Module Book-Financial Accounting PDF

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SIM MODULE BOOKDiploma in Management StudiesFINANCIAL ACCOUNTINGModule BookFINANCIAL ACCOUNTINGModule Book Developer : Janice Lee & Sunny WongProduction : SIM Global EducationModule Book  SIM Global Education 2019Table of Content Introduction Session 1: Introduction to Financial Accounting Sess...

Description

SIM MODULE BOOK

Diploma in Management Studies FINANCIAL ACCOUNTING

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Module Book

FINANCIAL ACCOUNTING Module Book Developer :

Janice Lee & Sunny Wong

Production

SIM Global Education

:

Module Book  SIM Global Education 2019

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All rights reserved. No part of this material may be reproduced in any form or by any means without permission in writing from SIM Global Education First Version @ Dec 2019

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Table of Content Introduction

5

Session 1:

Introduction to Financial Accounting

13

Session 2:

Double Entry Bookkeeping

27

Session 3:

Trading Account

41

Session 4 & Session 5:

The Adjusting Process

58

Session 6:

Current Assets: Inventory

74

Session 7:

Current Assets: Receivables

86

Session 8:

Non-Current Assets

98

Session 9:

Liabilities and Shareholders’ Equity

109

Session 10:

Cash Flow Statement

119

Session 11 & Session 12: Financial Statement Analysis

127

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Module Book

FINANCIAL ACCOUNTING Content This course is designed to provide students with an understanding of the fundamental concepts and principles of accounting, accounting equation, double-entry concepts, assets and liabilities, inventory, tax and auditing. Emphasis is placed on analysis of business transactions of a company and understanding basic financial statements to support decision-making. Students will be taught how to prepare the profit and loss statements, cash flow statements and balance sheets.

Module Aims The aims of this module are to enable students to: 1. 2. 3. 4. 5. 6. 7. 8.

Understand the objectives of financial reporting and explain the fundamental accounting concepts and principles. Understand the accounting cycle, apply the principles of double-entry and prepare financial statements. Apply the matching principle and understand the basis of accrual accounting in the preparation of financial statements. Account for inventory transactions and analyse the effects of different inventory methods on financial statements. Understand the issues in managing receivables and account for receivables. Account for non-current assets and their depreciation. Prepare the statement of cash flows. Perform basic financial statement analysis.

Learning Outcomes On completion of this module, the student should be able to: 1.

Show a detailed knowledge and understanding of:

i) ii) iii) iv) v) 2.

The accounting equation and accounting rules. The classification of accounts. Bookkeeping and the accounting cycle. The relation between the principal financial statements. The interpretation of financial statements, the analysis of profitability, of solvency and gearing. Demonstrate module specific skills with respect to:

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i) ii) iii)

Preparing a simple balance sheet from financial information. Forecasting financial statements for simple cases and adjusting financial statements for transactions. Citing, explaining, selecting, and applying formats/models to solve numerical problems in such areas as: analysis of financial statements and computation of depreciation.

3.

Show cognitive skills with respect to:

i) ii) iii)

Integrating and synthesizing between module topics to discuss coherent approaches to the key issues faced in planning and controlling a business from the accounting perspective. Developing familiarity and confidence with accounting / financial arithmetic. Applying accounting models in a “real world” context.

4.

Demonstrate transferable skills in:

i) ii) iii) iv) v) vi)

Information retrieval and numerical analysis. Analytical reasoning. Communication and presentation. Accounting in context. Problem formulation and decision making. Working with others.

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Delivery of Module and Lesson Plan S/N

Topics

Learning Outcomes At the completion of this session, participants will be able to:

Prescribed Text, Readings and/or Activities

1.

Introduction to Financial Accounting

1. Define the nature and purpose of accounting. 2. Identify the users of accounting information. 3. Understand business and the types of business organisations. 4. Understand accounting concepts and principles. 5. State the accounting equation and define each element of the equation. 6. Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 7. Describe the financial statements and explain how they interrelate.

SIM Financial Accounting Module Book Session 1

2.

Double Entry Accounting

1. Describe the characteristics of an account and a chart of accounts. 2. Describe and illustrate journalising transactions using the double-entry accounting system. 3. Describe and illustrate the journalising and posting of transactions to accounts. 4. Prepare an unadjusted trial balance and explain how it can be used to discover errors. 5. Discuss the limitations of the balance sheet in portraying financial position.

SIM Financial Accounting Module Book Session 2

3.

Trading Account

1. Explain the difference between a trade receivable and a trade payable. 2. Explain the purchases account, purchases returns account, sales account and sales returns account and prepare the journal entries in a periodic inventory system. 3. Explain the difference between cash and trade discounts. 4. Explain and compute the Cost of Goods Sold, Gross Profit and Net Profit of a trading business. 5. Prepare financial statements with trading account.

SIM Financial Accounting Module Book Session 3

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4 & The Adjusting 5. process

1. Describe the nature of the adjusting process. 2. Journalise entries for accounts requiring adjustment. 3. Prepare an adjusted trial balance. 4. Prepare financial statements from the adjusted trial balance.

SIM Financial Accounting Module Book Session 4 and 5

6.

Current Assets: Inventory

1. Describe the importance of control over inventories. 2. Describe three inventory cost flow assumptions. 3. Determine the cost of inventory under the perpetual and periodic inventory system. 4. Compare and contrast the use of the three inventory costing methods. 5. Describe and illustrate the reporting of merchandise inventory in the financial statements.

SIM Financial Accounting Module Book Session 6

7.

Current Assets: Receivables

1. Describe the common classes of receivables. 2. Describe the accounting for uncollectible receivables. 3. Describe the direct write-off method of accounting for uncollectible receivables. 4. Account for the allowance for uncollectible receivables.

SIM Financial Accounting Module Book Session 7

8.

Non-Current Assets

1. Define, classify, and account for the cost of fixed assets. 2. Compute depreciation, using the following methods: straight-line method and reducingbalance method. 3. Journalise entries for the disposal of fixed assets. 4. Describe intangible assets.

SIM Financial Accounting Module Book Session 8

9.

Liabilities and Shareholders’ Equity

1. Define and illustrate current liabilities related to accounts payable and current portion of longterm debt. 2. Describe the nature of the corporate form of organisation. 3. Describe the two main sources of stockholders’ equity. 4. Describe and illustrate the characteristics of stock and classes of shares.

SIM Financial Accounting Module Book Session 9

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10.

Cash Flow Statement

1. Describe the cash flow activities reported in the statement of cash flows. 2. Prepare cash flows from operating activities, using the indirect method. 3. Prepare cash flows from investing activities. 4. Prepare cash flows from financing activities. 5. Prepare a statement of cash flows

SIM Financial Accounting Module Book Session 10

11 & 12.

Financial Statement Analysis

1. Describe basic financial statement analytical methods. 2. Use financial statement analysis to assess the solvency of a business. 3. Use financial statement analysis to assess the profitability of a business.

SIM Financial Accounting Module Book Session 11 and 12

Teaching and Learning Methods Participants will learn through a combination of lectures and practice exercises. Participants will be expected to learn independently by carrying out reading and directed study beyond that available within taught classes.

Indicative Readings Textbook required

SIM Financial Accounting Module Book, Diploma in Management Studies, SIM Global Education, BPP Learning Media

Supplementary reading

Wood, F. & Sangster, A (2015). Frank Wood’s Business Accounting Vol. 1. 13th Edition, Harlow, Essex, Pearson, ISBN: 9781292084664 McLaney E and Atrill, P (2012), Accounting, An Introduction, 6th Edition, FT Prentice Hall, Harlow, ISBN: 9780273771838

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Assessment/coursework All assessments must comply with the SIM Rules and Regulations. To satisfy module requirements, students must: 1) Satisfactorily complete and present on due dates their completed assignment. A penalty of 20% of the total marks will be imposed for late submission. A submission later than 1 calendar day past deadline will receive a zero mark. 2) Complete all assignments and the online examination in a satisfactory manner. 3) Reference all their work and observe SIM’s policy on plagiarism. Students found guilty of plagiarism will be dealt with severely. 4) Adopt either the Harvard or APA (American Psychological Association) Referencing Style.

Specific for this module are the following requirements: Weighting between components A and B – A: 60% B: 40% Element Description % of Assessment Component A (Controlled Conditions) Online minutes)

Examination

(120

60%

Component B (Assignments) CAs Total (Component A+B)

40% 100%

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FINANCIAL ACCOUNTING SESSION 1 INTRODUCTION TO FINANCIAL ACCOUNTING At the end of the lecture, students should be able to: 1. 2. 3. 4. 5. 6. 7.

Define the nature and purpose of accounting. Identify the users of accounting information. Understand business and the types of business organisations. Understand accounting concepts and principles. State the accounting equation and define each element of the equation. Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. Describe the financial statements and explain how they interrelate.

1.1

Nature and Purpose of Accounting

Accounting is the process of recording, analyzing, summarizing, interpreting and communicating business transactions to users of the information to help them in making decisions. There is a difference between bookkeeping and accounting. Bookkeeping is the process of recording transactions accurately and systematically following the double entry system. Accounting goes beyond bookkeeping or record keeping. The data recorded is summarized and financial information is reported to management and other interested parties in the form of financial reports. The financial reports namely the Statement of Comprehensive Income shows the financial performance of the enterprise for a certain period of time, and the Statement of Financial Position shows the enterprise’s financial position as at a point in time. The results of the enterprise’s business events could be analyzed through the use of percentages and ratios and further interpreted for the purpose of decision making.

Activity 1 Is bookkeeping part of accounting? Bookkeeping is a part of accounting which focuses on recording of transactions accurately and systematically. Accounting goes beyond that to include analysing, summarising, interpreting and communicating transactions.

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1.2

Users/Stakeholders of Accounting Information

Internal users (within business organisation): Owners, managers and employees. External users (outside biz organisation): Credit suppliers, bankers and lenders, investors, government.

Activity 2 Why are the users/stakeholders interested in the accounting information? Internal users: Owners: assess the returns of their investment; Employees: want to be assured of steady employment; Managers: concerned with the company’s performance as their performance is based on their stewardship of the company’s resources.

External users Creditors and lenders: assess the ability to meet payments for goods and services acquired on credit terms and lenders such as banks are concerned with a company’s ability to service the loan. Governments: interested in the financial data to assess taxes. Prospective Investors: interested to invest in a business that is financially stable and solvent.

1.3

Understand Business and Types of Business Organisations

A business is a unit of whatever size or nature which exists to make a profit. The types of businesses include trading, service and manufacturing. Profit is defined as revenue less expenses. The three types of business organisations are: Sole traders – refers to ownership by one person who has total control over the business operations. A sole trader or sole proprietor can enjoy all profits made and bear all losses incurred. Sole traders can have employees. Partnerships – refers to ownership by two or more people working together to earn profits. The partners will share profits and bear losses according to their profit-sharing ratio as agreed upon. Limited liability company – refers to ownership by purchase of shares and the shareholders have liability limited to the amount they pay for their shares. (Owners: Shareholders) Activity 3

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Business transactions are business activities taking place in a business firm which can be on cash or credit basis. What are some common business transactions in a business organisation?  Examples of transactions: Purchase of inventory/product/stock Sales of inventory/product/stock Pay salaries and wages, utilities, rent etc. Take up a bank loan 1.4

Accounting Concepts and Principles

These are the broad assumptions which underlie the financial accounts of business entities and they are important in the construction of accounting statements. a) b) c) d) e) f) g) h) i) j) k)

Going concern Accruals Objectivity Consistency Historical cost Accounting period Matching Business entity Duality Money measurement Prudence

a)

Going concern: the business is assumed to continue to operate indefinitely and not likely to be liquidated in the foreseeable future. Hence business transactions are recorded at the historical cost and not at the liquidating value.

b)

Accruals: the income and expense are recognized in the accounting periods to which they relate rather than on cash basis. This implies that income must be recorded in the accounting period in which it is earned rather than in the period in which cash will be received . Likewise, expenses must be recorded in the period in which it is incurred, rather than in the period in which cash will be paid. This concept will enable proper matching of revenue and expenses so that accurate periodic profit can be ascertained. The accruals basis results in balance day adjustments which will be further explained in Session 4.

c)

Objectivity: accounting information should be freed from bias, that is they must be supported by objective evidence which is verifiable. Source documents are used to verify the events or transactions. This concept supports the historical cost concept.

d)

Consistency: similar items are given similar treatment within one accounting period and from one accounting period to the next. For instance, in the inventory costing methods such as FIFO, LIFO and WAC methods; a method chosen is to be applied consistently in each accounting

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e)

period. The purpose is to have effective comparison of the results of one accounting period to another and to avoid manipulation of accounting results. Historical cost: transactions are stated in the accounts at the price at which the transactions occur. The amounts initially recorded in the accounting records are at their cost or purchase price. The historical cost is adopted as it is objective and verifiable. (Ignore market price)

f)

Accounting period: the indefinite life of a business is divided into shorter time periods known as accounting periods of twelve months. This will enable financial reports to be prepared at the end of each period to meet the needs of various users.

g)

Matching: expenses incurred by a business entity must be matched with the revenue earned in the same accounting period. It is a process for periodic profit determination based on the accrual basis. The statement of comprehensive income (SCI) is prepared based on the matching concept.

h)

Business entity: a business is considered separate and distinct from its owners or managers. So only business activities are recorded and not the personal activities of the owner. Every business transaction is recorded from the viewpoint of the business.

i)

Duality: every business transaction has a two-fold effect. This gives rise to the double-entry bookkeeping system. DEBIT & CREDIT

j)

Money measurement: only transactions that can be expressed in monetary terms be recorded. It enables many otherwise unlike items to be added together. Some events are significant to the business but are not recorded as they could not be quantified into dollars and cents such as competence of employees.

k)

Prudence: a business should exercise caution not to overstate assets, revenues and gains and not to understate liabilities, expenses and losses. This concept gives rise to providing for depreciation on fixed assets and creating the allowance for receivables for outstanding trade receivables are so as not to overstate assets and profits.

Activity 4 Give examples of the application of the Duality concept. When an owner contributes personal cash to commence a business, it will be recorded as business cash and at the same time recorded as a capital contribution. 1.5 The Accounting Equation

Assets = Liabilities + Owner’s Equity

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IMPORTANT PAGE Assets: items of value or resources which a business owns. Fixed Assets: Assets that can be used for more than one accounting period Land and building (Premises)/Property Motor vehicle Office equipment

Current Assets: Assets that can be converted into cash within one accounting period Cash Stock / Inventory/Product Trade debtors / Accounts receivable / Credit customers of inventory (Haven’t pay) Furniture and fittings Prepaid expense Session 4 Plant and machinery Accrued revenue Session 4 Liabilities / Debts: Resources owing by the business or resources contributed by non-owners such as bankers and credit suppliers. Current Liabil...