Overview of Accounting Environment and Financial Statements - PowerPoint PPT Presentation

About This Presentation

Overview of Accounting Environment and Financial Statements


Overview of Accounting Environment and Financial Statements Aim of the Accounting Information accounting is an information system that measures, processes and ... – PowerPoint PPT presentation

Number of Views:331
Avg rating:3.0/5.0
Slides: 51
Provided by: Adm9100


Transcript and Presenter's Notes

Title: Overview of Accounting Environment and Financial Statements

Overview of Accounting Environment and Financial
Aim of the Accounting Information
  • accounting is an information system that
    measures, processes and communicates financial
    information of an economic entity to the decision
  • measurable
  • systematic
  • financial statements and other financial reports
  • economic entity is an economic organization that
    acts independently
  • business entity is an economic entity that sells
    goods or provides services

Environment of a Business Organization
General Environment of Businesses
Task Environment of Businesses
Business Language
Users of Accounting Information
Internal Users Top management Department managers External Users Users with direct financial interest Users with indirect financial interest
  1. creditors investors
  2. government regulatory agencies labor unions
    financial advisors brokerage firms auditors
    lawyers consumer groups and academicians
  • executive officers

Objective of Financial Statements
  • the objective of financial statements is to
    provide information to users to help them in
    their economic decisions
  • the financial statements are expected to provide
    information about the future cash flows of an
    entity, its financial structure, profitability
    and liquidity, and its financial position and
    changes in financial position
  • financial statements provide information about
    assets, liabilities, revenues, expenses and cash

Business Activities
Financing Activities
  • initially - funds to setup a business
  • in later periods funds to run operations and to
  • obtaining such funds either from external or
    internal sources

Funds obtained from creditors
shareholders Funds provided to payment of
payment of
interest dividends
of debts Cash management
Investing Activities
  • Spending the funds obtained effectively and
  • involve purchase and sale of
  • buildings, machinery or other investment
    instruments such as government bonds, treasury
  • extending loans to other companies
  • are expected to contribute directly or indirectly
    to the profit maximization and solvency goals of
    the business

Operating Activities
  • involve the daily activities of the entities to
    run the business
  • include
  • sales and marketing of the goods sold and
    services provided
  • production
  • purchasing merchandise and inventory items
  • managing human resources
  • effective and efficient management of operating
    activities needed to achieve profitability and

Financial Statements
  • All financial statements are interrelated because
    each statement provides information about a
    different aspect of the same entity
  • financial statements
  • balance sheet
  • income statement
  • the cash flow statement
  • statement of changes in equity
  • Notes to the financial statements accounting
    policies and explanatory notes about various items

Financial Statements
  • balance sheet provides information about the
    financial position or the resources available and
    the claims on these resources
  • income statement provides information about how
    well these resources are used to generate income
    in a given period
  • cash flow statement provides information about
    the movement in the cash and cash equivalents in
    a given period
  • both the income statement and the balance sheet
    are prepared on accrual basis
  • the cash flow statement is prepared on cash basis
    of accounting
  • in order to meet the objective of financial
    statements, certain assumptions and qualitative
    characteristics are defined in the framework by

Balance Sheet
  • The main objective -to fairly disclose the
    financial position of a company at a certain date
  • a balance sheet is made up of assets, liabilities
    and owners' equity sections
  • IAS No.1 requires that the balance sheets should
    give the name of the company, the date it is
    prepared for, and the monetary unit and the level
    of precision adopted e.g. stated in thousands of

Balance Sheet or Statement of Financial Position
  • As of a specific date
  • The amount of resources owned by a company in
    order to run business and
  • How these resources were funded
  • Assets
  • Liabilities
  • Owners or Shareholders Equity depending on
    the formation of business

Sections of Balance Sheet
  • Current AssetsExpected to be converted into cash
    within the normal operating cycle or held for
    resale purposes
  • Assets that are kept on hand for a short period
    and are expected to be converted into cash within
    the twelve months following the balance sheet
  • Assets that are held primarily for the purpose of
    being traded, and
  • Unrestricted cash and cash equivalents
  • Long-term assets Assets that the entity expects
    to use longer than one year or the operating
    cycle purpose of providing resources for the
    operations of an entity in the future

Any liability for which the amount can reasonably
be estimated and with known payment date should
be disclosed in the liabilities section of the
balance sheet Any liability with uncertain
payment dates and amounts should be disclosed in
the notes to the financial statements Liabilities
to various entities or groups such as the
creditors, employees and customers should be
clearly labeled and disclosed Classified as short
and long-term- Current liabilities include
amounts with determinable amounts and payment
dates that are within the next year Long-term
liabilities are usually debts incurred by the
entity for the purpose of financing the
operations and investments
Shareholders Equity
includes the amounts invested in the business by
the founding owners or investors, the earnings
(losses) that are retained in the business from
previous years income (losses) current year
income or loss either separately or within
retained earnings
Liabilities and Shareholders Equity
(No Transcript)
Income Statement
  • summarizes the revenues and expenses of an entity
    for a certain period in time
  • reveals the results of operations during a period
  • shows whether an entity is successful in
    achieving the goal of profitability

Income Statement
  • flow statement reflecting the performance of a
    company in terms of utilizing the resources in a
    given period
  • provides information about the revenues and the
    related expenses in a given period, as well as
    the losses incurred in the same period
  • The bottom line figure of the income statement is
    the profit or income of the period

Sections of Income Statement
  • Revenues from ordinary activities of an entity
    and the related expenses are reported in
    accordance with the matching principle
  • classified according to the function, such as
    cost of goods sold or according to the nature of
    the expense
  • reported in a separate section that reports the
    results of the ordinary activities.
  • The presentation and disclosure of discontinued
    operations- the post-tax income or loss of the
    segment until disposition and the post-tax gain
    or loss of disposing the segment is presented in
    the income statement as separate line items

(No Transcript)
Cash Flow Statement
  • deals with cash in-flows and out-flows company
    resulting from operating, financing and investing
    activities for a specific period
  • presents information regarding the goal of

Cash Flow Statement
  • shows the amount of cash generated through the
    three main activities of any entity
  • Financing
  • Investing
  • Operating
  • a cash flow statement has also three sections
    that parallel the main activities.

(No Transcript)
Statement of Changes in Equity
  • shows the amounts invested by the owners in a
    given period, as well as the movements in the
    shareholders equity accounts
  • main purpose of the statement is to present all
    the changes that affected the shareholders
    equity in a period
  • movements in the reserve accounts are based on
    the profit appropriation of the prior period
  • retained earnings column in the statement
    reflects the net of prior period income and

(No Transcript)
Statements of a single company
Auditing and Auditors Opinion
  • Independent audit of financial statements
  • the examination of the financial statements,
    accounting system and internal controls, and the
    accounting records of a company
  • purpose of an independent audit is to express an
    opinion on the financial statements-
  • whether they are prepared in accordance with the
    generally accepted accounting principles
  • whether they fairly present the financial
    position of the company
  • auditors report implies that the financial
    statements are free of material misstatements

Board of Directors XYZ Corporation We have
audited the accompanying balance sheets of XYZ
Corporation as of 31 December 2005 and 2004, and
the related statements of income, shareholders
equity and cash flows for the years then ended.
These financial statements are the responsibility
of the Companys management. Our responsibility
is to express an opinion on these financial
statements based on our audits. We conducted our
audits in accordance with generally accepted
auditing standards. Those standards require that
we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements are free of material misstatement. An
audit includes examining, on a test basis,
evidence supporting the amounts and disclosures
in the financial statements. An audit also
includes assessing the accounting principles used
and significant estimates made by the management,
as well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion. In our opinion, the financial
statements referred to above present fairly, in
all material respects, the financial position of
XYZ Corporation at 31 December 2005 and 2004, and
the results of its operations and its cash flows
for the years then ended, in accordance with
International Financial Reporting Standards as
published by the International Accounting
Standards Board. Signature of the Independent
Auditor Date and Place of the Report
Ethics in Accounting
  • moral principles that an individual bases his/her
    behavior on
  • should the project manager give away bribes if
    the competitors are also bribing?
  • if an accountant knows that a product is
    environmentally hazardous although it is not
    illegal, should she or he report it to the
    authorities even if s/he knows that she might
    lose her job?
  • the ethics committee is working on the
    professional rules of conduct

Quality of Earnings
  • Having stable and recurring basic revenue
    generating activities
  • using consistent estimates and rules High same
    methods of estimation and rules
  • proximity of revenue recognition and cash
  • High when revenue recognition and cash
    collection are close
  • High quality earnings are presumed to be fair
    representations of the economic performance of
    the firm
  • Low quality earnings overstate fair earnings

What will affect Quality of Earnings?
  • Managers discretion in measuring and reporting
    earnings in
  • Choosing among alternative accounting principles
  • Making estimates
  • Timing transactions in order to control

Hypothetical Classification of Accounting Systems
Exh. 11.3
Regulatory Bodies
  • National
  • Capital Markets Board (CMB)
  • Ministry of Finance
  • Turkish Accounting Standards Board (TASB)
  • TURMOB (Union of Chambers of Certified Public
    Accountants of Turkey)
  • International
  • International Federation of Accountants
  • International Accounting Standards Board-
    International Financial Reporting Standards
  • Financial Accounting Standards Board (FASB)
  • Federation of European Accountants (FEA)

  • Commercial Code of 1850 was a translation of the
    French Commercial Code
  • formed the first accounting regulation in Turkey
  • second Commercial Code was enacted in 1926
  • code was based on the German commerce and company
    laws that also regulated the accounting practices
  • accounting system has been heavily influenced by
    the American system or Anglo-Saxon system since
    the beginning of the 1960's

Accounting in Turkey
  • The law of Istanbul Stock Exchange (ISE) in
    1984, but full operations started in 1986
  • Foundation of the Capital Markets Board (CMB)
    and the Istanbul stock exchange, and the increase
    in foreign investments advanced the development
    of the accounting and auditing standards
  • Increase in joint ventures and foreign trade led
    to establishment of offices of the then-"Big
    Eight" accounting firms in Turkey
  • As a result of these developments, large private
    enterprises started to report their financial
    statements in accordance with the International
    Accounting Standards in addition to national
    reporting requirements

Accounting in Turkey
  • The first set of financial accounting standards
    for the publicly owned and/or traded companies
    was developed in January 1989 by the CMB to be in
    effect for the fiscal years that start on or
    after January 1, 1989
  • However, accounting standards used by the
    family-owned or small to medium sized companies
    was, and to some extent still is, treated as
    identical with tax accounting

Uniform Chart of Accounts
  • In 1992, Ministry of Finance organized a
    committee to instigate the accounting principles
    and a uniform chart of accounts that would be
    used by all companies
  • The Ministry published the committee's report in
    a communiqué on December 26, 1992 establishing
    the principles and the uniform chart of accounts
    to be in effect starting January 1,1994
  • All companies except banks, brokerage firms, and
    insurance companies are required to conform
  • Banks are subject to accounting rules set by the
    Central Bank of Turkey and Banking Regulation and
    Supervision Agency, and brokerage and insurance
    firms comply with the CMB rules.

Turkish Accounting Standards Board
  • In February 1994, Turkish Accounting and Auditing
    Standards Board (TAASB) was formed
  • mission to develop accounting and auditing
  • As of January 1, 2002, TAASB prepared 19
    accounting standards under the name of Turkish
    Accounting Standards (TAS) that were published by
    TURMOB (Union of Chambers of Certified Public
    Accountants of Turkey)
  • standards were not widely applied by the Turkish
    companies and the Board was dissolved and
    re-formed as the Turkish Accounting Standards
    Board (TASB) under the Prime Ministry in April

Regulatory Environment
  • the Ministry of Finance's regulation of 1992, the
    CMB rules, the Commercial Code and the Procedural
    Tax Law, Banking Regulation and Supervision
    Agency and the Central Bank regulations
  • All profit oriented companies -The Commercial
    Code and the Procedural Tax Law and Uniform
    Chart of Accounts
  • Listed companies and financial intermediaries
    Uniform Chart of Accounts, Commercial Code and
    Procedural Tax Law and CMB rules

Current Status
  • New CMB accounting standards in effect starting 1
    Jan 2005
  • Almost same as the IAS/IFRS
  • Traded companies are required to comply
  • TASB- officially translated the accounting
  • Turkish Commercial Code Expected to be in
    effect mid 2006

Underlying Assumptions of Financial Statements
  • Accrual Basis of Accounting
  • Continuity or Going Concern Assumption
  • Periodicity or the Time Period Assumption
  • Monetary Value or Unit-of-Measure Assumption

Underlying Concepts
  • Understandability
  • Relevance
  • Materiality
  • Reliability
  • Faithful Representation
  • Substance over Form
  • Neutrality (Objectivity)
  • Prudence (Conservatism)
  • Completeness
  • Comparability

Constraints on Relevant and Reliable Information
  • Timeliness
  • Benefit and Cost

Underlying Principles
  • Cost Concept
  • Revenue
  • Matching
  • Full Disclosure

A fellow has been learning to be a balloonist and
takes his first solo flight. Unfortunately the
wind gets up, he is blown off course and is
forced to land. He is in a paddock close to a
road but has no idea where he is. He sees a car
coming along the road and hails it. The driver
gets out and the balloonist says, "G'day mate,
can you tell me where I am?'. "Yes, of course",
says the motorist. "You have just landed in your
balloon and with this wind you have obviously
been blown off course. You are in the top paddock
on John Dawson's farm, 13.5 kilometres from
Canowindra. John will be ploughing the paddock
next week and sowing wheat. There is a bull in
the paddock. It is behind you and about to attack
you." At that moment the bull reaches the
balloonist and tosses him over the fence. Luckily
he is unhurt. He gets up, dusts himself off and
says to the motorist, "I see you're an
accountant". "Good Grief", says the other man,
"you're right. How did you know that?" "I employ
accountants", says the balloonist. "The
information you gave me was detailed, precise and
accurate. Most of it was useless and it arrived
far too late to be of any help."
Write a Comment
User Comments (0)
About PowerShow.com