Javid Iqbal Assistant Professor Department of Management Sciences COMSATS Institute of Information Technology, Islamabad
Education • M. Sc in Accounting (Pass with Distinctions, August 2007 -June 2009) Graduate School, School of Business, Economics and Law, Gothenburg University, Sweden • Master of Business Administration in Finance (2004 -2006) Department of Business Administration University of Sargodha, Pakistan • Master of Commerce in Accounting (2001 -2003) Hailey College of Commerce University of the Punjab, Pakistan • Bachelor of Commerce (1999 -2001) Hailey College of Commerce University of the Punjab, Pakistan
DISTINCTIONS & AWARDS • Rotary International Student House (RISH) has selected one of the top five international students from Gothenburg University, Sweden. • Awarded distinction on master project (Thesis) presented to fulfill the requirement of Master of Science in Accounting degree. • Awarded cash prize and certificate on project of European financial crises
EXPERIENCE • Assistant Professor – COMSATS Institute of Information Technology, Islamabad – (2009 to till date) • Research Fellowship – School of Business, Economics and Law, Gothenburg University, Sweden – 2009 • Lecturer – University of Education, Lahore, Pakistan – 2006 to 2007 • Lecturer – Hi-Aims College of Commerce, Jauharabad – 2004 to 2005
RESEARCH INTERESTS • Financial Disclosure, • Financial Regulations, • Financial Statements Analysis, • • Accounting Practices, • Management Accounting
End of Profile
Accounting 1 Course Contents MGT 130
Business Organizations • Proprietorships, • partnerships • corporations.
Business types • Manufacturing • Merchandizing • Services business.
Accounting Information for Decision Making • Financial Accounting • Management Accounting, • Objectives with regards to the information
GAAP and Accounting Standards • Generally Accepted Accounting principles, • IAS and • IFRS – Basis for business entities for Preparing Financial Statements for the external users
Economic Transactions • Double entry system • Transactions • Principles of Debit and Credit
Accounting Equation • Rules of Accounting equation • Techniques of calculating – Assets, – Liabilities and – Owner’s equity • Transactions in Accounting Equation
Financial Statements • Financial Accounting – Income Statement, – Balance Sheet, – Cash flow statement and – Statement of changes in Owner`s equity
The Accounting Cycle • Preparing Journals • Preparing Ledgers; the main book of original entries • Preparing Trial Balance, • Adjusting entries and adjusted Trial Balance • Preparing Financial Reports • Closing entries and completion of Accounting cycle
• Special Journals • Receivable • Inventories • Control over cash – Bank Reconciliation Statement
End of Course Outline
Recommended Book • Meigs, Williams, Haka and Bettner: Accounting: The Basis for Business Decisions. Ed(11 th) • Warren Reeve Fess: Accounting, 21 st Edition
Accounting 1 MGT 130 Chapter 1
Objectives 1. Describe the nature of a business. 2. Describe the role of accounting in business. 3. Describe the profession of accounting. 4. Summarize the development of accounting principles 5. State the accounting equation and define each element of the equation.
Objectives 6. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. 7. Describe the financial statements of a proprietorship and explain how they interrelate.
Types of Businesses • Manufacturing • Merchandizing • Services business.
Types of Businesses Manufacturing Business Product Toyota Motors Intel Nishat Nike Coca-Cola Sony Cars, vans Computer chips Textile Athletic shoes Beverages Stereos and television
Types of Businesses Merchandizing Business Product Metro Cash & Carry General merchandise D. Watson Medicine United Mobiles Mobile Phones Amazon. com Internet books, music,
Types of Businesses Services Business Product PIA Marriott Hotels HBL PTCL Transportation Hospitality and lodging Financial Services Telecommunication
There are three types of business organizations ü Proprietorship ü Partnership ü Corporation
A proprietorship is owned by one individual. Advantages • Ease in organizing • Low cost of organizing Disadvantage • Limited source of financial resources • Unlimited liability
A partnership is owned by two or more individuals. Advantages • More financial resources than a proprietorship. • Additional management skills. Disadvantage • Unlimited liability.
A corporation is organized under state or federal statutes as a separate legal entity. Advantage • The ability to obtain large amounts of resources by issuing stocks. • Limited liability Disadvantage • Double taxation. • Difficult process to establish
Business Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
Business Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors.
Business Strategies Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.
Business Stakeholders A business stakeholder is a person or entity having an interest in the economic performance of the business.
Business Stakeholders • Owners • Banks • Customers • Government Agencies etc
Common Things –Organizational Goals –Need Information
Organizational Goals • Profit Making • Welfare Work
The Process of Providing Information 1 Identify stake Internal: -holders. Owners, managers, employees STAKEHOLDERS External: Customers, creditors, government 2 Assess stakeholders’ informational needs.
The Process of Providing Information 4 Record economic data about business activities and events. Accounting Information System 3 Design the accounting information system to meet stakeholders’ needs.
The Process of Providing Information Internal: Owners, managers, employees 5 STAKEHOLDERS External: Customers, creditors, government Prepare accounting reports for stakeholders. Accounting Information System
Purpose of Information • Investors want to know if a company is a good investment. • Creditors want to know if they should extend credit, how much to extend, and for how long. • Managers want to know if a new product will be profitable. • Owners want to know which employees are productive. • Government regulators want to know if financial statements conform to requirements.
The Purpose of Accounting The basic purpose of Accounting is to provide information to decision makers that is useful in making economic decisions.
Accounting System • The accounting system is a series of steps performed to – Analyze, – Record, – Quantify, – Accumulate, – Summarize, – Classify, – Interpret – Report economic events and their effects on an organization and to prepare the financial statements.
Accounting • Accounting is a process of – Identifying, – Recording, – Summarizing, and – Reporting economic information to decision makers
Accounting System Accumulates data for use in both financial and managerial accounting Accounting System Accumulates cost information Financial Accounting Managerial Accounting
Financial Accounting • Financial accounting - focuses on the specific needs of decision makers external to the organization, such as stockholders, suppliers, banks, and government agencies i. e. annual reports, quarterly reports, semi annual reports.
Financial Statements • • Balance Sheet Income Statement Cash Flow Statement of Changes in Owner’s Equity – Notes
Financial Statements Balance Sheet ◦ Shows financial position of the company for a specific point in time/date i. e. 31 st December 2010, 30 th June 2010 etc. Income Statement ◦ Shows net results of business operations for a specific period of time i. e. a week, month, semi-annual, Annual Cash Flow Statement ◦ Shows inflow-outflow of funds for a specific period of time. Statement of Changes in Owner’s Equity ◦ Shows changes incurred in the total equity for a specific period of time
The Balance Sheet Sections of the balance sheet: Assets - resources of the firm that are expected to increase or cause future cash flows (everything the firm owns) Liabilities - obligations of the firm to outsiders or claims against its assets by outsiders (debts of the firm) Owners’ Equity - the residual interest in, or remaining claims against, the firm’s assets after deducting liabilities (rights of the owners)
Income Statement = = Sales Revenue Less Expenses Gross profit Operating Cost: Selling General Administration Expenses Net Income xxxx xxxx
Managerial Accounting It is a science of Identify information, Measure information, Analyze information, Interpret information, and Communicate information • Focus of managerial accounting is on the needs of managers within the organization rather than interested parties outside the organization.
Costing Accounting • Accumulate cost data for use in both managerial and financial accounting i. e. production cost data (MA), value inventory for balance sheet (FA)
Accounting System Accumulates data for use in both financial and managerial accounting Accounting System Financial Accounting Published financial statements and other financial reports Managerial Accounting Information for decision making, planning, directing, and controlling an organization's operations and assessing its competitive position
Managerial Accounting Financial Accounting Users of information Managers within organizations Interested parties outside organizations Regulations Not required and unregulated Must confirm to GAAP/IFRS/IAS/SECP Source of Data Organizations basic accounting system plus other sources Almost exclusive drawn from the org`s basic accounting system which accumulate financial info Nature of Reports and Focus on subunits within org Focus on entire procedures (Dept, divisions, region etc), enterprise based on historical as well as Historical Data projection of future events
Profession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
Generally Accepted Accounting Principles (GAAP)
The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.
The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business
The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business
The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners
What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2010, Javid Iqbal begins a business that will be known as Opportunities Incorporation.
a. Javid Iqbal deposits Rs. 25, 000 in a bank account in the name of Opportunities. Assets a. = Cash 25, 000 = Owner’s Equity Javid , Capital 25, 000 Investment by Javid Iqbal
b. Opportunities exchanged Rs. 20, 000 for land. Assets Cash + Land Bal. 25, 000 b. – 20, 000 +20, 000 Bal. 5, 000 20, 000 = = Owner’s Equity Javid Iqbal, Capital 25, 000
c. During the month, Opportunities purchased supplies for Rs. 1, 350 and agreed to pay the supplier in the near future (on account). Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital = Bal. 5, 000 20, 000 25, 000 c. + 1, 350 Bal. 5, 000 1, 350 20, 000 1, 350 25, 000
d. Opportunities Inc. provided services to customers, earning fees of Rs. 7, 500 and received the amount in cash. Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital Bal. 5, 000 1, 350 20, 000 = 1, 350 25, 000 d. + 7, 500 Fees earned Bal. 12, 500 1, 350 20, 000 1, 350 32, 500
e. Opportunities Inc. paid the following expenses: wages, Rs. 2, 125; rent, 800; utilities, Rs. 450; and misc, Rs. 275. Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital Bal. 12, 500 1, 350 20, 000 1, 350 32, 500 e. – 3, 650 – 2, 125 Wages = – 800 Rent – 450 Util. – 275 Misc. Bal. 8, 850 1, 350 20, 000 1, 350 28, 850
f. Opportunities paid Rs. 950 to creditors during the month. Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital Bal. 8, 850 1, 350 20, 000 = 1, 350 28, 850 f. – 950 Bal. 7, 900 1, 350 20, 000 400 28, 850
g. At the end of the month, the cost of supplies on hand is Rs. 550, so Rs. 800 of supplies were used. Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital Bal. 7, 900 1, 350 20, 000 = 400 28, 850 g. – 800 Supplies expense Bal. 7, 900 550 20, 000 400 28, 050
h. At the end of the month, Javid withdrew Rs. 2, 000 in cash from the business for personal use. Owner’s Assets = Liabilities + Equity Accounts Javid Iqbal, Cash + Supplies + Land Payable Capital Bal. 7, 900 550 20, 000 = 400 28, 050 h. – 2, 000 Withdrawal Bal. 5, 900 550 20, 000 400 26, 050
Effects of Transactions on Owner’s Equity
Accounting reports, called financial statements, provide summarized information to the owner.
Financial Statements • Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date. • Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Financial Statements • Income statement—A summary of the revenue and expenses for a specific period of time. • Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
Opportunities Income Statement For the Month Ended November 30, 2010 Fees earned Rs. 750 000 Operating expenses: Wages expense Rent expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses Net income Rs. 212500 800 00 450 00 To the statement of owner’s equity 275 00 1 135 00 Rs. 3 050 00
Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 Net income for November Rs. 0 Rs. 25 000 00 3 050 00 Rs. 28 050 00 2 000 00 Less withdrawals Increase in owner’s equity To the balance Javid Iqbal, capital, November 30, 2010 sheet 26 050 00 Rs. 26 050 00
Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 From Net income for November the income statement Less withdrawals Increase in owner’s equity Javid Iqbal, capital, November 30, 2010 Rs. 25 000 00 3 050 00 Rs. 28 050 00 2 000 00 26 050 00 Rs. 26 050 00
Opportunities Inc. Statement of Owner’s Equity For the Month Ended November 30, 2010 Javid Iqbal, capital, November 1, 2010 Investment on November 1 From Net income for November the income statement Rs. 0 Rs. 25 000 00 3 050 00 Rs. 28 050 00 2 000 00 Less withdrawals Increase in owner’s equity To the balance Javid Iqbal, capital, November 30, 2010 sheet 26 050 00 Rs. 26 050 00
Opportunities Inc. Balance Sheet November 30, 2010 Cash Assets Supplies Land Total assets Liabilities Rs, 5 900 00 Accounts Payable From the statement of owner’s equity Rs. 400 00 550 00 Owner’s Equity 20 00 Javid Iqbal, cap. 26 050 00 Total liabilities and Rs. 26 450 00 owner’s equity Rs. 26 450 00 This balance sheet presented using the account form
Opportunities Inc. Balance Sheet November 30, 2010 Cash Assets Supplies Land Total assets Liabilities Rs, 5 900 00 Accounts Payable Rs. 400 00 550 00 Owner’s Equity 20 00 Javid Iqbal, cap. 26 050 00 Total liabilities and Rs. 26 450 00 owner’s equity Rs. 26 450 00 This balance sheet presented using the account form
When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.
Opportunities Inc. Statement of Cash Flows For the Month Ended November 30, 2010 Cash flows from operating activities: Cash received from customers Rs. 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 00 ) Cash flows from financing activities: Cash received as owner’s investment Rs. 25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. sheet Rs. 5 900 00 Should match Cash on the balance
Opportunities Inc. Balance Sheet November 30, 2010 Assets Liabilities match Cash Rs, 5 900 00 Accounts Payable Rs. 400 00 Supplies Land Total assets 550 00 Owner’s Equity 20 00 Javid Iqbal, cap. 26 050 00 Total liabilities and Rs. 26 450 00 owner’s equity Rs. 26 450 00 This balance sheet presented using the account form
Statement of Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
Tools for Financial Analysis and Interpretation The ratio of liabilities to owner’s equity allows owners like Javid Iqbal to analyze the firm’s ability to withstand poor business conditions. Total Liabilities Ratio of liabilities = to owner’s equity Total owner’s equity (or total stockholders’ equity)
Tools for Financial Analysis and Interpretation Ratio of Rs. 400 liabilities to = owner’s equity Rs. 26, 050 Ratio of liabilities to = 0. 015 / 15% owner’s equity
Chapter 1 The End
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