Accounting for Executives

1
Accounting for Executives

• Week 1
• Lecture Hours 2.5 hours
• 5/11/2010 (Fri)

2
Lecturer Harris H.K. Lui MBA (Accounting and
Finance), ACCA, LLB (China Law)

• Email address hklui2007_at_yahoo.com.hk

3
Course Aims

• The module is intended for aspiring managers with
  little or no formal financial training or
  experience, whose present and future positions
  will affect the acquisition and use of business
  resources.
• This module looks at the financial aspects of
  managing business resources.
• The module will help students to understand the
  basic terminology, concepts and techniques that
  underpin both financial and management
  accounting.
• This module is designed to improve students
  understanding and use of financial information.

4
Examination Style

• Time Allowed 2 hours
• 4 Compulsory Questions on the following areas
• Budgeting
• Prepare financial statements, i.e. income
  statement and balance sheet
• Accounting ratios and interpretation
• Cost-volume-profit Analysis
• Variance analysis

5
Syllabus Content

• Introduction to accounting and finance
• The role of accounting in business.
• Who needs to use accounting information.
• The distinction between financial accounting and
  management accounting.
• Basic concepts and terms underpinning accounting
  information.
• The regulatory framework.

6
Syllabus Content

• Recording and reporting business activity
• The accounting equation.
• Recording business transactions in ledger
  accounts.
• Function of profit and loss accounts and balance
  sheets.
• Why adjustments are made to figures in the
  accounts.
• Simple profit and loss accounts and balance
  sheets for a small business.
• Using computerised systems.
• How to deal with assets, stocks and bad debts
  when recording and reporting accounting
  information.

7
Syllabus Content

• Using financial information to manage business
  resources an introduction
• Why cash management is important to an
  organisation.
• Cash flow budgets.
• The working capital cycle.
• How cost information can assist managers in
  planning and controlling the use of business
  resources.
• Costs including variable and fixed costs.
• Breakeven analysis in simple situations.

8
Syllabus Content

• An introduction to the construction and use of
  budgets in managing business resources
• Preparing budgets.
• Using budgets to control business resources.

9
Chapter 1

• Introduction of Accounting Equation and Common
  Forms of Financial Statements

10
Complete Set of Financial Statements

• A complete set of financial statements includes
  the following components under HKAS 1
• Balance sheet (statement of financial position)
• Income statement (statement of comprehensive
  income)
• Statement of cash flows
• Statement of changes in equity
• accounting policies and explanatory notes

11
CHEUNG KONG (HOLDINGS) LIMITED Consolidated
profit and loss account
12
CHEUNG KONG (HOLDINGS) LIMITED- Consolidated
Balance Sheet
13
CHEUNG KONG (HOLDINGS) LIMITED Consolidated
statement of changes in equity
14
CHEUNG KONG (HOLDINGS) LIMITED Consolidated
statement of cash flows
15
The accounting equation

• Resources in the Biz Resources supplied by the
  owner
• (e.g.Capital invested)

The amount of the resources supplied by the
owner(s) is called capital. The actual resources
that are in the business are called assets.
Asset Capital
16
The accounting equation
Asset Capital Liabilities

• It is common for the owner to obtain loans or
  other peoples resources to acquire some of the
  assets, then these loans is named as liabilities.

17
Types of Accounts

• Assets
• Land and Building Motor Vehicles
• Furniture and Fixtures
• Investment Properties
• Stock
• Debtors
• Prepayments
• Bank and Cash
• Petty Cash

Liabilities Long-term loan Debentures Trade
Creditors Utility Creditors (e.g. water service,
electricity) Accruals
Capital Capital Ordinary Shares Preference
Shares
18
Non-current vs Current Asset

• Non-current assets are those assets which are
  bought for extended use within the business
  rather than for trade/ sale.
• (e.g. Land and Building, Motor Vehicles,
  Furniture and Fixtures)
• Current assets are those assets which within a
  short period of time will change their form.
• (e.g. Stock, Debtors, Prepayments, Bank and Cash
• Petty Cash)

19
Double entry system for assets, liabilities and
capital

• Title of account
• Debit side Credit side

Assets a/c Debit, Credit Liabilities
a/c Credit, Debit Capital a/c Credit,
Debit
20
Example

• Chris Black started a business with 100,000 and
  save the money into HSB Bank on 1 Aug 200X.
• DR. CR.
• HSB BANK 100,000
• CAPITAL 100,000
• HSB Bank

21
Example
Capital
22
Characteristics of Accounting Equation

• The accounting equation has the following
  important characteristics
• The value of the assets is the same as the value
  of the liabilities.
• Both sides of the equation are of equal value,
  i.e. they balance.
• The assets of a business must come from
  somewhere in fact, they are financed by the
  liabilities of the business in this case the
  owners investment.
• The application of the business entity concept
  distinguishes the owner and the business and thus
  the business incurs a liability back to the owner
  of the invested capital

23
Example (cont)

• Chris further borrow 150,000 from the bank as
  the resources of the company. This bank loan is a
  liability of the business, but at the same time
  the asset has increased by 150,000. The
  financial position of the business can now be
  represented in the accounting equation as
  follows
• Dr. Cr.
• Bank 150,000
• Long-term liabilities/ Loan 150,000

24
Example (cont)
Chris Black carried out the following
transactions during the first week of trading.
He 1 Purchased a motor vehicle for 15,000
paying by cheque. 2 Withdrew 1,000 from the bank
for use as cash float. 3 Purchased shop premises
for 60,000 paying by cheque.
25
(No Transcript)
26
Example (cont)

• Transaction 1
• 100,000 (owner) 150,000 (debt) 235,000
  (bank) 15,000 (vehicle)
• 100,000 (owner) 150,000 (liabilities)
  250,000 (assets)
• Transaction 2
• 100,000 (owner) 150,000 (debt) 234,000
  (bank) 15,000 (vehicle) 1,000(cash)
• 100,000 (owner) 150,000 (liabilities)
  250,000 (assets)
• Transaction 3
• 100,000 (owner) 150,000 (debt) 174,000
  (bank) 60,000 (premises) 15,000 (vehicle)
  1,000 (cash)
• 100,000 (owner) 150,000 (liabilities)
  250,000 (assets)
• Note that following all these transactions the
  accounting equation is still in balance.

27
Capital

• The initial cash put in by the owner is called
  the capital. Capital is a liability of the
  business to the owner. The size and value of this
  initial capital may increase over the life of the
  business. The capital can increase in at least
  two ways
• 1 The owner can put in more of their own money
  into the business. The new funds increase the
  capital of the business.
• 2 The business itself can generate additional
  capital by selling goods or services at a profit.
  This profit is earned on behalf of the owner by
  the business. The profit belongs to the owner
  and, provided it is not taken out of the business
  by the owner, will increase the capital element
  of the accounting equation. These profits are
  called retained profits.

28
Liabilities

• Liabilities are the debts of the business. They
  represent what the business owes to external
  parties other than the owner. The external
  liabilities or obligations, called the creditors
  of a business, may be classified according to the
  time period within which they have to be settled.
  Thus there are
• Long-term liabilities Liabilities which fall due
  for payment after one year or longer.
• Current liabilities Liabilities which fall due
  for payment within one year, including that part
  of the long-tem loans due for repayment within
  one year.

29
Example (cont)
30
Intangible assets

• Assets that are not physically exist, the owner
  of it can derived economic benefits from the use
  of it.
• Example
• Patents where the governments grants the patent
  owner the exclusive right for a period of years
  to produce and sell an invention such as a mini
  music system, personal disc assistant (PDA).
• Trademarks or brand names are the distinctive
  identifications by which customers recognise a
  product or service, for example the logos of
  Heinz, Coca Cola or AOL.

31
Balance Sheet (Statement of Financial Position)

• The balance sheet (or statement of financial
  position) is a development of the accounting
  equation. The balance sheet has the primary
  purpose of reporting the financial position of an
  organisation at a single point in time.
• Recall the accounting equation we have learnt-

Fixed assets Current assets - Current
liabilities Long Term liabilities Initial
capital Retained profits
32
Pro forma

• XXX Company Balance Sheet as at 31-Dec-200X
• Fixed Assets
• Premises X,XXX
• Vehicles X,XXX
• X,XXX
• Current Assets
• Bank XX,XXX
• Cash XX,XXX XX,XXX
• Less Current liabilities (X,XXX)
• Net Current Assets
• Less Long-term liabilities
• Bank loan (XX,XXX)
• X,XXX
• XXX,XXX
• Capital XXX,XXX
• Add Retained Profits (or Less Accumulated
  loss) XX,XXX
• XXX,XXX

33
Example (cont)

• Chris Black Balance Sheet as at the end of week 1
• Non-current Assets
• Premises
• Vehicles
• Current Assets
• Bank
• Cash
• Less Current liabilities
• Net current assets
• Less Long-term liabilities
• Bank loan ( )
• Capital
• Add Retained Profits

34
Stock and Trading Profit

• Chris Black buys and sells computers. Computers
  are the goods the business buys with the
  intention of reselling. These are called stocks.
  In order to start, Chris Black decides in week 2
  of trading to purchase 50,000 of computers on
  credit. This activity does not generate any
  profit as the transaction is only increasing the
  current asset stock and creating a creditor, or
  current liability, of 50,000.
• Dr. Cr.
• Stock 50,000
• Creditors/ Trade payables 50,000
• After entering the above transaction into the
  book of Chris the revised balance sheet should
  appears as

35
Example (cont)
36
Example (cont)

• During the third week of trading Chris Blacks
  computers, which cost 10,000, were sold for
  14,000. The customers all paid by cheque.
• The profit Chris made
• Sales - Cost of Goods Sold Profit
• 14,000 - 10,000 4,000
• Stock decreased by 10,000
• Bank increased by 14,000
• Retained Profit increased by 4,000

37
(No Transcript)
38
Trade on credit

• During week 4, Chris sells computers costing
  6,000 for 11,000 but the customer was granted
  30 days credit. He further paid wages 500 by
  cheque.
• Profit on this transaction 11,000 - 6,000
  5,000
• New retained profits 4,000 5,000 9,000
• The wages paid reduce the profits by 500
• Retained profits 9,000 - 500 8,500
• Other affected account balance
• Stock decreased by 6,000
• Bank decreased by 500
• Debtors Increased by 11,000

39
(No Transcript)
40
Profit and Loss Account (Income Statement)

• Pro forma
• Chris Black Trading ,Profit and Loss Account for
  the month ended 31-Jan-200X
• Sales X,XXX
• Less Cost of goods Sold
• Opening Stock XXX
• Add Purchases XXX
• Less Closing Stock (XXX)
• Cost of goods sold (XXX)
• Gross Profit X,XXX
• Less Expenses
• Wages XXX
• Electricity XXX
• Insurance XXX
• Rent and rates XXX XXX
• Net profit X,XXX

41
Example (cont)

• Chris Black Trading ,Profit and Loss Account for
  the month ended 31-Jan-200X
• Sales
• Less Cost of goods Sold
• Opening Stock
• Add Purchases
• Less Closing Stock ( )
• Cost of goods sold ( )
• Gross Profit
• Less Expenses
• Net profit