S - Insurance accounting 3 (2010)

Prof. S.S.Gao – MCF – Lec 3 p9
Accounting Liability
Does it represent a claim on the firm’s resources?
Conservatism principle: all accounting liabilities are obligations, but not all obligations are recognized as accounting liabilities
Prof. S.S.Gao – MCF – Lec 3 p11
Accounting Equity
Does it represent an owners’ claim
Equity is a residual claim. Recognition of equity depends on the recognition of assets and liabilities. – Contributed capital - funds invested by the owner
Prof. S.S.Gao – MCF – Lec 3 p10
Classification of Liabilities
When do we make the payment? Current Liabilities - to be paid within one year (or current operating cycle) Non-current Liabilities - to be paid longer than one year
TAXES REPAY LOANS DIVIDENDS TO SHAREHOLDERS
Prof. S.S.Leabharlann Baiduao – MCF – Lec 3 p21
THE RELATIONSHIP BETWEEN CASH FLOW AND FINANCIAL POSITION
CHANGE IN FINANCIAL POSITION
Assets = Liabilities + Equity Assets = things of value owned by the firm with future economic benefits Liabilities = future economic costs, “fixed” claims Owners’ Equity = residual claim of the owners
Prof. S.S.Gao – IA – Lec 3 p1
Learning Objectives
To understand the accounting equation and how it relates to the balance sheet, income statement and statement of cash flows. To define and identify the basic accounts Understand the purpose of statement of cash flow and distinguish between its key sections Understand the difference between the direct and indirect methods for the operations section
(BALANCE SHEET) (CASH FLOW)
ENDING FINANCIAL POSITION
(BALANCE SHEET)
Prof. S.S.Gao – MCF – Lec 3 p20
WHAT DO WE USE CASH FOR?
CAPITAL EXPENDITURE AND INVESTMENT INTEREST ON LOANS
(BALANCE SHEET) (CASH FLOW)
ENDING FINANCIAL POSITION
(BALANCE SHEET)
Prof. S.S.Gao – MCF – Lec 3 p3
THE BALANCE SHEET
RESOURCES = ASSETS
€
$
CLAIMS = LIABILITIES + EQUITY
• Common Stock / ordinary shares • Preferred Stock • Treasury Stock
– Retained Earnings - result of operations – Other stuff
• Valuation adjustments • Foreign currency translation
Prof. S.S.Gao – MCF – Lec 3 p16
THE IMPORTANCE OF CASH FLOW
☺
HEARTBEAT or LIFEBLOOD OF AN ORGANISATION
☺ ☺
CRITICAL FOR SURVIVAL MORE IMPORTANT THAN PROFITS
– Payment of obligation must be for a reasonably definite amount at a reasonably definite future time – Benefit in exchange for the payment must already have been received Question: Insurance premium is an income or a liability?
Prof. S.S.Gao – MCF – Lec 3 p14
What type of account?
Identifying assets, liabilities, or equity • Goodwill developed by the firm • Unsettled damage suit • Factory • Increase in value of land • Employee payroll taxes payable
(CASH FLOW)
BEGINNING FINANCIAL POSITION
(BALANCE SHEET)
ENDING FINANCIAL POSITION
(BALANCE SHEET)
Prof. S.S.Gao – MCF – Lec 3 p22
Prof. S.S.Gao – MCF – Lec 3 p12
What type of account?
Identifying assets, liabilities, or equity • Equipment • Retained Earnings • Patent • Common Stock • Dividend Payable
Prof. S.S.Gao – MCF – Lec 3 p6
Accounting Asset
Does it provide future benefits? • Conservatism principle: all accounting assets have potential future benefits, but not all potential future benefits are recognized as accounting assets
Prof. S.S.Gao – MCF – Lec 3 p8
Classification of Assets
When do we realize the benefit? Current Assets - benefits consumed within one year (or one operating cycle) Non-current Assets - resource held and consumed for several years
Prof. S.S.Gao – MCF – Lec 3 p17
WHERE DOES THE CASH COME FROM?
OPERATING ACTIVITIES SALE OF FIXED ASSETS
RETURNS ON INVESTMENTS
NEW LOANS OR EQUITY
Prof. S.S.Gao – MCF – Lec 3 p18
Prof. S.S.Gao – MCF – Lec 3 p2
Overview of the Primary Financial Statement
FINANCIAL PERFORMANCE
(PROFIT AND LOSS) - INCOME STATEMENT
CHANGE IN FINANCIAL POSITION BEGINNING FINANCIAL POSITION
Prof. S.S.Gao – MCF – Lec 3 p4
The Fundamental Accounting Equation
Assets = Liabilities + Stockholders’ Equity
=
I.O.U.
+
Prof. S.S.Gao – MCF – Lec 3 p5
Balance sheet equation
Enron case
Prof. S.S.Gao – MCF – Lec 3 p19
AN OVERVIEW OF THE PRIMARY FINANCIAL STATEMENTS
FINANCIAL PERFORMANCE
(PROFIT AND LOSS) - INCOME STATEMENT
CHANGE IN FINANCIAL POSITION BEGINNING FINANCIAL POSITION
Prof. S.S.Gao – MCF – Lec 3 p7
Are those accounting assets?
Air, Weather (cool, hot), Rain Relationship Goodwill Local Environment (e.g., good local community school) Beauty of female employees (e.g., KLM vs Air China)
Prof. S.S.Gao – MCF – Lec 3 p15
Cash Flows and Cash Flow Statement
• • • • Is cash flow the same as cash? Profit vs. cash flow The components of cash flow statement Direct vs. Indirect Methods
Prof. S.S.Gao – MCF – Lec 3 p13
What type of account?
Identify assets, liabilities, or equity • Accumulated depreciation • Prepaid Expense • Supplies Inventory • Accounts Receivable • Land
– A firm must acquire rights to their future use as a result of a past transaction or exchange – The value of future benefits must be measurable with “reasonable” precision
Insurance Accounting
Session 3
FINANCIAL ACCOUNTING: Accounts and Cash Flow Statements
Prof. Simon Gao School of Accounting, Economics & Statistics Napier University Business School