Teaching

• Fourth year at SMU
  • Also teaching ACCT 420
• Before SMU: Taught at the University of Illinois Urbana-Champaign while completing my PhD

Research

• Accounting disclosure: What companies say, and why it matters
• Approach this using AI/ML techniques

What will this course cover?

Teaching philosphy

1. Accounting is best learned in a seminar style
   • Less lecture, more thinking
2. Working with others greatly extends learning
   • If you are ahead:
     • The best sign that you’ve mastered a topic is if you can explain it to others
   • If you are lost:
     • Gives you a chance to get help and catch up

Grading

• Standard SMU grading policy
• Participation @ 10%
• Homework @ 10% (equally weighted)
• 2 quizzes @ 7.5% each
• Group project @ 15%
• Final exam @ 50%

Participation

Actively learn & learn from others

Outside of class

Quizzes

• Why?
  • Reinforce what you have learned
  • Early progress indicator
• What to expect?
  • 1 hour each
  • Context based
  • Long format
    • Extracting information from a situation
    • Problem solving

Group project

• What to expect
  • 1 case per group covering a recent or ongoing accounting issue
  • Groups of 4-5, fairly assigned
• Why?
  • Brings course material to a real context
  • Helps develop soft skills
  • Learn about many real world situations

Final exam

• Why?
  • Ex post indicator of attainment
• How?
  • 3 hours
  • Long format (like quizzes)
    • Potentially some MCQ
  • Same exam across all sections

Expectations

Textbook

Brand new book this semester. Consider the slides to be more reliable. There are also videos for early chapters on eLearn.

Tech use

• Laptops and other tech are OK!
  • Use them for learning, not messaging
• Examples of good tech use:
  • Taking notes
  • Viewing slides
  • Working out problems
  • Group work
• Avoid:
  • Watching livestreams of pandas or Overwatch
  • Messaging your friends on Telegram
  • Working on homework for the class in a few hours

Office hours

• TA Office hours: Fixed time slots, TBD
• Prof office hours:
  • Walk in hours from 2:30 to 4:30pm on Mondays
  • Bookable at rmc-link.youcanbook.me
  • I may host extra office hours around quizzes and the exam, subject to demand.
• Short questions can be emailed
  • I try to respond within 24 hours

\(\quad\)Office hours begin the week of Session 2

Fixed time slots are for drop-ins – no appointment necessary. Any other office hours should be booked using the link above

About you

• Results are anonymous

Learning objectives

What is accounting?

The language of business

1. Measure business activities
   • Ex.: Sales, wages, inventory changes, …
2. Process reports into data
   • For managers, investors, etc.
3. Communicate results to financial statement (F/S) users
   • Ex.: Statements, disclosures, press releases, …

Types of accounting

1. Financial
   • Provides information to external users.
   • Needs to be decision relevant
   • Audit fits in here
2. Managerial
   • Provides information to internal users
   • Used for budgeting, forecasting, strategy
3. Tax
   • Technically a subset of financial accounting
   • Used for determining tax liability

Financial Accounting

How companies communicate information publicly

Audit

Looking for a needle – it may or may not be there

Managerial Accounting

How companies generate and communicate information internally

Tax accounting

Pay money to save even more money

Why should we care?

Forms of business

Forms of business

Forms of business

Summary:

IFRS (our accounting rules)

• IASB created IFRS in 2001
  • An attempt to standardize accounting rules across countries
  • Over 100 countries and 49,890 companies using IFRS

0: not used; 1: optional; 2: mandatory

IFRS conceptual framework

IFRS conceptual framework

• Prescribes nature, function, and boundary of an accounting system
• Purpose: To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity

The conceptual framework lays a foundation for resolving big issues

Financial Information

• Focused on general purpose financial statements prepared at least annually
  • Usually quarterly
  • Semiannually in the UK
• Economic resources: what you own
  • Inventory, buildings, patents, etc.
• Claims: claims on the company’s assets
  • Claims by lenders and creditors (debt)
  • Claims by owners (shareholders)

Relevance

• Fundamental characteristic
• Is the information material?
  • Material: Important enough to warrant sharing
  • Would not disclosing (or incorrectly disclosing) affect users’ decisions?

The information is useful

Faithful Representation

• Fundamental characteristic
• Complete: Includes all necessary information to understand economic phenomenon
• Neutral: No bias
• Free from error: no errors or omissions

Information is complete, neutral and free from error

Comparability

• Enhancing characterisic
• Information by the firm can be compared across years
  • Not across firms
• If you change the way something is calculated, show the new and the old way

Compare over time for the same firm

Verifiability

• Enhancing characterisic
• All accounting figures can be verified from a paper trail
  • Receipts
  • Records of counts
  • Calculations

Verifiability: Paper trail

Timeliness

• Enhancing characterisic
• Takes time to prepare and verify information
• More timely is a tradeoff with other characteristics

Is the information useful when released?

Understandability

• Enhancing characteristic
• Regardless of how useful the content is, it isn’t useful unless users can understand it
• Baseline is a reasonably educated user
  • You after you finish this class

Can a reasonably educated user use it?

Accrual Accounting

• Assumption
• The basis for our accounting system and many others
• Alternative is cash basis
  • Record when cash changes hands
• This will be the focus next week

Record when something happens, not when cash changes hands

Going concern

• Assumption
• Entity will last long enough to use all assets and pay all liabilities

Assume the company isn’t collapsing

Cost constraint

Benefit of accounting to society outweighs its cost

Review

Note

• We’ll cover each of these at length later
• Covered in Session 3:
  • Income Statement
  • Changes in Equity
  • Balance Sheet
• Covered in Sessions 10 and 11:
  • Statement of Cash Flows

Income Statement

• Part of the Statement of Comprehensive Income
  • We’ll get to this later
• Shows net profit or loss for a period
  • Comprised of:
    • Revenues and gains
    • Expenses and losses

Statement of Changes in Equity

• Shows transactions with owners
• Net income flows from the Income Statement to this Statement
• Includes outflows from dividends

Balance Sheet

• More formally known as the Statement of Financial Position
• A snapshot at a point in time of a company’s:
  1. Assets
  2. Liabilities
  3. Equity

Statement of Cash Flows

• Measures cash receipts and payments
• Breaks cash activities into:
  1. Operating activities
  2. Investing activities
  3. Financing activities

Examples

• Breadtalk 2018
• Samsung 2018
• DBS 2018

Building blocks

• Everything is classified as one of:
  1. Assets
  2. Liabilities
  3. [Shareholders’] Equity
• All elemenets of a transaction

Assets

Economic resources controlled by an entity which are expected to produce future economic benefits to the entity.

• Cash, accounts receivable (A/R)
• Inventory, equipment
• Factories, machinery
  
  
• Coffee shop:
  • Cash
  • Inventory (coffee beans, food)
  • Fixed assets (building, espresso machine)

Debit = Increase \(\qquad\) Credit = Decrease

Liabilities

Present obligations of the entity which are expected to result in an outflow of economic benefits from the entity.

• Accounts payable
• Bills outstanding: Wages payable, utilities payable
• Debt
  
  
• Coffee shop:
  • Bank loan (maybe used to buy the building)
  • Outstanding utility bill
  • Bill from coffee supplier

Debit = Decrease \(\qquad\) Credit = Increase

Equity

The residual interest in the entity’s assets after deducting the entity’s liabilities and represents shareholder’s residual claim to the entity’s assets.

• Share capital: Amount paid in by owners
• Retained earnings: net profit not released as dividends
• Revenue: Sales, income
• Expenses: costs of doing business
  
  
• Coffee shop:
  • The money put in by the founder
  • Revenue from selling coffee and expenses from paid wages

Debit = Decrease \(\qquad\) Credit = Increase

In class activity

Base equation

\[Assets = Liabilites + Equity\]

• Intuition:
  1. All the assets must be owned by someone
  2. Liabilities and Equity represent all the claims on assets
  3. Assets must equal liabilities plus equity

Changing assets

Changing liabilities

Changing equity: Income and expenses

Changing equity: other accounts

Retained earnings: \(\sum_{\text{all years}}(Revenues - Expenses - Dividends)\)

Expanded equation:

\[ \begin{align} Assets &= Liabilities + Equity \\ \\ Equity &= Shares + Retained~Earnings - Dividends \\ &+ Revenues - Expenses \end{align} \]

Tips on the accounting equation

• Raising capital: assets ↑ (cash), equity ↑ (share capital)
• Paying an expense early: assets ↑ (prepaid expense), assets ↓ (cash) [no net effect]
• Paying prerecorded wages: assets ↓ (cash), liability ↓ (salaries payable)
• Revenue: asset ↑ (cash), revenue ↑
  • With inventory, add: asset ↓ (inventory), expense ↑ (cost of goods sold)
• Paying debt: assets ↓ (cash), liabilities ↓
  • No change in equity unless there’s an interest payment

Group problems

• How would the following transactions affect the expanded accounting equation for a small coffee shop?

1. Sell a latte to a customer.
2. Pay the utility bill.
3. Buy lunch for the supplier’s representative.
4. Take a business trip to Guatemala to visit coffee farms. Paid by cash.
5. Take a vacation to Guatemala (not for business).
6. Bought a new coffee maker on credit.

Harder group problem

• Post on the eLearn discussion board by the end of the day
  • Accounting Equation Exercise
  • Include all group members’ names

Wrap up

• For next week:
  1. Recap the reading for this week
  2. Read the pages for next week
     • Bookkeeping (Chapter 2)
     • Accrual accounting and adjusting entries (Chapter 3)
  3. Practice on eLearn
     • Automatic feedback provided
     • Make sure you have the accounts and accounting equation down!
       • You’ll need to know these next week