(Statement of financial position)
Assets = Liabilities + Stockholders Equity
The Balance Sheet Summarizes:
At a point in time
Once assets and liabilities have been determined. The Stockholders equity is looked at
Owned by 2 or more owners
Must dissolved if ownership change
The affairs of the owners and the business must be kept separate for financial
However, a partnership is not a taxable entity for tax purposes. The individua
Ethical Financial Reporting
Ethics: a code of conduct that applies to everyday life.
Professional Ethics: key to the accountants reputation for independence and competence.
The code of professional ethics of the American Institute of Certified Public Acco
The oversight of a corporations management and ethics by its board of directors
Decision Makers: The Users of Accounting Information
Decision makers fall into three categories:
Internal Decision makers:
Statement of Cash Flows
The Statement of Cash Flows summarizes:
How the entity obtained cash?
How much cash they obtained?
What they did with the cash?
Over a period of time.
Statement of Cash Flows:
Net cash from operating activities ($)
Plus: Net cash f
A Quick Look at the Annual Report
Management Discussion & Analysis (MD&A)
The Rules of the Game in Accounting- GAAP
Generally Accepted Accounting Principles (GAAP)
Encompass the conventions, rules, and procedures necessary to define accept
The FaceBook of Businesses- Communication with users
Four major statements in financial accounting:
Balance Sheet (also called Statement of Financial Position)
Income Statement (also called Statement of Operations)
Retained Earnings Statement
Retained Earnings Statement
What is Retained Earnings?
The accumulated earnings of a business less the amount paid in dividends to stockholders, i.e.
the earnings retained in a corporation for reinvestment.
Dividends: Distribution of the net income (profi
Link Between Revenues and Retained Earnings
Revenues increase retained
earnings (part of owners
Retained earnings is increased
Revenue accounts are increased
Examples Using Debit and Credit
Examples: (Using debit and credit)
A company received contributions of $10,000 from each of the two
principal owners in exchange for shares of stock.
_ OE (capital Stock)
May 12 Purchased miscellaneous supplies
General JournalA chronological list of transactions
Account Titles and Explanations
Analyzing the Effects of Transactions on the Accounting Equation
The Expanded Accounting Equation
Assets end = Liabilities end +
Owners Equity end
= Liabilities end + Capital Stock end + Retained Earnings end
Retained Earnings end = Retained
THE ACCOUNTING INFORMATION SYSTEMS
From Events to Transactions
A transaction must include exchange of values
The Concept of Recording Transactions:
*Not all recognized events are supported by standard documents.
When to Use Debit and Credit
When any assets increases, we debit the assets
When any assets decreases, we credit the assets
When any liabilities increases, we credit the liabilities
When any liabilities decreases, we debit the liabilities
The Language of debit and credit
Shorthand representation of a general ledger account.
The T Account
OK! I know the basic concept. Debit and credit are just two terms re
Basic Accounting Definitions
In the real world, transactions are entered into
Trial Balance: a list of each account and its balance at a specific point in time. It
is NOT a financial statement, but merely a convenient device to prove the equality
Analyzing a Special-Order Decision:
Woodchuck Corp. makes several varieties of wooden furniture. It has been approached
about producing a special order for rocking chairs. A local senior citizens group would
use the special-order chairs in a n
Assigning Activity Costs to Individual Products or Services
1. Select an Activity Cost Driver for Each Cost Pool
Activity Cost Driver A measure of the underlying activity that occurs in
each activity cost pool.
Non volume-Based Cost Drivers Measures that
Activity Based Management (ABM)
Activity Based Management (ABM) Encompasses all of the actions that managers take to
improve operations or reduce costs based on the ABC data.
Managers must use ABC to manage the underlying activities and identify areas tha
Cost Volume Profit Analysis:
Cost Volume Profit analysis - calculate break-even in both units and dollars.
Calculate CM and CM%.
Multiproduct break-even analysis, degree of operating leverage, margin of
1. Cost-Volume-Profit (CVP) analysis Is a ma
Assigning Indirect Costs to Activities:
Activities that support the entire company (all
products, customers, batches, and units)
Product or Customer
Activities that relate to a specific product line or
Total Quality Management (TQM)
Appraisal or Inspection Costs Incurred to identify defective products before they get
to the customer.
Internal Failure Costs Result from the defects that are caught before the product is
shipped to th
Unit Contribution Margin Method:
Unit Contribution Margin Method Tells us how much contribution margin is generated
by each additional unit sold.
Total Contribution Margin = Total
Fixed Costs + Profit (Zero at break-even point)
Unit Contribution Margin x
Margin of Safety
Margin of Safety Is the difference between actual or budgeted sales and the break-even
Think of the margin of safety as a buffer zone that identifies how much sales can
drop before the business will suffer a loss.
Margin of Saf
Activity Based Costing (ABC)
Break-even point in units = Fixed cost / Contribution margin per unit
Break-even point in $ = Fixed cost / Contribution margin ratio
Activity Based Costing - Calculate the activity rate and