2-1 powerpoint presentation by douglas cloud professor emeritus of accounting pepperdine university...

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PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud

Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,

the Star Logo, and South-Western are trademarks used herein under license.

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Task Force Image Gallery clip art included in this electronic presentation is used with the

permission of NVTech Inc.

F1322Business Business ActivitiesActivities— — The Source of The Source of Accounting Accounting InformationInformation

Financial AccountingA Bridge to Decision MakingA Bridge to Decision Making

Ingram and Albright

6th edition

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Once you have completed this

chapter, you should be able to—

Once you have completed this

chapter, you should be able to—

ObjectivesObjectivesObjectivesObjectives

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2. Demonstrate how accounting measures and records business activities.

3. Identify investing activities and explain why they are important to a business.

4. Identify operating activities and explain how they create profits for a company.


ContinuedContinuedContinuedContinued

1. Identify financing activities and explain why they are important to a business.

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5. Describe how financial reports summarize business activities and provide information for business decisions.


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11ObjectiveObjectiveObjectiveObjective

Identify financing activities and explain why they are important to a business.

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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

A business is an organization that exists for

the purpose of making a profit for its owners.

A business is an organization that exists for

the purpose of making a profit for its owners.

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A contribution by owners to a business, along with any profits

that are kept in the business, is known as

owners’ equity.

A contribution by owners to a business, along with any profits

that are kept in the business, is known as

owners’ equity.


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The amount a company borrows is the

principal of a loan. Interest is the cost of borrowing and is paid to creditors in addition

to the repayment of principal.

The amount a company borrows is the

principal of a loan. Interest is the cost of borrowing and is paid to creditors in addition

to the repayment of principal.

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Financing from Owners and Creditors

Exhibit 1Exhibit 1Exhibit 1Exhibit 1

Favorite

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22Demonstrate how accounting measures and records business activities.

ObjectiveObjectiveObjectiveObjective

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An account is a record of the increases and decreases in the

dollar amount associated with a specific resource or activity.

An account is a record of the increases and decreases in the

dollar amount associated with a specific resource or activity.

Accounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business Activities

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Accounting transactions are descriptions of business

activities (or events) that are measured in dollar values and

recorded in accounts.

Accounting transactions are descriptions of business

activities (or events) that are measured in dollar values and

recorded in accounts.

Accounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business Activities

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AssetsAssets =Resources

controlled by the business

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

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AssetsAssets = LiabilitiesLiabilities Owners’ Equity

Owners’ Equity+

The claims of creditors to a company’s resources

Owners’ claims on the company’s

assets

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

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On January 2, 2007, Favorite Cookie Company received

$10,000 from the company’s owners. On January 3, 2007, the company received $8,000

from the bank.

On January 2, 2007, Favorite Cookie Company received

$10,000 from the company’s owners. On January 3, 2007, the company received $8,000

from the bank.

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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts

Beginning Amounts 0 = 0 + 0

1/2 Cash 10,000Contributed Capital 10,000

1/3 Cash 8,000Notes payable 8,000Ending Amounts 18,000 = 8,000 + 10,000



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Cash refers to financial resources in the form of coins and currency,

bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and

obligations of a company.

Cash refers to financial resources in the form of coins and currency,

bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and

obligations of a company.


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Contributed capital is an owners’ equity account and

identifies amounts contributed to a company by its owners.

Contributed capital is an owners’ equity account and

identifies amounts contributed to a company by its owners.


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Notes payable is a liability account used to identify amounts a company owes to creditors with

whom a formal agreement, or note, has been signed.

Notes payable is a liability account used to identify amounts a company owes to creditors with

whom a formal agreement, or note, has been signed.


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33Identify investing activities and explain why they are important to a business.


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Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

Investing activities involve the acquisition or disposal

of long-term resources used by a business.

Investing activities involve the acquisition or disposal

of long-term resources used by a business.

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Investing in Long-Term ResourcesExhibit 4Exhibit 4Exhibit 4Exhibit 4

Favorite

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On January 5, Favorite Cookie Company paid $6,000 for

office equipment. On January 6, the company bought a

delivery van for $25,000. It paid $3,000 in cash and financed the remaining

$22,000 of the purchase price with a note payable.

On January 5, Favorite Cookie Company paid $6,000 for

office equipment. On January 6, the company bought a

delivery van for $25,000. It paid $3,000 in cash and financed the remaining

$22,000 of the purchase price with a note payable.


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Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000

Cash –6,000 1/6 Equipment 25,000

Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000


On January 5, one asset increased (Equipment) and another asset decreased

(Cash) by the same amount, so the accounting equation remained unchanged.

On January 5, one asset increased (Equipment) and another asset decreased

(Cash) by the same amount, so the accounting equation remained unchanged.


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On January 6, the company acquired a delivery van for $25,000.

On January 6, the company acquired a delivery van for $25,000.


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The company paid $3,000 in cash.The company paid $3,000 in cash.


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The balance of $22,000 was financed by issuing a note payable.

The balance of $22,000 was financed by issuing a note payable.


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44Identify operating activities and explain how they create profits for a company.


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Operating activities are those activities necessary to acquire and sell goods

and services.

Operating activities are those activities necessary to acquire and sell goods

and services.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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Revenue is the amount a company expects to receive

when it sells goods or services.

Revenue is the amount a company expects to receive

when it sells goods or services.


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Expense is the amount of resources consumed in the process of acquiring and

selling goods and services.

Expense is the amount of resources consumed in the process of acquiring and

selling goods and services.


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Purchase of Goods for SaleExhibit 6Exhibit 6Exhibit 6Exhibit 6

Favorite

FragileFragileFragileFragile

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Merchandise inventory is an asset

account and identifies the cost of goods a

company has purchased that are

available for sale to customers.

Merchandise inventory is an asset

account and identifies the cost of goods a

company has purchased that are

available for sale to customers.


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On January 7, Favorite Cookie

Company purchased cookies from the bakery at a cost of $7,200.

On January 7, Favorite Cookie

Company purchased cookies from the bakery at a cost of $7,200.

Favorite Cookie Co.


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Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 7,200

Cash –7,200Ending Amounts 40,000 = 30,000 + 10,000

The company now has goods costing $7,200 for sale.

The company now has goods costing $7,200 for sale.


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The firm spent cash to acquire the merchandise.The firm spent cash to

acquire the merchandise.


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The ending amount of assets remains the same.

The ending amount of assets remains the same.


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Selling Goods to CustomersExhibit 8Exhibit 8Exhibit 8Exhibit 8

Favorite

FragileFragileFragileFragile

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Favorite Cookie Company sells 380 boxes of cookies

(cost to purchase = $6,080) to the store

January for $11,400, receiving cash.

Favorite Cookie Company sells 380 boxes of cookies

(cost to purchase = $6,080) to the store

January for $11,400, receiving cash.


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ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date Accounts

1/31Cash 11,400Sales Revenue 11,400

1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +31,120 = 30,000 + 10,000 + 5,320

CashOther Assets

ContributedCapital

RetainedEarnings

Sold 380 boxes of cookies at $30 each. Cash increases $11,400.

Sold 380 boxes of cookies at $30 each. Cash increases $11,400.


Beginning Amounts 1,800 +38,200 30,000 10,000

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Date Accounts



CashOther Assets

ContributedCapital

RetainedEarnings


Revenue from sales increases Retained Earnings by $11,400.Revenue from sales increases

Retained Earnings by $11,400.


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Date Accounts



CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 1,800 +38,200 30,000 10,000A second entry is required to record the cost of $6,080…

A second entry is required to record the cost of $6,080…


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Date Accounts



CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 1,800 +38,200 30,000 10,000…and a reduction in the amount of inventory.

…and a reduction in the amount of inventory.


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Date Accounts



CashOther Assets

ContributedCapital

RetainedEarnings



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Cost of Goods Sold identifies the cost to the company of goods

transferred to customers.

Cost of Goods Sold identifies the cost to the company of goods

transferred to customers.

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On January 6, paid $300 for supplies used during January.On January 6, paid $300 for

supplies used during January.




Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/6 Supplies Expense –300Cash –300


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NOTICERevenues increase owners’ equity. Expenses decrease owners’ equity.

NOTICERevenues increase owners’ equity. Expenses decrease owners’ equity.

NOTICENOTICE

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On January 8, paid $600 for rent for January.

On January 8, paid $600 for rent for January.




Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings


1/8 Rent Expense –600Cash –600

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On January 31, paid $1,000 for wages for January.

On January 31, paid $1,000 for wages for January.




Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings


1/31Wages Expense –1,000Cash –1,000

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On January 31, paid $200 for utilities for January.

On January 31, paid $200 for utilities for January.




Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/31Utilities Expense –200Cash –200


Ending Amounts 11,100 +32,120 = 30,000 + 10,000 + 3,220

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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4

Click the button to skip this exercise.

Popovich Company had the following transaction during June. Indicate the amount of cash, other

assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.

June 1 $15,000 of merchandise inventory was purchased for cash.

If you experience trouble making the button work, type 66 and press “Enter.”


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ASSETS = LIAB. + OWNERS EQ.

Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000

June 1

Press “Enter” or click left mouse key for solution.

MerchandiseInventory 15,000

Cash –15,000

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June 15 Sold merchandise for $60,000 cash. The merchandise had cost Popovich $28,000.




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June 15 Cash 60,000Sales

Revenue 60,000Cost of Goods

Sold -28,000MerchandiseInventory -28,000


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June 23 Borrowed $250,000 from the bank.




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June 23 Cash 250,000Bank Loan 250,000


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June 25 Paid $2,000 for supplies used in June.




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June 25 SuppliesExpense -2,000

Cash -2,000


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June 28 June wages of $5,000 were paid.




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June 25 WagesExpense –5,000

Cash –5,000


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June 30 $100,000 of equipment was purchased for cash.




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June 30 Equipment 100,000Cash –100,000


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June 30 Paid $6,000 for utilities consumed in June.




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June 30 UtilitiesExpense –6,000

Cash –6,000


End. Amts. 222,000 147,000 280,000 50,000 39,000

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55Describe how financial reports summarize business activities and provide information for business decisions.


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Financial statements are reports that summarize the

results of a company’s accounting transactions for

a fiscal period.

Financial statements are reports that summarize the

results of a company’s accounting transactions for

a fiscal period.

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The income statement reports revenues and expenses for a fiscal period as a means of

determining how well a company has performed in

creating profit for its owners.

The income statement reports revenues and expenses for a fiscal period as a means of

determining how well a company has performed in

creating profit for its owners.

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AccountAccountJanuary 31 January 31

BalanceBalanceAssets:

Cash

11,100Merchandise inventory

1,120Equipment

31,000Liabilities:

Notes Payable

30,000Owners’ Equity:

Contributed Capital

10,000Sales Revenue

11,400Cost of Goods Sold

(6,080)Wages Expense

(1,000)Rent Expense

(600)Supplies Expense

(300)Utilities Expense

(200)

$7,200 $7,200 – $6,080– $6,080$7,200 $7,200 – $6,080– $6,080

Exhibit 12Exhibit 12

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Cash


1,120Equipment

31,000Liabilities:

Notes Payable


Contributed Capital

10,000Sales Revenue



(1,000)Rent Expense



(200)

$6,000 $6,000 + $25,000+ $25,000$6,000 $6,000 + $25,000+ $25,000


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Cash


1,120Equipment

31,000Liabilities:

Notes Payable


Contributed Capital

10,000Sales Revenue



(1,000)Rent Expense



(200)

$8,000 +$8,000 + $22,000 $22,000$8,000 +$8,000 + $22,000 $22,000


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Favorite Cookie CompanyIncome Statement

For the Month Ended January 31, 2007

Sales revenue $11,400Cost of goods sold (6,080)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 3,220

AccountAccount January 31 Balance

Owners’ Equity:

Contributed Capital 10,000

Sales Revenue 11,400

Cost of Goods Sold (6,080)

Wages Expense (1,000)

Rent Expense (600)

Supplies Expense (300)

Utilities Expense (200)


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A fiscal period is the time period

for which a company reports

its financial activities.




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Net income is the amount of profit earned by a business during a fiscal period.




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A balance sheet identifies a company’s assets and claims to those assets by creditors

and owners at a specific date.

A balance sheet identifies a company’s assets and claims to those assets by creditors

and owners at a specific date.

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Favorite Cookie CompanyBalance Sheet

At January 31, 2007

Assets:Cash $11,100Merchandise inventory 1,120Equipment 31,000

Total assets $43,220Liabilities and Owners’ Equity

Notes payable $30,000Contributed capital 10,000Retained earnings 3,220

Total liabilities and owners’ equity $43,220

equal


2-77

The statement of cash flows reports events that affected a

company’s cash account during a fiscal period.

The statement of cash flows reports events that affected a

company’s cash account during a fiscal period.

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Favorite Cookie CompanyStatement of Cash Flows


Operating ActivitiesReceived from customers $11,400Paid for merchandise (7,200)Paid for wages (1,000)Paid for rent (600)Paid for supplies (300)Paid for utilities (200)Net cash flow from operating activities $ 2,100

Investing ActivitiesPaid for equipment (31,000)ContinuedContinuedContinuedContinued


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Carried forward $(28,900)Financing Activities

Received from creditors $30,000Received from owners 10,000Net cash flow from financing activities 40,000

Net cash flow for January 11,100Cash balance, January 1 0Cash balance, January 31 $ 11,100

The statement of cash flows is useful for identifying how much cash a company has,

where that cash came from, and how the company used its cash during a fiscal period.

The statement of cash flows is useful for identifying how much cash a company has,

where that cash came from, and how the company used its cash during a fiscal period.

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Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears.

Wages expenseCost of goods soldSales revenueMerchandise inventoryNet incomeRetained earnings

Income statementIncome statementIncome statementBalance sheetIncome statementBalance sheet

Press “Enter” or click left mouse button for solutions.


Click the button to skip this exercise.If you experience trouble making the button work, type 82 and press “Enter.”

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Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears.

Contributed capitalRent expenseCashNotes payable

Balance sheetIncome statementBal. sheet & SCFlowsBalance sheet

Press “Enter” or click left mouse button for solutions.

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What role does accounting play What role does accounting play in an organization’s in an organization’s

transformation process?transformation process?

What role does accounting play What role does accounting play in an organization’s in an organization’s

transformation process?transformation process?

Accounting is an information system for the measurement and reporting of the

transformation of resources into goods and services and the sale or transfer of these goods

and services to customers.

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Assets $40,000

+11,400 -8,180$43,220

ProfitRevenues $11,400Expenses -8,180Net Income $ 3,220

Liabilities $30,000 Owners’ Equity: Contributed Capital 10,000 Retained Earnings 3,220

$43,220 Exhibit 16Exhibit 16Exhibit 16Exhibit 16

Reporting the Transformation ProcessReporting the Transformation ProcessReporting the Transformation ProcessReporting the Transformation Process

1

2

3

4

5

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Financial AnalysisFinancial AnalysisFinancial AnalysisFinancial Analysis

Return on assets (ROA) is the ratio of net income

to total assets.

Return on assets (ROA) is the ratio of net income

to total assets.

Net Income

Total AssetsROA =

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Net Income

Total AssetsROA =

For Favorite Cookie Company at January 31, 2007,

ROA is 7.5 percent.


ROA is 7.5 percent.

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Net Income

Total Assets

$3,220

$43,220= 7.5%


ROA is 7.5 percent.


ROA is 7.5 percent.

ROA =

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Business Activities

OperatingInvesting

Financing

Business Activities

OperatingInvesting

Financing

Accounting MeasuringRecordingReportingAnalyzing

Accounting MeasuringRecordingReportingAnalyzing

Business Decisions

Business Decisions

Actions Based on Business Decisions

A Model of the Accounting Process


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THE ENDTHE END

CCHAPTERHAPTER 2 2

2-1 powerpoint presentation by douglas cloud professor emeritus of accounting pepperdine university...

Documents

financing activities

records business activities

objectivesobjectives

accounting equation

favorite slide

objectiveobjective slide

investing activities

operating activities