Summary

Summary Basic Accounting Principles

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Course
Financial and Carbon Accounting & Reporting

Institution
Imperial College London (ICL)

Book
Cornerstones of Financial Accounting (with 2011 Annual Reports

Overview Accounting, Financial Reporting, Income Statement and Balance sheet Preparing Financial Statements (The Balance Sheet Equation, Three Fundamentals of double entry bookkeeping, T-Accounts, Analysing transactions) The cash flow statement (Structure Statement of Cash Flows (IFRS), Preparatio...

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Uploaded on November 25, 2017
Number of pages 31
Written in 2016/2017
Type Summary

accounting
financial accounting
managerial accounting
financial reporting
income statement
balance sheet
cash flow statement
ratio analysis

Book Title:Cornerstones of Financial Accounting (with 2011 Annual Reports

Author(s):Jay Rich, Jeff Jones

Edition:december 2012
ISBN:9781133943976
Edition:1

Institution
Imperial College London (ICL)
Education
MSc Climate Change, Management and Finance
Course
Financial and Carbon Accounting & Reporting

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Basic accounting principles

Table of Contents
Basic accounting principles .............................................................................................. 1
Session 1: Overview Accounting, Financial Reporting, Income Statement and Balance sheet ...... 2
Session 2: Preparing Financial Statements ................................................................................ 6
The Balance Sheet Equation (The Accounting Equation) ...............................................................6
Three Fundamentals of double entry bookkeeping .......................................................................7
T-Accounts.......................................................................................................................................7
Analysing transactions ....................................................................................................................8
Session 3: The cash flow statement .......................................................................................... 9
Cash flow .........................................................................................................................................9
Structure Statement of Cash Flows (IFRS) ......................................................................................9
Preparation of Statement of Cash Flows ..................................................................................... 10
Session 4: Annual Report and Ratio Analysis ........................................................................... 12
Annual Report Analysis ............................................................................................................... 12
Ratio Analyses .............................................................................................................................. 14
Session 5: Managerial Accounting .......................................................................................... 16
Introduction to Management Accounting ................................................................................... 16
Different types of costs ................................................................................................................ 17
Cost behaviour: Variable and fixed costs ..................................................................................... 18
Cost Volume Profit analysis: Contribution margin ...................................................................... 19
Break even analysis / Safety margin calculations ........................................................................ 19
Target profit calculations ............................................................................................................. 20
Sales mix decisions ....................................................................................................................... 20
Session 7: Balanced Score Card, Budgeting ............................................................................. 20
Introduction ................................................................................................................................. 20
Balanced Scorecard ...................................................................................................................... 20
Budgeting ..................................................................................................................................... 22
Session 8: Limiting factors and Accounting for overheads // activity based costing .................. 24
Short term decision making: Limiting Factors ............................................................................. 24
Costing: Accounting for overhead ............................................................................................... 24
1. Absorption costing ................................................................................................................... 24
2. Activity based costing .............................................................................................................. 25
Session 9: Variance Analysis ................................................................................................... 26
Standard Costing .......................................................................................................................... 26
Variance analysis .......................................................................................................................... 26
Session 10: Capital Investment Appraisal ................................................................................ 29
Capital Investment Appraisal ....................................................................................................... 29
Payback period ............................................................................................................................. 30
Net present value ......................................................................................................................... 30
Internal rate of return .................................................................................................................. 31

,Session 1: Overview Accounting, Financial Reporting, Income Statement and Balance
sheet

What is accounting?
• Accounting is all about recording and interpreting business transactions and
providing financial information to users so they can make decisions
• Accounting provides information to a number of key stakeholders, both internally and
external.
• Its goal is to identify, measure and communicate financial information such that key
stakeholders can take informed decisions and companies can be compared.
• We distinct between financial accounting and management accounting
• Financial Accounting provides financial information on a business’s recent financial
performance targeted at external users, such as shareholders
•Backward-looking
•Double-entry bookkeeping
•Income statement, Statement of Financial Position and Statement of Cash
Flows
• Management Accounting primarily serves the internal needs of the organisation.
• Internal needs of business
• Unlike financial accounting, not required by law
• Management accounting supports short and long term decision-making

More on Financial Accounting
Regulatory framework
• The regulatory framework is the set of rules and regulations which govern
accounting practice ensuring that financial statements give a true and fair view of
the financial position and performance of the reporting entity.
o In the United Kingdom, there are two main sources of regulations
▪ Companies Acts and Financial Reporting Standards
o At international level, the International Accounting Standard Board (IASB)
provides a broad regulatory framework
▪ International Financial Reporting Standards (IFRS). These apply to all
European listed companies, including the UK

Accounting Principles
• We have these to provide transparency and accountability
• Accounting Conventions
1. Entity.
2. Monetary Measurement.
3. Historical Cost.
4. Periodicity.
• Accounting Concepts
1. Going Concern.
a. Going concern: not if we liquidate, but if the company continue running
2. Matching (accruals).
a. revenue generated and the cost to generate that revenue

, 3. Consistency.
a. one item should be treated the same way in all years: or not you will have to
explain why not (this is again, to compare)
4. Prudence.
a. be conservative: If we know something is coming (like restructuring costs) we
should use those costs, however, if there is revenue that might happen, we
should not include it.

Financial accounting major statements
- Statement of financial position (Balance sheet): Financial position (listing of assets
and liabilities) on a specific date
o 31.12 or in march

Balance sheet (limited company)
Assets
Noncurrent assets
• Tangible assets (PPE)
• Intangible assets

Current assets (benefits within next year)
• Cash
• Trade Receivable
• Inventory
• Prepaid Assets

Liabilities
Non-current liabilities (obligations after a year)
• Bank borrowings and bonds
• Other types of liabilities (deferred taxes, pensions)

Current liabilities (obligations within next year)
• Bank borrowings
• Trade payable and other payables
• Deferred revenues and other noncash liabilities

Stockholders’ Equity
Stockholders’ equity
• Issues share capital
• Share premium Account
• Retained earnings

Balance sheet equation:
Assets = Liabilities + Stockholders equity

Net assets = SH equity = assets - liabilities

• Stockholders equity is:
▪ Contributed capital (sale of shares)
▪ Common stock (par value)

, ▪ Share premium account (excess over par value)
▪ Treasury Stock (stock repurchased by company)
• Retained earnings (arises from operations)
▪ Accumulation of Net income (Revenue – Expenses) – Dividends
▪ Dividends are distributions of retained earnings to
shareholders. Dividends are not an expense. They are
recorded as a reduction of retained earnings on the
declaration date (creates a liability until payment date)
• An asset is a resource that is expected to provide future economic benefits
(i.e. generate future cash inflows or reduce future cash outflows)
▪ An asset is recognized when:
▪ It is acquired in a past transaction or exchange (already
happened)
▪ The value of its future benefits can be measured with a
reasonable degree of precision (can be measured in future)
• A liability is a claim on assets by “creditors” (non-owners) that represents an
obligation to make future payment of cash, goods, or services
▪ A liability is recognized when:
▪ The obligation is based on benefits or services received
currently or in the past (already happened)
▪ The amount and timing of payment is reasonably certain (can
be measured in future)
- Income statement (Profit and Loss account): Results of operations over a period of
time using accrual accounting (i.e., recognition income and expenses tied to business
activities)

Income statement (limited company)
Revenue (or Sales)
-/- Cost of Goods Sold
Gross Profit
-/- Operating Expenses
Operating Income
-/- Interest, Gains and Losses
Pre-tax Income
-/- Income Tax Expense
Net Income

Income statement equations:
Net Income = Revenue – Expenses

Net income is also called “earnings” or
“net profit”
• The income statement reports increase in shareholders’ equity due to operations over a
period of time (net income is added to retained earnings)
• All income statement items are based on Accrual Accounting principles
▪ Recognition of revenues and expenses are based on business activities, not cash
flows
▪ Net income ≠ Net cash flow
▪ Revenue is recognized when goods or services are provided (revenue recognition
principle).
▪ Revenues ≠ Cash inflows

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