Introduction To Accounting
Introduction To Accounting
Accounting
Credit Hours: 2
Pre-requisite: None
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Course Description
• Accounting for Managers emphasizes the interpretation
rather than the construction of accounting information
and encourages a critical, rather than unthinking
acceptance of the underlying assumptions behind
accounting. It links theory with practical examples and
case studies drawn from real-life business situations
across a range of industries.
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Course Objectives
By the end of this course, students will be able to:
•Familiarize students with the use of accounting
information in decision making.
•Acquaint learners with the skills of financial reports
analysis.
•Understand how to use accounting information in
planning and control.
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UNIT 1: Context of Accounting.
– Introduction to Accounting: Accounting, accountability and
the account.
– A short history of accounting.
– The role of management accounting.
– Recent developments in management accounting.
– Accounting and its Relationship to Shareholder Value and
Corporate Governance.
– Capital and product markets.
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UNIT 1: Context of Accounting.
– Value-based management.
– Shareholder value, strategy, and accounting.
– Company regulation and corporate governance
– Recording Financial Transactions and the Principles of
Accounting.
– Business events, transactions, and the accounting system.
– The double entry: recording transactions.
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UNIT 1: Context of Accounting.
– Extracting financial information from the accounting
system.
– Basic principles of accounting.
– Cost terms and concepts: the limitations of financial
accounting.
– Management Control, Management Accounting, and its
Rational-Economic Assumptions.
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UNIT 1: Context of Accounting.
– Management control systems.
– Management planning and control systems and
management accounting.
– Non-financial performance measurement
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UNIT 2: The Use of Financial Reports for
Decision-Making
• Constructing Financial Reports:
• International Financial Reporting Standards (IFRSs)
True and fair view.
• Framework for the Preparation and Presentation of
Financial Statements.
• Reporting profitability: The Income Statement.
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UNIT 2: The Use of Financial Reports for
Decision-Making
– Reporting financial position:
• The Balance Sheet.
• Accruals accounting.
• Depreciation.
– Reporting cash flow: The Cash Flow Statement.
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UNIT 2: The Use of Financial Reports for
Decision-Making
Interpreting Financial Reports • Activity/efficiency
and Alternative Perspectives: • Working capital
• Annual Reports • Managing receivables
• Operating and Financial • Managing inventory
Review • Managing payables
• Ratio analysis • Shareholder return
• Profitability • Interpreting financial
• Liquidity information using ratios
• Gearing
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UNIT 2: The Use of Financial Reports for
Decision-Making
– Accounting for Inventory:
• Introduction to Inventory
• Methods of costing inventory in manufacturing
• Job costing illustration
• Process costing illustration
• Long term contract costing
• Management accounting statements
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
• Accounting and Information Systems
– Introduction to accounting and information
systems
– Internal controls for information systems
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
• Cost behavior
• Cost-volume-profit analysis
• Alternative approaches to pricing
• Cost-plus pricing
• Target rate of return pricing
• Optimum selling price
• Special pricing decisions
• Transfer pricing
• Segmental profitability
• Cost classification
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Calculating product/service costs
– Shifts in management accounting thinking
– Alternative methods of overhead allocation
– Activity-based costing
– Behavioral implications of management
accounting
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Strategic Investment Decisions
• Investment appraisal
• Accounting rate of return.
• Payback.
• Discounted cash flow.
• Comparison of techniques.
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Budgeting and Budgetary Control.
• What is budgeting?
• The budgeting process
• What is budgetary control?
• Flexible budgeting
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UNIT 3: Using Accounting Information for
Decision-Making, Planning, and Control
– Variance analysis.
• Cost variances.
• Materials variance.
• Labor variance.
• Overhead variances.
• Reconciling the variances.
• Criticism of variance analysis.
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ASSESSMENT SCHEME
Presentations (group and individual) 25%
Term paper 25%
Final examination 50%
Total 100%
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Textbook
Ross S, Wester field. R., and Jaffe, J., and
Kakani, RK. (2014). Corporate Finance. 10th ed.
India: McGraw Hill
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• Ross S, Wester field. R., and Jordan, BD. (2000). Corporate Finance. 5th
ed. USA: McGraw Hill.
• Ross S, Wester field. R., and Jaffe, J., and Kakani, RK. Corporate
Finance. 10th ed. USA: McGraw Hill.
• Brealey, Myers, and Allen. (2008). Corporate Finance. 9th ed. USA:
McGraw Hill.
• Brealey, Myers, and Marcus. (2001). Corporate Finance. 3rd ed. USA:
McGraw Hill.
• Brealey, Myers, and Marcus. (2012). Fundamentals of Corporate
Finance. 7th ed. USA: McGraw Hill.
• Brealey, Myers, and Marcus. (2001). Corporate Finance. 3rd ed. USA:
McGraw Hill.
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Nature of Accounting
An information system whose purpose is to . . .
Identify Measure
Collect Communicate
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Nature of Accounting . . .
• All organizations . . .
– Large or small;
– Manufacturing, merchandising or service;
– Profit or nonprofit . . .
have a need for accounting information
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Nature of Financial
• Thus, Accounting
the primary role of ... .
accounting is to
provide useful information for the decision
making needs of:
• investors, lenders, owners, mangers, and
others both inside and outside the
company.
• However, the need of internal and external
users often differ.
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Accounting as an Aid to Decision Making
• Accounting information is useful to anyone who makes
decisions that have economic results.
• Managers want to know if a new product will be
profitable.
• Owners want to know which employees are productive.
• Investors want to know if a company is a good
investment.
• Creditors want to know if they should extend credit,
how much to extend, and for how long.
• Government regulators want to know if financial
statements conform to requirements.
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Who are the
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Accounting Environment
External Accounting Information . . .
Much of the
information is
confidential.
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Management Accounting Vs Financial Accounting
Internal Users
External Users
Managerial accounting
provides information needs Financial accounting provides
for internal decision external users with financial
makers. statements.
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Managerial vs Financial Accounting
Issue Managerial Financial
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Managerial vs Financial Accounting
Issue Managerial Financial
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Managerial vs Financial Accounting
Issue Managerial Financial
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Managerial vs Financial Accounting
Issue Managerial Financial
Business Unit Segments of the Company as a whole
business
Preparation Depends on Annually and
management needs Quarterly
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Ac c o unt ing IFR
un datio n o f S
The Fo
Systems
• Generally accepted accounting principles (GAAP) encompass the
conventions, rules, and procedures for determining acceptable
accounting practices at a particular time.
• They are pronouncements by designated authoritative bodies that
must be followed in all applicable cases.
• Accounting practices developed by respected bodies and
industries or that have evolved over time.
• International Accounting Standard Board (IASB) is primarily
responsible for evaluating, setting, or modifying IFRS.
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Type of Business Organizations
We can classify business organizations in
various types based on:
a.Ownership
b.Activities
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a. Based on Ownership
Sole
Sole Proprietorship
Proprietorship Partnership
Partnership Corporation
Corporation
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b. Activity performed
Liquidity Investing
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The three Business Activities . . .
1) Financing Activities:
Obtaining capital from owners and creditors
Repaying creditors and a return to owners.
2) Investing Activities:
Spending the capital it receives in ways that are productive
and will help the business achieve its objectives.
Buying and selling long-term assets to be used in the business.
3) Operating Activities:
Selling of goods and services to customers.
Employing managers and workers, buying and producing goods
and services, and paying taxes.
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Business Goals, Activities Cont’d)
Performance Measures:
Indicate whether or not managers are achieving the business
goals and if they are managing business activities well.
Performance measures include:
Earned income or profit
Cash flow
Ratio of expenses to revenues
Ratio of money owed to total resources controlled.
Note: Managers should understand these measures.
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ACCOUNTING PROCESS
The
The Accounting
Accounting Cycle
Cycle
Illustration
Transactions
Account Name
Debit / Dr. Credit / Cr.
Transaction #1 $10,000 $3,000 Transaction #2
Transaction #3 8,000
Balance $15,000
Account Name
Debit / Dr. Credit / Cr.
Balance $1,000
Balance
Balance Balance
Balance
Debit
Debit Credit
Credit Normal Balance
Assets Chapter
Equity
3-24
Normal Balance
Normal Balance
Chapter
Expense
3-23
Revenue
Chapter
3-25
Normal Balance
Normal Balance
Chapter
3-27 Chapter
3-26
Debit
Credit
Illustration 3-3
The equation must be in balance after every transaction. For every Debit
there must be a Credit.
Illustration 3-8
LO 4
2.
2. Posting
Posting
Expanded Example
The purpose of transaction analysis is
Cash Dividends
Debit Credit Debit Credit
100,000 9,000 5,000
12,000 6,000
5,000
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
9. October 26: Employees are paid every four weeks. The
total payroll is $2,000 per day. The pay period ended on
Friday, October 26, with salaries of $40,000 being paid.
Illustration 3-17
Oct. 26 Salaries expense 40,000
Cash 40,000
Cash Salaries Expense
Debit Credit Debit Credit
100,000 9,000 40,000
12,000 6,000
5,000
40,000
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
2.
2. Posting
Posting
10. October 31: Pioneer Advertising receives $28,000 in cash
and bills Copa Company $72,000 for advertising services
of $100,000 provided in October. Illustration 3-18
Trial Balance –
A list of each
account and its
balance; used
to prove
equality of debit
and credit
balances.
LO 4 Record transactions in journals, post to
ledger accounts, and prepare a trial balance.
4.
4. Adjusting
Adjusting Entries
Entries
Makes it possible to:
Deferrals Accruals
1. Prepaid Expenses. 3. Accrued Revenues.
Expenses paid in cash and Revenues earned but not yet
recorded as assets before received in cash or recorded.
they are used or consumed.
2. Unearned Revenues. Revenues 4. Accrued Expenses.
received in cash and recorded as Expenses incurred but not
liabilities before they are earned. yet paid in cash or recorded.
10,000
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-35
Statement
Presentation:
Advertising
supplies identifies
that portion of the
asset’s cost that
will provide future
economic benefit.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-34
Statement
Presentation:
Advertising
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Insurance. On Oct. 4th, Pioneer paid $6,000 for a one-year fire
insurance policy, beginning October 1. Show the entry to
record the purchase of the insurance.
Oct. 4 Prepaid insurance 6,000
Cash 6,000
5,500
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-35
Statement
Presentation:
Prepaid Insurance
identifies that
portion of the
asset’s cost that
will provide future
economic benefit.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Illustration 3-34
Statement
Presentation:
Insurance
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Prepaid
“Prepaid Expenses”
Expenses”
Depreciation. Pioneer Advertising estimates depreciation on its
office equipment to be $400 per month. Accordingly, Pioneer
recognizes depreciation for October by the following adjusting
entry.
Oct. 31 Depreciation expense 400
Accumulated depreciation 400
Depreciation Expense Accumulated Depreciation
Debit Credit Debit Credit
400 400
Statement
Presentation:
Accumulated
Depreciation—is a
contra asset
account.
Statement
Presentation:
Depreciation
expense identifies
that portion of the
asset’s cost that
expired in
October.
LO 5 Explain the reasons for preparing adjusting entries.
Adjusting
Adjusting Entries
Entries for
for “Unearned Revenues””
“Unearned Revenues
Receipt of cash that is recorded as a liability because the revenue has not
been earned.
Statement
Presentation:
Unearned service
revenue identifies
that portion of the
liability that has
not been earned.
Statement
Presentation:
Service revenue
represents that
portion of the
liability that was
earned in October.
Illustration 3-34
Statement
Presentation
Illustration 3-35 LO 5
Adjusting
Adjusting Entries
Entries for
for “Accrued
“Accrued Expenses”
Expenses”
Expenses incurred but not yet paid in cash or recorded.
Adjusting entry results in:
Retained Statement
Income
Earnings of Financial
Statement
Statement Position
LO 6
6.
6. Preparing
Preparing Financial
Financial Statements
Statements
Illustration 3-35
LO 6
7.
7. Closing
Closing Entries
Entries
To reduce the balance of the income statement (revenue and expense)
accounts to zero.
LO 7
7.
7. Closing
Closing
Entries
Entries
Illustration 3-37
LO 7
8.
8. Post-Closing
Post-Closing Trial
Trial Balance
Balance
Illustration 3-38