returned by

customers there are no

inventory entries.

Returns from customers are

recorded by reducing the cost

of goods sold and adding backinto inventory.


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Q. No. 4 At November 30, one day cleaners have available the

following data concerning its bank checking account:

(a) At November 30, cash per the bank statement was Rs.37,758;

per the accounting records, 42,500.(b) The cash receipts of 6,244 on November 30, were deposited

on December 1.

(c) Included on the bank statement was a credit for 167 interests

earned on this checking account during November.

(d) Two checks were outstanding at November 30, No. 921 for

Rs.964 and No. 925 for Rs.1,085.

(e) Enclosed with the bank statement were two debt memoranda

for the following items: service charges for November, Rs.14;and a Rs.700 check of a customer Tanya Miller, marked NSF.

Instructions:

Prepare the bank reconciliation at November 30?

Prepare adjusting entries based on the bank reconciliation?




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Q. No. 5 How an accounting information system can be helpful for

managers?

Answer:

An accounting information system (AIS) is a structure that a business uses to

collect, store, manage, process, retrieve and report its financial data so that it can

be used by accountants, consultants, business analysts, managers, chief financial

officers (CFOs), auditors and regulatory and tax agencies.

In particular, specially trained accountants work with AIS to ensure the highest level

of accuracy in a company's financial transactions and recordkeeping and to make

financial data easily available to those who legitimately need access to it, all while

keeping data intact and secure. This article will describe the primary components ofAIS and some of its real-life applications.

Components of an Accounting Information System

Accounting information systems generally consist of six main parts: people,

procedures and instructions, data, software, information technology

infrastructure and internal controls. Let's look at each component in detail.

People

The people in an AIS are simply the system users. Professionals who may need to usean organization's AIS include accountants, consultants, business analysts, managers,chief financial officers and auditors. (Learn more in What does a chief financialofficer Do?)

An AIS helps the different departments within a company work together. Forexample, management can establish sales goals for which staff can then order theappropriate amount of inventory. The inventory order notifies the accountingdepartment of a new payable. When sales are made, sales people can enter customerorders, accounting can invoice customers, the warehouse can assemble the order, theshipping department can send it off, and the accounting department gets notified of

a new receivable. The customer service department can then track customershipments and the system can create sales reports for management. Managers canalso see inventory costs, shipping costs, manufacturing costs and so on.

The AIS should be designed to meet the needs of the people who will be using it. Thesystem should also be easy to use and should improve, not hinder, efficiency.




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Procedure and InstructionsThe procedure and instructions of an AIS are the methods it uses for collecting,storing, retrieving and processing data. These methods will be both manual andautomated, and the data can come from both internal sources (e.g., employees) andexternal sources (e.g., customers' online orders). Procedures and instructions will be

coded into AIS software; they should also be "coded" into employees throughdocumentation and training. Procedures and instructions must be followedconsistently to be effective.

To store information, an AIS must have a database structure such as structured querylanguage (SQL), a computer language commonly used for databases. The AIS will alsoneed various input screens for the different types of system users and differenttypes of data entry, as well as different output formats to meet the needs ofdifferent users and different types of information.

Data

The data contained in an AIS is all the financial information pertinent to theorganization's business practices. Any business data that impacts the company's

finances should go into an AIS. The data included in an AIS will depend on the natureof the business, but it may consist of the following:

sales orders customer billing statements sales analysis reports purchase requisitions vendor invoices

check registers

general ledger inventory data payroll information timekeeping tax information

This data can then be used to prepare accounting statements and reports such asaccounts receivable aging, depreciation/amortization schedules, trial balance, profitand loss, and so on. Having all this data in one place - in the AIS - facilitates abusiness's recordkeeping, reporting, analysis, auditing and decision-making activities.For the data to be useful, it must be complete, correct and relevant.

SoftwareThe software component of an AIS is the computer programs used to store, retrieve,

process and analyze the company's financial data. Before there were computers, AISswere manual, paper-based systems, but today, most companies are using computersoftware as the basis of the AIS. Small businesses might use Intuit's Quickbooks, SagePeachtree Accounting, or Microsoft's Small Business Accounting but there are manyothers. Small to mid-sized businesses might use SAP's Business One. Mid-sized and




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large businesses might use Microsoft's Dynamics GP, Sage Group's MAS 90 or MAS 200,Oracle's Peoplesoft or Epicor Financial Management.

Quality, reliability and security are key components of effective AIS software.Managers rely on the information it outputs to make decisions for the company, and

they need high-quality information to make sound decisions.

Information Technology InfrastructureInformation technology infrastructure is just a fancy name for the hardware used tooperate the accounting information system. Most of these hardware items are thingsa business would need to have anyway - they include personal computers, servers,

printers, surge protectors, routers, storage media, and possibly a backup powersupply. In addition to cost, factors to consider in selecting hardware include speed,storage capability and whether it can be expanded and upgraded.

A good AIS should also include a plan for maintaining, servicing, replacing and

upgrading components of the hardware system, as well as a plan for the disposal ofbroken and outdated hardware so that sensitive data is completely destroyed.

Internal ControlsThe internal controls of an AIS are the security measures it contains to protectsensitive data. These can be as simple as passwords or as complex as biometricidentification. An AIS must have internal controls to protect against unauthorizedcomputer access and to limit access to authorized users which includes some usersinside the company. It must also prevent unauthorized file access by individuals whoare allowed to access only select parts of the system. (For more on personal safety,check out Protecting Your Financial Documents From Disaster)

An AIS contains confidential information belonging not just to the company but alsoto its employees and customers. This data may include Social Security numbers,salary information, credit card numbers, and so on. All of the data in an AIS shouldbe encrypted, and access to the system should be logged and surveilled. Systemactivity should be traceable as well.

An AIS also needs internal controls that protect it from computer viruses, hackersand other internal and external threats to network security . Furthermore, it mustbe protected from natural disasters and power surges that can cause data loss.(Learn how you can get a job in this field, read A Guide To Careers In Accounting

Information Systems)




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How Accounting Information System can be helpful for Managers?

The Accounting Information System can be helpful for managers in the followingways;

1. Define accountings, identify business goals and activities, and describe therole of accounting in making informed decisions.

2. Identify the many users of accounting information in society.3. Explain the importance of business transactions, money measure, and separate

entity to accounting measurement.4. Describe the corporate form of business organization.5. Define financial position, state the accounting equation, and show how they

are affected by simple transactions.6. Identify the four financial statements.7. State the relationship of generally accepted accounting principles (GAAP) to

financial statements and the independent CPAs report, and identify the

organizations that influence GAAP.8. Define ethics and describe the ethical responsibilities of accountants.

Define accountings, identify business goals and activities, and describe the roleof accounting in making informed decisions.

Accounting provides a vital service by supplying the information decisionmakers need to make reasoned choices among alternative uses of scarceresources in the conduct of business and economic activities.

Accounting is a link between business activities and decision makers.

Accounting measures business activities by recording data aboutthem for future use.

The data are stored until needed and then processed to becomeuseful information.

1. Profitability.

A business must take in enough money to pay all the costs of doing business, with

enough left over as profit for the owners to want to stay in business.

2. Liquidity.

A business must have enough cash available to pay debts when they are due.




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Identify the many users of accounting information in society.

Requires financial information to carry out its basic functions.

1. Financing the business.

2. Investing the resources of the business.

3. Producing goods and services.

4. Marketing goods and services.

5. Managing employees.

6. Providing information to decision makers.




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Explain the importance of business transactions, money measure, and separateentity to accounting measurement.

Business transactions as the object of measurement.

Business transactions are economic events that effect the financial position of

a business entity.

o Transactions are the raw material of accounting reports.

o Transactions must relate directly to a business entity.

Money Measure.

o Money is the only factor common to all business transactions.

o The monetary unit a business uses depends on the country in which the

business resides.

o Exchange rates translate one currency to another.

The Concept of Separate Entity.

o A business is a separate entity, distinct from its creditors and customers

and from its owner or owners.

Describe the corporate form of business organization.

Sole Proprietorship.

Partnership.

Corporation.

Formation of a Corporation.

Organization of a Corporation.o Stockholders.

o Board of Directors.

o Management.

Define financial position, state the accounting equation, and show how they areaffected by simple transactions.

Assets are economic resources owned by a business that are expected to

benefit future operations.

o Monetary items.o Nonmonetary physical things.

Liabilities are the present obligations of a business to pay cash, transfer

assets, or provide services to other entities in the future.

Owners equity represents the claims by the owners of a business to the assets

of the business.




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Owners equity is the residual equity that remains after deducting liabilities

from assets.

OE = Assets - Liabilities.

Assets = Liabilities + SE.

SE = Contributed Capital + Retained Earnings.

Identify the four financial statements

Financial statements are the primary means of communicating important

accounting information to users.

Financial statements represent models of the business enterprise because

they show the business in financial terms.

Financial statements are not perfect pictures of the real thing.

Summarizes revenues earned expenses incurred over a period of time. Is considered by many to be the most important financial report because it

shows whether or not a business achieved its profitability goal of earning

an acceptable income.

Shows the changes in retained earnings over a period of time.




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http://www.accountingtools.com/cost-principlehttp://www.wisegeek.com/what-is-cost-principle.htmhttp://en.wikipedia.org/wiki/Internal_control

http://www.cliffsnotes.com/study_guide/Internal-Control.topicArticleId21081,articleId-21006.html

http://en.wikipedia.org/wiki/Cash_flow_statementhttp://www.investopedia.com/articles/04/033104.asp#axzz1bgHCriaQhttp://www.investopedia.com/terms/r/retainedearnings.asp#axzz1bgHCriaQhttp://beginnersinvest.about.com/od/analyzingabalancesheet/a/retained-earnings.htmhttp://www.ilikeinvesting.com/general-investment-articles/short-term-investments.phphttp://www.accountingtools.com/questions-and-answers/what-is-the-

differencebetween-the-periodic-and-perpetual-in.htmlhttp://basiccollegeaccounting.com/the-difference-between-periodic-inventory-system-

and-perpetual-inventory-system/http://www.investopedia.com/articles/professionaleducation/11/accounting

information-systems.asp#axzz1bgHCriaQ


http://www.cliffsnotes.com/study_guide/Internal-Control.topicArticleIdhttp://www.accountingtools.com/questions-and-answers/what-is-the-differencehttp://www.accountingtools.com/questions-and-answers/what-is-the-differencehttp://basiccollegeaccounting.com/the-difference-between-periodic-inventory-system-http://basiccollegeaccounting.com/the-difference-between-periodic-inventory-system-http://www.investopedia.com/articles/professionaleducation/11/accountinghttp://www.cliffsnotes.com/study_guide/Internal-Control.topicArticleIdhttp://www.accountingtools.com/questions-and-answers/what-is-the-differencehttp://www.accountingtools.com/questions-and-answers/what-is-the-differencehttp://basiccollegeaccounting.com/the-difference-between-periodic-inventory-system-http://basiccollegeaccounting.com/the-difference-between-periodic-inventory-system-http://www.investopedia.com/articles/professionaleducation/11/accounting


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24

M. Hammad Manzoor

508195394

# 508, 5th Floor,

Continental Trade Centre,

Clifton - 08, KARACHI. (0321-

Financial Accounting

52801

Mr. Attiq ur Rehman

H. No. A-64/4,

Lane No.02, Lalarukh

WAH CANTT. (0300-513