the function of education is to teach one to think intensively and to think critically......
TRANSCRIPT
The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education.
— Martin Luther King Jr., American civil rights leader (1929-1968)
1
THE PURPOSE OF THE PURPOSE OF ACCOUNTINGACCOUNTING
FINANCIAL INFORMATIONFINANCIAL INFORMATIONABOUT A BUSINESSABOUT A BUSINESSTO INDIVIDUALS TO INDIVIDUALS AND ORGANIZATIONSAND ORGANIZATIONS
TO PROVIDE:TO PROVIDE:
Forms of Business Forms of Business OrganizationOrganization
Sole proprietorshipSole proprietorship
PartnershipPartnership
CorporationCorporation
3
Sole ProprietorshipSole Proprietorship
Business owned Business owned by one personby one person
Simple to Simple to establishestablish
Owner controlledOwner controlledTax advantagesTax advantagesOwner personally Owner personally
liableliableFinancing difficultFinancing difficult
4
PartnershipPartnership
Two or more Two or more ownersowners
Simple to Simple to establishestablish
Shared controlShared controlBroader skills & Broader skills &
resourcesresourcesTax advantagesTax advantagesPersonal liabilityPersonal liability
5
CorporationCorporation
Separate legal Separate legal entity owned by entity owned by stockholdersstockholders
Easy to transfer Easy to transfer ownershipownership
Greater capital Greater capital raising potentialraising potential
Lower legal Lower legal liabilityliability
Unfavorable tax Unfavorable tax treatmenttreatment
6
THE ACCOUNTING PROCESSTHE ACCOUNTING PROCESS
Accounting Is A System Of:Accounting Is A System Of:
It is accomplished in 6 steps:
Gathering financial Gathering financial informationinformation
About a businessAbout a businessAnd reporting it to usersAnd reporting it to users
STEP ONESTEP ONE
ANALYZING
Looking at events that have taken place and thinking about how they affect the business
STEP TWOSTEP TWO
Entering financial information about events into the accounting system
RECORDING
STEP THREESTEP THREE
Sorting and grouping similar items together
CLASSIFYING
STEP FOURSTEP FOUR
Bringing the various items of information together to determine a result
SUMMARIZING
STEP FIVESTEP FIVE
Giving the results to interested parties
REPORTING
STEP SIXSTEP SIX
Deciding the meaning and importance of the information in various reports
INTERPRETING
Study Objectives of Study Objectives of Chapter 1Chapter 1
1.1. Understand the content and Understand the content and purpose of each of the financial purpose of each of the financial statements. statements.
a)a) Clarify the meaning of Clarify the meaning of assetsassets, , liabilitiesliabilities, and , and stockholders’ equitystockholders’ equity..
b)b) Learn what the basic accounting Learn what the basic accounting equation tells us about a business.equation tells us about a business.
2.2. Describe the components that Describe the components that supplement the financial supplement the financial statements in an annual report.statements in an annual report.
14
Study Objectives of Study Objectives of Chapter 1Chapter 13.3. Identify the users and uses of Identify the users and uses of
accounting information.accounting information.4.4. Explain the 3 principal business Explain the 3 principal business
activities that affect cash.activities that affect cash.
15
Define some terms:Define some terms:
SalesSales RevenueRevenue ExpenseExpense AssetAsset LiabilityLiability Owner’s EquityOwner’s Equity
16
Content and Purpose of Financial Content and Purpose of Financial StatementsStatements
Businesses tell users how they are doing through four financial statements:
17
How would you answer the question, “How is your business doing?”
Four Financial StatementsFour Financial Statements
Income StatementIncome Statement
Retained Earnings StatementRetained Earnings Statement
Balance SheetBalance Sheet
Statement of Cash FlowsStatement of Cash Flows
18
Over Time
Over Time
Over Time
At some point in Time
Income StatementIncome Statement
Did you make any money???Did you make any money???
Summarizes revenues and expenses Summarizes revenues and expenses
for period: for period: month, quarter, year.month, quarter, year.
If revenue > expense = If revenue > expense = Net Income.Net Income.
19
20Do this statement first!Do this statement first!
Income StatementIncome Statement
Retained Earnings Retained Earnings StatementStatement
Shows changes in retained earnings Shows changes in retained earnings
for period: for period: month, quarter, yearmonth, quarter, year
Beginning balanceBeginning balance
AddAdd Net Income from income Net Income from income
statement.statement.
Deduct DividendsDeduct Dividends
Ending balanceEnding balance
21
Retained Earnings Retained Earnings StatementStatement
22Do this statement second!
Balance SheetBalance Sheet
Reports Reports assetsassets and claims to assets.and claims to assets.
Claims of creditors, Claims of creditors, liabilities.liabilities.
Claims of owners, Claims of owners, stockholders’ stockholders’
equity.equity.
Assets = Liabilities + Stockholders’ Assets = Liabilities + Stockholders’
EquityEquity
Specific date – Specific date – one point in time!one point in time!
23
Balance SheetBalance Sheet
24
From Retained From Retained Earnings Earnings StatementStatement
Statement of Cash FlowsStatement of Cash Flows
Provides information about cash Provides information about cash
receipts and cash paymentsreceipts and cash payments
Summarizes for period: Summarizes for period: month, month,
quarter, year.quarter, year.
Cash effects of operating, Cash effects of operating,
investing, and financing investing, and financing
activities.activities.
25
Statement of Cash FlowsStatement of Cash Flows
Where did the cash come from?Where did the cash come from?
How was cash used during the How was cash used during the
period?period?
What was the change in the cash What was the change in the cash
balance during the period?balance during the period?
A company cannot survive without A company cannot survive without
cash!cash!
26
Statement of Cash Flows..Statement of Cash Flows..
27
Agrees Agrees
withwith Balance Balance SheetSheet
Three Business Activities that Three Business Activities that affect Cashaffect Cash
OperatingOperating
InvestingInvesting
FinancingFinancing
28
Operating ActivitiesOperating ActivitiesRevenuesRevenues are the increases in are the increases in
assets resulting from the sale of a assets resulting from the sale of a product or serviceproduct or service
ExpensesExpenses are the cost of assets are the cost of assets consumed or services used in consumed or services used in generating revenue.generating revenue.
If revenue If revenue >> expense expense == Net Net IncomeIncome
If revenue If revenue << expense expense == Net Net Loss!Loss!
29
Operating ActivitiesOperating Activities
What the business What the business does to make does to make money;money;◦ Selling goodsSelling goods◦ Providing servicesProviding services◦ ManufacturingManufacturing◦ Cost of SalesCost of Sales◦ AdvertisingAdvertising◦ Paying employeesPaying employees◦ Paying utilitiesPaying utilities
30
Investing ActivitiesInvesting Activities
Investments in the Investments in the company’s future company’s future (Obtaining resources or assets to (Obtaining resources or assets to operate the business)operate the business)
◦ LandLand◦ BuildingsBuildings◦ VehiclesVehicles◦ ComputersComputers◦ FurnitureFurniture◦ EquipmentEquipment
31
Financing Activities – Financing Activities – Raising Raising money to finance the businessmoney to finance the business
Borrowing createsBorrowing creates liabilitiesliabilities◦ Bank loansBank loans◦ Debt securitiesDebt securities◦ Goods on credit or Goods on credit or
payablespayables
Selling stockSelling stock creates creates stockholders’ stockholders’ equityequity
32
Statement of Cash FlowsStatement of Cash Flows
To be continued in
chapter 13.
33
Users of Financial InformationUsers of Financial InformationInternalInternal
InternalInternal vs.vs.
ExternaExternall
34
AssetsAssets
Resources owned by the business to be Resources owned by the business to be used to generate future revenueused to generate future revenue◦ CashCash◦ Accounts receivableAccounts receivable◦ InventoriesInventories◦ Furniture and fixturesFurniture and fixtures◦ EquipmentEquipment◦ SuppliesSupplies
35
LiabilitiesLiabilitiesObligations or debts of the Obligations or debts of the
businessbusiness◦Notes payableNotes payable◦Accounts payableAccounts payable◦Interest payableInterest payable◦Salaries payableSalaries payable◦Unearned revenueUnearned revenue
36
Stockholders’ EquityStockholders’ Equity
Ownership claims on assetsOwnership claims on assets◦Paid-in capitalPaid-in capital
Common stockCommon stock
◦Retained earningsRetained earnings
37
Basic Accounting Basic Accounting EquationEquation
38
AssetsAssets
= =
Liabilities + Stockholders’ EquityLiabilities + Stockholders’ Equity
39
Which is Which is notnot one of the three forms of one of the three forms of business organization?business organization?
a.a. Sole proprietorship.Sole proprietorship.
d.d. Corporation.Corporation.
c.c. Partnership.Partnership.
b.b. Creditorship.Creditorship.
Question 1Question 1
40
Which is an advantage of corporations Which is an advantage of corporations relative to partnerships and sole relative to partnerships and sole proprietorshipsproprietorships??
a. a. Lower taxes.Lower taxes.
d. d. Most common form of business organization.Most common form of business organization.
c.c. Reduced legal liability for investors.Reduced legal liability for investors.
b. b. Harder to transfer ownershipHarder to transfer ownership
Question 2Question 2
41
Which is Which is notnot one of the three primary one of the three primary business activities that affect cash?business activities that affect cash?
a.a. Financing.Financing.
d.d. Investing.Investing.
c.c. Advertising.Advertising.
b. b. Operating.Operating.
Question 3Question 3
42
Which of the following is Which of the following is notnot a correct a correct representation of the accounting equation?representation of the accounting equation?
a. a. Assets Assets == Liabilities Liabilities ++ Stockholders’ Equity Stockholders’ Equity
d. d. Assets - Assets - Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities
c. c. Assets Assets + + Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities
b. b. Assets - Liabilities = Stockholders’ EquityAssets - Liabilities = Stockholders’ Equity
Question 4Question 4
43
Using the accounting equation, answer the following question.
If Liabilities = $10,000 and
Then Assets =
Stockholders’ Equity = $20,000
Question 5Question 5
44
Using the accounting equation, answer the following question.
If Assets = $75,000
Then Stockholders’ Equity =
And Liabilities = $35,000
Question 6Question 6
45
ANSWERSANSWERS
46
Which is Which is notnot one of the three forms of one of the three forms of business organization?business organization?
a.a. Sole proprietorship.Sole proprietorship.
d.d. Corporation.Corporation.
c.c. Partnership.
b.b. Creditorship.Creditorship.
Question 1Question 1
47
Question 2Question 2
Which is an advantage of corporations Which is an advantage of corporations relative to partnerships and sole relative to partnerships and sole proprietorshipsproprietorships??
a. a. Lower taxes.Lower taxes.
d. d. Most common form of business organization.Most common form of business organization.
c. Reduced legal liability for investors.c. Reduced legal liability for investors.
b. b. Harder to transfer ownershipHarder to transfer ownership
48
a.a. Financing.Financing.
d.d. Investing.Investing.
c.c. Advertising.Advertising.
b. b. Operating.Operating.
Which is Which is notnot one of the three primary one of the three primary business activities that affect cash?business activities that affect cash?
Question 3Question 3
49
Which of the following is Which of the following is notnot a correct a correct representation of the accounting equation?representation of the accounting equation?
a. a. Assets Assets == Liabilities Liabilities ++ Stockholders’ Equity Stockholders’ Equity
d. d. Assets - Assets - Stockholders’ Equity Stockholders’ Equity = = Liabilities Liabilities
c. c. Assets Assets + + Stockholders’ Equity Stockholders’ Equity = = LiabilitiesLiabilities
b. b. Assets - Liabilities = Stockholders’ EquityAssets - Liabilities = Stockholders’ Equity
Question 4Question 4
50
Using the accounting equation, answer the following question.
If Liabilities = $10,000 and
Then Assets =
Stockholders’ Equity = $20,000
$30,000 $30,000 == $10,000 $10,000 ++ $20,000 $20,000
$30,000$30,000
Question 5Question 5
51
Using the accounting equation, answer the following question.
If Assets = $75,000
Then Stockholders’ Equity =
And Liabilities = $35,000
$40,000$40,000
$75,000 $75,000 == $35,000 $35,000 ++ $40,000 $40,000
Question 6Question 6
Supplements to the Financial Supplements to the Financial Statements in an Annual Statements in an Annual ReportReport
Management Discussion and Management Discussion and AnalysisAnalysis
Notes to Financial StatementsNotes to Financial Statements
Auditor’s reportAuditor’s report
52
Management’s Discussion and Management’s Discussion and Analysis covers three items:Analysis covers three items:
1.1. LiquidityLiquidity
2.2. Capital resourcesCapital resources
3.3. Results of Results of
operationsoperations
53
Management’s Discussion and Management’s Discussion and AnalysisAnalysis
54
Notes to Financial StatementsNotes to Financial Statements
Explanatory notes and Explanatory notes and supplementary schedulessupplementary schedules
Clarifies information in financial Clarifies information in financial statementsstatements
Expands with additional detailExpands with additional detailDescribes accounting policiesDescribes accounting policiesExplains uncertainties and Explains uncertainties and
contingenciescontingencies
55
Notes to Financial StatementsNotes to Financial Statements
56
Auditor’s ReportAuditor’s Report
Certified Public Accountant – CPACertified Public Accountant – CPAAuditor (CPA) conducts Auditor (CPA) conducts
independent examination of independent examination of financial statementsfinancial statements
Fair representation?Fair representation?Follow Follow generally accepted generally accepted
accounting principles (GAAP)?accounting principles (GAAP)?Unqualified opinionUnqualified opinion
57
Auditor’s ReportAuditor’s Report
58
59
Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings ?Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600
CSU begins on CSU begins on Jan. 1, 2007Jan. 1, 2007
For year For year ended ended Dec. Dec. 31, 2007,31, 2007, prepareprepare Income Income
statementstatement Retained Retained
earnings earnings statementstatement
Balance sheetBalance sheet
Problem: CSU CorporationProblem: CSU Corporation
60
Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings ?Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600
Action step 1:Action step 1: Report the Report the revenues & revenues & expenses for expenses for a period of a period of time, time, Income Income StatementStatement
Problem: CSU CorporationProblem: CSU Corporation
61
Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings ?Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600
Action step 1:Action step 1: Report the Report the revenues & revenues & expenses for expenses for a period of a period of time, time, Income Income StatementStatement
Problem: CSU CorporationProblem: CSU Corporation
62
CSU CorporationCSU CorporationIncome StatementIncome Statement
For the Year Ended December 31, 2007For the Year Ended December 31, 2007
Create the headingCreate the heading
Name of the Name of the statementstatement
Name of the Name of the companycompany
Period Period of timeof time
Problem: CSU CorporationProblem: CSU Corporation
63
CSU CorporationCSU CorporationIncome StatementIncome Statement
For the Year Ended December 31, 2007For the Year Ended December 31, 2007RevenuesRevenues
Service revenueService revenue $17,000$17,000
List the revenuesList the revenues
Use dollar signs to denote U.S. currencyUse dollar signs to denote U.S. currency
Problem: CSU CorporationProblem: CSU Corporation
CSU CorporationCSU CorporationIncome StatementIncome Statement
For the Year Ended December 31, 2007For the Year Ended December 31, 2007RevenuesRevenues
Service revenueService revenue $17,000$17,000ExpensesExpenses
Rent expenseRent expense $9,000$9,000Insurance expenseInsurance expense 1,000 1,000Supplies expenseSupplies expense 200 200
Total expensesTotal expenses 10,20010,200
________________
List the expenses & underline sub-totalsList the expenses & underline sub-totals
Problem: CSU CorporationProblem: CSU Corporation
CSU CorporationCSU CorporationIncome StatementIncome Statement
For the Year Ended December 31, 2007For the Year Ended December 31, 2007RevenuesRevenues
Service revenueService revenue $17,000$17,000ExpensesExpenses
Rent expenseRent expense $9,000$9,000Insurance expenseInsurance expense 1,000 1,000Supplies expenseSupplies expense 200 200
Total expensesTotal expenses 10,200 10,200Net IncomeNet Income $ 6,800$ 6,800
Calculate net income: revenues - expensesCalculate net income: revenues - expenses
________________________________
________________________________
Problem: CSU CorporationProblem: CSU Corporation
66
Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings ?Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600
Action step 2: Action step 2: Show Show amounts and amounts and causes of causes of changes in changes in retained retained earningsearnings
Use Net Use Net Income from Income from Income Income StatementStatement
DividendsDividends
Problem: CSU CorporationProblem: CSU Corporation
67
CSU CorporationCSU CorporationRetained Earnings StatementRetained Earnings Statement
For the Year Ended December 31, 2007For the Year Ended December 31, 2007
Retained earnings, January 1Retained earnings, January 1 $ 0$ 0Add: Net incomeAdd: Net income 6,8006,800
6,8006,800Less: DividendsLess: Dividends 600 600Retained earnings, Dec. 31 Retained earnings, Dec. 31 $ 6,200$ 6,200
____________
Problem: CSU CorporationProblem: CSU Corporation
68
Service revenue $17,000Accounts receivable $4,000Accounts payable $2,000Building rental expense $9,000Notes payable $5,000Common stock $10,000Retained earnings $6,200Equipment $16,000Insurance expense $1,000Supplies $1,800Supplies expense $200Cash $1,400Dividends $600
Action step 3: Action step 3: Present assets Present assets and claims to and claims to those assets those assets at a specific at a specific point in time point in time on the on the Balance SheetBalance Sheet
Use $6,200 Use $6,200 Retained Retained earnings from earnings from previous previous statement!statement!
Problem: CSU CorporationProblem: CSU Corporation
69