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Unit 1 Accounting：The Language of BusinessAccounting is often called ―the language of business‖. The acceleration of chang in our society has contributed to increasing complexities in this ―language‖, which is used in recording and interpreting basic economic data for individuals,enterprises, governments and other entities.Accounting is defined broadly as the process of identifying, recording, and summarizing data related to business transactions and events to permit informed judgement and decisions by users of the information. Such data are to a large extent of a financial nature and are frequently stated in monetary terms. Accounting is also concerned with reporting and interpreting the information.Accounting helps decision making by showing where and when a company spends money and makes commitments, prioviding information for evaluating financial performance, and illustrating the financial implications of choosing one plan isstead of another. Accountin also helps predict the future effects of decisions, and it helps direct attention to current problems, imperfections, and inefficienc ies, as well as opportunities.Consider some basic relationships in the decision-making process:When economic events occur, accountants analyze and record the events. Periodically, accountants summarize the results of the events into financial statements. Users then rely on the financial statements when making their dicisions. Our focus includes all four boxes. All financial accounting courses cover the analysis and recording of information and preparing financial statements. We pay more attention to the underlying business processes creating the events and to the way in which the financial reports help decision makers to take action.Accounting provides the techniques for accumulating and the language for communicating economic data to various individuals and institutions. Investors in a business enterprise need the information about its financial status and its future prospective. Bankers and suppliers appraise the financial soundness of a business organization and assess the risk involved before making loans and granting credits. Govermment agencies are concerned with the financial activities of business organizations for purpose of taxation and regulation. Employees and their union representatives are also vitally interested in the stability and profitability of the organizations that hire them. Accounting information is also needed and used by financial analysts, trade associations,stock exchanges, and educational rmation required by all these groups and interested in the financial position and the operating results of a business.The gathering and presentation of this information for extermal financial reporting is known as financial accounting.However, the individuals most dependent upon and must involved with end priducts of accounting are those who are chaged with the responsibility for directing the operations of enterprises. They are often referred to collectively as ―the management‖, who need various types of accounting information in the conduct of day-to-day operations of the business and in evaluating current operations and in planning the future operations. The use of accounting information through analysis and in combination with information from other areas for business decisions and internal management purpose is referred to as managerial accounting ormanagement accounting.The field of accounting is divided into three broad divisions:public, private and governmental.A certified public accountant, or CPA, as the term is usually abbreviated, must pass a series of examinations, after which he or she receives a certificate. In the United Stated, the certification examinations are prepared and administered by the American Institute of Certified Public Accountants. The various states or other major govemmental jurisdictions set additional qualifications for residence, experience, and so on..The British equivalent of a CPA is called a chartered accountant.Public accounting consists largely of auditing and tax services. An audit is a review of the financial records of an organization. It is usually performes at fixed intervals of time—perhaps quarterly, semiannually, or annually. Separation of ownership from management in corporations creates a demand for auditing, a third-party examination of the financial statements. Auditors evaluate the record-keeping system of the firm and test specific taansactions and account balances to provide assurance that the balances fairly reflect the financial position and performance of the company. Ethical behavior is critically important in professional activities such as accounting. In public accounting, the value of an audit is directly linked to the credibility of the auditor as an ethical, independent professional who is qualifiied to evaluate the financial statements of the firm and is also reliably committed to disclosing problems or concerns uncovered in the ecaluation.And as the tax laws have grown increasingly complex, not only corporations but also individuals have had to utilize the services of accountants in preparing their tax forms and calculating their tax liability. Business enterprises, governmernt agencies, and nonprofit organizations all employ public accountants either regularly or on a part time basis.Pvivate accountants, also called executive or administrative accountants, handle the financial records of a business.They work on a salsry basis. Those who work for manufacturing concerns are sometimes called industrial accountants. Some large corporations employ hundreds of employees in their accounting offices.All branches of governmernt employ accountants. In the United States, this includes federal, state, and local governmernts. In addition, government owned corporations in the United States and in many other countries have accountants on therr staffs. All of these accountants, like those in private industry, are salaried rather than paid a fee.As in many other areas of human activity during the twentieth century, a number of specialized fields in accounting have evolved as a result of rapid technological advances and accelerated economic growth.. The most important accounting fields include financial accounting, auditing, cost accounting fields include financial accounting, auditing, cost accouting, management accounting, tax accounting, budgetary accounting, international accounting, and social accounting.Unit 2 Generally Accepted Accounting PrinciplesTo be useful, financial accounting information must be assembled and reported objectively.Those who must rely on such information have a right to be assured-that the data are free from bias and inconsistency—whether deliberate or not.For this reason, financial accounting relies on certain standards or guides that have been proved useful over the years in imparting economic data.These standards are called generally accepted accounting principles. They are closely related to experience and pracrice and may change over a time.V arious terms, such asprinciple, standard, assumption, convention, and concept, are often used to describe such guides.The most fundamental concepts underlying the accounting process are (1)an economic entity assumption, (2)a going-concern assumption, (3)a monetary unit assumption,and (4)a perodicity assumption. The basic principles followed by accountants in recording business transactions can be classified as (1)the historical cost principle, (2) the revenue realuzation principle, (3) the matching principle, (4) the consistency principle, (5) the full disclosure principle, and (6) the objectivity principles.These principles relate basically to how assets, liabilities, revenues, and expenses are to be recognized, measured, and reported.Accounting is also affected by certain considerations that merit attention.These considerations referred to as modifying conventions are (1) materiality, (2) industry practice, and (3) conservatism.Generally accepted accounting principles are not natural laws in the sense of the laws of physics and chemisty.They are man-made rules that depend for their authority upon their general acceptance by the accounting profession.Currently, generally accepted accounting principles in the U.S.A. are developed by a group called the Financial Accounting Standards Board(FASB), which is composed of seven full-time members.The principles established by the FASB are called Statements of Financial Accounting Standards.The FASB develops its statements by using a feedback process, in which interested people and organizations can participate by communicating their opinions to the FASB.First, the FASB writes a discussion memorandum, which explains the topic under current consideration.Then public hearings are held where accountants and other interested parties can express their opinions, either orally or in writing.The groups that most consistently offer opinoions about proposed FASB statements are the Securities Exchange Commission(SEC), the American Institute of Certified Public Accounting Association(AAA), and companies with a direct interest in a particular statement that has been proposed by the FASB.After the FASB holds public hearings about a potential statement, it prepares a draft of the statement, called an exposure draft, which describes the FASB’s proposed solution to the problem being considered.The FASB then receives and evaluates public comment about the exposure draft.Finally, its members vote on the statement.If four or more of the members appovre, the proposed statement becomes one of the generally accepted accounting principles.To ensure that generally accepted accounting principles are followed by publicly owned corporations, the SEC requires that financial information, in the form of financial statement, be submitted annually by all such companies to the SEC. These financial statements must be audited by an accountant who is not on the staff of the firm that issued the staements(an independent certidied public accountatnt).In addition, the statements must include a report by the accountant about the review, which is known as the auditor’s report.The purpose of the review is to obtain the objective opinion of a professional accountant from outside the company that the financial statements fairly present the information was prepared according to generally accepted accounting principles.The financial statement and the auditor’s report must be made available to stockholders and potential stockholders of publicly owned corporations.Business and the environments in which they operate are constantly changing.And so are the economy, technology, and laws.Therrfore, financial information and the methods of presenting that information must change in order to meet the needs of the people who use the information.Generally accepted accounting principles are changed and refined as accountants respond to the changing environment.Unit 3 The Accounting SystemThe basic structure of an accounting system, which is rather simple in nature, has six parts of classifications:(1)assets, (2)liabilities, (3)owners’ equity, (4)revenues, (5)expenses and(6)profit.An asset is anything of value that is owned by a business or an individual, the value of which is determined by the acquisition price, or historical cost, of the item.Liabilities represent the debts owed to others known as creditors and referred to as ―payables‖,claims by creditors.Accountasnts referred these claims, together with the claims by owners, as the equities of a business.Owner s’equity represents the portion of the assets that belongs to the owner of the business.It is the net asset of a business, which is the difference between the amout of the assets owned and the amount of the liabilities owed by a business.Revenues represent assets coming into the business from the performance of a service or the sales of a product to a customer for cash or on credit.In some cases, however, realization of a revenue may simply mean the discharge of a debt owed by the business.Expenses represent assets that are used, consumed, or worn out as a result of employing them in the business for the prupose of earning revenue.Expenses are often referred to as ―the cost of doing business‖, which decrease the net asset in the business.Together revenues and expenses define the fundamental meaning of income, which is simply the excess of revenues over mon synonyms for income are profits or earnings.The first three classifications of the accounting structure—assets, liabilities, and owners’equity form the basic accounting equation or balance sheet equation, which is expressed as follows:Assets=Liabilities+Owners’ EquityItems of value owned(by business)=amount owed or creditor’s claim on assets+capital invested by owners or owners’claim on assets.Owners’ Equity=Paid-in capital+Retained earningsThe total cumulative owners’equity generated by income or profits is called retained earnings or retained income.Retained earnings= Revenues- expensesSome activities or the day-to-day events of a business are known as transactions. Every business will usually have financial transactions as well as non-financial ones.From an accounting standpoint, we are only concerned with the financial transactions of the business, which involve the performance of a service or the sale of a product to a customer, or the acquisition of service or materials and/or equities (liabilities or owners’ equity). Each business transaction will result in one of the following:1.Increase one asset and decrease another asset;2.Decrease one equity and increase another equity;3.Increase an asset and increase an equity;4.Decrease an asset and decrease an equity.One of the direct effects of the accounting equation mentioned above is the double—entry system of recording, which simplu means that both sides, or the two-fold effects, of a business transaction are recorded. And when you record both sides of a business transaction, you are keeping the books in balance. For example, if supplies were purchased for $200 from a supplier on credit, a business would own supplies costing $200 and owe the creditor $200 for the purchase on account. Both sides of the transaction would be recorded, and that results in an increase to theSupplies(assets) and an increase to the Accounts Payable(liabilities) for the purchase, and eventually a balance in books.The easiest way to keep a record of business transactions is to record them when there is an exchange of cash. This is the cash system, or the cash basis of accounting. For example, when a business performs services to customers, the revenue earned would be recorded when cash is actually received. Therefore, only cash sales would be recorded as revenue earned for a period, whereas sales on account or charge sales would not be recognized until the customers paid the account.A more meaningful method used by most businesses is called the accrual system, or the accrual basis of accounting, which recognizes revenue when earned regardless of when the cash is received. A sale on account is recorded as revenue earned through the cash has not been received. Expenses for the period are recognized when they are incurred even if they have not been paid.The result of business transactions are summarized and reported to various users at the end of a certain period of time, known as an accounting period.The most common accounting period is the fiscal year, consisting of a 12-month period,which may or may not be the same as a calender year.It is also common to axxount for a fiscal period of less than one year, such as one month(monthly) or three months(quarterly). Each business entity determines its own financial reporting needs, but it is a requirement by the federal government that all businesses prepare an annual or fiscal year report known as the general-purpose external financial report.Unit 4 Balance Sheet and Income StatementA balance sheet presents the financial position of a business enterprise at a given date.The financial position consists of the addets, liabilities, and owners’ equity.A balance sheet shows the financial resources a business owns, the debes that the business owes, and the residual interest of the business, which is the difference between what it owns and what it owes.In its traditional format, account form, a balance sheet lists assets on the left-hand side and liabilities and owners’equity on the right-hand side. When the liabilities and owners’ equity are added together, they will be equal to the assets.Therefore, the statement is saide to ―balance‖ because the left-hand column is equal to the right-hand column.The balance sheet is basically a historcal report, because it shows the cumulative dffect of past transactions and events. According to the definition provided by the Financ ial Accounting Stamdards Board(FASB):Assets are probable future economic benefits obtained or controlled by a particular entit as aresult of past transactions or events. Generally, assets can be vlassified into current sssets and non-current assets. Current assets are those assets that are in the form of cash or are expected to be turned into cash in the short run, usually within one year. Among them are cash, marketable securities, accouns receivable, notes receiveble, inventories, and prepaid expenses. There are four categories of non-current assests:(1)long-term or restricted funds, investments and receivables;(2)long-term tangible resources used in operations, such as land, build ings, machinery and equipment and so forth;(3)long-term intangible resources, examples of such assets qte patents, trademarks, copyrights,and franchises;and (4)other non-current assets.Another category of balance sheet items is liabilities, which can be further classified into current liabilities.Current liabilities are debts that must be paid off within one year or the normal operating cycle, whichever is longer, such as accounts payable, notes payable, revenues collected in advance.Non-current liabilities usually consist of long-term notes, mortgages loans and bonds,which are debts not due for at least one yeat.Owners’ equity is the difference between total assets and total libilities. It represents a business enterprese’s ownership inerest, the residual interest in the assets of the entity that remains after deducting its liabilities. It is requored by the law that a corporation’s owners’equity be divided into two parts: capital stock, which is the amount invested in the company, and retained earning, which represent the cumulative earnings of the company less any distribution of these earnings called dividends. Single proprietorships or partnerships, however, do not have to distinguish between amounts invested by the owners and any undistributed earnings.The most important change in a balance sheet between two periods of time is the change in owners’ equity. It is important that the potential creditor or investor know not only the amount of this change, but also the principal factors that have contributed to it.One such factor is the operating results of the business.Consequently, in addition to a balance sheet, the publicly held corporation must also publish an income statement, which provides the details of the changes in owners’equity between two periods that have resulted from the operations of the business.The purpose of the income statement is to indicate how successful the business has been in meeting the objective of earning profits, which is of primary importance to the board of didrectors in evaluating the management of the company , to stockholders or potential stockholders in marking investment decisions, and to banks and other creditors in deciding on actions to be taken with respect to loans.Other things being equal, a profitable company is a good company to invest in, lend money to, work for, and deal with in general.The major categories of the income statement, say, for a merchandising company are revenue, cost of goods sold, and operating expenses. In the revenue section, sales returns and allowances and sales discounts are deducted from the fross sales to yield net sales.The cost of goods sold is obtained by adding the beginning inventory and net purchase for the period and deducting the ending inventory. To calculate net purchase, purchase returns and allowances is deducted from delivered cost of purchase which comes from the purchase amount deducting purchase discount and adding freight-in.By deducting the cost of goods sold from the net sales, we arrive at an intermediate amount called gross profit on sales.The operating expenses are then deducted from the gross profit on sales to obtain the net operating income for the period.The operating expenses of a merchandising business are typically classified into selling expenses and general and administrative expenses. Some business items affecting the determination of a final net income amount may not relate to the primary operating activities of the business. Interest income and interest expense, for example, may be viewed as relating more to financing and investomg activities than to merchandising efforts.They are often shown in a separate category called ―Other Income and Expense‖at the bottom of the income statement.Income before income taxes is computed by income from operations deducting other income and expense, and then less income taxes expende, the final net income amount is figured.There are two forms of income statement—the multiple-step and the single-step form.For corporations, another important statement that comes from the same period of time as an income statement is the statement of retained earnings, which shows the beginning retained earnings, the net income and dividends(authorized withdrawal of income) for the period, and the ending retained earnings.For single propritetorships and partnerships, a similar statement called the statement of owners’equity is prepared.The statement shows the beginning equity, changes during the period, and ending equity.Unit 5 Cash Flow StatementThe objective of a cash flow statement is to provide users of financial statement with information not provided in a balance sheet and a statement of net income and retained earnings, that is information about the inflows and outflows of cash and cash equivalents of an enterprise in an accounting period, in order to enable users of financial statements to understand and evaluate the ability of the enterprise to fenerate cash and cash equivalents and, accordingly, to forecast the future cash flows of the enterprise.Cash comprises cash on hand and deposits that are readily available for payment. Cash equivalents ate short-time(usually less than 3 months), highly liquis investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, such as treasury bill. Cash flows are inflows and outflows of cash and cash equivalents of an enterprise. Cash flows should be classified into the following three categories:(1)cash flows from operating activities(CFFO);(2)cash flows from investing activities(CFFI); and (3)cash flows from financing activities(CFFF).Operating activities are all transactions and events of the enterprise that are not investing or financing activities.The principal cash inflows from operating activities inc lude:(1) cash receipts from the sale of goods and the rendering of services(excluding output value added tax received and after deduction of cash payments for the return of goods sold);(2)receipts of rental income;(3)receipts of output value added tax and refunds of value added tax; and (4)receipts of other tax and levy refunds other than value added tax. The principle cash outflows from operating activities include:(1)cash payments for goods and services(excluding the portion of input value added tax which can be used to offset output value added tax and cash receipts for the return of goods purchased); (2)cash payments for operating leases;(3)cash payments to and on behalf of employee;(4)payments of value added tax(excluding the portion of payment for input value added tax which cannot be used to offset output value added tax);(5)payments of income tax; and (6)payments of odther tax and levy other than value added tax and income tax.Investing activities are the acquisition and disposal of long-term assets and investments not include in cash equivalents.The principal cash inflows from investing activities include:(1)cash receipts from return of investments;(2)cash receipts from distribution of dividends or profits;(3)cash receipts from bond interest income; and (4)net cash receipts from the sale of fixed assets, intangible assets and other long-term assets(if this is a megative figure, it should be presented as a cash outflow from investing activities).The principal cash outflows from investing activities include:(1)cash payments to acquire fixed assets, intangible assets and other long-term assets;(2)cash payments to acquire equity investments; and (3)cash payments to acquire debt investments.Financing activities are those activities that result in change in the size and composition of the capital and borrowings of the enterprise. The principle cash inflows from financing activities include:(1)cash proceeds from issuing shares;(2)cash proceeds from issuing bonds; and (3)cash receipts from borrowings.The principal cash outflows from financing activities include:(1)cash repayments of amounts borrowed;(2)cash payments for costs arising on any financing activities;(3)cash payments for distribution of dividends or profits;(4)cash payments of interest expenses;(5)cash payments for finance leases; and (6)cash payments for the reduction of registered capital.The cash flow statement should report cash flows of an enterprise during the current period classified by operating, investing and financing activities.The preparation of cash flow statement bases on cash and cash equivalents.There are two altermative methods to prepare cash flow statement —direct method and indirect method.An ehterprise should report cash flows from operating activities using the direct method, whereby major classes of cash receipts and cash payments are disclosed to reflect cash flows from operating activities of the enterprise.The cash flow statement can be prepared by using one of the procedures —worksheet analysis and T —account analysis.T —account analysis is similar to the worksheet approach except that a sepatate T —account is set up for each item for the analysis purpose.Unit 6 Financial Statement AnalysisFinancial statement analysis is a process of selection, relation, and evaluation.The first step is to select from the total information available about a business enterprise the information relevant to the decision under consideration.The second step is to arrange the information in a way that will bring out signigicant relationships.The final step is to study these relationships and interpret the results.The process of financial statement analysis consists of the application of analytical techniques to financial statements in order to derive from them measruements and relationships that are significant and useful for decision making.Thus , financial statement analysis, first and foremost, serves the essential function of converting data into useful information.In respect of the quantitative data presented in the financial statements, three techniques used widely to assist decision malers in understanding the external statements are: (1)comparative analysis (through preparation of trend statements),(2)structural analysis (through preparation of common –size statements), and (3) ratio analysis.The focus of this material will be on how ratio analysis helps information users interpret and evaluate the data vintained in financial statements.Ratio analysis is the process of calculating and interpreting financial rations.Ratios are used in analyzing financial statements because they convert huge amount of data nto workable form, thus making the information more meaningful.However, we should emphasize that a ratio in isolation means very little. Its utility comes froms compraring it to some standards.The standards could be the same ratio for prior periods, an industy average, or some other benchmark..For discussion purposes, financial ratios can be classified into four categories:liquidity, financial leverage, efficiency, and profitability.（1） Liquidity RatiosRatios in this category are designed to assist one in judging if a firm can pay its current liabilities when due. Liquidily ratios that are widely used include current ratio and quick ratio. Current Ratio:Current ratio is widely used to test a firm ’s ability to meet its short-term obligation.It is computed as follows: Current Ratio=s Liabilitie Current AssetsCurrentGenerally speaking, the higher the ratio, the greater ability of a firm to pay off its current liabilities. A widely used rule of thumb is that a firm with a current ratio of 2 or more is in good shape in terms of being able to pay maturing current liabilities.Most experienced analysts realize rule may be misleading.。