Ch01_Wey_Fin_6e

Ch01_Wey_Fin_6e - Chapter 1- 1 Chapter 1 Chapter 1 Chapter...

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Unformatted text preview: Chapter 1- 1 Chapter 1 Chapter 1 Chapter Chapter Accounting In Action Financial Accounting, Sixth Edition Chapter 1-2 Accounting in Action Accounting in Action What is What Accounting? Accounting? Three Three activities activities Who uses Who accounting data data Chapter 1- 3 The Building The Blocks of Accounting Accounting Ethics in Ethics financial reporting reporting Generally Generally accepted accounting principles principles Assumptions The Basic The Accounting Equation Equation Assets Liabilities Stockholders' Stockholders' equity equity Using the Using Basic Accounting Equation Equation Transaction Transaction analysis analysis Summary of Summary transactions transactions Financial Financial Statements Statements Income Income statement statement Statement of Statement retained earnings earnings Balance Balance sheet sheet Statement of Statement cash flows cash What is Accounting? What is Accounting? The purpose of accounting is to: (1) identify, record, and communicate the record communicate economic events of an (2) organization to (3) interested users. Chapter 1- 4 SO 1 Explain what accounting is. What is Accounting? What is Accounting? Three Activities Illustration 1-1 Accounting process The accounting process includes the bookkeeping function. Chapter 1- 5 SO 1 Explain what accounting is. Who Uses Accounting Data? Who Uses Accounting Data? Internal Users Management IRS Investors Human Resources Finance Common Questions Creditors Marketing Customers Chapter 1- 6 Labor Unions SEC External Users SO 2 Identify the users and uses of accounting. Who Uses Accounting Data? Who Uses Accounting Data? Common Questions Asked User 1. Can we afford to give our employees a pay raise? Human Resources 2. Did the company earn a satisfactory income? Investors 3. Do we need to borrow in the near future? Management 4. Is cash sufficient to pay dividends to the stockholders? Finance 5. What price for our product will maximize net income? Marketing 6. Will the company be able to pay its short­term debts? Creditors Chapter 1-7 SO 2 Identify the users and uses of accounting. The Building Blocks of Accounting The Building Blocks of Accounting Various users need financial information The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced. Chapter 1-8 Financial Statements Balance Sheet Income Statement Retained Earnings Statement Statement of Cash Flows Note Disclosure Generally Accepted Generally Accounting Principles (GAAP) Principles SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting The Building Blocks of Accounting Organizations Involved in Standard Setting: Securities and Exchange Commission (SEC) http://www.sec.gov/ Financial Accounting Standards Board (FASB) http://www.fasb.org/ International Accounting Standards Board (IASB) http://www.iasb.org/ Chapter 1- 9 SO 4 Explain generally accepted accounting principles and the cost principle. The Building Blocks of Accounting The Building Blocks of Accounting Cost Principle (Historical) – dictates that companies record assets at their cost. Issues: Reported at cost when purchased and also over the time the asset is held. Cost easily verified, whereas market value is often subjective. Fair value information may be more useful. Chapter 1-10 SO 4 Explain generally accepted accounting principles and the cost principle. Assumptions Assumptions Monetary Unit Assumption – include in the accounting records only transaction data that can be expressed in terms of money. Economic Entity Assumption – requires that activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities. Proprietorship. Partnership. Corporation. Chapter 1-11 Forms of Business Ownership SO 5 Explain the monetary unit assumption SO and the economic entity assumption. and Forms of Business Ownership Forms of Business Ownership Proprietorship Corporation Generally owned by one person. Owned by two or more persons. Ownership divided into shares of stock Often small service­ type businesses Often retail and service­type businesses Owner receives any profits, suffers any losses, and is personally liable for all debts. Chapter 1-12 Partnership Generally unlimited personal liability Separate legal entity organized under state corporation law Limited liability Partnership agreement SO 5 Explain the monetary unit assumption SO and the economic entity assumption. and The Basic Accounting Equation The Basic Accounting Equation Assets = Liabilities + Stockholders ’ Equity Provides the underlying framework for recording and summarizing economic events. Assets are claimed by either creditors or owners. Claims of creditors must be paid before ownership claims. Chapter 1-13 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, The Basic Accounting Equation The Basic Accounting Equation Assets = Liabilities + Stockholders ’ Equity Provides the underlying framework for recording and summarizing economic events. Assets Resources a business owns. Provide future services or benefits. Cash, Supplies, Equipment, etc. Chapter 1-14 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, The Basic Accounting Equation The Basic Accounting Equation Assets = Liabilities + Stockholders ’ Equity Provides the underlying framework for recording and summarizing economic events. Liabilities Claims against assets (debts and obligations). Creditors ­ party to whom money is owed. Accounts payable, Notes payable, etc. Chapter 1-15 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, The Basic Accounting Equation The Basic Accounting Equation Assets = Liabilities + Stockholders ’ Equity Provides the underlying framework for recording and summarizing economic events. Stockholders’ Equity Ownership claim on total assets. Referred to as residual equity. Paid­in Capital, Retained Earnings (Corporation). Chapter 1-16 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, Stockholders’ Equity Stockholders’ Equity Illustration 1-6 Revenues result from business activities entered into for the purpose of earning income. Common sources of revenue are: sales, fees, services, commissions, interest, dividends, royalties, and rent. Chapter 1-17 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, Stockholders’ Equity Stockholders’ Equity Illustration 1-6 Expenses are the cost of assets consumed or services used in the process of earning revenue. Common expenses are: salaries expense, rent expense, utilities expense, tax expense, etc. Chapter 1-18 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, Stockholders’ Equity Stockholders’ Equity Illustration 1-6 Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings, however dividends are not an expense. Chapter 1-19 SO 6 SO State the accounting equation, and define assets, liabilities, and stockholders’ equity. assets, Using The Basic Accounting Equation Using The Basic Accounting Equation Transactions are a business’s economic events recorded by accountants. May be external or internal. Not all activities represent transactions. Each transaction has a dual effect on the accounting equation. Chapter 1-20 SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) P1-1A: Barone’s Repair Shop was started on May. Prepare a tabular analysis of the following transactions for the month of May. 1. Stockholders invested $10,000 cash to start the repair shop. Assets Cash 1. + Liabilities Accounts Receivable Accounts Payable + Equipment = +10,000 Chapter 1-21 Stockholders’ Equity + Common Stock +10,000 SO 7 SO Investment Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 2. Purchased equipment for $5,000 cash. Assets Cash 1. ­5,000 Accounts Receivable Accounts Payable + Equipment = +10,000 2. + Liabilities Chapter 1-22 Stockholders’ Equity + Common Stock +10,000 Investment +5,000 SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 3. Paid $400 cash for May office rent. Assets Cash 1. ­5,000 3. Accounts Receivable Accounts Payable + Equipment = +10,000 2. + Liabilities ­400 Chapter 1-23 Stockholders’ Equity + Retained + Earnings Common Stock +10,000 +5,000 ­400 Expense SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 4. Received $5,100 from customers for repair service. Assets Cash 1. ­5,000 3. 4. Accounts Receivable Accounts Payable + Equipment = +10,000 2. + Liabilities ­400 +5,100 Chapter 1-24 Stockholders’ Equity + Retained + Earnings Common Stock +10,000 +5,000 ­400 +5,100 Revenue SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 5. Paid dividends of $1,000 cash. Assets Cash + Liabilities Accounts Receivable Accounts Payable + Equipment = Stockholders’ Equity + Retained + Earnings Common Stock 1. +10,000 2. ­5,000 3. 4. ­400 +5,100 ­400 +5,100 5. ­1,000 ­1,000 Chapter 1-25 +10,000 +5,000 SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 6. Paid part-time employee salaries of $2,000. Assets Cash + Liabilities Accounts Receivable Accounts Payable + Equipment = Stockholders’ Equity + Retained + Earnings Common Stock 1. +10,000 +10,000 2. ­5,000 3. 4. ­400 +5,100 ­400 +5,100 5. 6. ­1,000 ­2,000 ­1,000 ­2,000 +5,000 Expense Chapter 1-26 SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 7. Incurred $250 of advertising costs, on account. Assets Cash + Liabilities Accounts Receivable Accounts Payable + Equipment = Stockholders’ Equity + Retained + Earnings Common Stock 1. +10,000 +10,000 2. ­5,000 3. 4. ­400 +5,100 ­400 +5,100 5. 6. ­1,000 ­2,000 ­1,000 ­2,000 +5,000 +250 7. Chapter 1-27 SO 7 SO ­250 Expense Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 8. Provided repair services on account to customers $750. Assets Cash + Liabilities Accounts Receivable Accounts Payable + Equipment = Stockholders’ Equity + Retained + Earnings Common Stock 1. +10,000 2. ­5,000 3. 4. ­400 +5,100 ­400 +5,100 5. 6. ­1,000 ­2,000 ­1,000 ­2,000 7. 8. +10,000 +5,000 +250 +750 ­250 +750 Revenue Chapter 1-28 SO 7 SO Analyze the effects of business transactions on the accounting equation. the Transactions (Problem) Transactions (Problem) 9. Collected $120 cash for services previously billed. Assets Cash + Liabilities Accounts Receivable Accounts Payable + Equipment = Stockholders’ Equity + Retained + Earnings Common Stock 1. +10,000 2. ­5,000 3. 4. ­400 +5,100 ­400 +5,100 5. 6. ­1,000 ­2,000 ­1,000 ­2,000 7. 8. 9. +10,000 +5,000 +250 +750 +120 6,820 + Chapter 1-29 ­120 630 + 5,000 = SO 7 SO ­250 +750 250 + 10,000 + 2,200 Analyze the effects of business transactions on the accounting equation. the Financial Statements Financial Statements Companies prepare four financial statements from the summarized Companies prepare four financial statements from the summarized accounting data: accounting data: Income Statement Chapter 1-30 Retained Earnings Statement Balance Sheet Statement of Cash Flows SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Income Statement Barone’s Repair Shop I ncome St at ement For t he Mont h Ended May 31, 2007 Revenues: S e r vic e r e ve nue Expenses: $ 5 ,8 5 0 S a la r y e x pe ns e 2 ,0 0 0 Re nt e x pe ns e 4 0 0 A d ve r t is ing e x pe ns e 2 5 0 T o t a l e x pe ns e s Net income Chapter 1-31 2 ,6 5 0 $ 3, 200 Reports the revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Income Statement Retained Earnings Statement Barone’s Repair Shop Bar one’s Repair Shop I ncome St at ement Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 Revenues: S e r vic e r e ve nue Expenses: $ 5 ,8 5 0 S a la r y e x pe ns e 2 ,0 0 0 Re nt e x pe ns e 4 0 0 A d ve r t is ing e x pe ns e 2 5 0 T o t a l e x pe ns e s Net income Chapter 1-32 2 ,6 5 0 $ 3, 200 A d d : N e t inc o me $ 3, 200 Le s s : Divid e nd s ( 1,0 0 0 ) Ret ained ear nings, May 31 $ 2 ,2 0 0 Net income is needed to determine the ending balance in retained earnings. SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Retained Earnings Statement Statement indicates the reasons why retained earnings has increased or decreased during the period. Bar one’s Repair Shop Ret ained Ear nings St at ement For t he Mont h Ended May 31, 2007 Ret ained ear nings, May 1 A d d : N e t inc o me $ 3, 200 Le s s : Divid e nd s Ret ained ear nings, May 31 Chapter 1-33 ( 1,0 0 0 ) $ 2 ,2 0 0 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Bar one’s Repair Shop Balance Sheet Retained Earnings Statement Bar one’s Repair Shop M ay 31, 2007 Ret ained Ear nings St at ement Asset s For t he Mont h Ended May 31, 2007 C as h $ 6 ,8 2 0 A c c o unt s r e c e ivab le 6 3 0 Ret ained ear nings, May 1 Eq uip me nt 5 ,0 0 0 A d d : N e t inc o me T ot al as s e t s $ 12 ,4 5 0 $ 3, 200 A c c o unt s p ay ab le $ 2 5 0 ( 1,0 0 0 ) Ret ained ear nings, May 31 Liabilit ies Le s s : Divid e nd s $ 2 ,2 0 0 St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-34 10 ,0 0 0 2, 200 The ending balance in retained earnings is needed in preparing the balance sheet. $ 12 ,4 5 0 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Reports the assets, liabilities, and stockholders’ equity at a specific date. Bar one’s Repair Shop Balance Sheet M ay 31, 2007 Asset s C as h $ 6 ,8 2 0 A c c o unt s r e c e ivab le 6 3 0 Eq uip me nt 5 ,0 0 0 T ot al as s e t s $ 12 ,4 5 0 Liabilit ies A c c o unt s p ay ab le $ 2 5 0 St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-35 10 ,0 0 0 2, 200 Assets listed at the top, followed by liabilities and stockholders’ equity. Total assets must equal total liabilities and stockholders’ equity. $ 12 ,4 5 0 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Balance Sheet Bar one’s Repair Shop Statement of Cash Flows Barone’s Repair Shop Balance Sheet S t at ement of Cash Flows M ay 31, 2007 For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Asset s C as h $ 6 ,8 2 0 A c c o unt s r e c e ivab le 6 3 0 Eq uip me nt 5 ,0 0 0 T ot al as s e t s $ 12 ,4 5 0 Liabilit ies A c c o unt s p ay ab le $ 2 5 0 St ockholder s' Equit y C o mmo n s t oc k Re t aine d e ar nings T ot al liab . & e q uit y Chapter 1-36 10 ,0 0 0 2, 200 $ 12 ,4 5 0 Ca s h r e c e ipt s f r o m c us t o m e r s Ca s h pa id f o r e x pe ns e s Ca s h pr o vid e d b y o pe r a t io ns Cash f low f rom I nvest ing $ 5 ,2 2 0 (2 ,4 0 0 ) 2 ,8 2 0 Pur c h a s e o f e q uipm e nt Cash f low f rom Financing (5 ,0 0 0 ) I nve s t m e nt b y o wne r s Dr a wing s b y o wne r s Ca s h pr o vid e d b y f ina nc ing N et increase in cash 10 ,0 0 0 (1,0 0 0 ) 9 ,0 0 0 6 ,8 2 0 Cash balance, May 1 Cash balance, May 31 ­ $ 6, 820 SO 8 Understand the four financial statements and how they are prepared. Financial Statements Financial Statements Information for a specific period of time. Answers the following: 1. Where did cash come from? 2. What was cash used for? 3. What was the change in the cash balance? Statement of Cash Flows Barone’s Repair Shop St at ement of Cash Flows For t he Mont h Ended May 31, 2007 Cash f low f rom Operat ions Ca s h r e c e ipt s f r o m c us t o m e r s Ca s h pa id f o r e x pe ns e s Ca s h pr o vid e d b y o pe r a t io ns Cash f low f rom I nvest ing $ 5 ,2 2 0 (2 ,4 0 0 ) 2 ,8 2 0 Pur c h a s e o f e q uipm e nt Cash f low f rom Financing (5 ,0 0 0 ) I nve s t m e nt b y o wne r s Dr a wing s b y o wne r s Ca s h pr o vid e d b y f ina nc ing N et increase in cash 10 ,0 0 0 (1,0 0 0 ) 9 ,0 0 0 6 ,8 2 0 Cash balance, May 1 Cash balance, May 31 Chapter 1-37 ­ $ 6 ,8 2 0 SO 8 Understand the four financial statements and how they are prepared. ...
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