Chapter+3+Slides+with+notes

Chapter+3+Slides+with+notes - Chapter Chapter 3 Operating...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: Chapter Chapter 3 Operating Decisions and the Income Statement ACCT 2010 Fall 2011 Allen Huang Chapter Three Slide 1 Transaction Analysis Process • Accounts and effects 1. Identify the accounts affected and classify the accounts affected and classify them by type of account (A, L, SE). 2. Determine the direction of the effect (increase or decrease) on each account. • Balancing 3. Verify that the accounting equation (∆A = ∆L + ∆SE) remains in balance. Chapter Three Slide 2 Direction of Transaction Effects • For Assets: DR = Left = Increase; CR = Right = Decrease CR Ri • For Liab and SE: CR = Right = Increase; DR = Left = Decrease Chapter Three Slide 3 Double-Entry Bookkeeping Assets + DR Liabilities − CR Normal Balance Shareholders’ Equity − DR − DR + CR Normal Balance + CR Normal Balance Retained Earnings Contributed Capital − DR − DR + CR + CR Normal Balance Normal Balance Expenses + DR Normal Balance Chapter Three − CR Revenues − DR + CR Normal Balance Slide 4 Why Debit Expenses? •A = L + SE = L + Cont. Capital + RE • End. RE = Beg. RE + NI – Dividend. RE Beg RE NI = Beg. RE + Rev – Exp – Dividend. • $1 ↑ in Rev End. RE ↑ by $1 (recall increase of RE is Cr) Cr increase in Rev; • $1 ↑ in Exp End. RE ↓ by $1 (recall decrease of RE is Dr) Dr increase in Exp. Chapter Three Slide 5 Transaction Analysis • Balance check: A = L + SE remains balance for each transaction. (I.e. ∆A = ∆L + ∆SE) • Equality check: Total Debits = Total Credits for each transaction. +A +A −L −SE +Exp −Rev = −A +L −Exp +A − (−A) = +L − (−L) ∆A Chapter Three +SE +Rev +SE − (−SE) = ∆L + ∆SE Slide 6 Contract Exchange (Not Transaction) • Most transactions with external parties involve an exchange where the business entity both gives up something and recei something and receives something in return. in ret • Signing a contract is just an exchange of promises but not assets, service, which will change the financial position of the firm. Chapter Three Slide 7 Learning Objectives for Ch 3 1. Learn a typical business operating cycle and the necessity for the time period assumption. 2. How business activities affect the elements of the income statement. 3. Learn the accrual basis of accounting and apply the revenue and matching principles. 4. Apply transaction analysis to examine and record th the effects of operating activities. 5. Prepare unadjusted financial statements. Chapter Three Slide 8 Business Background How do business activities affect the income the income statement? How are these activities recognized and measured? How are these activities reported on the income statement? Chapter Three Slide 9 The Operating Cycle Begin Purchase inputs or products from products from suppliers on credit. Receive payment from customers. And pay suppliers. Manufacture products. Deliver product or provide service to customers on credit. Chapter Three Slide 10 The Operating Cycle Company Name Industry Operating Cycle Yum Brands Inc Restaurant 12 days Cathay Pacific Airlines 40 days Walmart Retailer 45 days Kroger Co Grocery Retailer 45 days Amazon.com Inc Online Retailer 22 days General Motors Auto Manufacturer 342 days Eli Lilly Corp Pharmaceutical 339 days Hewlett-Packard Co Manufacturer 110 days Chapter Three Slide 11 Underlying Accounting Assumptions Time Period: The long life of a company can be reported over a series of shorter time periods. Recognition Issues: When should the effects of operating activities be recognized (recorded)? Measurement Issues: What amounts should be recognized? Chapter Three Slide 12 Reporting Income • Income is a salient measure of performance used by: – Investors (to predict future performance) – Creditors (to determine the likelihood that you are creditworthy) – Boards of directors (to determine management compensation) Chapter Three Slide 13 Elements on the Income Statement Revenue Increases in assets or settlement of liabilities from delivering or producing goods, rendering services, or other activities that constitute the ongoing major or central operations. Expense Outflows or other using up of assets/or incurrence of liabilities from delivering or producing goods, rendering services, or other activities that constitute the ongoing major or central operations. . Gains Increase in net assets from peripheral or incidental transactions and from all other transactions and events except those that result from revenues or investment by owners. . Revenues − Expenses + Gains − Losses = NI Losses Decrease in net assets from peripheral or incidental transactions and from all other transactions and events except those that result from revenues or investment by owners. Chapter Three Slide 14 Papa John’s Primary Operating Activity is selling pizza and selling franchises. Operating Activities Peripheral Activities Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income For the Year Ended December 31, 2006 (dollars in thousands) Revenues Revenues Restaurant and commissary sales Franchise royalties and development fees Total revenues Costs and expense s Cost of sales Salaries and benefits expense General and administrative expense s Total costs and expenses Operating income Other revenues and gains (expense and losses) Investment income Interest expense Income before income taxes Income tax expense Net income Earnings per share $ 884,000 117,000 1,001,000 425,000 164,000 314,000 903,000 98,000 1,000 (3,000) 96,000 33,000 63,000 $ $ 1.96 Chapter Three Slide 15 Papa John’s Primary Operating Expenses Cost of sales (used inventory) (used inventory) Salaries and benefits to employees Other Other costs (like advertising, insurance, and depreciation) Chapter Three Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income For the Year Ended December 31, 2006 (dollars in thousands) Revenues Restaurant and commissary sales Franchise royalties and development fees Total revenues Costs and expense s Cost of sales Salaries and benefits expense General and administrative expense s Total costs and expenses Operating income Other revenues and gains (expense and losses) Investment income Interest expense Income before income taxes Income tax expense Net income Earnings per share $ 884,000 117,000 1,001,000 425,000 164,000 314,000 903,000 98,000 $ $ 1,000 (3,000) 96,000 33,000 63,000 1.96 Slide 16 Earnings Per Share Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income For the Year Ended December 31, 2006 (dollars in thousands) Net Income Weighted Average Number of Common Shares Outstanding Earnings Earnings Per Share Revenues Revenues Restaurant and commissary sales Franchise royalties and development fees Total revenues Costs and expense s Cost of sales Salaries and benefits expense General and administrative expense s Total costs and expenses Operating income Other revenues and gains (expense and losses) Investment income Interest expense Income before income taxes Income tax expense Net income $ 884,000 117,000 1,001,000 425,000 164,000 314,000 903,000 98,000 $ Earnings per share $ Chapter Three 1,000 (3,000) 96,000 33,000 63,000 1.96 Slide 17 Papa John's International, Inc. and Subsidiaries Consolidated Statement of Income For the Year Ended December 31, 2006 (dollars in thousands) Corporations are taxable entities. Income tax expense computed as Income Before Taxes Taxes × Tax Rate (Federal, State, Local and Foreign). Chapter Three Revenues Restaurant and commissary sales Franchise royalties and development fees Total revenues Costs and expense s Cost of sales Salaries and benefits expense General and administrative expense s Total costs and expenses Operating income Other revenues a nd gains (expense a nd losses) Other revenues and gains (expense and losses) Investment income Interest expense Income before income taxes Income tax expense Net income Earnings per share $ 884,000 117,000 1,001,000 425,000 164,000 314,000 903,000 98,000 $ $ 1,000 (3,000) 96,000 33,000 63,000 1.96 Slide 18 Cash Basis Accounting Revenue is recorded when cash is received. Expenses are recorded when cash is paid. Cash accounting is NOT GAAP!! Chapter Three Slide 19 Accrual Accounting Assets, liabilities, revenues, and expenses should be recognized when the transaction should be recognized when the transaction that that causes them occurs, not necessarily not when cash is paid or received. Required by Generally Acceptable Accounting Principles Chapter Three Slide 20 Revenue Principle • Recognize revenues when all of the following criteria are met: following criteria are met: 1. Delivery has occurred or services have been rendered. 2. There is persuasive evidence of an arrangement for customer payment. 3. The price is fixed or determinable. 4. Collection is reasonably assured. Chapter Three Slide 21 PCCW Footnotes Chapter Three Slide 22 Exceptions • Income recognition before the delivery of product – Example: Long term contracts (airplanes, or construction of buildings or pipelines). We usually recognize revenues on a percentage of completion method). • Income recognition after the sale – Example: Sales where payment comes in periodic Sales where payment comes in periodic installments after the product/service has actually changed hands (e.g., retail home furnishings). Used because there is often unusually high risk that payment may not be collected. Chapter Three Slide 23 Boeing Company, 2008 Annual Report Revenue Recognition Chapter Three Slide 24 Rent-A-Center 2009 Annual Report Chapter Three Slide 25 Revenue Principle When cash is received on the date the revenue is earned, the following entry is made: revenue is earned the following entry is made: Company Delivers AND $ Received Cash (+A) Sales revenue (+R, +SE) Chapter Three x,xxx x,xxx Slide 26 Revenue Principle If cash is received before the company delivers goods or services, the liability account UNEARNED UNEARNED REVENUE is recorded. Cash received before revenue is earned $ Received Cash (+A) Unearned revenue (+L) x,xxx x,xxx Revenue Deferral Chapter Three Slide 27 Revenue Principle If cash is received before the company delivers goods or services, the liability account UNEARNED UNEARNED REVENUE is recorded. Cash received before revenue is earned $ Received Revenue Earned Cash (+A) Unearned revenue (+L) x,xxx x,xxx Accruals reverse. Unearned Revenue (−L) Sales Revenue (+R, +SE) Chapter Three x,xxx x,xxx Slide 28 Revenue Principle Typical liabilities that become revenue when earned include . . . CASH COLLECTED (Goods or services due to customers) REVENUE over time will (Earned when goods become or services provided) Rent collected in advance Rent revenue Unearned air traffic revenue Air traffic revenue Deferred subscription revenue Subscription revenue Chapter Three Slide 29 Revenue Principle If cash is received after the company delivers goods or services, an asset ACCOUNTS ACCOUNTS RECEIVABLE RECEIVABLE is recorded. Cash received after revenue is earned Company Delivers Accounts receivable (+A) x,xxx Sales revenue (+R, +SE) x,xxx Revenue Accrual Chapter Three Slide 30 Revenue Principle If cash is received after the company delivers goods or services, an asset ACCOUNTS ACCOUNTS RECEIVABLE RECEIVABLE is recorded. Cash received after revenue is earned $ Received Company Delivers Accounts receivable (+A) x,xxx Sales revenue (+R, +SE) x,xxx Accruals reverse. Cash (+A) x,xxx Accounts receivable (−A) x,xxx Chapter Three Slide 31 The Revenue Principle Assets reflecting revenues earned but not yet received in cash include . . . CASH TO BE COLLECTED (Owed by customers) and already earned as REVENUE (Earned when goods or services provided) Interest receivable Interest revenue Rent receivable Rent revenue Royalties receivable Royalty revenue Chapter Three Slide 32 Revenue Recognition The following transactions occurred in Sept, 2012. For each transaction, indicate the revenue account title and amount. If revenues is not to be recognized in Sept, explain why. a. b. c. d. e. f. g. A customer orders and receives 10 personal computers from Dell; the customer orders and receives 10 personal computers from Dell; the customer promises to pay $18,400 within three months. Answer from Dell’s standpoint. Hyundai, Inc, sells a truck with a list price of $20,050 for $18,050 cash. Bon-ton Department Store order 1,000 men’s shirt from Arrow Shirt Company for $15 each for future delivery. The terms require payment in full within 30 days of delivery. Answer from Arrow’s standpoint. Arrow Shirt Company completes production of the shirts described in (c) and delivers the order. Answer from Arrow’s standpoint. Arrow receives payment from Bon-Ton for the order described in (c). Answer from Arrow’s standpoint. A customer purchases a ticket from American Airlines for $410 cash to travel the following January. Answer from American Airlines’ standpoint. General Motors issues $20 million in new common stock. Chapter Three Slide 33 Revenue Recognition h. Penn State University receives $18,300,000 cash for 80,000 fivegame season football tickets. i. Penn State plays the first football game referred to in (h). j. Precision Construction Company signs a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Precision receives a check for $50,000 as a deposit on the future construction. Answer from Precision’s standpoint. k. On September 1, 2012, a bank lends $1,200 to a company; the note principal and $144 ($1,200 x 12%) annual interest are due in one year. Answer from the bank’s standpoint. l. A popular ski magazine company receives a total of $1,980 today $1 from subscribers. The subscriptions begin in the next fiscal year. Answer from the magazine company’s standpoint. m. Sears, a retail store, sells a $100 lamp to a customer who charges the sales on his credit card. Answer from Sears’ standpoint. Chapter Three Slide 34 Revenue Recognition a. A customer orders and receives 10 personal computers from Dell; the customer promises to pay $18,400 within three months. Answer from Dell standpoint Dell’s standpoint. Sales revenue; $18,400. b. Hyundai, Inc, sells a truck with a list price of $20,050 for $18,050 cash. Sales revenue; $18,050. c. Bon-ton Department Store order 1,000 men’s shirt from Arrow Shirt Company for $15 each for future delivery. The terms require payment in full within 30 days of delivery. Answer from Arrow’s standpoint. 30 None; No transaction has occurred, exchange of promises only. d. Arrow Shirt Company completes production of the shirts described in (c) and delivers the order. Answer from Arrow’s standpoint. Sales revenue; $15,000. Chapter Three Slide 35 Revenue Recognition e. Arrow receives payment from Bon-Ton for the order described in (c). Answer from Arrow’s standpoint. None; Payment related to revenue recorded previously in (d). Payment related to revenue recorded previously in (d) f. A customer purchases a ticket from American Airlines for $410 cash to travel the following January. Answer from American Airlines’ standpoint. None; No revenue in Sept, earnings process is not yet complete. g. General Motors issues $20 million in new common stock. None; No revenue is earned, issuance of stock is a financing activity. h. Penn State University receives $18,300,000 cash for 80,000 fivegame season football tickets. None; No revenue earned in Sept, earnings process is not complete. i. Penn State plays the first football game referred to in (h). Ticket sales revenue; $3,660,000 (= $18,300,000 / 5 games). Chapter Three Slide 36 Revenue Recognition j. Precision Construction Company signs a contract with a customer for the construction of a new $500,000 warehouse. At the signing, Precision receives a check for $50,000 as a deposit on the future construction. Answer from Precision’s standpoint. None; No revenue earned in Sept, earnings process is not complete. k. On September 1, 2012, a bank lends $1,200 to a company; the note principal and $144 ($1,200 x 12%) annual interest are due in one year. Answer from the bank’s standpoint. Interest revenue; $12 (= $1,200 x 12% / 12 months). l. A popular ski magazine company receives a total of $1,980 today from subscribers. The subscriptions begin in the next fiscal year. Answer from the magazine company’s standpoint. None; No revenue earned in Sept, earnings process is not complete. m. Sears, a retail store, sells a $100 lamp to a customer who charges the sales on his credit card. Answer from Sears’ standpoint. Sales revenue; $100. Chapter Three Slide 37 The Matching Principle Resources consumed to to earn revenues in an accounting period should be recorded in that period, regardless regardless of when cash is paid. of when cash is paid Chapter Three Slide 38 When to Recognize Expenses? • General principle – Product costs (costs directly related to the product/service) We match these costs with the revenues generated. Examples: – Period costs (costs not directly linked to product or service) We record these costs as and when they occur Examples: Chapter Three Slide 39 Matching Principle When cash is paid on the date the expense is incurred, the following entry is made: Expense Incurred AND $ Paid Rent expense (+E, −SE) Cash (−A) Chapter Three x,xxx x,xxx Slide 40 Matching Principle If cash is paid before the company receives goods or services, an asset account PREPAID PREPAID EXPENSE EXPENSE is recorded. Cash is paid before expense is incurred $ Paid Prepaid rent expense (+A) x,xxx Cash (−A) x,xxx Expense Deferral Chapter Three Slide 41 Matching Principle If cash is paid before the company receives goods or services, an asset account PREPAID PREPAID EXPENSE EXPENSE is recorded. Cash is paid before expense is incurred $ Paid Expense Incurred Prepaid rent expense (+A) x,xxx Cash (−A) x,xxx Accruals reverse. Rent expense (−R, −SE) Prepaid rent expense (−A) Chapter Three x,xxx x,xxx Slide 42 Matching Principle Typical assets and their related expense accounts include. . . CASH PAID FOR as used over time becomes EXPENSE Suppli es Supplies expense Prepaid insurance Insurance expense Buildings and equipment Depreciation expense Chapter Three Slide 43 Matching Principle If cash is paid after the company receives goods or services liability PAYABLE recorded or services, a liability PAYABLE is recorded. Cash paid after expense is incurred Expense Incurred Wages expense (+E, −SE) Wages payable (+L) x,xxx x,xxx Expense Accrual Chapter Three Slide 44 Matching Principle If cash is paid after the company receives goods or services liability PAYABLE recorded or services, a liability PAYABLE is recorded. Cash paid after expense is incurred $ Paid Expense Incurred Wages expense (+E, −SE) Wages payable (+L) Accruals reverse. x,xxx x,xxx Wages payable (−L) Cash (−A) x,xxx x,xxx Chapter Three Slide 45 Matching Principle Typical liabilities and their related expense accounts include . . . CASH TO BE PAID and already incurred as EXPENSE Salaries payable Salaries expense Interest payable Interest expense Property taxes payable Property tax expense Chapter Three Slide 46 Expense Recognition The following transactions occurred in Jan, 2012. For each transaction, if an expense is to be recognized in Jan, indicate the expense account title and amount. If not recognized, indicate why. a. b. c. d. e. f. Dell pays its computer service technicians $79,500 in salaries for the two weeks ended January 7. Answer from Dell’s standpoint. At the beginning of Jan, Turner Construction Company pays $4,410 in worker’s compensation insurance for the first three months of the year. McGraw-Hill uses $754 worth of electricity and natural gas in its headquarters building for which it has not yet been billed. Arrow Shirt Company completes production of 500 men’s shirts ordered by Bon-Ton’s Department Store at a cost of $10 each and delivers the order. Answer from Arrow’s standpoint. The campus bookstore receives 500 accounting texts at a cost of $43 each. The terms indicate that payment is due within 30 days of delivery. During the last week of Jan, the campus bookstore sold 450 accounting texts received in (e) at a sales price of $92. Chapter Three Slide 47 Expense Recognition g. h. i. j. k. l. Hyundai, Inc., pays its salespersons $3,200 in commissions related to Dec automobile sales. Answer from Hyundai’s standpoint. A new grill is purchased and installed at a Wendy’s restaurant at the end of the day on Jan 31; $8,750 cash payment is made on that day. of the day on Jan 31; a $8,750 cash payment is made on that day. The University of Florida orders 60,000 season football tickets from its printer and pays $5,410 in advance for the custom printing. The first game will be played in Sept. Answer from the University’s standpoint. Carousel Mall has janitorial supplies costing $4,000 in storage at the beginning of Jan. An additional $2,600 worth of supplies was purchased during Jan. At the end of Jan, $410 worth of janitorial supplies remained in storage. Wang Co. paid $3,600 for a fire insurance policy on Jan 1. The policy Co paid $3 for fire insurance policy on Jan The policy covers 12 months beginning on Jan 1. Answer from Wang’s standpoint. Parillo’s Taxi pays a $595 invoice from a consulting firm for services received and recorded in Dec. Chapter Three Slide 48 Expense Recognition a. Dell pays its computer service technicians $79,500 in salaries for the two weeks ended January 7. Answer from Dell’s standpoint. Salary expense; $39,750 incurred in January. The remaining half was incurred in December was incurred in December. b. At the beginning of Jan, Turner Construction Company pays $4,410 in worker’s compensation insurance for the first three months of the year. Insurance expense; $1,470 (= 4, 410 / 3) incurred in January. c. McGraw-Hill uses $754 worth of electricity and natural gas in its headquarters building for which it has not yet been billed. Utilities expense; $754. d. Arrow Shirt Company completes production of 500 men’s shirts ordered by Bon-Ton’s Department Store at a cost of $10 each and delivers the order. Answer from Arrow’s standpoint. Cost of goods sold; $5,000 (= 500 shirts x $10 per shirt). Chapter Three Slide 49 Expense Recognition e. f. g. h. The campus bookstore receives 500 accounting texts at a cost of $43 each. The terms indicate that payment is due within 30 days of delivery. None; Expense will be recorded in the future when the related Expense will be recorded in the future when the related revenue has been earned. During the last week of Jan, the campus bookstore sold 450 accounting texts received in (e) at a sales price of $92. Cost of goods sold; $19,350 (= 450 books x $43 per book). Hyundai, Inc., pays its salespersons $3,200 in commissions related to Dec automobile sales. Answer from Hyundai’s standpoint. None; December expense paid in January. December expense paid in January. A new grill is purchased and installed at a Wendy’s restaurant at the end of the day on Jan 31; a $8,750 cash payment is made on that day. None; Expense will be recorded as depreciation over the equipment’s useful life. Chapter Three Slide 50 Expense Recognition i. j. k. l. The University of Florida orders 60,000 season football tickets from its printer and pays $5,410 in advance for the custom printing. The first game will be played in Sept. Answer from the University’s standpoint. None; Expense will be recorded when the related revenue has been Expense will be recorded when the related revenue has been earned. Carousel Mall has janitorial supplies costing $4,000 in storage at the beginning of Jan. An additional $2,600 worth of supplies was purchased during Jan. At the end of Jan, $410 worth of janitorial supplies remained in storage. Supplies expense; $6,190 (= $4,000 + $2,600 - $410). Wang Co. paid $3,600 for a fire insurance policy on Jan 1. The policy covers 12 months beginning on Jan 1. Answer from Wang’s standpoint. Insurance expense; $300 (= $3,600 / 12 months). Parillo’s Taxi pays a $595 invoice from a consulting firm for services received and recorded in Dec. None; December expense paid in January. Chapter Three Slide 51 Expanded Transaction Analysis Model Let’s look at an expanded transaction look at an expanded transaction analysis model that includes the recording of revenues and expenses. Chapter Three Slide 52 A Brief Review about Dr and Cr • Accounts which increase by Dr. and decrease by Cr. (with Dr. balance): – Assets – Expenses (operating activities) – Losses (investing activities) • Accounts which increase by Cr. and decrease by Dr. (with Cr. Balance): – Liabilities – Contributed capital (financing activities) capital (financing activities) – Revenue (operating activities) – Gains (investing activities) – Retained earnings (operating and/or financing activities) Chapter Three Slide 53 A Brief Review About Transaction Analysis 1. Identify the accounts affected (at least two accounts). 2. Determine which accounts are increased and which accounts are decreased. 3. The accounting equation must always be in balance (balance rule). 4. The total dollar value of the debits in the transaction should equal the total dollar value of the credits (debit/credit equality rule). Chapter Three Slide 54 A = L + SE ASSETS LIABILITIES Debit Credit for for Increase Decrease Debit Credit for for Decrease Increase Next, let’s see how Revenues how Revenues and and Expenses affect Retained Earnings. CONTRIBUTED CAPITAL CAPITAL RETAINED EARNINGS EARNINGS Debit Credit for for Decrease Increase Debit Credit for for Decrease Increase Chapter Three Slide 55 Expanded Transaction Analysis Model Dividends decrease Retained Earnings. RETAINED EARNINGS Debit Credit for for Decrease Increase Net Income increases Retained Earnings. ∆RE = NI – Dividend = (Rev - Exp) - Dividend REVENUES Debit Credit for for Decrease Increase Chapter Three EXPENSES Debit Credit for for Increase Decrease Slide 56 Analyzing Papa John’s Transaction Let’s apply the complete apply the complete transaction analysis model to some of Papa John’s transactions. All amounts are in thousands of dollars. Chapter Three Slide 57 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. Identify & Classify the Accounts 1. Cash (asset) 2. Franchise fee revenue (revenue) 3. Unearned franchise fees (liability) Determine the Direction of the Effect the Direction of the Effect Determine the Direction of the Effect 1. Cash increases. 2. Franchise fee revenue increases. 3. Unearned franchise fees increases. Chapter Three Slide 58 Papa John’s sold franchises for $400 cash. The company earned $100 immediately. The rest will be earned over several months. Assets Cash = 400 Liabilities Unearned franchise revenue + 300 Stockholders' Equity Franchise fees 100 revenue GENERAL JOURNAL Date Description Cash Unearned franchise revenue Franchise fees revenue Page 1 Debit 400 Credit 300 100 Chapter Three Slide 59 The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Identify & Classify the Accounts Identify & Classify the Accounts 1. Cash (asset) 2. Restaurant sales revenue Restaurant sales revenue (revenue) 3. Cost of sales- restaurant (expense) 4. Inventories (asset) Determine the Direction of the Effect Determine. the Direction of the Effect 1 the Direction of the Effect Cash increases. 2. Restaurant sales revenue increases. 3. Cost of sales- restaurant increases. 4. Inventories decrease. Chapter Three Slide 60 The company sold $36,000 of pizzas for cash. The costs of the pizza ingredients for those sales were $9,600. Assets Cash = Liabilities 36,000 Inventory (9,600) + Stockholders' Equity Restaurant sales 36,000 revenue Cost of sales (9,600) GENERAL JOURNAL GENERAL JOURNAL Date Date Description Description Cash Page 1 Page 1 Debit Debit 36,000 Restaurant sales revenue Cost of sales - restaurant Inventories Credit Credit 36,000 9,600 9,600 Chapter Three Slide 61 Transaction Analysis A new company CollegeCaps, Inc. operates a small store in an area mall and specializes in baseball-type caps with logos printed on them. Record the journal entries occurring in the first two weeks of operation. a. b. c. d. e. f. g. h. i. j. Issued 1,000 shares of stock to investors for cash at $30 per share. Borrowed $50,000 from the bank to provide additional funding to begin operations; the note is due in two years. Paid $1,200 for current month’s rent and another $1,200 for next month’s. Paid $2,400 for 1-year insurance policy (recorded as a prepaid expense). Purchased furniture and fixtures for the store for $15,000 on account. The amount is due within 30 days amount is due within 30 days. Purchased university logo caps as inventory of store for $1,800 cash. Placed advertisements in local college newspaper for a total of $250 cash. Sold caps totaling $400, half of which was charged on account. The cost of the caps sold was $150. Made full payment for furniture and fixtures purchased on account in (e). Received $50 from a customer on account. Chapter Three Slide 62 Transaction Analysis a. Issued 1,000 shares of stock to investors for cash at $30 per share. Cash (+A) 30,000 Contributed capital (+SE) 30,000 b. Borrowed $50,000 from the bank to provide additional funding to begin $50 from the bank to provide additional funding to begin operations; the note is due in two years. Cash (+A) 50,000 Note payable (long-term) (+L) 50,000 c. Paid $1,200 for current month’s rent and another $1,200 for next month’s. Rent expense (−SE) 1,200 Prepaid rent (+A) 1,200 Cash (−A) 2,400 d. Paid $2,400 for 1-year insurance policy (recorded as a prepaid expense). Prepaid insurance (+A) 2,400 Cash (−A) 2,400 Chapter Three Slide 63 Transaction Analysis e. Purchased furniture and fixtures for the store for $15,000 on account. The amount is due within 30 days. Furniture and fixtures (+A) 15,000 Accounts payable (+L) payable (+L) 15 15,000 f. Purchased university logo caps as inventory of store for $1,800 cash. Inventory (+A) 1,800 Cash (−A) 1,800 g. Placed advertisements in local college newspaper for a total of $250 cash. Advertising expense (+E,−SE) expense (+E 250 Cash (−A) 250 Chapter Three Slide 64 Transaction Analysis h. Sold caps totaling $400, half of which was charged on account. The cost of the caps sold was $150. Cash (+A) 200 Accounts receivable (+A) 200 Sales revenue (+R, +SE) 400 Cost of goods sold (+E,−SE) Inventory (−A) i. j. 150 150 Made full payment for furniture and fixtures purchased on account in (e). Accounts payable (−L) 15,000 Cash (−A) 15,000 Received $50 from a customer on account. Cash (+A) 50 Accounts receivable (−A) Chapter Three 50 Slide 65 How are Unadjusted Financial Statements Prepared? After posting all of the January transactions to T-accounts, we can prepare Papa John’s unadjusted financial unadjusted financial statements. Chapter Three Slide 66 How are Financial Statements Prepared? Income Statement Revenues – Expenses = Net Income Beginning Retained Earnings + Net Income – Dividends Declared Ending Retained Earnings Statement of Retained Earnings Balance Sheet Statement of Cash Flows Assets = Liabilities + Stockholders’ Equity Contributed Capital Retained Earnings Change = Cash from Operating Activities in + Cash from Investing Activities Cash + Cash from Financing Activities Chapter Three Slide 67 Income Statement Several expenses, including income tax expense, have not have not been determined at this point in the accounting process. Papa John's International, Inc. and Subsidiaries Unadjusted Consolidated Statement of Income For the Month Ended January 31, 2007 (dollars in thousands) Revenues Restaurant sales revenue Franchise fee rev enue Total revenues Costs and expenses Cost of sales Salaries and benefits expense General and administrativ expenses e Total costs and expenses Operating income Other revenues and gains (expense and losses) Inv estment income Gain on sale of land Income before income taxes Income tax expense Net income Earnings per share Chapter Three $ 66,000 2,800 68,800 30,000 14,000 7,000 51,000 17,800 $ 1,000 3,000 21,800 21,800 $ 0.68 Slide 68 Statement of Retained Earnings PAPA JOHN'S INTERNATIONAL, INC. AND SUBSIDIARIES Unadjusted Consolidated Statement of Retained Earnings For the Month Ended Janaury 31, 2007 (Dollars in thousands) Beginning balance, December 28, 2006 Net income Div idends Ending balance, January 31, 2007 $ $ 147,000 21,800 (3,000) 165,800 The net income comes from the Income Statement just prepared. Chapter Three Balance Sheet The ending balance from the Statement of Retained Earnings flows into the equity equity section of the Balance Sheet. Chapter Three Slide 69 PA JOHN'S INTERNA PA TIONA INC. A L, ND SUBSIDIA RIES Unadjusted Consolidated Balance Sheets (Dollars in thousands) A ssets Jan. 31, 2007 Current assets: Cash $ 43,900 A ccounts receivable 19,200 Supplies 26,000 Prepaid expenses 17,000 Other current assets 14,000 Total current assets 120,100 Long-term investments 2,000 Property and equipment, net of depreciation 207,000 Long-term notes receivable 15,000 Intangibles 67,000 Other assets 17,000 Total assets $ 428,100 Liabilities and Stockholders' Equity Current liabilities: A ccounts payable Dividends payable A ccrued expenses payable expenses payable Total current liabilities Unearned franchise fees Long-term notes payable Other long-term liabilities Total liabilities Stockholders' equity: Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ 39,000 3,000 73,000 115,000 7,300 110,000 27,000 259,300 3,000 165,800 168,800 428,100 Slide 70 Transaction Analysis A new candy store in Collegetown opens on Feb 1, 2011. The shop specializes in a selection of chocolate candies. The following transactions occurred in Feb 2011, the first month of operation. 1. Set up appropriate T-accounts for Cash, Accounts Receivable, Supplies, Merchandise Inventory, Prepaid Expenses, Equipment, Furniture and Fixtures, Accounts Payable, Notes Payable, Contributed Capital, Sales Revenue, Cost of Goods Sold (expense), Advertising Expense, Wage Expense, and Repair Expense. All accounts begins with zero balances. 2. Prepare journal entries, and post them to T-accounts. 3. Prepare financial statements at the end of the month ended Feb 28, 2011 (income statement, statement of retained earnings, and balance sheet). Chapter Three Slide 71 Transaction Analysis a. Received four shareholders’ contributed capital of $17,600 cash to form the corporation; issued stock. b. Paid three months’ rent for store at $880 per month (prepaid expenses). c. Purchased supplies for $330 cash. supplies for $330 cash. d. Purchased and received candy for $5,500 on account, due in 60 days. e. Negotiated and signed a two-year $11,000 loan at the bank. f. Used the money in (e) to purchase a computer for $2,750 (for recordkeeping and inventory tracking) and the balance for furniture and fixtures for the store. g. Placed a grand opening advertisement in the local paper for $500 cash. h. Made sales on Valentine’s Day totaling $2,000; $1,675 was in cash and the rest on accounts receivable. The cost of the candy sold was $1,100. i. Made a $550 payment on accounts payable. j. Incurred and paid employee wages of $450. k. Collected accounts receivable of $55 from customers. l. Made a repair to one of the display cases for $130 cash. m. Made cash sales of $2,200 during the rest of the month. The cost of the candy sold was $1,210. Chapter Three Slide 72 Transaction Analysis a. Received four shareholders’ contributed capital of $17,600 cash to form the corporation; issued stock. Cash (+A) 17,600 Contributed capital (+SE) 17,600 b. Paid three months’ rent for store at $880 per month (prepaid expenses). Prepaid Expense (+A) 2,640 Cash (−A) 2,640 c. Purchased supplies for $330 cash. Merchandise Supplies (+A) Cash (−A) 330 330 d. Purchased and received candy for $5,500 on account, due in 60 days. Inventories (+A) 5,500 Accounts Payable (+L) 5,500 Chapter Three Slide 73 Transaction Analysis e. Negotiated and signed a two-year $11,000 loan at the bank. Cash (+A) 11,000 Note payable (+L) 11,000 f. Used the money in (e) to purchase a computer for $2,750 (for recordkeeping and inventory tracking) and the balance for furniture and fixtures for the store. Furniture and Fixtures (+A) 8,250 Equipment (+A) 2,750 Cash (−A) 11,000 g. Placed a grand opening advertisement in the local paper for $500 cash. Advertising Expense (+E, −SE) 500 Cash (−A) 500 Chapter Three Slide 74 Transaction Analysis h. Made sales on Valentine’s Day totaling $2,000; $1,675 was in cash and the rest on accounts receivable. The cost of the candy sold was $1,100. Cash (+A) 1,675 Accounts Receivables (+A) Receivables (+A) 325 Sales Revenue (+SE) 2000 Cost of Goods Sold (+E, −SE) 1100 Merchandise Inventories (−A) i. j. 1100 Made a $550 payment on accounts payable. Account Payable (−L) Payable 550 Cash (−A) 550 Incurred and paid employee wages of $450. Wage Expense (+E, −SE) 450 Cash (−A) 450 Chapter Three Slide 75 Transaction Analysis k. Collected accounts receivable of $55 from customers. Cash (+A) 55 Accounts Receivable (−A) 55 l. Made a repair to one of the display cases for $130 cash. Repair Expense (+E, −SE) 130 Cash (−A) 130 m. Made cash sales of $2,200 during the rest of the month. The cost of the candy sold was $1,210. Cash (+A) 2,200 Sales Revenue (+SE) 2,200 Cost of Goods Sold (+E, −SE) 1,210 Merchandise Inventories (−A) Chapter Three 1,210 Slide 76 Chapter Three Slide 77 Income Statement Chapter Three Slide 78 Statement of Retained Earnings Chapter Three Slide 79 Balance Sheet Chapter Three Slide 80 ...
View Full Document

Ask a homework question - tutors are online