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Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
1
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
22
The Financial Statements
Chapter 1
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
3
Explain why accounting is the language of
business
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
4
The Language of Business
• Measures business activities
• Processes data into reports
• Communicates results
▫ Produces financial statements
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
5
Flow of Accounting Information
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
6
Users of Accounting Information
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
7
Financial Accounting Managerial Accounting
• Provides information for
external users
▫ Investors
▫ Creditors
▫ Government
▫ The public
• Provides information for
internal users – managers
• Includes:
▫ Budgets
▫ Forecasts
Kinds of Accounting
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
8
Organizing a Business
Proprietorship Partnership LLC Corporation
Owner(s) Proprietor -One Partners – two
or more
Members Stockholders
– usually
many
Personal
liability of
owner(s)
for
business
debts
Proprietor is
personally liable
Partners are
personally
liable; limited
partners are
not
Members
are NOT
personally
liable
Stockholders
are NOT
personally
liable
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
9
Proprietorships
• Single owner
• Common business form for small retail stores and
professional service providers
• Proprietor personally liable for business debts
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
10
Partnerships
• Two or more parties as co-owners
• Not a taxpaying entity
▫ Income passes through to partners
• Governed by an agreement
• Mutual agency
▫ Each partner can act on behalf of the entity
• Unlimited liability
• Involve risk
▫ Limited liability partnerships lessen risk
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
11
Limited-Liability Company (LLC)
• One or many owners (members)
• Limited liability
• Like a partnership, not a taxpaying entity
▫ Income flows through to members
• Popular form of business due to combination of
tax status and limited liability
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
12
Corporations
• Owned by stockholders
▫ Stock represents share of ownership
• Ability to raise large sums of capital
• Larger than proprietorship and partnerships
• Formed under state law
▫ Legally distinct from its owners
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
13
Corporations
• Double taxation
▫ Corporate income is taxed
▫ Shareholders taxed on distributions of earnings
(dividends)
• Stockholders elect Board of Directors
▫ Set policy and appoint officers
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
14
Explain and apply underlying accounting
concepts, assumptions, and principles
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15
Conceptual Foundations of Accounting
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
16
To provide financial information that is useful to existing investors,
lenders, and other creditors in making decisions about providing
resources to that entity
Relevance
(includes materiality)
Faithful
representation
Comparability Verifiability Timeliness Understandability
Cost
Financial Reporting Standards
Objective
Fundament
al
Qualitative
Characterist
ics
Constraints
Enhancing
Qualitative
Characteristics
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
17
Assumptions & Principles
• Entity assumption
▫ A business is a separate economic unit
• Continuity (going- concern) assumption
▫ Entity will continue to exist indefinitely
• Historical cost principle
▫ Assets recorded at purchase price
• Stable monetary unit assumption
▫ Dollar’s purchasing power is stable over time
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
18
International Financial Reporting
Standards (IFRS)
• Many countries have own versions of generally
accepted accounting principles (GAAP)
▫ Reports had to be restated to convert accounting
data from one country to another
• IFRS developed and are used by most countries in
the world
▫ U.S. still follows own GAAP
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
19
International Financial Reporting
Standards (IFRS)
• U.S. GAAP overseen by the Securities & Exchange
Commission (SEC)
▫ SEC tentatively set date for U.S. adoption of IFRS in
2015
▫ Will make it easier to compare financial statements
across the world
• Most common accounting practices similar under
both U.S. GAAP and IFRS
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
20
Apply the accounting equation to business
organizations
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
21
Accounting Equation Elements
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22
Assets
Liabilities
Owner’s
equity
Assets = Liabilities + Owner’s Equity
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
23
Assets Liabilities
• Cash
• Merchandise inventory
• Property, plant, and equipment
• Accounts payable
• Income taxes payable
• Long-term debt
Assets and Liabilities
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
24
Owners’ equity
• Stockholders’ equity
▫ Paid-in capital
▫ Retained earnings
AssetsAssets LiabilitiesLiabilities Owners’ EquityOwners’ Equity
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
25
Corporate Accounting Equation
Assets Liabilities Stockholders’ equity
Paid-in capital
Retained
earnings
Amounts
stockholders
have
invested
Common
stock
Amounts
earned and
kept by
business
+
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
26
Transactions Affecting Retained
Earnings
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27
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
28
Net Income
Revenues
Expenses
Net Income
If
expenses
exceed
revenues
If
expenses
exceed
revenues
A net loss
results
A net loss
results
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
29
Beginning Retained
Earnings
Net Income
(Net Loss)
Dividends
Ending Retained
Earnings
Expenses
Revenues
minus
equals
Plus or minus minus equals
The Components of Retained Earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
30
Assets = Liabilities + Owner’s Equity
• (1) If the assets of ABC Co. are $500,000 and the
liabilities are $290,000, how much is there in
owner’s equity?
• (2) If owner’s equity in Joe’s Car Care is $160,000
and liabilities are $240,000, how much are assets?
• (3) XYZ co. reported monthly revenues of
$148,000 and expenses of $37,500. What is the
results of operations of the month?
Copyright ©2012 Pearson Education Inc.30
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
31
• (4) Jody’s Bakery incurred expenses of $35,500
for the month but generated revenues of $94,000.
What were the results of her efforts for the
month?
• (5) If the beginning balance of retained earnings
is $100,000, revenue is $55,000, expenses total
$35,000, and the Company pays a $10,000
dividend, what is the ending balance of retained
earnings?
Assets = Liabilities + Owner’s Equity
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
32
Let’s Practice
• Turn to Exercise E1-16A on page 34.
• Work through the Accounting Equation for each
Company.
• Which Company has the strongest financial
position and why?
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
33
More Practice
• Let’s do Exercise 1-17A on page 34.
• We’ll work through this problem together after
you have had a chance to work through it first.
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
34
Exercise 1-17A - page 34
Assets $280 $430 $170
$880
Liabilities $300$170
$470
Assets Liabilities Equity$880 $470 $410
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
35
Exercise 1-17A - page 34
Assets $280 $430 $170
$880
Liabilities $300$170
$470
Assets Liabilities Equity
Assets = resources
Liabilities = amounts
owed to creditors
$410
Stockholder ownership
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
36
Evaluate business operations through the
financial statements
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
37
The Financial Statements
Question Financial
Statement
Answer
How well did the company
perform during the year?
Income statement Revenues
−Expenses
Net income or (net loss)
Why did the company’s
retained earnings change
during the year?
Statement of
retained earnings
Beginning retained earnings
+ Net Income (-Net Loss)
−Dividends
Ending retained earnings
What is the company’s
financial position at year-
end?
Balance sheet Assets = Liabilities + Owners’
equity
How much cash did the
company generate and
spend during the year?
Statement of cash
flows
Operating cash flows
+/− Investing cash flows
+/− Financing cash flows
Increase(decrease) in cash
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
38
Income Statement
Balance Sheet
Statement of Cash
Flows
Statement of
Retained Earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
39
The Income Statement
• Also called the Statement of Operations
• Reports two main categories
▫ Revenues and gains
▫ Expenses and losses
• Shows the “bottom line”
▫ Net income or net loss for the period
• Net income is the most important item in the
financial statements
▫
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
40
ABC Corporation
Income Statement
Year Ended December 31, 2012
Net sales $XX,XXX
Other revenue XX,XXX
Total revenues XX,XXX
Cost of goods sold XX,XXX
Gross profit XX,XXX
Selling, general, and administrative expenses XX,XXX
Income from operations XX,XXX
Interest expense XX,XXX
Income before income taxes XX,XXX
Income tax expense XX,XXX
Net Income $XX,XXX
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
41
Statement of Retained Earnings
• Retained earnings is portion of net income
company has kept over a period of years
• Positive balance indicates revenues exceeded
expenses
• Accumulated deficit indicates expenses have
exceeded revenues
• Net income (or net loss) flows from the Income
Statement to the Statement of Retained Earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
42
ABC Corporation
Statement of Retained Earnings
Year Ended December 31, 2012
Retained earnings, December 31, 2011 $XX,XXX
Plus: Net income XX,XXX
Less: Dividends XX,XXX
Retained earnings, December 31, 2012 $XX,XXX
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
43
The Balance Sheet
• Also called the Statement of Financial Position
• Reports
▫ Assets
▫ Liabilities
▫ Stockholders’ equity
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
44
Current Assets Long-term Assets
• Expected to be converted to
cash, sold or consumed in the
next year or within the
business’s operating cycle
▫ Whichever is longer
• Include
▫ Cash and cash equivalents
▫ Short-term investments
▫ Accounts and notes
receivable
▫ Inventory
▫ Prepaid expenses
• Will be held longer than one
year
• Include
▫ Property and equipment
 Land
 Buildings
 Computers
 Equipment
▫ Intangibles
▫ Long-term investments
Assets on the Balance Sheet
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
45
Current Liabilities Long-term Liabilities
• Debts payable in the next year
or within the business’s
operating cycle
• Include
▫ Current maturities of long-
term debt
▫ Accounts payable
▫ Income taxes payable
▫ Accrued expenses
• Debts payable more than one
year from balance sheet date
• Include
▫ Long-term notes payable
▫ Bonds payable
Liabilities on the Balance Sheet
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
46
Stockholders’ Equity on the Balance
Sheet
• Represents stockholders’ ownership of the
business assets
• Consists of:
▫ Common stock
▫ Additional paid-in capital
▫ Retained earnings
▫ Treasury Stock
▫ Accumulated other comprehensive income (loss)
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47
Assets
Cash and cash equivalents Accounts payable
Merchandise inventory Taxes payable
Prepaid expenses Total current liabilities
Total current assets Long-term debt
Total liabilities
Property and Equipment Common stock
Less: accumulated depreciation Additional paid-in capital
Net Property and Equipment Retained earnings
Other assets Total stockholders' equity
Total assets Total liabilities & stockholders' equity
Liabilities and Stockholders' Equity
ABC Corporation
Balance Sheet
December 31, 2012
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
48
The Statement of Cash Flows
• Measures cash receipts and cash payments
• Fourth required financial statement
• Categorizes into three types of activities:
▫ Operating
▫ Investing
▫ Financing
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
49
Cash Flow Categories
• Operating activities
▫ Cash receipts and payments from selling goods and
services
• Investing activities
▫ Purchasing & selling long-term assets
• Financing activities
▫ Issuing stock, paying dividends, borrowing, and
repayment of borrowed funds
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
50
Let’s Practice!!!
• Turn to Exercise 1-20A on page 35 and we will
work through this together!
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
51
Exercise 1-20A
(a) Common stock
(b) Income tax payable
(c) Dividends
(d) Income tax expense
(e) Ending balance
of retained earnings
(f) Total assets
(g) Long-term debt
(h) Revenue
Balance SheetBalance Sheet
Balance SheetBalance Sheet
Statement of Retained EarningsStatement of Retained Earnings
Income StatementIncome Statement
Balance SheetBalance Sheet
Balance SheetBalance Sheet
Balance SheetBalance Sheet
Income StatementIncome Statement
Statement of Retained EarningsStatement of Retained Earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
52
Exercise 1-20A
(i) Cash spent to acquire a
building
(j) Selling, general &
administrative expenses
(k) Adjustments to reconcile net
income to net cash from
operations
(l) Ending cash balance
(m) Current liabilities
(n) Net income
Statement of Cash FlowsStatement of Cash Flows
Income StatementIncome Statement
Statement of Cash FlowsStatement of Cash Flows
Balance SheetBalance Sheet
Statement of Cash FlowsStatement of Cash Flows
Balance SheetBalance Sheet
Statement of Retained EarningsStatement of Retained Earnings
Income StatementIncome Statement
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
53
Construct financial statements and analyze the
relationships among them
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
54
Income Statement
• Reports revenue and expenses
▫ These accounts are only reported on the Income
Statement
• Shows net income or net loss
▫ If revenues exceed expenses, company has net
income
▫ If expenses exceed revenues, company has net loss
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
55
Statement of Retained Earnings
• Opens with beginning retained earnings balance
• Adds net income (or subtracts net loss)
▫ Flows from the Income Statement
• Subtracts dividends
• Reports ending retained earnings balance
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
56
Balance Sheet
• Reports assets, liabilities, and stockholders’ equity
▫ These accounts are reported only on the balance
sheet
• Shows that assets equal sum of liabilities and
stockholders’ equity
• Reports retained earnings which comes from the
statement of retained earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
57
Statement of Cash Flows
• Reports cash flows from operating, investing, and
financing activities
▫ Results in an increase or decrease
• Shows whether cash increased or decreased
during the year
• Reports ending cash as shown on the balance
sheet
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
58
Relationships between Financial
Statements
Income Statement
Year Ended December 31, 2012
Revenues $XX,XXX
Expenses (XX,XXX)
Net income $XX,XXX
Statement of Retained Earnings
Year Ended December 31, 2012
Beginning retained earnings $XX,XXX
Net income XX,XXX
Cash dividends (XX,XXX)
Ending retained earnings $XX,XXX
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
59
Statement of Retained Earnings
Year Ended December 31, 2012
Beginning retained earnings $XX,XXX
Net income XX,XXX
Cash dividends (XX,XXX)
Ending retained earnings $XX,XXX
Balance Sheet
December 31, 2012
Assets $XX,XXX
Liabilities $XX,XXX
Stockholders’ equity:
Common stock $XX,XXX
Retained earnings XX,XXX
Total liabilities and equity $XX,XXX
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
60
Statement of Cash Flows
Year Ended December 31, 2012
Cash flows from operating activities $XX,XXX
Cash flows from investing activities XX,XXX
Cash flows from financing activities XX,XXX
Net cash flows XX,XXX
Cash balance, December 31, 2011 XX,XXX
Cash balance, December 31, 2012 $XX,XXX
Balance Sheet
December 31, 2012
Assets $XX,XXX
Liabilities $XX,XXX
Stockholders’ equity:
Common stock $XX,XXX
Retained earnings XX,XXX
Total liabilities and equity $XX,XXX
Cash from
the Asset
section of
the
Balance
Sheet
equals
ending
Cash on
the
Statement
of Cash
Flows
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
61
Evaluating a Company
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
62
Evaluate business decisions ethically
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
63
Influences on Business Decisions
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
64
Decision Framework for Making
Ethical Judgments
What is the issue?
Who are the stakeholders and what are the
consequences of the decisions to each?
Weigh the alternatives.
Make the decision and be prepared to deal with the
consequences.
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
65
Practice Problem
• Work in teams on Practice Problem 1-62B
• Page 45 & 46 in the textbook.
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
66
Problem 1-62B
• Req. 1
Truett Corporation
Income Statement
Year Ended December 31, 2013
• Revenue:
• Sales revenue $ 260,000
• Other revenue 51,000
• Total revenue $ 311,000
• Expenses:
 Salary expense $ 28,000
 Other expenses 249,000
 Total expenses 277,000
• Income before income tax 34,000
• Income tax expense ($34,000 × .40) 13,600
• Net income $ 20,400
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
67
Req. 2
• a. Faithful representation. Report revenues at their actual sale value because that
represents more faithfully what happened than what management believes the
goods are worth.
•
• b. Historical cost principle. Account for expenses at their actual cost, not a
hypothetical amount that the company might have incurred if the products were
purchased outside.
•
• c. Historical cost principle. Account for expenses at their actual cost.
•
• d. Entity assumption. Each division of the company is a separate entity, and the
company as a whole constitutes an entity for accounting purposes.
•
• e. Stable-monetary-unit assumption. Accounting in the United States ignores the
effect of inflation.
•
• f. Continuity (going-concern) assumption. There is no evidence that A Division of
Truett Corporation is going out of business, so it seems safe to assume that the
company is a going concern.
•
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
68
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.
69

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Week 1 Slideshow

  • 1. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 1
  • 2. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 22 The Financial Statements Chapter 1
  • 3. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 3 Explain why accounting is the language of business
  • 4. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 4 The Language of Business • Measures business activities • Processes data into reports • Communicates results ▫ Produces financial statements
  • 5. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 5 Flow of Accounting Information
  • 6. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 6 Users of Accounting Information
  • 7. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 7 Financial Accounting Managerial Accounting • Provides information for external users ▫ Investors ▫ Creditors ▫ Government ▫ The public • Provides information for internal users – managers • Includes: ▫ Budgets ▫ Forecasts Kinds of Accounting
  • 8. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 8 Organizing a Business Proprietorship Partnership LLC Corporation Owner(s) Proprietor -One Partners – two or more Members Stockholders – usually many Personal liability of owner(s) for business debts Proprietor is personally liable Partners are personally liable; limited partners are not Members are NOT personally liable Stockholders are NOT personally liable
  • 9. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 9 Proprietorships • Single owner • Common business form for small retail stores and professional service providers • Proprietor personally liable for business debts
  • 10. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 10 Partnerships • Two or more parties as co-owners • Not a taxpaying entity ▫ Income passes through to partners • Governed by an agreement • Mutual agency ▫ Each partner can act on behalf of the entity • Unlimited liability • Involve risk ▫ Limited liability partnerships lessen risk
  • 11. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 11 Limited-Liability Company (LLC) • One or many owners (members) • Limited liability • Like a partnership, not a taxpaying entity ▫ Income flows through to members • Popular form of business due to combination of tax status and limited liability
  • 12. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 12 Corporations • Owned by stockholders ▫ Stock represents share of ownership • Ability to raise large sums of capital • Larger than proprietorship and partnerships • Formed under state law ▫ Legally distinct from its owners
  • 13. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 13 Corporations • Double taxation ▫ Corporate income is taxed ▫ Shareholders taxed on distributions of earnings (dividends) • Stockholders elect Board of Directors ▫ Set policy and appoint officers
  • 14. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 14 Explain and apply underlying accounting concepts, assumptions, and principles
  • 15. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 15 Conceptual Foundations of Accounting
  • 16. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 16 To provide financial information that is useful to existing investors, lenders, and other creditors in making decisions about providing resources to that entity Relevance (includes materiality) Faithful representation Comparability Verifiability Timeliness Understandability Cost Financial Reporting Standards Objective Fundament al Qualitative Characterist ics Constraints Enhancing Qualitative Characteristics
  • 17. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 17 Assumptions & Principles • Entity assumption ▫ A business is a separate economic unit • Continuity (going- concern) assumption ▫ Entity will continue to exist indefinitely • Historical cost principle ▫ Assets recorded at purchase price • Stable monetary unit assumption ▫ Dollar’s purchasing power is stable over time
  • 18. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 18 International Financial Reporting Standards (IFRS) • Many countries have own versions of generally accepted accounting principles (GAAP) ▫ Reports had to be restated to convert accounting data from one country to another • IFRS developed and are used by most countries in the world ▫ U.S. still follows own GAAP
  • 19. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 19 International Financial Reporting Standards (IFRS) • U.S. GAAP overseen by the Securities & Exchange Commission (SEC) ▫ SEC tentatively set date for U.S. adoption of IFRS in 2015 ▫ Will make it easier to compare financial statements across the world • Most common accounting practices similar under both U.S. GAAP and IFRS
  • 20. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 20 Apply the accounting equation to business organizations
  • 21. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 21 Accounting Equation Elements
  • 22. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 22 Assets Liabilities Owner’s equity Assets = Liabilities + Owner’s Equity
  • 23. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 23 Assets Liabilities • Cash • Merchandise inventory • Property, plant, and equipment • Accounts payable • Income taxes payable • Long-term debt Assets and Liabilities
  • 24. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 24 Owners’ equity • Stockholders’ equity ▫ Paid-in capital ▫ Retained earnings AssetsAssets LiabilitiesLiabilities Owners’ EquityOwners’ Equity
  • 25. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 25 Corporate Accounting Equation Assets Liabilities Stockholders’ equity Paid-in capital Retained earnings Amounts stockholders have invested Common stock Amounts earned and kept by business +
  • 26. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 26 Transactions Affecting Retained Earnings
  • 27. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 27
  • 28. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 28 Net Income Revenues Expenses Net Income If expenses exceed revenues If expenses exceed revenues A net loss results A net loss results
  • 29. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 29 Beginning Retained Earnings Net Income (Net Loss) Dividends Ending Retained Earnings Expenses Revenues minus equals Plus or minus minus equals The Components of Retained Earnings
  • 30. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 30 Assets = Liabilities + Owner’s Equity • (1) If the assets of ABC Co. are $500,000 and the liabilities are $290,000, how much is there in owner’s equity? • (2) If owner’s equity in Joe’s Car Care is $160,000 and liabilities are $240,000, how much are assets? • (3) XYZ co. reported monthly revenues of $148,000 and expenses of $37,500. What is the results of operations of the month? Copyright ©2012 Pearson Education Inc.30
  • 31. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 31 • (4) Jody’s Bakery incurred expenses of $35,500 for the month but generated revenues of $94,000. What were the results of her efforts for the month? • (5) If the beginning balance of retained earnings is $100,000, revenue is $55,000, expenses total $35,000, and the Company pays a $10,000 dividend, what is the ending balance of retained earnings? Assets = Liabilities + Owner’s Equity
  • 32. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 32 Let’s Practice • Turn to Exercise E1-16A on page 34. • Work through the Accounting Equation for each Company. • Which Company has the strongest financial position and why?
  • 33. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 33 More Practice • Let’s do Exercise 1-17A on page 34. • We’ll work through this problem together after you have had a chance to work through it first.
  • 34. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 34 Exercise 1-17A - page 34 Assets $280 $430 $170 $880 Liabilities $300$170 $470 Assets Liabilities Equity$880 $470 $410
  • 35. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 35 Exercise 1-17A - page 34 Assets $280 $430 $170 $880 Liabilities $300$170 $470 Assets Liabilities Equity Assets = resources Liabilities = amounts owed to creditors $410 Stockholder ownership
  • 36. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 36 Evaluate business operations through the financial statements
  • 37. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 37 The Financial Statements Question Financial Statement Answer How well did the company perform during the year? Income statement Revenues −Expenses Net income or (net loss) Why did the company’s retained earnings change during the year? Statement of retained earnings Beginning retained earnings + Net Income (-Net Loss) −Dividends Ending retained earnings What is the company’s financial position at year- end? Balance sheet Assets = Liabilities + Owners’ equity How much cash did the company generate and spend during the year? Statement of cash flows Operating cash flows +/− Investing cash flows +/− Financing cash flows Increase(decrease) in cash
  • 38. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 38 Income Statement Balance Sheet Statement of Cash Flows Statement of Retained Earnings
  • 39. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 39 The Income Statement • Also called the Statement of Operations • Reports two main categories ▫ Revenues and gains ▫ Expenses and losses • Shows the “bottom line” ▫ Net income or net loss for the period • Net income is the most important item in the financial statements ▫
  • 40. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 40 ABC Corporation Income Statement Year Ended December 31, 2012 Net sales $XX,XXX Other revenue XX,XXX Total revenues XX,XXX Cost of goods sold XX,XXX Gross profit XX,XXX Selling, general, and administrative expenses XX,XXX Income from operations XX,XXX Interest expense XX,XXX Income before income taxes XX,XXX Income tax expense XX,XXX Net Income $XX,XXX
  • 41. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 41 Statement of Retained Earnings • Retained earnings is portion of net income company has kept over a period of years • Positive balance indicates revenues exceeded expenses • Accumulated deficit indicates expenses have exceeded revenues • Net income (or net loss) flows from the Income Statement to the Statement of Retained Earnings
  • 42. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 42 ABC Corporation Statement of Retained Earnings Year Ended December 31, 2012 Retained earnings, December 31, 2011 $XX,XXX Plus: Net income XX,XXX Less: Dividends XX,XXX Retained earnings, December 31, 2012 $XX,XXX
  • 43. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 43 The Balance Sheet • Also called the Statement of Financial Position • Reports ▫ Assets ▫ Liabilities ▫ Stockholders’ equity
  • 44. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 44 Current Assets Long-term Assets • Expected to be converted to cash, sold or consumed in the next year or within the business’s operating cycle ▫ Whichever is longer • Include ▫ Cash and cash equivalents ▫ Short-term investments ▫ Accounts and notes receivable ▫ Inventory ▫ Prepaid expenses • Will be held longer than one year • Include ▫ Property and equipment  Land  Buildings  Computers  Equipment ▫ Intangibles ▫ Long-term investments Assets on the Balance Sheet
  • 45. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 45 Current Liabilities Long-term Liabilities • Debts payable in the next year or within the business’s operating cycle • Include ▫ Current maturities of long- term debt ▫ Accounts payable ▫ Income taxes payable ▫ Accrued expenses • Debts payable more than one year from balance sheet date • Include ▫ Long-term notes payable ▫ Bonds payable Liabilities on the Balance Sheet
  • 46. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 46 Stockholders’ Equity on the Balance Sheet • Represents stockholders’ ownership of the business assets • Consists of: ▫ Common stock ▫ Additional paid-in capital ▫ Retained earnings ▫ Treasury Stock ▫ Accumulated other comprehensive income (loss)
  • 47. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 47 Assets Cash and cash equivalents Accounts payable Merchandise inventory Taxes payable Prepaid expenses Total current liabilities Total current assets Long-term debt Total liabilities Property and Equipment Common stock Less: accumulated depreciation Additional paid-in capital Net Property and Equipment Retained earnings Other assets Total stockholders' equity Total assets Total liabilities & stockholders' equity Liabilities and Stockholders' Equity ABC Corporation Balance Sheet December 31, 2012
  • 48. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 48 The Statement of Cash Flows • Measures cash receipts and cash payments • Fourth required financial statement • Categorizes into three types of activities: ▫ Operating ▫ Investing ▫ Financing
  • 49. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 49 Cash Flow Categories • Operating activities ▫ Cash receipts and payments from selling goods and services • Investing activities ▫ Purchasing & selling long-term assets • Financing activities ▫ Issuing stock, paying dividends, borrowing, and repayment of borrowed funds
  • 50. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 50 Let’s Practice!!! • Turn to Exercise 1-20A on page 35 and we will work through this together!
  • 51. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 51 Exercise 1-20A (a) Common stock (b) Income tax payable (c) Dividends (d) Income tax expense (e) Ending balance of retained earnings (f) Total assets (g) Long-term debt (h) Revenue Balance SheetBalance Sheet Balance SheetBalance Sheet Statement of Retained EarningsStatement of Retained Earnings Income StatementIncome Statement Balance SheetBalance Sheet Balance SheetBalance Sheet Balance SheetBalance Sheet Income StatementIncome Statement Statement of Retained EarningsStatement of Retained Earnings
  • 52. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 52 Exercise 1-20A (i) Cash spent to acquire a building (j) Selling, general & administrative expenses (k) Adjustments to reconcile net income to net cash from operations (l) Ending cash balance (m) Current liabilities (n) Net income Statement of Cash FlowsStatement of Cash Flows Income StatementIncome Statement Statement of Cash FlowsStatement of Cash Flows Balance SheetBalance Sheet Statement of Cash FlowsStatement of Cash Flows Balance SheetBalance Sheet Statement of Retained EarningsStatement of Retained Earnings Income StatementIncome Statement
  • 53. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 53 Construct financial statements and analyze the relationships among them
  • 54. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 54 Income Statement • Reports revenue and expenses ▫ These accounts are only reported on the Income Statement • Shows net income or net loss ▫ If revenues exceed expenses, company has net income ▫ If expenses exceed revenues, company has net loss
  • 55. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 55 Statement of Retained Earnings • Opens with beginning retained earnings balance • Adds net income (or subtracts net loss) ▫ Flows from the Income Statement • Subtracts dividends • Reports ending retained earnings balance
  • 56. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 56 Balance Sheet • Reports assets, liabilities, and stockholders’ equity ▫ These accounts are reported only on the balance sheet • Shows that assets equal sum of liabilities and stockholders’ equity • Reports retained earnings which comes from the statement of retained earnings
  • 57. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 57 Statement of Cash Flows • Reports cash flows from operating, investing, and financing activities ▫ Results in an increase or decrease • Shows whether cash increased or decreased during the year • Reports ending cash as shown on the balance sheet
  • 58. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 58 Relationships between Financial Statements Income Statement Year Ended December 31, 2012 Revenues $XX,XXX Expenses (XX,XXX) Net income $XX,XXX Statement of Retained Earnings Year Ended December 31, 2012 Beginning retained earnings $XX,XXX Net income XX,XXX Cash dividends (XX,XXX) Ending retained earnings $XX,XXX
  • 59. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 59 Statement of Retained Earnings Year Ended December 31, 2012 Beginning retained earnings $XX,XXX Net income XX,XXX Cash dividends (XX,XXX) Ending retained earnings $XX,XXX Balance Sheet December 31, 2012 Assets $XX,XXX Liabilities $XX,XXX Stockholders’ equity: Common stock $XX,XXX Retained earnings XX,XXX Total liabilities and equity $XX,XXX
  • 60. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 60 Statement of Cash Flows Year Ended December 31, 2012 Cash flows from operating activities $XX,XXX Cash flows from investing activities XX,XXX Cash flows from financing activities XX,XXX Net cash flows XX,XXX Cash balance, December 31, 2011 XX,XXX Cash balance, December 31, 2012 $XX,XXX Balance Sheet December 31, 2012 Assets $XX,XXX Liabilities $XX,XXX Stockholders’ equity: Common stock $XX,XXX Retained earnings XX,XXX Total liabilities and equity $XX,XXX Cash from the Asset section of the Balance Sheet equals ending Cash on the Statement of Cash Flows
  • 61. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 61 Evaluating a Company
  • 62. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 62 Evaluate business decisions ethically
  • 63. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 63 Influences on Business Decisions
  • 64. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 64 Decision Framework for Making Ethical Judgments What is the issue? Who are the stakeholders and what are the consequences of the decisions to each? Weigh the alternatives. Make the decision and be prepared to deal with the consequences.
  • 65. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 65 Practice Problem • Work in teams on Practice Problem 1-62B • Page 45 & 46 in the textbook.
  • 66. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 66 Problem 1-62B • Req. 1 Truett Corporation Income Statement Year Ended December 31, 2013 • Revenue: • Sales revenue $ 260,000 • Other revenue 51,000 • Total revenue $ 311,000 • Expenses:  Salary expense $ 28,000  Other expenses 249,000  Total expenses 277,000 • Income before income tax 34,000 • Income tax expense ($34,000 × .40) 13,600 • Net income $ 20,400
  • 67. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 67 Req. 2 • a. Faithful representation. Report revenues at their actual sale value because that represents more faithfully what happened than what management believes the goods are worth. • • b. Historical cost principle. Account for expenses at their actual cost, not a hypothetical amount that the company might have incurred if the products were purchased outside. • • c. Historical cost principle. Account for expenses at their actual cost. • • d. Entity assumption. Each division of the company is a separate entity, and the company as a whole constitutes an entity for accounting purposes. • • e. Stable-monetary-unit assumption. Accounting in the United States ignores the effect of inflation. • • f. Continuity (going-concern) assumption. There is no evidence that A Division of Truett Corporation is going out of business, so it seems safe to assume that the company is a going concern. •
  • 68. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 68
  • 69. Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 69

Editor's Notes

  1. Accounting is an information system. It gathers, manipulates and translates business transactions into organized, reliable, timely and understandable information from which users can make informed decisions.
  2. The accounting process begins and ends with people making decisions.
  3. 1.) Individuals – like you and me use accounting to make everyday decisions. 2.) Investors and Creditors – Investors use accounting information to determine if and how much of return can be expected by investing in a company. - Creditors use accounting information to determine whether a Company is a good credit risk (i.e. – can we lend money or provide good and services prior to receiving payment from the Company). 3.) Regulatory Bodies – the IRS and other state & local governments are interested in accounting information for collecting various types of taxes. The SEC (Securities Exchange Commission) is interested in accounting information for those Companies wishing to have their stocks listed on the Exchange and insuring that once listed that the Company files the appropriate documents in a timely manner. 4.) Nonprofit Organizations - these entities make most of their budgetary and operational decisions from accounting information. Additionally, they are also required to file various reports to governmental agencies.
  4. Several differences between Financial and Managerial Accounting: Financial Accounting Managerial Accounting 1.) Focuses on external users. 1.) Reports to managers inside the organization for planning, controlling and decision making. 2.) Emphasizes past financial activity. 2.) Emphasizes decisions affecting the future. 3.) Emphasizes objectivity and verifiability. 3.) Emphasizes relevance. 4.) Emphasizes precision. 4.) Emphasizes timeliness. 5.) Companywide reports. 5.) Segment reports. 6.) Must follow GAAP / IFRS. 6.) Does not have to e GAAP/ IFRS compliant. 7.) External reports are mandatory. 7.) External reports are not mandatory.
  5. 1.) Also known as “Sole Proprietorships”. 2.) Does not have to file existence with any governmental agency; no formal documents or agreements required. 3.) Taxes for income flow through the individuals personal tax return on either Schedule C or Schedule E.
  6. 1.) As the term partnership implies, it requires two or more co-owners to be a partnership. 2.) Two types of partnerships: General and Limited (Limited Liability). 3.) Although partnerships are required to file a tax return, it is not a taxpaying entity. Income passes through to the personal tax return via a Form K-1 and income is generally reported on Schedule E. 4.) All partnership should be governed by an agreement. 5.) In a general partnership, there exists mutual agency which means any of the partners can act on behalf of the entity. In a limited partnership, limited partners generally CANNOT act on behalf of the entity. They exchange their right of management for having limited personal liability or credit risk exposure of the partnership. They are “silent partners”. 6.) Are general partners have unlimited personal liability for the debts of the partnership. 7.) Unless stipulated in the partnership agreement, the partnership dissolves when a partner leaves the partnership or one partner becomes deceased.
  7. 1.) Owners in a LLC are known as members, not partners. 2.) Although LLCs are required to file a tax return, it is not a taxpaying entity. Income passes through to the personal tax return via a Form K-1 and income is generally reported on Schedule E. 4.) All LLC should be governed by an agreement and many states require this document to be filed with the Secretary of State’s office. 5.) This form of business is much more popular than a partnership because members enjoy limited liability as well as paying lower taxes due to the fact that income is paid through the personal return. 6.) This entity does survive if one of the members wants out of the LLC or becomes deceased.
  8. Relevance – capable of making a difference to the decision maker. Faithful Representation – information must be: 1.) complete; 2.) accurate (w/o material error) and neutral (free from bias). In other words, the information must be reliable. Materiality - an accounting item is material if its inclusion or omission would influence the decision making of the person using the accounting information. Materiality accounting relieves companies of the need to record immaterial items, as is required by other accounting principles. Comparability – the accounting information must be prepared in a manner that allows it to be compared similarly to previous periods the entity has reported and has also can to compared to similar entities within an industry. Verifiability – information must be able to be checked for accuracy, completeness and reliability (this is typically done by internal and external auditors). Timeliness – information must be available to users within a timeframe where the information is pertinent and useful in their making decisions. Understandability – must be sufficiently transparent so as to make sense to reasonably informed users of the information. Constraint – anything that prevents you from getting more of want you want.
  9. The Historical Cost Principle in Accounting conflicts with the position that many Economists and Financial Professional take in regarding an asset’s value. The latter takes the position that the asset’s value is what the current market value is for the asset today.
  10. Assets – what you have Liabilities – what you owe Owner’s Equity – what you own
  11. Revenues is also known as Sales.
  12. 1.) 500,000 = 290,000 – 210,000 2.) 400,000 = 240,000 + 160,000 3.) 148,000 – 37,500 = 110,500
  13. 4.) 94,000 - 35,500 = 58,500 5.) 100,000 + (100,000 – 55,000) – 10,000 = 135,000