Overview of Accounting Environment and Financial Statements

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Aim of the Accounting Information accounting is an information system that

measures, processes and communicates financial information of an economic entity to the decision makers

measurable systematic financial statements and other financial reports economic entity is an economic organization that

acts independently business entity is an economic entity that sells

goods or provides services

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Environment of a Business Organization

General Environment of Businesses

Task Environment of Businesses

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Business Language

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Users of Accounting Information

executive officers 1. creditors ; investors 2. government ; regulatory

agencies ; labor unions; financial advisors; brokerage firms; auditors; lawyers; consumer groups; and academicians

Internal Users1. Top management2. Department managers

External Users1. Users with direct financial interest2. Users with indirect financial interest

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Objective of Financial Statements the objective of financial statements is to provide

information to users to help them in their economic decisions

the financial statements are expected to provide information about the future cash flows of an entity, its financial structure, profitability and liquidity, and its financial position and changes in financial position

financial statements provide information about assets, liabilities, revenues, expenses and cash flows

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Business Activities

Operating Activities

Investing Activities

Financing Activities

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Financing Activities initially - funds to setup a business in later periods – funds to run operations and to grow obtaining such funds either from external or internal

sources

Funds obtained: from creditors shareholdersFunds provided to: payment of payment of interest dividends repayment of debtsCash management

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Investing Activities Spending the funds obtained effectively and

efficiently involve purchase and sale of

buildings, machinery or other investment instruments such as government bonds, treasury bills

extending loans to other companies are expected to contribute directly or indirectly to the

profit maximization and solvency goals of the business

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Operating Activities involve the daily activities of the entities to run the

business include

sales and marketing of the goods sold and services provided

production purchasing merchandise and inventory items managing human resources

effective and efficient management of operating activities needed to achieve profitability and liquidity

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Financial Statements All financial statements are interrelated because

each statement provides information about a different aspect of the same entity

financial statements : balance sheet income statement the cash flow statement statement of changes in equity

Notes to the financial statements: accounting policies and explanatory notes about various items

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Financial Statements balance sheet provides information about the financial position

or the resources available and the claims on these resources income statement provides information about how well these

resources are used to generate income in a given period cash flow statement provides information about the movement

in the cash and cash equivalents in a given period both the income statement and the balance sheet are prepared

on accrual basis the cash flow statement is prepared on cash basis of

accounting in order to meet the objective of financial statements, certain

assumptions and qualitative characteristics are defined in the framework by IASB

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Balance Sheet

The main objective -to fairly disclose the financial position of a company at a certain date

a balance sheet is made up of assets, liabilities and owners' equity sections

IAS No.1 requires that the balance sheets should give the name of the company, the date it is prepared for, and the monetary unit and the level of precision adopted e.g. stated in thousands of TL.

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Balance Sheet or Statement of Financial Position As of a specific date The amount of resources owned by a

company in order to run business and How these resources were funded Assets Liabilities Owners’ or Shareholders’ Equity – depending

on the formation of business

Sections of Balance Sheet

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AssetsCurrent Assets:Expected to be converted into cash within

the normal operating cycle or held for resale purposes Assets that are kept on hand for a short period and are expected

to be converted into cash within the twelve months following the balance sheet date

Assets that are held primarily for the purpose of being traded, and Unrestricted cash and cash equivalents

Long-term assets: Assets that the entity expects to use longer than one year or the operating cycle; purpose of providing resources for the operations of an entity in the future

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Assets Current AssetsCashNotes ReceivableAccounts ReceivablesTrading Securities InventoriesPrepaid Expenses

Long-Term AssetsInvestmentsProperty, Plant And EquipmentLess: Accumulated DepreciationIntangible Assets, netNatural Resources, netTotal Assets

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LiabilitiesAny liability for which the amount can reasonably be estimated and

with known payment date should be disclosed in the liabilities section of the balance sheet

Any liability with uncertain payment dates and amounts should be disclosed in the notes to the financial statements

Liabilities to various entities or groups such as the creditors, employees and customers should be clearly labeled and disclosed

Classified as short and long-term-Current liabilities include amounts with determinable amounts and payment

dates that are within the next year Long-term liabilities are usually debts incurred by the entity for the purpose of

financing the operations and investments

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Shareholders’ Equityincludes the amounts invested in the business

by the founding owners or investors, the earnings (losses) that are retained in the

business from previous years’ income (losses)

current year income or loss *either separately or within retained earnings

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Liabilities and Shareholders’ EquityLIABILITIES SHAREHOLDERS’ EQUITYCurrent LiabilitiesShort-term Bank Loans Common Stock (Share capital)Current Portion of Long-term Loans Preferred StockAccounts Payable Additional Paid-In CapitalNotes Payable Treasury StockCustomer Advances Retained EarningsTaxes Payable ReservesSalaries and Wages PayableRent PayableLong-Term LiabilitiesConsumer LoansBonds PayableLong-term Loans or Bank LoansLease ObligationsTotal Liabilities Total Shareholders' Equity

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Balance Sheet[Date](all numbers in NTL000)

ASSETS LIABILITIES

Current Assets Current LiabilitiesCash Accounts payable

Accounts receivable Short-term notes

(less doubtful accounts) Current portion of long-term notes

Inventory Interest payable

Temporary investment Taxes payable

Prepaid expenses Accrued payroll

Total Current Assets Total Current Liabilities

Fixed Assets Long-term LiabilitiesLong-term investments Mortgage

Land Other long-term liabilities

Buildings Total Long-Term Liabilities(less accumulated depreciation)

Plant and equipment(less accumulated depreciation) Shareholders' Equity

Furniture and fixtures Capital stock

(less accumulated depreciation) Retained earnings

Total Net Fixed Assets Total Shareholders' Equity

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Income Statement summarizes the revenues and expenses of

an entity for a certain period in time reveals the results of operations during a

period shows whether an entity is successful in

achieving the goal of profitability

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Income Statement

flow statement reflecting the performance of a company in terms of utilizing the resources in a given period

provides information about the revenues and the related expenses in a given period, as well as the losses incurred in the same period

The bottom line figure of the income statement is the profit or income of the period

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Sections of Income Statement

Revenues from ordinary activities of an entity and the related expenses are reported in accordance with the matching principle classified according to the function, such as cost of goods sold; or

according to the nature of the expense reported in a separate section that reports the results of the

ordinary activities. The presentation and disclosure of discontinued operations-

the post-tax income or loss of the segment until disposition and the post-tax gain or loss of disposing the segment is presented in the income statement as separate line items

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Income Statement

RevenueGross SalesLess: Sales Returns and Allowances Net Sales 0

Cost of Goods SoldBeginning InventoryAdd: Purchases

Freight-inDirect LaborIndirect Expenses

Inventory Available 0Less: Ending Inventory Cost of Goods Sold 0

Gross Profit (Loss) 0

ExpensesAdvertisingAmortizationBad DebtsBank ChargesCharitable ContributionsCommissionsContract LaborDepreciationDues and SubscriptionsEmployee Benefit ProgramsInsurance InterestLegal and Professional FeesLicenses and FeesMiscellaneousOffice ExpensePayroll TaxesPostageRentRepairs and MaintenanceSuppliesTelephoneTravelUtilitiesVehicle ExpensesWages Total Expenses 0

Net Operating Income 0

Gain (Loss) on Sale of AssetsInterest Income Total Other Income 0

Net Income (Loss) 0

[Name][Time Period]

Other Income

in NTL 000

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Cash Flow Statement deals with cash in-flows and out-flows

company resulting from operating, financing and investing activities for a specific period

presents information regarding the goal of liquidity

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Cash Flow Statement shows the amount of cash generated through

the three main activities of any entity Financing Investing Operating

a cash flow statement has also three sections that parallel the main activities.

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[Name][Time Period] in NTL 000

Cash received from customersCash paid for merchandiseCash paid for wages and other operating expensesCash paid for interestCash paid for taxesOther

Cash received from sale of capital assets (plant and equipment, etc.)Cash received from disposition of business segmentsCash received from collection of notes receivableCash paid for purchase of capital assetsCash paid to acquire businessesOther

Cash received from issuing stockCash received from long-term borrowingsCash paid to repurchase stockCash paid to retire long-term debtCash paid for dividendsOther

Statement of Cash Flows

Cash flows from investing activities

Cash flows from financing activities

Cash flows from operating activities

Net cash provided (used) by operating activities

Net cash provided (used) by investing activities

Net cash provided (used) in financing activitiesIncrease (decrease) in cash during the periodCash balance at the beginning of the periodCash balance at the end of the period

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Statement of Changes in Equity

shows the amounts invested by the owners in a given period, as well as the movements in the shareholders’ equity accounts

main purpose of the statement is to present all the changes that affected the shareholders’ equity in a period

movements in the reserve accounts are based on the profit appropriation of the prior period

retained earnings column in the statement reflects the net of prior period income and losses

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[Name][Time period] in NTL 000

Preferred Stock Common Stock Additional

Paid-in CapitalRetained Earnings (Accumulated Deficit) Total

Beginning balanceIssuance of stockNet income (net loss)DividendsOtherOtherOtherOtherEnding balance

Statement of Change in Equity

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Statement of Cash Flowsfor the year 2005Cash flow from operations(+)Cash flow from investments(+)Cash flow from financing(=) Net Change in Cash(+) Beginning Cash Balance(=) Ending Cash Balance

Statement of Changes in Equityfor the year 2005Beginning balance of SHE(+) increase in capital(-) dividends declared(+/-) other changes(=) ending balance of SHE

Statements of a single company

2004 2005 2004 2005Assets Liabities and Shareholders' EquityCurrent Assets: Current LiabitiesCashLong-term Assets Long-term Liabilities

SHESharecapital (common stock)Retained EarningsTotal SHE

TOTAL ASSETS TOTAL LIABILITIES AND SHE

Balance Sheet as of a date for a company

Income StatementFor the year 2005

Revenues(-) Expenses

Net Income

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Auditing and Auditors’ Opinion

Independent audit of financial statements: the examination of the financial statements, accounting

system and internal controls, and the accounting records of a company

purpose of an independent audit is to express an opinion on the financial statements- whether they are prepared in accordance with the generally

accepted accounting principles whether they fairly present the financial position of the

company auditors’ report implies that the financial statements

are free of material misstatements

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Board of Directors XYZ CorporationWe have audited the accompanying balance sheets of XYZ Corporation as of 31 December 2005 and 2004, and the related statements of income, shareholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of XYZ Corporation at 31 December 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in accordance with International Financial Reporting Standards as published by the International Accounting Standards Board.

Signature of the Independent AuditorDate and Place

of the Report

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Ethics in Accounting moral principles that an individual bases his/her behavior on should the project manager give away bribes if the competitors

are also bribing? if an accountant knows that a product is environmentally

hazardous although it is not illegal, should she or he report it to the authorities even if s/he knows that she might lose her job?

the ethics committee is working on the professional rules of conduct

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Quality of Earnings Having stable and recurring basic revenue generating

activities1) using consistent estimates and rules

High: same methods of estimation and rules2) proximity of revenue recognition and cash collection

High: when revenue recognition and cash collection are close

High quality earnings are presumed to be fair representations of the economic performance of the firm

Low quality earnings overstate fair earnings

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What will affect Quality of Earnings?

Managers’ discretion in measuring and reporting earnings in: Choosing among alternative accounting

principles Making estimates Timing transactions in order to control

recognition

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Exh. 11.3Hypothetical Classification

of Accounting Systems

B u s in e ssE co n om ics,

T h e o ry

B u s in e ssp ra c tice

p ra g m a tic,B rit ish o rig in

M ic ro -b a sed

C o n tine n ta l:G o v 't, T a x,

L e g a l

G o ve rn m e ntE co n o m ics

M a cro -b a sed

D e ve lo p edW e s te rn

C o u n tries

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Regulatory Bodies National

Capital Markets Board (CMB) Ministry of Finance Turkish Accounting Standards Board (TASB) TURMOB (Union of Chambers of Certified Public

Accountants of Turkey) International

International Federation of Accountants International Accounting Standards Board- International

Financial Reporting Standards (IFRS) Financial Accounting Standards Board (FASB) Federation of European Accountants (FEA)

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ACCOUNTING IN TURKEY

Commercial Code of 1850 was a translation of the French Commercial Code

formed the first accounting regulation in Turkey second Commercial Code was enacted in 1926 code was based on the German commerce and

company laws that also regulated the accounting practices

accounting system has been heavily influenced by the American system or Anglo-Saxon system since the beginning of the 1960's

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Accounting in Turkey The law of Istanbul Stock Exchange (ISE) in 1984, but

full operations started in 1986 Foundation of the Capital Markets Board (CMB) and

the Istanbul stock exchange, and the increase in foreign investments advanced the development of the accounting and auditing standards

Increase in joint ventures and foreign trade led to establishment of offices of the then-"Big Eight" accounting firms in Turkey

As a result of these developments, large private enterprises started to report their financial statements in accordance with the International Accounting Standards in addition to national reporting requirements

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Accounting in Turkey

The first set of financial accounting standards for the publicly owned and/or traded companies was developed in January 1989 by the CMB to be in effect for the fiscal years that start on or after January 1, 1989

However, accounting standards used by the family-owned or small to medium sized companies was, and to some extent still is, treated as identical with tax accounting

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Uniform Chart of Accounts In 1992, Ministry of Finance organized a committee to instigate

the accounting principles and a uniform chart of accounts that would be used by all companies

The Ministry published the committee's report in a communiqué on December 26, 1992 establishing the principles and the uniform chart of accounts to be in effect starting January 1,1994

All companies except banks, brokerage firms, and insurance companies are required to conform

Banks are subject to accounting rules set by the Central Bank of Turkey and Banking Regulation and Supervision Agency, and brokerage and insurance firms comply with the CMB rules.

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Turkish Accounting Standards Board In February 1994, Turkish Accounting and

Auditing Standards Board (TAASB) was formed

mission to develop accounting and auditing standards

As of January 1, 2002, TAASB prepared 19 accounting standards under the name of Turkish Accounting Standards (TAS) that were published by TURMOB (Union of Chambers of Certified Public Accountants of Turkey)

standards were not widely applied by the Turkish companies and the Board was dissolved and re-formed as the Turkish Accounting Standards Board (TASB) under the Prime Ministry in April 2002

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Regulatory Environment

the Ministry of Finance's regulation of 1992, the CMB rules, the Commercial Code and the Procedural Tax Law, Banking Regulation and Supervision Agency and the Central Bank regulations

All profit oriented companies -The Commercial Code and the Procedural Tax Law ; and Uniform Chart of Accounts

Listed companies and financial intermediaries: Uniform Chart of Accounts, Commercial Code and Procedural Tax Law and CMB rules

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Current Status

New CMB accounting standards in effect starting 1 Jan 2005

Almost same as the IAS/IFRS Traded companies are required to comply TASB- officially translated the accounting

standards Turkish Commercial Code – Expected to be

in effect mid 2006

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Underlying Assumptions of Financial Statements Accrual Basis of Accounting Continuity or Going Concern Assumption Periodicity or the Time Period Assumption Monetary Value or Unit-of-Measure

Assumption

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Underlying Concepts Understandability Relevance Materiality Reliability Faithful Representation Substance over Form Neutrality (Objectivity) Prudence (Conservatism) Completeness Comparability

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Constraints on Relevant and Reliable Information Timeliness Benefit and Cost

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Underlying Principles

Cost Concept Revenue Matching Full Disclosure

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A fellow has been learning to be a balloonist and takes his first solo flight. Unfortunately the wind gets up, he is blown off course and is

forced to land. He is in a paddock close to a road but has no idea where he is. He sees a car coming along the road and hails it. The driver gets out and the balloonist says, "G'day mate, can you tell me where I am?'.

"Yes, of course", says the motorist. "You have just landed in your balloon and with this wind you have obviously been blown off course.

You are in the top paddock on John Dawson's farm, 13.5 kilometres from Canowindra. John will be ploughing the paddock next week and sowing

wheat. There is a bull in the paddock. It is behind you and about to attack you."

At that moment the bull reaches the balloonist and tosses him over the fence. Luckily he is unhurt. He gets up, dusts himself off and says to the

motorist, "I see you're an accountant".

"Good Grief", says the other man, "you're right. How did you know that?"

"I employ accountants", says the balloonist. "The information you gave me was detailed, precise and accurate. Most of it was useless and it

arrived far too late to be of any help."