ACT2111 Introductory Financial Accounting

Chapter 1 Accounting in Action

Instructor : Dr. Shijie (Kenny) Yang

Email: sjyang@cuhk .[Link]
7 Tips for First-Year University Students
Check emails every day (install Outlook on your phone)

Self-learning is very important (in-class learning is not enough)

Prepare your own study notes for each course (it helps you digest
knowledge; don’t rely on instructors’ PPT only)

Be organized and keep due dates in mind (instructors never check your
progress, and you have to manage it yourself)

Approach instructors/TAs/USTFs during their office hours

Stay focused and work hard (getting an A (or A-) is not easy)

Take good care of your health (keep a work-life balance)

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Why accounting is a challenging course?
❑ Some reasons (or more)
❑ Freshmen lack business-related background knowledge
❑ Accounting looks boring
❑ It takes time to do assignments
❑ Don’t know why accounting is useful
❑ During the add/drop period, you may choose …

escape from this course have a great day

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Why learning accounting is important?
❑ It allows you to understand how a business is operated
❑ It is the first course for every business school student
❑ It is a tool for you to obtain an analyze useful information from companies

Products &
Money
Services

Consumers Companies Investors

As a consumer, you already see this By learning accounting, you will know
more about this

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Largest companies in the world
(ranked by market value)
Accounting information allows you to know:
1) What resources they have
2) How much they earn every year
3) A lot of details about their business

, China

, China
Where do we obtain companies’ information?

Consumers’ view Investors’ view

[Link] [Link]
[Link] [Link]

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What is accounting?
❑ Accounting is “the language of business.” It is the information
system that identifies, records, and communicates the
economic events of an organization to interested users
❑ How do we use this language? (three activities)

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An overview of business operations

Customers

Shareholders

Creditors

Accounting is an information
system. It allows a company to
record business processes and
improve its decision making Suppliers

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Who use accounting data?
❑ Internal Users ❑ External Users

More external users

• Taxing authorities
• Regulatory agencies
• Labor unions

Managerial accounting (ACT2121) Financial accounting (ACT2111)

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High school courses vs. Accounting
when you learn accounting… ❑ Like Physics and Chemistry, it has basic equations
❑ Like English and Chinese, it is a (business) language
❑ Unlike Mathematics, its calculation is simple

No worries, accounting sometimes

looks strange, but it is very logical!

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How to allocate your time in learning every week?
Office hours or discussion
with classmates

Review sessions
(before exams)
Lectures (3 hours)

Homework Self-learning
assignments (preview and review)

We have no regular
Depending on the difficulty of each chapter, Tutorial videos tutorials. We only hold
you may need to spend 10~15 hours per and exercises review sessions later
week in total to digest new knowledge before exams

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How will your grade be determined?
❑ Tutorial questions (10%)
will be done online on WileyPLUS
❑ Homework assignments (20%)
❑ Mid-term exam (30%) (scheduled on Nov 6, 2021)
❑ Final exam (40%) (schedule to be announced)

❑ More information
❑ You have unlimited attempts for tutorial questions
❑ You have up to three attempts for each homework assignment
❑ Pay attention to due dates! (usually next Sunday after announcement)
❑ Exam questions are very similar to tutorial and assignment questions

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eTextbook and WileyPLUS
❑ eTextbook: Financial Accounting with IFRS
❑ by Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
❑ 4th Edition, eTextbook version with WileyPLUS system
❑ Online assignment system: WileyPLUS

eTextbook WileyPLUS

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If you have any questions, you may …
❑ Knowledge-specific questions • Instructor
❑ Explanation of knowledge • Teaching Assistants (TA)
❑ Advice on learning • Undergraduate Student
Teaching Fellows (USTFs)

Office hour consultation

❑ Course admin questions

❑ Purchase of textbook and WileyPLUS
❑ Online assignment system
❑ Schedule (e.g., sick leave) Emails
❑ Blackboard announcements cuhkszact2111@[Link]
(Mon-Fri)

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Course outline
❑ Ch 1 Accounting in Action
❑ Ch 2 The Recording Process
❑ Ch 3 Adjusting the Accounts
❑ Ch 4 Completing the Accounting Cycle
❑ Ch 5 Accounting for Merchandise Operations
❑ Ch 6 Inventories
❑ Ch 8 Accounting for Receivables
❑ Ch 9 Plant Assets, Natural Resources, and Intangible Assets
❑ Ch 10 Current Liabilities
❑ Ch 11 Non-Current Liabilities
❑ Ch 12 Corporations: Organization, Share Transactions, and Equity
❑ Ch 14 Statement of Cash Flows
❑ Ch 15 Financial Analysis: The Big Picture

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Modern accounting has a long history of 500 years
❑ Who invented accounting?
Luca Pacioli (1447–1517) was
an Italian mathematician. He is
referred to as “the Father of
Accounting and Bookkeeping"
in Europe and he was the first
person to publish a work on the
double-entry system of book-
keeping
Portrait of Luca Pacioli

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“Single-entry” vs. “Double-entry” accounting

❑ “Single-entry” accounting
❑ each financial transaction is a
single entry in a transaction log
❑ used in small businesses where
transactions are small and simple
❑ does not require training in
accounting
❑ anyone who can arrange numbers
in a table and add and subtract can
set up and use a single-entry
system

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“Single-entry” vs. “Double-entry” accounting

❑ “Double-entry” accounting
❑ each financial transaction calls for at
least two changes in the accounts
❑ Debit
❑ Credit
❑ used in large firms to accurately
track their records of accounts
❑ requires at least some level of formal
training in accounting
❑ have a solid grasp of concepts such as
debit, credit, chart of accounts, and
accounting equations
❑ this is why we have this course!

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The Accounting Equation
❑ “Double-entry” accounting requires that the basic accounting
equation always holds

Assets Liabilities Equity

How do we interpret this equation?

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The Accounting Equation (cont’d)

Assets Liabilities Equity

“a cake” “who can share the cake”

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The Accounting Equation (cont’d)

Assets Liabilities Equity

“a cake”

❑ Assets are resources a business owns

❑ Examples: Cash, Equipment, Buildings, Inventory,
Receivables from customers …
❑ The common characteristic possessed by all assets is
the capacity to provide future services or benefits

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The Accounting Equation (cont’d)

Assets Liabilities Equity

“who can share the cake”

❑ Liabilities are the creditors’ claims on assets
❑ that is, existing debts and obligations
❑ Examples: Bank loans, Payables to suppliers, Payables
to employees …
❑ Creditors may legally force the liquidation of a
business that does not pay its debts

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The Accounting Equation (cont’d)

Assets Liabilities Equity

“who can share the cake”

❑ Equity is the owners’ claim on assets

❑ Examples: Investments from owners, Retained earnings
❑ Equity = Assets - Liabilities
❑ It is often referred to as residual equity—that is, the
equity “left over” after creditors’ claims are satisfied.

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The Accounting Equation (cont’d)
❑ In reality:
❑ Assets is not a static cake. Its size and components can change over time
❑ Liabilities and Equity can involve a large group of different people

Assets Liabilities Equity

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The Accounting Equation - Equity
❑ What affect equity? For the moment, we only focus on “ordinary shares”, which are
classified as equity. Another type of shares are called “preference
❑ Share Capital-Ordinary (+) shares”. Not every company has “preference shares”.
The amounts paid in by shareholders for
the ordinary shares they purchase

❑ Revenues (+)
The gross increases in equity resulting from Equity
business activities entered into for the
purpose of earning income

❑ Expenses (-)
The cost of assets consumed or services used
in the process of earning revenue
❑ Dividends (-) Shareholders
The distribution of cash or other assets to (owners)
shareholders

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Analyze business transactions
❑ The system of collecting and processing transaction data and
communicating financial information to decision-makers is
known as the accounting information system
❑ Accounting information systems rely on a process referred to
as the accounting cycle

❑ We will explain each of these steps in Chapters 1-4.

❑ In Chapter 1, we analyze the effects of business transactions on the
accounting equation
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Transaction analysis
❑ Expanding the basic equation for analysis

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Transaction (1) Investment by Shareholders
❑ Ray and Barbara Neal decide to start a smartphone app development
company that they incorporate as Softbyte SA. On September 1, 2020,
they invest €15,000 cash in the business in exchange for €15,000 of
ordinary shares. The ordinary shares indicates the ownership interest
that the Neals have in Softbyte SA.

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Transaction (2) Purchase of Equipment for Cash
❑ Softbyte SA purchases computer equipment for €7,000 cash.

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Transaction (3) Purchase of Supplies on Credit
❑ Softbyte SA purchases headsets (and other computer accessories
expected to last several months) for €1,600 from Mobile Solutions.
Mobile Solutions agrees to allow Softbyte to pay this bill in October.
This transaction is a purchase on account (a credit purchase).

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Transaction (4) Services Performed for Cash
❑ Softbyte SA receives €1,200 cash from customers for app development
services it has performed. This transaction represents Softbyte’s
principal revenue-producing activity. Recall that revenue increases
equity.

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Transaction (5) Purchase of Advertising on Credit
❑ Softbyte SA receives a bill for €250 from Programming News for
advertising on its website but postpones payment until a later date

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Transaction (6) Services Performed for Cash & Credit
❑ Softbyte SA performs €3,500 of app development services for
customers. The company receives cash of €1,500 from customers, and
it bills the balance of €2,000 on account.

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Transaction (7) Payment of Expenses
❑ Softbyte SA pays the following expenses in cash for September: office
rent €600, salaries and wages of employees €900, and utilities €200.

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Transaction (8) Payment of Accounts Payable
❑ Softbyte SA pays its €250 Programming News bill in cash. The company
previously [in Transaction (5)] recorded the bill as an increase in
Accounts Payable and a decrease in equity.

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Transaction (9) Receipt of Cash on Account
❑ Softbyte SA receives €600 in cash from customers who had been billed
for services [in Transaction (6)].

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Transaction (10) Dividends
❑ The company pays a dividend of €1,300 in cash to Ray and Barbara
Neal, the shareholders of Softbyte SA. This transaction results in an
equal decrease in assets and equity.

Dividends are NOT expenses!

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Summary of Transactions
❑ Tabular Analysis of Transactions

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Summary of Transactions
❑ Key Points
1. Each transaction must be analyzed in terms of its effect on:
a. The three components of the basic accounting equation
b. Specific types (kinds) of items within each component
2. The two sides of the equation must always be equal
3. The Share Capital-Ordinary and Retained Earnings columns
indicate the causes of each change in the shareholders’ claim
on assets

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Tabular Analysis – Exercise

❑ Analyze the effects of each transaction on the accounting equation

❑ Use appropriate category names (not descriptions)
❑ Keep the accounting equation in balance

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Tabular Analysis – Solution

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Financial Statements
❑ Describe the five financial statements and how they are prepared
[Link] statement: presents the revenues and expenses and resulting net
income or net loss for a specific period of time.
[Link] earnings statement: summarizes the changes in retained earnings for
a specific period of time.
[Link] of financial position: reports the assets, liabilities, and equity of a
company at a specific date. (referred to as a balance sheet)
[Link] of cash flows: summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time.
[Link] income statement: presents other comprehensive income
items that are not included in the determination of net income in the income
statement.
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Financial Statements - Income Statement

period of time
(a month)

“Net loss” if Net income will be used to determine

revenues < expenses the ending balance in retained earnings

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Financial Statements - Retained Earnings Statement
Net income from the
Income Statement

period of time
(a month)

The ending balance in retained earnings will be

used in preparing the statement of financial position

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Financial Statements - Statement of Financial Position
Statement of Financial Position is
also called “Balance Sheet”

a specific date The ending balance in

(month-end) retained earnings

The cash shown on the

statement of financial
position will be used in
preparing the
statement of cash flows

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Financial Statements - Statement of Cash Flows
More in Chapter 14

1
period of time
(a month)

3
The cash shown on
the statement of
financial position

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Financial Statements - Comprehensive income statement
❑ Other comprehensive income items are not part of net
income but are considered important enough to be reported
separately. This statement immediately follows the income
statement.
More in higher-level
accounting courses

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Financial Statements - Exercise

❑ Review previous financial statements to determine how total assets, net

income, and equity are computed.
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Financial Statements - Solution

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Financial Statements - Solution (cont’d)

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Career Opportunities in Accounting
• Individuals in public accounting offer expert service to the general public,
Public in much the same way that doctors serve patients and lawyers serve
Accounting clients.
• Choices: Auditing, taxation, management consulting

• Individuals in private accounting are employees of for-profit companies

Private and not-for-profit organizations
Accounting • Choices: Cost accounting, budgeting, accounting information system
design and support, tax planning and preparation, internal auditing

Governmental • Choices: Tax authorities, local governments, law enforcement agencies,

company regulators, accounting educators at public colleges and
Accounting universities “Big Four”
accounting firms
The CPA license is necessary for public
Forensic • Choices: Investigate theft and fraud using accounting, auditing, and
investigative skills accountants who work either solo or
Accounting
for companies that provide accounting
services to others

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Career Opportunities in Accounting (cont’d)
Other
• Gov’t
BA of • Law Firms

Accounting
Investment
Financial
Big 4 Firms • Fund
•
• Auditing Sell-Side
Analyst
• Taxation Banks
• Consulting • Comm Banks
• Invest Banks Corporate

Consulting-PE
Partner VC (Risk Corporate
Management) Finance

Accounting is not a career-limiting choice.

CIO/ Instead, it is a useful tool and a profession
CFO
CRO/ that enhances your future career path.
/CEO
CCO

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Glossary
❑ Single-entry bookkeeping (单式记账法) ❑ Dividends (分红)
❑ Double-entry bookkeeping (复式记账法) ❑ Revenues (收入)
❑ Debit (借方) ❑ Expenses (费用)
❑ Credit (贷方) ❑ Net income (净利润)
❑ Financial Accounting (财务会计) ❑ Net loss (净损失)
❑ Managerial Accounting (管理会计) ❑ Retained earnings (留存收益)
❑ Stock (股票) ❑ Financial statements (财务报表)
❑ Market value (市值) ❑ Income statement (利润表)
❑ Owners / Shareholders (所有者，股东) ❑ Retained earnings statement (留存收益表)
❑ Investors (投资者) ❑ Statement of financial position / Balance sheet (资产负债表)
❑ Creditors (债权人) ❑ Statement of cash flows (现金流量表)
❑ Assets (资产) ❑ Comprehensive income statement (综合收益表)
❑ Liabilities (负债) ❑ Accountant (会计师)
❑ Equity (股东权益) ❑ The Big Four (四大会计师事务所)
❑ Share capital—ordinary (普通股) ❑ PwC (普华永道) / Deloitte (德勤) / EY (安永) / KPMG (毕马威)
❑ Preference shares (优先股)

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