ACC501 Session 1
Introduction of
Business Accounting
Assoc. Prof. Doan Anh Tuan
PhD. CPA
1
• Identify Activities & Users
• Financial vs. Managerial Accounting
Learning • IFRS
Objectives • Sustainability
• Corporate Governance
• Ethics in Financial Reporting
• Financial Statements Overview
Learning Objective 1
Identify Activities
& Users
3
Identify the Activities and Users Associated with Accounting
Accounting consists of three basic activities—it
• identifies,
• records, and Journal - Ledger - Trial Balance - Balance sheet - Income sheet - Cash flow
• communicates
the economic events of an organization to interested users.
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 4
Three Activities
The accounting process includes
the bookkeeping function.
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 5
Who Uses Accounting Data
Internal Users
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 6
Who Uses Accounting Data
External Users
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Do It 1: Basic Concepts
Indicate whether the following statements are true or false.
1. The three steps in the accounting process are identification, recording, and communication.
2. Bookkeeping encompasses all steps in the accounting process.
3. Accountants prepare, but do not interpret, financial reports.
4. The two most common types of external users are investors and company officers.
5. Managerial accounting activities focus on reports for internal users.
Solution:
1. True
2. False
3. False
4. False
5. True
LO 1 Copyright ©2018 John Wiley & Sons, Inc. 8
Learning Objective 2
Financial vs.
Managerial
Accounting
9
Financial & managerial accounting
• Financial accounting is the preparation and presentation of
financial statements to allow users to make economic
decisions about the entity
• Financial Statements are a set of statements directed
towards the common information needs of a wide range of
users (both internal and external)
• Key financial statements consist of:
• Statement of cash flows
• Balance sheet
• Income statement
10
Financial &
managerial accounting
• Management accounting provides economic information for
internal users that is then reflected in financial accounting
statements for external users
• Management accounting is predominately about planning
and decision making for future events
• Core activities include
• Formulating plans and budgets
• Providing information to be used in monitoring and
control within the entity
• Forecasting
11
Managerial vs. Financial Accounting (1 of 3)
Managerial vs. Financial Accounting (2 of 3)
Managerial vs. Financial Accounting (3 of 3)
Learning Objective 2
IFRS
15
IFRS
• IFRS are International Financial Reporting Standards (IFRS) that consist of a
set of accounting rules that determine how transactions and other accounting
events are required to be reported in financial statements. They are designed to
maintain credibility and transparency in the financial world, which enables
investors and business operators to make informed financial decisions.
• IFRS standards are issued and maintained by the International Accounting
Standards Board (IASB) (part of IFAC) and were created to establish a common
language so that financial statements can easily be interpreted from company
to company and country to country.
• List of IFRS standards from http://www.ifrs.org/issued-standards/list-of-
standards/
Use of IFRS
around the
world (2018)
Adoption of IFRS
Benefits of a
common
accounting
standard
IFRS vs. US GAAP
• The largest difference between the US GAAP (Generally Accepted Accounting
Principles) and IFRS is that IFRS is principle-based while GAAP is rule-based. Rule-
based frameworks are more rigid and allow less room for interpretation, while a
principle-based framework allows for more flexibility.
• There are pros and cons to both approaches, depending on how they are
used. For example, using a standard that fits within a “rule” but that clearly does
not represent the principle behind the standard, can be a downside of the
GAAP. While conversely, taking an overly liberal interpretation of standards is a
potential drawback to the IFRS.
Learning Objective 3
Sustainability
21
People, Planet, and Profit (Triple Bottom
Line) Insight
Beyond Financial Statements
Should we expand our financial statements beyond the income statement,
retained earnings statement, balance sheet, and statement of cash flows? Some
believe we should take into account ecological and social performance, in
addition to financial results, in evaluating a company. The argument is that a
company’s responsibility lies with anyone who is influenced by its actions. In
other words, a company should be interested in benefiting many different
parties, instead of only maximizing stockholders’ interests.
A socially responsible business does not exploit or endanger any group of
individuals. It follows fair trade practices, provides safe environments for
workers, and bears responsibility for environmental damage. Granted,
measurement of these factors is difficult. How to report this information is also
controversial. But, many interesting and useful efforts are underway.
Throughout this textbook, we provide additional insights into how companies
are attempting to meet the challenge of measuring and reporting their
contributions to society, as well as their financial results, to stockholders.
LO 5 22
“Sustainable development is development that meets
the needs of the present without compromising the
ability of future generations to meet their own needs.”
Sustainability • - Brundtland (1987)
development Brundtland, G 1987, Our Common Future: Report of
the World Commission on Environment and
Development, Oxford University Press, Oxford.
23
Definition of ESG
24
Impact of
ESG on
financials
Firm level cor = bribery = under table money
25
UN Sustainable Development Goals (SDGs)
https://sdgs.un.org/goals
26
Key global sustainability reporting framework
Copyright Eng Wan Ng FCPA 27
International Sustainability Reporting
Standards (Latest Update)
• International investors with global investment portfolios are increasingly calling for high quality,
transparent, reliable and comparable reporting by companies on climate and other environmental,
social and governance (ESG) matters.
• On 3 November 2021, the IFRS Foundation Trustees announced the creation of a new standard-
setting board—the International Sustainability Standards Board (ISSB)—to help meet this demand.
The IFRS Foundation will complete consolidation of the Climate Disclosure Standards
Board (CDSB—an initiative of CDP) and the Value Reporting Foundation (VRF—which houses the
Integrated Reporting Framework and the SASB Standards) by June 2022.
• The intention is for the ISSB to deliver a comprehensive global baseline of sustainability-related
disclosure standards that provide investors and other capital market participants with information
about companies’ sustainability-related risks and opportunities to help them make informed decisions.
Sustainability Standards | IFAC
Learning Objective 4
Corporate
Governance
29
What is corporate governance?
• A set of relationships between a company’s management, its board, its
shareholders and other stakeholders
• A structure through which the company’s objectives are set
• A means for determining how to achieve those objectives and monitor
performance
• Should provide incentives for the board and management to pursue
objectives that are in the interests of the company
• Should facilitate monitoring (e.g. by shareholders, stakeholders and
regulators)
• Refer to G20/OECD Principles of Corporate Governance - OECD
Core Elements of the OECD Principles
I. Ensuring the basis for an effective corporate governance framework
The corporate governance framework should promote transparent and fair markets, and the
efficient allocation of resources. It should be consistent with the rule of law and support effective
supervision and enforcement.
II. The rights and equitable treatment of shareholders and key ownership functions
The corporate governance framework should protect and facilitate the exercise of shareholders’
rights and ensure the equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain effective redress for violation of
their rights.
III. Institutional investors, stock markets, and other intermediaries
The corporate governance framework should provide sound incentives throughout the investment
chain and provide for stock markets to function in a way that contributes to good corporate
governance.
The OECD Principles (continued)
*IV. The role of stakeholders in corporate governance
The corporate governance framework should recognise the rights of stakeholders established by law
or through mutual agreements and encourage active co-operation between corporations and
stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.
V. Disclosure and transparency
The corporate governance framework should ensure that timely and accurate disclosure is made on
all material matters regarding the corporation, including the financial situation, performance,
ownership, and governance of the company.
VI. The responsibilities of the board
The corporate governance framework should ensure the strategic guidance of the company, the
effective monitoring of management by the board, and the board’s accountability to the company
and the shareholders.
Learning Objective 5
Ethics in
Financial
Reporting
33
The Agency Problem
• Agency relationship
• Relationship between stockholders & management
• Principal hires an agent to represent his/her interest
• Stockholders (principals) hire managers (agents) to run the company
• Agency problem
• Conflict of interest between principal and agent
Ethics in Financial Reporting
• Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG,
and other companies.
• Regulators and lawmakers concerned that economy would suffer if
investors lost confidence in corporate accounting. In response,
• Congress passed Sarbanes-Oxley Act (SOX) which took effect from
2002.
• Effective financial reporting depends on sound ethical behavior.
LO 2
Ethics Insight: Dewey & LeBoeuf LLP
I Felt the Pressure—Would You?
“I felt the pressure.” That’s what some of the employees of the now-defunct law
firm of Dewey & LeBoeuf LLP indicated when they helped to overstate revenue and
use accounting tricks to hide losses and cover up cash shortages. These employees
worked for the former finance director and former chief financial officer (C FO) of the
firm. Here are some of their comments:
• “I was instructed by the CFO to create invoices, knowing they would not be sent
to clients. When I created these invoices, I knew that it was inappropriate.”
• “I intentionally gave the auditors incorrect information in the course of the
audit.”
What happened here is that a small group of lower-level employees over a period of
years carried out the instructions of their bosses. Their bosses, however, seemed to
have no concern as evidenced by various e-mails with one another in which they
referred to their financial manipulations as accounting tricks, cooking the books, and
fake income.
Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the Alleged Fraud,” Wall
Street Journal (March 28, 2014).
Why did these employees lie, and what do you believe should be their penalty for
these lies?
LO 2 Copyright ©2018 John Wiley & Sons, Inc. 36
Professional codes of ethics
• APES110 Code of ethics for professional accountants, issued by the
Accounting Professional & Ethical Standards Board (APESB) and
established by CPA Australia and the Institute of Chartered
Accountants Australia New Zealand
• Members of the two professional bodies above MUST comply with
the code of ethics
Prepared by Nicole Beatson
Professional codes of ethics continued
• Five fundamental principles espoused in the code to guide a
member's decision making:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality
5. Professional behaviour
standard1.pdf (apesb.org.au)
Prepared by Nicole Beatson
Sarbane Oxley – key highlights
Section 302: CEOs and CFOs are responsible for accuracy and veracity of financial reports and
have noted any deficiencies in internal controls or instances of fraud.
Section 401: Firms must release financial reports with full disclosure of entire material condition of
the company, including off balance sheet liabilities and transactions.
Section 403: Principal stockholders and management must disclose any company-related
transactions.
Section 404: The CFO and CEO must personally certify that they stand behind financial reports.
Firms must establish internal financial controls and corporate officers must sign off that they have
verified the effectiveness of the controls within 90 days of publishing the annual report.
Section 409: If a firm experiences any material changes in their financial or operating conditions,
they must inform shareholders immediately, or as the act says, “on a rapid and current basis.”
Section 802: Companies can not destroy, alter, or conceal records, documents, and objects relating
to finance and business transactions - in particular, if these actions could obstruct a legal
investigation. These documents must be kept for a minimum of five years. Noncompliance could lead
to prison.
Sarbane Oxley – penalties for noncompliance
Prescribed penalties for noncompliance with SOX regulations are severe.
They include the following:
➢Delisting of stock from public stock exchanges
➢Fines of up to five million dollars
➢Invalidation of D&O insurance policies
➢Up to 20 years in prison (for CEOs and CFOs who willfully submit an
incorrect certification audit)
➢Clawback of any bonuses paid within a year of any malfeasance
Learning Objective 6
Financial
Statements
Overview
41
Financial Statements
First Question
Net income will result during a time period when:
A. assets exceed liabilities.
B. assets exceed revenues.
C. expenses exceed revenues.
D. revenues exceed expenses.
LO 5 42
Financial Statements
First Answer
Net income will result during a time period when:
A. assets exceed liabilities.
B. assets exceed revenues.
C. expenses exceed revenues.
D. Answer: revenues exceed expenses.
LO 5 43
Financial Statements
Income Statement and Retained Earnings Statement
Net income is
needed to
determine the
ending balance
in retained
earnings.
LO 5 44
Financial Statements
Retained Earnings Statement and Balance Sheet
Balance in
retained
earnings is
needed in
preparing the
balance sheet.
LO 5 45
Financial Statements
Balance Sheet and Statement of Cash Flows
Balance sheet
and income
statement are
needed to
prepare
statement of
cash flows.
LO 5 46
Income Statement
• Reports the profitability of the company’s operations over a
specific period of time.
• Lists revenues first, followed by expenses.
• Shows net income (or net loss).
• Revenue – Expenses = Net Income / (Loss)
• Does not include investment and dividend transactions
between the stockholders and the business.
Alternative Terminology
The income statement is sometimes referred to as the
statement of operations, earnings statement, or profit and loss
statement.
LO 5 47
Retained Earnings Statement
• Reports the changes in retained earnings for a specific
period of time.
• The time period is the same as that covered by the
income statement.
• Information provided indicates the reasons why
retained earnings increased or decreased during the
period.
LO 5 48
Balance Sheet
• Reports the assets, liabilities, and stockholders’ equity
at a specific date.
• Lists assets at the top, followed by liabilities and
stockholders’ equity.
• Total assets must equal total liabilities and
stockholders’ equity.
• Total assets = total liabilities + shareholders’ equity
• Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or
year-end).
LO 5 49
Statement of Cash Flows
• Information on the cash receipts and payments for a specific
period of time.
• There are 3 components of cash flows: operating, investing and
financing.
• Answers the following:
o Where did cash come from?
o What was cash used for?
o What was the change in the cash balance?
Helpful Hint
The income statement, retained earnings statement, and
statement of cash flows are all for a period of time, whereas the
balance sheet is for a point in time.
LO 5 50
Cash Flow from Operations
Operations
To calculate cash Net Income $86
flow from operations, Depreciation 90
Deferred Taxes 13
start with net income,
Changes in Current Assets and Liabilities
add back non-cash Accounts Receivable -24
items like Inventories 11
Accounts Payable 16
depreciation and Accrued Expenses 18
adjust for changes in Other -8
current assets and Cash Flow from Operating Activities $202
liabilities (other than
cash).
Cash Flow from Investing
Cash flow from Acquisition of fixed assets -$198
investing activities Sales of fixed assets 25
Total Cash Flow from Investing Activities -$173
involves changes in
capital assets:
acquisition of fixed
assets and sales of
fixed assets (i.e., net
capital expenditures).
Cash Flow from Financing
Cash flows to and Retirement of debt (includes notes) -$73
from creditors and Proceeds from long-term debt sales 86
Dividends -43
owners include
Repurchase of stock -6
changes in equity and Proceeds from new stock issue 43
long-term debt.
Total Cash Flow from Financing $7
Financial Statements
Second Question
Which of the following financial statements is prepared
as of a specific date?
A. Balance sheet.
B. Income statement.
C. Retained earnings statement.
D. Statement of cash flows.
LO 5 54
Financial Statements
Second Answer
Which of the following financial statements is prepared
as of a specific date?
A. Answer: Balance sheet.
B. Income statement.
C. Retained earnings statement.
D. Statement of cash flows.
LO 5 55
Sources of Information
• CNBC, Yahoo Finance
• Annual reports
• Wall Street Journal
• Internet
• NYSE (www.nyse.com)
• NASDAQ (www.nasdaq.com)
• SEC
• EDGAR (Electronic Data Gathering, Analysis, and Retrieval system)
• 10K (annual report) & 10Q (quarterly) reports
Case study
After numerous campus interviews, Greg Thorpe, a senior at Great Northern College, received two office
interview invitations from the Baltimore offices of two large firms. Both firms offered to cover his out-of-
pocket expenses (travel, hotel, and meals). He scheduled the interviews for both firms on the same day, one
in the morning and one in the afternoon. At the conclusion of each interview, he submitted to both firms his
total out-of-pocket expenses for the trip to Baltimore: mileage $112 (280 miles at $0.40), hotel $130, meals
$36, and parking and tolls $18, for a total of $296. He believes this approach is appropriate. If he had made
two trips, his cost would have been two times $296. He is also certain that neither firm knew he had visited
the other on that same trip. Within 10 days, Greg received two checks in the mail, each in the amount of
$296.
Instructions
a. Who are the stakeholders (affected parties) in this situation?
b. What are the ethical issues in this case?
c. What would you do in this situation?
