International Accounting - Appunti

Principles of international accounting

Objective

Analyse and comprehend the differences in accounting and marketing systems from different countries. 3 domande (5 p) e 2 esercizi (8.5 p), 90 min. Quindi quasi 20 min per esercizio e poi c’è il commento. Il primo step è l’identificazione degli studenti, mostri ID e il badge, mostri la scrivania la stanza, webcam sempre accesa. Una parte è su moodle, una parte scritta a mano. Su moodle si risponde alle domande, i commenti con i risultati, su carta si mettono i calcoli. La carta si scannerizza, si fa un pdf e si carica su Moodle, dopo l’esame sono dati 15 minuti per queste operazioni. Se i risultati non corrispondono ai calcoli l’esame è annullato. Domande esempio: harmonization vs standardization. Adoption of and convergence with FEE. All’esame saranno problemi nuovi.

Public financial reporting

A : public financial reporting to external users.

Double entry system

Ccountingd - : a fundamental concept underlying present-day bookkeeping and accounting, states that every financial transaction has equal and opposite effects in at least two different accounts. It is used to satisfy the accounting equation. The accounting basic equation is the mathematical structure of the balance sheet.

Assets = Liabilities + Equity

• Assets = total of economic resources, resources a business owns, like cash, inventory (materials, finished, semi-finished), equipment, intangible assets, accounts receivable.
• Liabilities = something a person or company owes, i.e. claims against assets (debts and obligations). Liabilities include loans, accounts payable, notes payable (a promise of payment), mortgages, deferred revenues, bonds, warranties, and accrued expenses.
• Equity = claim of ownership on total assets. What is returned to investors whether assets are sold off in case of liquidation. Equity consists in: share capital, funds by selling shares to investors; retained earnings, or profit [= revenue – expenses – dividends].

Within the financial statement the company identifies and records the important economic events in a company’s life to interested (internal and external) users. Economic events are those events that imply an exchange of money. Moreover, the type of users determines the type of accounting, management accounting and financial accounting. Financial accounting is primarily referred to the preparation of an accounting statement. Our course is more focused on financial accounting. Management accounting is primarily related to the analysis of costs and benefits, to take decisions and to estimate a budget.

Bookkeeping

The simple process of recording economic activities.

Example 01 (Tabular Analysis)

Could happen on the exam. We have a list of transactions that we should be able to include in the accounting basic equation. At the exam only the transaction is given.

• Ex. 1, there is an exchange of money, so it is a transaction.
• Ex. 2 is another transaction where money the company has are spent on equipment, another asset.
• Ex. 3 they owe 1600.
• Ex. 4, the company provides services for cash and credits (on account).
• Ex. 5 salary goes in expenses.
• Ex. 6 dividends are paid. Dividends are usually paid by cash. You can now have the retained earnings. The amount of assets should be equal to liabilities and equity. So, we can calculate assets, liabilities and equities, and then add for equilibrium.

T-Account form

Bookkeeping Accounting record of increases and decreases of assets, liabilities and equities, revenues, expenses. It is illustrated in a T-Account form. At the top there’s the account title (such as “cash” or “account payables”), on the left the debt, on the right the credit. Assets and expenses are increased using debits (+) and decreased using credits; while liabilities, owner's equity, and revenues are decreased using debits (-) and increased using credits. In bookkeeping each transaction must affect two or more accounts, by debiting and crediting, in order to keep the equation in balance (total debts must equal credits). Double-entry accounting specifies that for every entry appearing on the left side (debit) of an account, there needs to be a corresponding entry on the right-hand side (credit) of an account.

Calculation steps

• To calculate: we calculate the 1. left side first, then 2. the right side.
• Finally, we write the 3. total balance on the greater side (as in the example)

If debts > credits = debit balance

If credits > debts = credit balance

We are going to see the same example 01 in bookkeeping.

Example 02 (Bookkeeping)

We are going to learn how to analyze or record transactions to phases of the accounting cycle:

1. Accounting equation (tabular analysis) | Analyze transactions
2. Journal Entry (journal – Bookkeeping with T-accounts) | record the transaction in a journal. One entry for each transaction in chronological order. Debit and credit can easily be compared.
3. Share journal information (not requested in the exam)
4. Trial Balance (a check for mistakes), you report all the closing balances from the bookkeeping in a T column format. The two totals shall be equivalent. Whether they are not equivalent, there is a mistake. To find the mistake you should first check all the total balance account by account. If the mistake isn’t found yet, you check the amounts of transactions reported in both sides.
5. Income Statement. To make adjusting entries. It is necessary to assign revenue and expenses to a certain period of time. In fact, some transactions are concluded within a fiscal year, and some are not.
6. Balance Sheet. 5 & 6 are steps to a financial statement.

The accrual accounting principal is contraposed to the cash accounting principle. In other words, Accrual accounting recognizes transaction when they occur (not when cash is paid).

The timing issue

The time period assumption can vary a lot, usually, we use the annually based financial statement. The fiscal year is usually opened on 1^st January and closed 31^st December, but this parameter can also vary.

Below, two practical examples of adjusting entries. Adjusting entries are changes to journal entries you've already recorded. Specifically, they make sure that the numbers you have recorded match up to the correct accounting periods. They are a preliminary step to the trial balance.

In the first example, to make the adjustment at the closing fiscal year: you calculate what is the expense relative to the fiscal year that you are closing, in this case, of just one month. You open an account rent expense, and you open an account for rent expense and for accrued rent expense. The accrued rent expense is a liability to the renting agency because you will pay the full amount at the end of the rental contract.

In the second example, there is an insurance contract that is paid in advance by cash. You first pay the full expense (prepaid insurance) and subtract the cash. At the closing fiscal year, you must write how much you have paid in that year, that is just one month (insurance expense), the relative expense, and reduce the prepaid insurance of the relative expense (100).

Adjusted trial balance

The following step is to prepare the adjusted trial balance. Finally, we prepare the financial statement. There are two substeps: the income statement (P&L) and the balance sheet (A&L).

Income statement

An income statement or profits & losses is one of the financial statements of a company and shows the company's revenues and expenses during a particular period. We write all the profits and losses of that time period. These data come from bookkeeping. If the profit (right) is higher than losses (left), you are in profit.

Balance sheet

A balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. We write all the assets on the left, and all equities and liabilities on the right. You first calculate the assets, then the equity and liabilities. If there is a difference you add up for the equilibrium. The balance sheet is a document made at the end of the fiscal year. To prepare the balance the 31^st of December means to take a picture of all the assets, liabilities and components of equity at that time.

Retained earnings = the difference of the net income – dividends.

Exercise 1A0

First thing: prepare the table for the tabular analysis:

1. First transaction: cash and share capital, 10000 each. For each transaction it is suggested to write down the result.
2. Equipment in exchange for cash, -5000 cash, +5000 equipment
3. Rent this is not an asset. It’s -400 in cash, and -400 in expenses.
4. Supplies are an asset. It’s -500 in cash, and +500 in supplies.
5. The cost of marketing is an expense, but you are not paying it right away. +250 Accounts Payable
6. You have sold a service. +5100 in cash and +5100 in revenues.
7. “*declared and *paid”, meaning that you announce that you are going to pay that amount before paying. If there is just an announcement/declaration you don’t have to account the transaction. On the exam, you need to write “this is just a declaration not an economic transaction, so I do not account this transaction”. But in this case, there is an actual exchange of money, so: -1000 cash, -1000 dividends.
8. I pay the service of the employ. -2000 cash, -2000 expense.
9. Same as 8 and 3 for the bills.
10. You sell another service but the customer doesn’t pay by cash, but on account, +750 acc. Rec., +750 revenues
11. A customer on the total amount of revenue paid on account pays 120, +120 cash, -120 acc. Receivables
12. You make the sum of all the columns. Give a check if the total amount of assets is equal to the sum of liabilities and equities! If they don’t balance it means that you made a mistake

Income statement: B0

1. Make the table
2. You report all the service revenue on the right
3. Then you report all the expenses separately. You can understand the type of expense copying them from the tabular analysis.
4. You make the sum and check for profit or losses.

Balance sheet: Bb

1. Table
2. You start from the asset side and report every column and make the total sum.
3. On equity, you report equities and the returned earnings (that you calculate from the three columns of the tabular analysis, rev, exp, div)
4. You report the columns of the liabilities
5. You sum liabilities and equities.
6. Check if they correspond.

Exercise 2

*Esercizio fatto su carta. Ricorda che le social shares date da investimento in cash e il cash sono entrambi positivi, anche se in colonne diverse.

Tabular analysis

*fatto su carta. Ricorda di non inserire il costo di equipment, infatti quello è nella colonna equipment non expenses. Inserisci solo i dati in rev e exp.

Balance sheet

*fatto su carta. Ricorda che i retained earnings sono la somma di revenues (+) exp (-) e div (-). Segna gli accounts payables e debiti anche se sono zero.

Exercise 3

1. T-account. As you can see all the columns are given, this means you need to use all of them. Prof suggest that we first work with T-account. Remember to specify in th comment why the event of the 12 of April is not registered (not a transaction). We register the admission revenue as unearned because this is defined as unearned adm rev because the company doesn’t know yet when customers are going to consume the coupon. So, the value of the book coupon sold is reported under unearned admission revenue and an increase of cash, left side.

T-Accounts

Exercise 5

Num. 5A Journal Entries

a) We need to prepare journal entries, that means in chronological order.

1. You take note of the first transaction and the two columns with a number on the left, without preparing the table.
2. It is not a transaction. We haven’t paid them yet, we are just saying how much we want to pay them. So, you are not registering the transaction, but you give a simple explanation on the exam.

b) Put in tabella (T-Accounts)

Note: when you sell shares for cash, cash goes into debt, and share go up. For example, if a company issued equity shares for $500,000, the journal entry would be composed of a Debit to Cash and a Credit to Common Shares. Also note that Revenues/Gains are recorded Debit is a decrease in value and Credit is an increase (regular), while for Expenses/Loss and Equity debit is an increase and credit is a decrease.

T-Accounts

c) Prepare a trial balance

It means that I have to calculate the closing balance of each t-account in b (as we did already) and report it on the trial balance scheme. I notice that I have closed certain elements on the left and some on the right. I report all the assets, then liabilities, equities, revenues and expenses (but the order doesn’t count at the exam). I report debts on the left and credit on the right. Then make the sum. The sum should balance, otherwise there is a mistake in b or c.

Trial Balance

d) Income statement and balance sheet

Income statement

1. You report all the service revenue on the right.
2. Then you report all the expenses separately. You can understand the type of expense copying them from the tabular analysis.
3. You make the sum and check for profit or losses.

Balance Sheet

1. You make the table with assets liabilities and equities.
2. They should match.
3. Remember that retained earning has a specific formula: rev – exp – div. Retained Earnings are negative in this case.
4. If revenues are higher than expenses you have a profit, otherwise you have a loss. The loss has to be reported on the right side, the side of the loss. This is required at the exam, otherwise it counts as a mistake.

Income statement

Balance sheet

Financial statement analysis

The financial statement analysis is useful to give an opinion on the performance of the company by looking at the balance sheet and income statement. We will consider several financial ratio for this purpose. One exercise at the exam will focus on the application of these ratios.

Indicators characteristics

The indicators have three characteristics: liquidity, profitability and solvency ratio. In this course, we will learn the most important in these three.

Comparison

• Intracompany (a comparison of ratio from different financial statement of the same company in a different period of time),
• Industry averages (a comparison with a number of similar companies),
• Intercompany (a comparison with another company, maybe a competitor).

Tools of analysis: ratio is not the only tool of analysis. Ratio, horizontal, vertical. We want study the other two in practice, but we will stay general.

Horizontal analysis

The horizontal analysis or trend analysis is similar to the intracompany analysis. We calculate the ratio from different period of times to compare them. Are total asset increasing? Is the profit increasing? Etc.

Vertical analysis

The vertical analysis or common-size analysis is a method of financial statement analysis in which each line item is listed as a percentage of a base figure within the statement. The sales/revenues are usually the target because they indicate the ability of the company to secure the market. We do that looking at the accounting basic equation.

We won’t do any exercise on these two types of analysis.

Ratio analysis

Ratio analysis means to use indication to provide an opinion on the economic performance of a company. Liquidity, profitability and solvency refer to three different aspects of the economic performance.

Liquidity

Measures short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash. Has the company enough assets to pay its liabilities?

Profitability

Measures the income or operating success of a company for a given period of time. It has usually to do with revenue and expenses, but also with other type of profit. Will the company be profitable over a certain period of time?

Solvency

Measures the ability of the company to survive over a long period of time. A way to finance an economic activity are financial obligations (like bonds or bank loans), long term debt (longer than one year, not short term, like accounts payable) the company shall give this the money back with interests within a certain window of time. Is the company able to pay back these money with interests? Another way is attracting the shared capital of investors. You give back all the shared capital with the assets when the business is closed.

In the financial analysis, a single ratio by itself is not very meaningful. The value of the analysis is given through comparison. So, it’s always better to do a comparison, that could be intracompany, intercompany or industry averages.