Notes Lecture 3
Chapter 2 (Textbook)
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McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, Inc.
A Quick Review
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McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, Inc.
Transaction Analysis Model
Debits and credits affect the Balance Sheet Model as follows:
+ for
ASSETS
A = L + SE
LIABILITIES + Credit for EQUITIES Credit for Debit for Debit for for Decrease Increase
+
Debit
Credit
Increase Decrease
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Decrease Increase
Transaction Analysis Model
Debit for Decrease Revenues + Credit for Increase + Debit for Increase Expenses -
Credit for Decrease
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Making Journal Entries
Step 1: Accounts and effects
Identify the accounts affected and
Step 2: Balancing
classify them by type of account (A, L, SE, R, E). Minimum of 2. Determine the direction of the effect (increase or decrease) on each account. Determine debits and credits
Verify that the accounting equation (A =
L + SE) remains in balance. Verify Debits = Credits
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The Accounting Cycle
During the period:
Analyze transactions. Record journal entries in the general journal. Post amounts to the general ledger. Close revenues, gains, expenses and losses to retained earnings.
Adjust revenues and expenses and related balance sheet accounts.
End of the period:
Prepare a complete set of financial statements. Disseminate statements to users.
We7will get to this step in Chapter 4 for now we are /14/10 overlooking it
Chapter 2 & Other New Material
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McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, Inc.
Objective of Financial Reporting To provide useful economic information to external users (primarily investors and creditors) for decision making and for assessing future cash flows.
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Concepts for Measuring & Reporting Information
Separate entity: Activities of the business are separate from activities of owners. Continuity: The entity will not go out of business in the near future. (also called the going-concern assumption) Unit-of-measure: Accounting measurements will be in the national monetary unit (i.e., $ in the U.S.). Historical cost principle: Cash equivalent cost given up is the basis for the initial recording of 7/14/10 elements.
Overview: Balance Sheet
Purpose is to report financial position of a firm at a particular point in time (specific date) Order of Assets: in order of liquidity (how soon an asset is expected to be turned into cash) Current assets are separated and given a sub-total. They are assets that will
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The Asset Section of a Classified Balance Sheet
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Obj100
Overview: Balance Sheet
Order of Liabilities: listed in order of maturity (how soon an obligation is to be paid). Current Liabilities are obligations that company will need to pay or settle within the coming year. Also
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Liabilities and Stockholders Equity Section of the Balance Sheet
P apa John's International, Inc. and Subsidiaries Consolidated Balance Sheet (dollars in thousands) January 31, December 28, 2007 2006 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 29,000 $ 29,000 Dividends payable 3,000 Accrued expenses payable 73,000 73,000 Total current liabilities 105,000 102,000 7,000 110,000 27,000 249,000 3,000 144,000 147,000 396,000 7,000 96,000 27,000 232,000 1,000 147,000 148,000 380,000
Unearned franchise fees Long-term notes payable Other long-term liabilities Total liabilities Stockholders' equity Contributed capital Retained earnings Total stockholders' equity Total 7/14/10 liabilities and stockholders' equity
$
$
Nature of Transactions
External Business events: exchanges of assets and liabilities between the business and one or more other parties.
Borrow cash
Obj104
from the bank
Obj102
Obj103
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Nature of Business Transactions
Internal events: not an exchange between the business and other parties, but have a direct effect on the accounting entity.
Loss due to fire damage.
Obj105
Obj106
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Obj107
Duality of Effects
Most transactions with external parties involve an exchange where the business entity gives up something but receives something
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Operating activities (Covered in the next chapter.) Investing Activities Purchasing long-term assets and investments for cash Selling long-term assets and investments for cash Lending cash to others Receiving principal payments on loans made to others Financing Activities Borrowing cash from banks Repaying the principal on borrowings from banks I ssuing stock for cash Repurchasing stock with cash Paying cash dividends
Statement of Cash Flows
+ + + +
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Statement of Cash Flows
Papa John's International, Inc. Consolidated Statement of Cash Flows For the Month Ended January 31, 2004 (in thousands) Operating activities (None in this chapter.) Investing Activities Purchased property and equipment $ (2,000) Purchased investments (1,000) Lent funds to franchisees (3,000) Net cash used in investing activities (6,000) Financing Activities I ssued common stock 2,000 Borrowed from banks 6,000 Net cash provided by financing activities 8,000 Net increase in cash 2,000 Cash at beginning of month 7,000 Cash at end of month $ 9,000
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In class Examples
New Accounts
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McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, Inc.
Papa Johns purchases $1,000 of stock in other companies as an investment.
Identify & Classify the Accounts Identify & Classify the Accounts 1. Cash (asset). 2. Investments (asset).
Determine the Direction of of the Effect Determine the Direction the Effect 1. Cash decreases. 2. Investments increase.
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Papa Johns lends $3,000 to new franchisees who sign five-year notes agreeing to repay Identify & Classify the Accounts Identify & Classify the Accounts 1. Cash (asset). 2. Notes Receivable (asset). the loan.
Determine the Direction of of the Effect Determine the Direction the Effect 1. Cash decreases. 2. Notes Receivable increases.
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Chapter 2 Homework
Help understand definitions & theory: - All Questions and E2-1 and E2-3 Practice journal entries: - E2-2, E2-4, E2-8, E2-10, E2-17 Practice journal entries, understand transactions, and construct/understand balance sheet: - P2-2, P2-3, P2-5 7/14/10
A Look Forward to Chapter 3
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McGraw-Hill/Irwin 2009 The McGraw-Hill Companies, Inc.
Accrual Accounting
Assets, liabilities, revenues, and expenses should be recognized when the transaction that causes them occurs, not necessarily when cash is paid or received.
Required by -
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Generally Acceptable Accounting Principles
Concepts for Measuring & Reporting Information
Under the Revenue Principle four criteria must be met to recognize revenues . . lDelivery has occurred or services have been rendered. persuasive evidence of an arrangement lThere is for customer payment. lThe price is fixed or determinable. lCollection is reasonably assured.
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Concepts for Measuring & Reporting Information
Matching Principle: Resources consumed to earn revenues in an accounting period should be recorded in that period, regardless of when cash is paid.
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