ACCT500 Advanced Topics in Accounting - …luna.pepperdine.edu/faculty/mkinsman/ACCT500/advanced/ACCT5000… · 4/24/13! 3! ACCT 500 Week 1! 7! Why do you teach?! • I teach because

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ACCT500 Advanced Topics ��in Accounting

Week 1–Understanding what we’ll do and accounting

Statements

© Michael D. Kinsman, Ph.D.

ACCT500, week 1 2

Welcome to ACCT500, Accounting!

•  This week, we will –  Introduce each of us –  Introduce the class – Learn about what accounting systems are – Learn about debits and credits – Actually create some financial statements

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Who is the professor? •  Dr. Michael Kinsman goes by the name

Mike. If you’ve gotta, Dr. Kinsman is fine. – Ph.D. in finance, Stanford University. – MBA in finance, Stanford University. – BA, math and econ, Claremont Men’s College

(now Claremont McKenna College)

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Who is the professor? •  Dr. Michael Kinsman goes by the name

Mike. If you’ve gotta, Dr. Kinsman is fine. – Ph.D. in finance, Stanford University. – MBA in finance, Stanford University. – BA, math and econ, Claremont Men’s College

(now Claremont McKenna College)

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Who is the professor? – Practicing CPA in Laguna Beach. – At Pepperdine since 1975. – Formerly at UCI for 12 years. – Former systems programmer for General

Electric. – Former manager at Pacific Telephone.

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How can I reach him?

•  In person: Before class here or at my office which is on the fourth floor farthest from the elevators to the right. I tend to get there about 45 minutes before class.

•  By e-mail: [email protected] •  By phone: (949) 223-2533.

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ACCT 500 Week 1 7

Why do you teach?

•  I teach because I love it. I enjoy working with students and helping them learn. I really get excited as you can do new things. More than that, when you have become a success, and that happens a lot, I get pretty happy seeing your name in the paper.

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What are the books for the class?

•  You will need a good basic accounting book–the one you used in your first accounting class (ACCT 472 or equivalent) will be fine and

•  A good basic finance text. Again, the one you used in your FINC474 class will be fine.

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Materials for the class •  You will want to download the working

papers and the notes from the class website. •  I will occasionally make other materials,

including answers and case problems for class, available on the website.

•  You also need a financial calculator. The syllabus lists several good ones–ranging in price from $1.99 to over $100.

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Who are you?

•  Name? •  Undergraduate school and major? •  Accounting background? •  Where do you work? •  What do you do there?

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Please fill out a 3x5 card

•  Use the long direction, please! •  At the top, ACCT500(Term)(Year) •  Name •  Address •  Office phone •  Home phone •  E-mail address •  Text message number if any

(If any of this is secret, write secret and I won’t divulge it. Else, I’ll show it to anyone in my accounting classes who asks for you.)

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Syllabus •  Each week is listed separately. •  The syllabus is also on our class website as

listed in my first email to you. •  If you can’t find that email, go to

kinsmans.com, use the pull down menu to get to Syllabus links, and go to our class website from there.

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A helpful hint on notetaking •  Also on the web pages (go back to my home

page) is Taking Notes in Graduate School. It might be useful.

•  A lot is going on in the class. I have recorded a previous class, and will post those oral notes for the weeks they are available within a day or so of our class session on that material. Those notes are available for most of our class sessions.

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What’s this class all about?

•  This is a class in “advanced accounting” – You have taken Accounting 452 or its

equivalent in the BSM program. So why do you need this 2 units?

•  The purpose of this class is to assure that you will be at least equal in knowledge to those who had accounting in the MBA program.

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You mean I’m not equal?

•  You may be–in fact, you may be better – My job–and yours–is to assure that you are

among the best. – That means that I’m going to work with you on

solidifying some of the accounting that you had. –  It also means that I am going to, in all

likelihood, teach you some things you did not have in your previous work.

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Oh yeah? Like what?

•  I suspect you may have had debits and credits, but we’re going to start tonight with those, with definitions, and with building some financial statements to assure that you both remember and can use what you learned in your previous accounting classes.

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Oh yeah? Like what?

•  We’re then going to move, in week 2, to cheating–cheating on financial statements and ways that you can catch that cheating; ways that have been set up to proscribe cheating; and problems that have nothing, per se, to do with “cheating,” but have to do, instead, with differences.

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Differences? Like what?

•  Two companies, identical in every respect, can report the same transactions in very different ways. Are they economically the same? Let’s at least assume that they are. But the financial reporting tells different stories between the two.

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Differences? Like what?

•  For example, in your first course you learned about different inventory methods that give very different results–whether you are LIFO (Last in, First out) or FIFO (First in, First out) can profoundly affect your reported income.

•  By the way, how does that work?

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In week 2 we’ll also do a case

•  Seal Best is a case I use in my classes to teach ratios. I’m going to ask, in doing that case, that you use the ratios as I present them in the week 2 notes, since the standards presented in the case are based on those ratios.

•  What we are trying to be is detectives–whodunit, and why? What are the effects.

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In week 3 we’ll turn our attention to taxes

•  I’m sure you learned about depreciation in your accounting class. But I’ll be very surprised if you learned about tax depreciation. That’s the only depreciation allowed in taxes.

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In week 3 we’ll turn our attention to taxes

•  We’ll also discuss taxation of capital gains and ordinary income

•  We’ll also discuss what the effects of tax are on various types of entities–corporations, partnerships and proprietorships are the common ones to consider. We will consider variations on them.

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In week 3 we’ll also talk about present value

•  You have had present value, I’m sure, in your accounting and finance classes. Now we’re going to use it in real life.

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In week 4 we’ll value–and how we assess it

•  Is present value all of it? No. – Risk is important – Timing is important – What’s this “efficiency of markets” stuff? – How do we assess financial health

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In week 5 we’ll talk about something you have not seen

•  Forecasting. This is probably the thing we do least of in accounting, and is probably one of the most important things we can do in accounting. We will discuss, in some detail, how to do forecasting for companies.

•  In week 5, I will also assign you to a team to present a case at week 6.

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Week 6–our last together

•  Your team will present a case handed out in class. We will talk more about this as the class progresses.

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How will I be graded? •  There’s a handout at the back of your syllabus that

shows: –  Weekly quizzes: 30 percent of the total points in the class. –  In class participation: 20 percent of the total points in the class. –  Final presentation: 35 percent of the total points in the class. –  Final critique. 15 percent of the total points in the class.

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This class runs on your questions!

•  I make the assumption that you understand the material unless you tell me otherwise. It is really important that you ask questions as you have them.

•  I admit it. I can’t teach. I can only help you learn. Let me help you!

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Weird stuff •  I do weird stuff. For example:

–  I really care if you get the content of the class. –  I start the class on time right at 6:00. I really

appreciate your efforts to be here on time. –  I call breaks for weird times like 9 minutes.

Why? We all know that 10 minutes is 15. But 9 minutes is 9. When I call a 9 minute break, I start nine minutes later.

–  I call on people who don’t have their hands raised.

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Where does accounting fit in?

•  Accounting is one of the social sciences

Social sciences

And is part of economics

Microeconomics Macroeconomics

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•  Economics is divided into two halves:

Microeconomics is the study of pricing and resource allocation

Macroeconomics is the study of how the government screws up the economy, according to at least one local economist

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•  Accounting is a subset of economics

Accounting is wholly contained in economics

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What’s accounting all about?

•  ??????????

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What’s accounting all about?

•  It’s the accurate recording of financial events.

•  Sure, that other stuff is important: – We run departments with accounting data. – We use accounting data to make decisions. – We record the cash and the assets of the

company using accounting data. – We even figure out when we’re broke using

accounting data.

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Who cares about accounting data?

•  ?????????? •  ?????????? •  ?????????? •  ??????????

•  ?????????? •  ?????????? •  ?????????? •  ??????????

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Who cares about accounting data?

•  Corporations •  Government •  Employees •  Competitors

•  Investors •  Banks and creditors •  Customers •  Society in general

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Who prepares financial information?

•  ??????????

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•  Company auditors: Internal auditors and the company controller’s staff.

•  ??????????

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•  Company auditors: Internal auditors and the company controller’s staff.

•  External auditors–the CPA’s.

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About auditors •  A turn of the century author wrote about

auditors: “The typical auditor is a man past middle age. Spare,

wrinkled, intelligent, passive, non-committal. With eyes like a codfish. Polite in contact, but at the same time unresponsive. Cold, calm and damnably composed as a concrete post or a plaster of Paris cast. A human petrification with a heart of feldspar and without the charm of a friendly germ. Minus bowels, passion or sense of humor, happily they never reproduce and all of them finally go to hell.”

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Financial Statements

•  The accounting process provides useful information to people who make rational investment, credit, and similar decisions.

•  The two basic financial statements are: – The Balance Sheet – The Income Statement

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The Balance Sheet

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The Income Statement

•  The income statement lists the revenues and expenses of the business for the period, and shows the user of the financial statement how much the business has earned for the period.

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The Income Statement

•  The income statement for the reporting period links the balance sheet from the beginning of the period to the balance sheet at the end of the period.

Beginning balance sheet

Income statement

Ending balance sheet

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Are there overriding principles?

•  There are overriding principles that will be useful to you as you study financial statements: – The Entity Principle – The Objectivity Principle – The Cost Principle – The Going Concern Principle

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Entity Principle

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Objectivity Principle

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Cost Principle

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Going-Concern Principle

•  In the absence of contrary evidence, we assume that a business will continue to exist indefinitely.

•  This causes us to report cost information, rather than liquidation values.

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Are there other rules for statements?

•  Financial statements are usually prepared using GAAP–Generally Accepted Accounting Principles.

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Why GAAP?

Purpose •  Helps to ensure that financial reports provide

information that is – Relevant – Reliable – Comparable��

•  Makes the financial statements more understandable and useful.

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Who decides what’s “Generally Accepted?”

•  Historically, GAAP resulted from practices that were commonly used.

•  Broad Principles – Result from long used accounting practices

•  Specific Principles – Result from deliberations of authoritative bodies

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GAAP, Auditing Standards, and Financial Accounting

The general relationships between the preparers, auditors, and the users are illustrated below:

GAAP

Audit Standards

Preparers

Auditors

Financial Statements

Audit Reports

Users

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How Is new GAAP Established?

•  Defined by the Financial Accounting Standards Board (FASB) which . . . –  is a nonprofit organization. –  has seven board members serving full time. –  has authority that is delegated by the Securities and

Exchange Commission (SEC).

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How GAAP Is Established

•  The FASB identifies problems in financial accounting and seeks ways to solve them.

•  The FASB seeks advice from people in accounting firms, business, and government.

•  Hearings are held before new standards are formalized.

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International Accounting Standards

•  Accounting Principles and Practices differ among nations. – Cultural differences – Economic differences – Political differences – Communication differences

•  Harmonization is the process of bringing all systems into general agreement.

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What are assets?

•  ??????????

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What are assets?

•  Something worth something. •  Something you can sell.

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What are liabilities?

•  ??????????

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What are liabilities?

•  Debts. •  Amounts we owe.

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What’s owner’s equity?

•  ??????????

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What’s owner’s equity?

•  Assets minus liabilities. •  What the owner could put in his pocket if he

sold the assets and paid off the liabilities.

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What is revenue?

•  ??????????

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What is revenue?

•  It’s what you get for what you do. •  It is not INCOME: That’s a reserved word. •  If you have something incidental to what

you do–like selling a desk as a CPA–that’s not revenue. It would be the sale of an asset.

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What’s expense?

•  ??????????

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What’s expense?

•  Expenses are the costs of doing our thing.

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To review:

•  ASSETS: Something worth something. •  LIABILITIES: Debts.

•  OWNER’S EQUITY: The difference between assets and liabilities (assets minus liabilities).

•  REVENUES: What you get for what you do. •  EXPENSES: What it costs you to do it.

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How do they fit together?

•  Trial balance equation: Assets + Expenses = Liabilities + Owner’s Equity + Revenue

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Assets + Expenses = Liabilities + Owner’s Equity + Revenue

•  Income equation Income = Revenue - Expenses

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Income = Revenue - Expenses

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•  Owner’s equity equation: New Owner’s Equity = Income + Old Owner’s Equity

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New Owner’s Equity = Income + Old Owner’s Equity

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•  Balance sheet equation

Assets = Liabilities + New Owner’s Equity




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Assets = Liabilities + New Owner’s Equity




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Larry Owen Company"1. Larry Owen invested $5,000 in a real estate agency."

2. He paid three months' office rent in advance, $300."

3. Paid $3,000 for a business automobile."

4. Purchased office equipment for cash, $1,000."

5. Purchased, on credit from Standard Supply Company, office supplies for $60 and office equipment for $350. "

6. Sold unneeded office equipment to Dale Hall for its $150 cost. Dale paid $100 cash and gave a $50 promise to pay later."

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ACCT 500 Week 1 77




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Larry Owen Company"2. He paid three months' office rent in advance, $300."



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Larry Owen Company!3. Paid $3,000 for a business automobile."



ACCT 500 Week 1 80

Larry Owen Company!4. Purchased office equipment for cash, $1,000."


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Does the Trial Balance balance?

•  Of course:

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But there’s a better way

•  What we just did works fine for small companies with few accounts, but what if you are IBM or Allergan?

•  In the late 1400’s, a monk named Pacciolli invented what is today called a T-account.

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The T-account

Left Right Assets + Liabilities Owner’s equity Revenue

Expense + means account increases here

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The T-account

Left Right Assets + Liabilities + Owner’s equity Revenue


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The T-account

Left Right Assets + Liabilities + Owner’s equity + Revenue


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The T-account

Left Right Assets + Liabilities + Owner’s equity + Revenue +


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The T-account

Left Right Assets + Liabilities + Owner’s equity + Revenue +

Expense + + means account increases here

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T-accounts

•  Of course, if you want to decrease what is in a t-account, you simply put the amount on the other side of the T.

•  When you put something on the other side of the T, you don’t need to use brackets–putting it on the other side tells you it’s a decrease.

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T-accounts

•  Notice that the T-account is set up like a trial balance: – Assets and Expenses increase on the left – Liabilities, Owner’s equity and Revenues

increase on the right.

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Larry Owen Company!1. Larry Owen invested $5,000 in a real estate agency."






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ACCT 500 Week 1 91

Larry Owen Company– T-account entry!

1. Larry Owen invested $5,000 in a real estate agency."

Cash Owner’s equity

5000 5000

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Larry Owen Company!1. Larry Owen invested $5,000 in a real estate agency."






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Larry Owen Company (2) 7. Collected $50 from Dale Hall."

8. Paid Standard Supply Company $175 of the amount owed for supplies and equipment."

9. Sold a house and collected an $850 commission."

10. Paid the part-time secretary's salary for the first two weeks of the month, $100."

11. On July 15, signed a contract to manage an apartment building for $50 per month. Collected the management fee for the last half of July and the month of August, $75.

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Larry Owen Company (3) 12. On July 31, paid the part time secretary's salary for the second

two weeks of July, $100."

13. Larry Owen withdrew $200 from the business for his personal use. "

14. Paid the monthly telephone bill of $20."

15. Paid for gas and oil used in the agency car, $25."

16. Paid for newspaper advertising that had appeared, $60."

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T-account detail (totals in yellow)

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T-account detail (totals in yellow)

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8 column worksheet

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8 column worksheet-trial balance

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Adjustments to be made

•  Three things have happened as we have completed our month: – Part of the prepaid rent has been used up. – Part of the unearned revenue has become

earned. – We counted the supplies and discovered that

there are $42 left.

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ACCT 500 Week 1 100

8 column worksheet after adjustments

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Finished 8 column worksheet

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Posting the adjustments (adjustments in blue and changed totals in orange)

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Posting the adjustments (adjustments in blue and changed totals in orange)

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Closing the books (closing in pink and changed totals in black)

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Closing the books (closing in pink and changed totals in black)

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That finishes what we’re going to do tonight.

Thanks for your patience. We will review some of this next week. Come with questions, and homework!

Documents

ACCT500 Advanced Topics in Accounting - …luna.pepperdine.edu/faculty/mkinsman/ACCT500/advanced/ACCT5000… · 4/24/13! 3! ACCT 500 Week 1! 7! Why do you teach?! • I teach because