bsad 221 introductory financial accounting donna gunn, ca
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BSAD 221Introductory Financial
Accounting
Donna Gunn, CA
Financial Statements
• Balance Sheet
• Income Statement
• Cash Flow Statement
• Statement of Retained Earnings
Financial statements summarize the financial activities of the business.
Financial Statement Relationships
Net income increases retained earnings, while a net loss will decrease retained earnings.
Dividends decrease retained earnings.
DIVIDENDSDecreases RETAINED
EARNINGS
Net Income = Revenues - Expenses
Increases
Financial Statement Relationships
SHAREHOLDERS’ EQUITY
SHARE CAPITAL
RETAINED EARNINGS
Share Capital and R/E make up Shareholders’ Equity.
Increases
Net Income = Revenues - Expenses
Increases
Financial Statement Relationships
SHAREHOLDERS’ EQUITY
SHARE CAPITAL
RETAINED EARNINGS
Net Income = Revenues - Expenses
ASSETS LIABILITIES SHAREHOLDERS’ EQUITY
= +
Increases
Increases
Note that this statement has ONLY
revenues and expenses!
The income statement impacts Retained Earnings
Income Statement Elements
Results of continuing operations can be presented in one of the two formats
Single step format:
Revenues
(All Operating Expenses)
Operating income
Multiple step format:
Sales
(Cost of Goods Sold)
Gross Margin
(Other Operating Expenses)
Operating Income
Classified Balance Sheet
Includes comparatives for the prior year
Current amounts - Amounts due within / or receivable within 1 year
Non-current amounts- Amounts due or receivable outside of a
year
Balance Sheet
$4,800 fixed assets - $1,440 accumulated amortization.
Balance SheetRemember that Total liabilities and equity ($19,945) must equal Total assets ($19,945).
Financial Statement Relationships
SHAREHOLDERS’ EQUITY
SHARE CAPITAL
RETAINED EARNINGS
Net Income = Revenues - Expenses
ASSETS LIABILITIES SHAREHOLDERS’ EQUITY
= +
Increases
Increases
Closing the Books Even though the balance sheet account balances
carry forward from period to period, the income statement accounts do not.
Closing entries:
1. Transfer net income (or loss) to Retained Earnings.
2. Establish a zero balance in each of the temporary accounts to start the next accounting period.
The Closing ProcessThe following accounts are called
temporary or nominal accounts and are closed at the end of the period . . .
• Revenues• Expenses• Gains• Losses, and• Dividends declared
The Closing Process Assets, liabilities, and shareholders’ equity
accounts are permanent, or real accounts, and are never closed.
•Assets•Liabilities•Shareholders’ Equity
The Closing Process
Three steps are used in the closing process . . .
1. Close revenues and gains to Retained Earnings
2. Close expenses and losses to Retained Earnings
3. Close Dividends (if any) to Retained Earnings
The Closing Process To close Ducharme’s Revenue accounts, the following
entry is required:
Dr. Sales Revenue 35,000
Cr. Retained Earnings 35,000
The Closing Process To close Ducharme’s expense accounts, the following
entry is required:
Dr. Income Summary 33,800 Cr. Cost of Goods Sold Cr. Operating Expenses
27,5006,300
The Closing Process Finally, to close Ducharme’s dividends account, the following entry is required (only if dividends account is directly debited
in original dividend journal entry rather than Retained Earnings):
(existing ??? Closebalance)
DividendsClose ???Dividends
Retained Earnings
Dr. Retained Earnings ???? Cr. Dividends
????
Post-closing Trial Balance
A Post-closing Trial Balance should be prepared as the last step of the accounting cycle to
check that debits equal credits and all temporary accounts have been
closed.
Current Ratio
An important indicator of a company’s ability to meet its current obligations.
Current Ratio = Current Assets ÷ Current Liabilities
Current Ratio
Current Ratio = Current Assets ÷ Current Liabilities
Petro-Canada has current assets of $2,826 and current liabilities of $3,348.
Current Ratio = $2,826 / $3,348
= 0.84
The Debt-To-Equity Ratio
Debt-To-Equity Ratio =Total Liabilities
Total Shareholders’ Equity
This ratio measures the relation between total
liabilities and the shareholders’ equity that
finances the assets.
An increasing ratio over time signals more reliance on debt financing and more
risk.
The Debt-To-Equity Ratio
Debt-To-Equity Ratio =Total Liabilities
Total Shareholders’ Equity
Debt-To-Equity Ratio =$123,900$246,200
= 0.50
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