b usiness a ctivities – t he s ource of a ccounting i nformation

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BBUSINESS USINESS AACTIVITIES CTIVITIES ––TTHE HE

SSOURCE OFOURCE OF A ACCOUNTING CCOUNTING

IINFORMATIONNFORMATION

BBUSINESS USINESS AACTIVITIES CTIVITIES ––TTHE HE

SSOURCE OFOURCE OF A ACCOUNTING CCOUNTING

IINFORMATIONNFORMATION

Electronic Presentation by Douglas Cloud

Pepperdine University

Electronic Presentation by Douglas Cloud

Pepperdine University

Chapter Chapter F2F2

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

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.

ObjectivesObjectivesObjectivesObjectives

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:

ContinuedContinuedContinuedContinued

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

ObjectivesObjectivesObjectivesObjectives

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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.

Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

Business activities are events that occur when a

business acquires, uses, or sells resources or claims to

those resources.

Business activities are events that occur when a

business acquires, uses, or sells resources or claims to

those resources.

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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities

Financing activities occur when owners or creditors provide

resources to a company or when a company transfers resources to

owners or creditors.

Financing activities occur when owners or creditors provide

resources to a company or when a company transfers resources to

owners or creditors.

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Financing from Owners and Creditors

Exhibit 1Exhibit 1Exhibit 1Exhibit 1

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22Demonstrate how accounting measures and records business activities.

ObjectiveObjectiveObjectiveObjective

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An account is a record of increases and decreases in the

dollar amount associated with a specific resource or activity.

An account is a record of increases and decreases in the

dollar amount associated with a specific resource or activity.

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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.

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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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Financing ActivitiesFinancing Activities

On January 2, 2004, Mom’s Cookie Company received

$10,000 from the company’s owners. On January 3, 2004, the company received $8,000

from the bank.

On January 2, 2004, Mom’s Cookie Company received

$10,000 from the company’s owners. On January 3, 2004, 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 + 10,000Cash refers to financial resources in the form of coins and currency, bank deposits,

and short-term investments that can be converted easily into currency.

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.

Accounting Representation of Financing Activities

Exhibit 3Exhibit 3Exhibit 3Exhibit 3

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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 + 10,000Contributed 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.

Accounting Representation of Financing Activities

Exhibit 3Exhibit 3Exhibit 3Exhibit 3

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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

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.

Accounting Representation of Financing Activities

Exhibit 3Exhibit 3Exhibit 3Exhibit 3

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

ObjectiveObjectiveObjectiveObjective

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Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

Investing activities involve the acquisition and disposal of long-

term resources used by a business.

Investing activities involve the acquisition and disposal of long-

term resources used by a business.

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Business Activities: Investing in Long-Term Resources

Exhibit 4Exhibit 4Exhibit 4Exhibit 4

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On January 5, Mom’s 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, Mom’s 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.

Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities

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

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

Cash –6,000

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.

Accounting Representation of Investing Activities

Exhibit 5Exhibit 5Exhibit 5Exhibit 5

ContinuedContinued

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

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

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

Accounting Representation of Investing Activities

Exhibit 5Exhibit 5Exhibit 5Exhibit 5

ContinuedContinued

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

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

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

Accounting Representation of Investing Activities

Exhibit 5Exhibit 5Exhibit 5Exhibit 5

ContinuedContinued

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

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

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

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

Accounting Representation of Investing Activities

Exhibit 5Exhibit 5Exhibit 5Exhibit 5

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

ObjectiveObjectiveObjectiveObjective

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Operating activities are those activities necessary to acquire

goods and services.

Operating activities are those activities necessary to acquire

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.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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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.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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

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Merchandise inventory is an

asset account and identifies the cost

of goods a company has

purchased for sale.

Merchandise inventory is an

asset account and identifies the cost

of goods a company has

purchased for sale.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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On January 7, Mom’s Cookie

Company purchased cookies from the bakery at a cost of $9,000.

On January 7, Mom’s Cookie

Company purchased cookies from the bakery at a cost of $9,000.

Mom’s Cookie Co.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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

Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 9,000

Cash –9,000Ending Amounts 40,000 = 30,000 + 10,000

The company now has $9,000 of goods for sale.The company now has

$9,000 of goods for sale.

Accounting Representation of Purchase of Merchandise

Exhibit 7Exhibit 7Exhibit 7Exhibit 7

ContinuedContinued

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

Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 9,000

Cash –9,000Ending Amounts 40,000 = 30,000 + 10,000

The firm spent $9,000 to acquire the merchandise.The firm spent $9,000 to acquire the merchandise.

Accounting Representation of Purchase of Merchandise

Exhibit 7Exhibit 7Exhibit 7Exhibit 7

ContinuedContinued

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

Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 9,000

Cash –9,000Ending Amounts 40,000 = 30,000 + 10,000

The ending amount of assets remains the same.

The ending amount of assets remains the same.

Accounting Representation of Purchase of Merchandise

Exhibit 7Exhibit 7Exhibit 7Exhibit 7

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Operating Activities: Selling Goods to Customers

Exhibit 8Exhibit 8Exhibit 8Exhibit 8

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Mom’s Cookie Company sells 380

boxes of cookies (cost to make = $7,600) to grocery stores during

the month for $11,400, receiving

cash.

Mom’s Cookie Company sells 380

boxes of cookies (cost to make = $7,600) to grocery stores during

the month for $11,400, receiving

cash.

Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

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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 -7,600Merchan. Inventory -7,600Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 0 +40,000 30,000 10,000

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

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

Accounting Representation of Operating Activities

Exhibit 9Exhibit 9Exhibit 9Exhibit 9

ContinuedContinued

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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 -7,600Merchan. Inventory -7,600Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 0 +40,000 30,000 10,000

Sales Revenue increases Retained Earnings by $11,400.

Sales Revenue increases Retained Earnings by $11,400.

Accounting Representation of Operating Activities

Exhibit 9Exhibit 9Exhibit 9Exhibit 9

ContinuedContinued

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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 -7,600Merchan. Inventory -7,600Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 0 +40,000 30,000 10,000A second entry is required to record the cost of $7,600…

A second entry is required to record the cost of $7,600…

Accounting Representation of Operating Activities

Exhibit 9Exhibit 9Exhibit 9Exhibit 9

ContinuedContinued

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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 -7,600Merchan. Inventory -7,600Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

CashOther Assets

ContributedCapital

RetainedEarnings

Beginning Amounts 0 +40,000 30,000 10,000…and a reduction in the amount of inventory.

…and a reduction in the amount of inventory.

Accounting Representation of Operating Activities

Exhibit 9Exhibit 9Exhibit 9Exhibit 9

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

supplies used during January.

ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/6 Supplies Expense -300Cash -300

Accounting Representation of Expenses

Exhibit 10Exhibit 10Exhibit 10Exhibit 10

Continued on Slide 45Continued on Slide 45

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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities

Did you notice that revenues increase

owners’ equity and expenses decrease owners’ equity?

Did you notice that revenues increase

owners’ equity and expenses decrease owners’ equity?

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

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

ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/8 Rent Expense -600Cash -600

Accounting Representation of Expenses

Exhibit 10Exhibit 10Exhibit 10Exhibit 10

ContinuedContinued

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

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

ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/31Wages Expense -1,000Cash -1,000

Accounting Representation of Expenses

Exhibit 10Exhibit 10Exhibit 10Exhibit 10

ContinuedContinued

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

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

ASSETS =ASSETS = LIABILITIELIABILITIESS

+ OWNERS’ EQUITY+ OWNERS’ EQUITY

Date AccountsCash

Other Assets

ContributedCapital

RetainedEarnings

1/31Utilities Expense -200Cash -200

Ending Amounts 9,300 +32,400 = 30,000 + 10,000 + 1,700

Accounting Representation of Expenses

Exhibit 10Exhibit 10Exhibit 10Exhibit 10

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

ObjectiveObjectiveObjectiveObjective

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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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Slide 51 is a summary of balances for Mom’s Cookie Company at

January 31 (Exhibit 12).

Slide 51 is a summary of balances for Mom’s Cookie Company at

January 31 (Exhibit 12).

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AccountAccountJanuary 31 January 31

BalanceBalanceAssets:

Cash

9,300Merchandise inventory

1,400Equipment

31,000Liabilities:

Notes Payable

30,000Owners’ Equity:

Contributed Capital

10,000Sales Revenue

11,400Cost of Goods Sold

(7,600)Wages Expense

(1,000)Rent Expense

(600)Supplies Expense

(300)Utilities Expense

(200)

$9,000 $9,000 – $7,600– $7,600$9,000 $9,000 – $7,600– $7,600$6,000 $6,000 + $25,000+ $25,000$6,000 $6,000 + $25,000+ $25,000

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

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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.

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

determining how well a company has performed.

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The income statement for Mom’s Cookie Company (Exhibit 13) is

shown on Slide 54.

The income statement for Mom’s Cookie Company (Exhibit 13) is

shown on Slide 54.

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Mom’s Cookie CompanyIncome Statement

For the Month Ended January 31, 2004

Sales revenue $11,400Cost of goods sold (7,600)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 1,700

AccountAccount January 31 Balance

Owners’ Equity:

Contributed Capital 10,000

Sales Revenue 11,400

Cost of Goods Sold (7,600)

Wages Expense (1,000)

Rent Expense (600)

Supplies Expense (300)

Utilities Expense (200)

Exhibit 13Exhibit 13Exhibit 13Exhibit 13

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Net income is the amount of profit earned by a business

during a fiscal period.

A fiscal period is the time period

for which a company wants

to report its financial activities.

Mom’s Cookie CompanyIncome Statement

For the Month Ended January 31, 2004

Sales revenue $11,400Cost of goods sold (7,600)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 1,700

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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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Mom’s Cookie CompanyBalance Sheet

At January 31, 2004

Assets:Cash $ 9,300Merchandise inventory 1,400Equipment 31,000

Total assets $41,700Liabilities and Owners’ Equity

Notes payable $30,000Contributed capital 10,000Retained earnings 1,700

Total liabilities and owners’ equity $41,700

equal

Exhibit 14Exhibit 14Exhibit 14Exhibit 14 Balance Sheet

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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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Mom’s Cookie CompanyStatement of Cash Flows

For the Month Ended January 31, 2004

Operating ActivitiesReceived from customers $11,400Paid for merchandise (9,000)Paid for wages (1,000)Paid for rent (600)Paid for supplies (300)Paid for utilities (200)Net cash flow from operating activities $ 300

Investing ActivitiesPaid for equipment (31,000)

ContinuedContinued

Exhibit 15Exhibit 15Exhibit 15Exhibit 15 Statement of Cash Flows

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Carried forward $(30,700)Financing Activities

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

Net cash flow in January 9,300Cash balance, January 1 0Cash balance, January 31 $ 9,300

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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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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AssetsAssets $40,000$40,000

+11,400+11,400 ––9,7009,700$41,700$41,700

ProfitProfitRevenuesRevenues $11,400$11,400ExpensesExpenses ––9,7009,700Net IncomeNet Income $ 1,700$ 1,700

LiabilitiesLiabilities $30,000$30,000 Owner Equity:Owner Equity: Contributed CapitalContributed Capital 10,00010,000 Retained EarningsRetained Earnings 1,700 1,700

$41,700 $41,700

Exhibit 16Exhibit 16Exhibit 16Exhibit 16 Reporting the Transformation Process

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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.

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Financial AnalysisFinancial AnalysisFinancial AnalysisFinancial Analysis

For Mom’s Cookie Company at January

31, 2004…

For Mom’s Cookie Company at January

31, 2004…

Net Income

Total Assets

$1,700

$41,700= 4.1%

ROA is 4.1%.

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Business Business ActivitiesActivities

OperatingOperatingInvestingInvesting

FinancingFinancing

Business Business ActivitiesActivities

OperatingOperatingInvestingInvesting

FinancingFinancing

AccountingAccounting MeasuringMeasuringRecordingRecordingReportingReportingAnalyzingAnalyzing

AccountingAccounting MeasuringMeasuringRecordingRecordingReportingReportingAnalyzingAnalyzing

Business Business DecisionsDecisionsBusiness Business DecisionsDecisions

Actions Based on Business Decisions

A Model of the Accounting Process

Exhibit 17Exhibit 17Exhibit 17Exhibit 17

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THE ENDTHE END

CCHAPTERHAPTER F2 F2

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