Financial Accounting with International Financial Reporting Standards
Financial Accounting 1 (FA1) class notes from lectures given by Victor Maas. The notes are 59 pages and includes all the lectures covered in the course 6011P0224Y at UvA.
financial accounting with international financial reporting standards
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Weitere Zusammenfassungen für
FAC2601 Assignment 4 Semester 2 2024
FAC2601 Assessment 3 Semester 2 2024
Accounting Categories (Debit and Credit Balances) - Financial Accounting (FAC)
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Universiteit van Amsterdam (UvA)
Business Administration
Financial Accounting 1 For Business (6011P0224Y)
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Financial Accounting with International Financial Reporting Standards
Lecture 1: Introduction ___________________________________________________________________ 2
Lecture 2: The Recording Process ___________________________________________________________ 4
Lecture 3: The Accounting Cycle ____________________________________________________________ 7
Lecture 4: Accounting for Merchandising Operations __________________________________________ 12
Lecture 5: Inventories ___________________________________________________________________ 17
Lecture 6: Cash and Receivables __________________________________________________________ 20
Lecture 7: Non-Current Assets ____________________________________________________________ 26
Lecture 8: Liabilities ____________________________________________________________________ 32
Lecture 9: Equity and the Structure of Corporations ___________________________________________ 39
Lecture 10: Investments (Financial Assets) __________________________________________________ 44
Lecture 11: A Closer Look at Other Financial Statements, Including the Statement of Cash Flows _______ 49
Lecture 12: Financial Statement Analysis ____________________________________________________ 55
,Financial Accounting with International Financial Reporting Standards
Lecture 1: Introduction
• Accounting is a way of systematically tracking everything that goes on in an organisation and to be
able to know at any point in time what the value of the organisation is.
o Accounting: identifying, recording and communicating an organisation’s economic events
to interested users.
• Organisations that use accounting → companies (from sole proprietorship to huge conglomerates),
non-profit organisations, government organisations
• Sole proprietorships – legally there is no difference between the owner and the company
o No distinction between private money and company money
o Proprietors have unlimited liability for all debts of their company
o Profit is private incomes
• Partnerships – two owners
o Common in professional services (lawyers, medics, accountants)
• Corporations – there is a separation between ownership and management and decision-making
rights
o Private corporation – few owners and certain regulations about selling shares
o Public corporation – everyone and anyone can buy and sell ownership shares
o Corporation is a legal entity → it can own things and owe things
▪ The corporation can buy a good and borrow money from a bank
o Formal separation of ownership and decision making
o A corporation is owned by one or more owners
▪ Owners have limited liability
▪ Each owner owns a percentage of the corporation
▪ Owners can be humans or other corporations
▪ Ownership shares can be transferred
o Owner(s) of corporation own(s) corporation which owns things corporation owns (assets)
o Owner(s) of corporation employ(s) managers who buy and sell corporation’s assets
o Owners of the corporation are not necessarily actively involved in decision making
o Owners (shareholders) invest their money in the corporation with the expectation of
receiving a positive return
o Owners want periodic information about what their share of the corporation is worth
▪ At least once per year; corporations are required to publish an annual report
• The main objective of the company is to create value for the owner
o The value of a company to its owner(s) is called equity
o Note that an increase in equity, is income to the owner
o The value of a corporation to its owners = what the corporation owns – what it owes
• How does the owner know how much value, if any, has been created?
o Necessary to have a system that systemically tracks all the company’s events
• The value of a company after transactions (example: Spicemeup.nl)
o When owner started the company → €25,000 CASH
o Transactions
▪ Storage rent: - €6,000 CASH
▪ Website (made by brother): - €2,000 CASH
▪ GWE expenses: - €4,000 CASH
▪ Computer equipment: - €5,000
▪ Hot sauce: - €10,000
▪ Sold hot sauce that was purchased for €5,000: + €22,000
o What does the owner own now?
▪ Computer equipment, worth €5,000
▪ Hot sauce, worth €10,000 - €5,000 = €5,000 (sold half of the hot sauce)
,Financial Accounting with International Financial Reporting Standards
▪ Website, (subjectivity involved in worth) → €0?
o Cash: €25,000 – 6,000 – 2,000 – 4,000 – 5,000 – 10,000 + 22,000 = €20,000
o What is the value of the firm after one year?
▪ Cash + assets = €20,000 + 5,000 + 5,000 = €30,00
▪ Increase in equity of €5,000
o Ambitious plans and therefore needs €80,000 extra in cash to finance growth plans
▪ One opportunity to start a corporation → this way he can share ownership of the
company with outsiders
▪ The ownership of the new corporation is split in 1,000 shares
• Tom Tabasco, his parents, and an investment firm own Spicemeup.nl BV
which in turn owns cash, equipment and hot sauce
▪ Value of the new corporation = €110,000
• Computer equipment, worth €5,000
• Hot sauce, worth €5,000
• Cash, €20,000 + €80,000 (from investors) = €100,000
▪ So, €110,,000 = €110 per share (and investors bought it for €100 per share)
o After another year the corporation has the following assets
▪ €75,000 cash + equipment worth €40,000 + inventory worth €10,000
▪ In addition, it still needs to pay €5,000 to a supplier in Costa Rica
▪ Value = €75,000 + €40,000 + €10,000 - €5,000 = €120,000
• So, €120 per share
• A euro invested in this corporation has generated a return of 9.09%
• The accounting equation: assets = liabilities + equity
o Assets → what the organisation owns
▪ E.g. cash, inventory, equipment, machines, buildings, patents (exclusive rights),
trademarks, accounts receivable (amounts to be received from customers)
o Liabilities → what the organisation owes
▪ E.g. bank loans, bonds, accounts payable (amounts owed to suppliers), unpaid
salaries (amounts owed to employees), unpaid taxes (amounts owed to the tax
authorities)
o Equity → the value of the corporation to its owners
▪ Equity = assets – liabilities
▪ This equation always holds for any firm at any point in time
▪ The corporation’s equity changes as the corporation does things
• The corporation’s operations affect what it owns and what it owes
o Equity only changes if the total value of what it owns and what it
owes changes
▪ Equity increases when there are revenues or investments by shareholders
▪ Equity decreases when there are expenses or dividends paid to shareholders
o The expanded accounting equation: A = L + SC + ∑(REV – EXP – DIV)
• Economic events → external and internal transactions that affect what the organisation owns
(assets), and/or what the organisation owes (liabilities)
o This includes transactions that do and transactions that do not affect equity
▪ Changes in the value of the firm and changes in how this value is invested in assets
and liabilities
• Company activities result in revenues and expenses
o Revenues: increases in the value of the firm due to the firm’s operations
▪ Common sources → sales, fees, interest, etc.
o Expenses: decreases in the value of the firm due to the firm’s operations; the cost of assets
consumed or services used in the process of earning revenue
▪ Common sources → salaries, rent, utilities, materials, etc.
• Net income: the difference between the revenues and expenses in a period
, Financial Accounting with International Financial Reporting Standards
o The change in the value of a company’s equity in the period due to the company’s
operations in that period
o Total revenue > total expenses → net income
o Total revenue < total expenses → net loss
• The value of a corporation’s equity can change in two different ways
o Operations → daily-basis
▪ Revenues and expenses resulting in a net income (or a net loss)
o Transactions with owners → infrequent
▪ Shareholders can invest in the corporation (buy shares)
▪ Shareholders can be paid by the corporation (dividends)
• Two main components of owner’s equity
o Share capital-ordinary (“paid-in capital”) → old equity → invested by shareholders
▪ Amount that shareholders have invested in the corporation
o Retained earnings → new equity → generated by operations
▪ Income from previous periods not (yet) paid out as dividends
▪ The sum of all the revenues minus all the expenses since the firm was established,
minus what has been paid out in the form of dividends.
• Bookkeeping: the process of identifying and recording transactions
o Each transaction has a dual effect on the accounting equation
• Interested users in accounting information
o Owners, potential owners, creditors (e.g. banks), suppliers, customers, non-profit
organisations, government agencies (Chamber of Commerce, tax authorities), managers
and employees
• Types of accounting
o Identifying and recording economic events and communication information to
▪ Users outside the organisation (including owners) → financial accounting
▪ Users inside the organisation → management accounting
o Financial accounting is subject to laws, regulations and standards
▪ Management accounting is not
▪ In most countries, organisations are required by law to periodically publish specific
financial statement for outside users (at least annually in “annual reports”)
o Financial statements
▪ Annual reports contain several financial statements
• Statement of financial position/ balance sheet
• Income statement
• Comprehensive income statement
• Retained earnings statement
• Statement of cash flows
o Management accounting reports
▪ In most large companies, units and divisions also produce financial statements,
which are submitted to company headquarters
▪ Company accountants (“controllers”) produce all sorts of other reports for
managers (ad hoc)
• Firms need to adhere to the International Financial Reporting Standards (IFRS)
Lecture 2: The Recording Process
• The accounting equation: assets = liabilities + equity
o assets = liabilities + (share capital–ordinary + retained earnings)
o assets = liabilities + (share capital–ordinary + revenues – expenses – dividends)
• Two Main Financial Statements
o Statement of Financial Position (aka. Balance Sheet)
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