1 Chapter 1 Accounting as a Form of Communication Financial Accounting 4e by Porter and Norton.
-
Upload
maximillian-james -
Category
Documents
-
view
231 -
download
0
description
Transcript of 1 Chapter 1 Accounting as a Form of Communication Financial Accounting 4e by Porter and Norton.
1
Chapter 1Accounting as a Form of
Communication
Financial Accounting 4e by Porter and Norton
2
Decisions Made with Financial Information
Invest??
Borrow $$??
Sell stocks or bonds??
Build new plant??
Add new product line??
Start new business??
Loan $$??Extend credit $$??
3
What is Accounting?
Identifying
Measuring
Communicating
EconomicInformation
to various
users
4
Internal and ExternalUsers of Accounting Information
Internal Users -
Management
CreditorsCurrentand
PotentialOwners
GovernmentAgencies
SuppliersTrade
Organizations
FinancialAnalysts
Banks
5
The Accounting Equation
Basic Accounting Equation
Economic Sources of financing . . .resources Liabilities: from creditors
Equity: from stockholders.=
Assets = Liabilities + Stockholders’ Equity
1-14
6
The Accounting Equation
Assets = Liabilities + Owners’ Equity (or Stockholders'
Equity)Creditors'
Claimsto Assets
Owners'Claims
to Assets
EconomicResources = +
Examples:CashAccounts receivableInventory
Accounts payableNotes payable
Capital stockRetained earnings
7
The Balance Sheet
Body of the Statement– AssetsAssets
Economic benefits owned by the business as a result of past transactions.
– LiabilitiesLiabilities Debts or obligations of the business that result from past transactions.
Stockholders’ EquityStockholders’ Equity Amount of financing provided by owners of the business and
operations.
1-13
8
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
1. Name of entity2. Title of statement3. Specific date4. Unit of measure
The Balance Sheet
reports the financial
position of an entity at a particular
point in time.
9
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Assets are listed by their
ease ofconversion into
cash.
Cash Amount of cash in the company’s bank accounts.
Accounts receivable
Amounts owed by customers from prior sales.
Inventories Parts and completed but unsold products.
Plant and equipment Factories and production machinery.
Land Land on which factories are built.
Assets are economic resources
owned by the business as a result of past transactions.
10
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(In thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Assets are listed by their
ease ofconversion into
cash.
Cash Amount of cash in the company’s bank account.
Accounts receivable
Amounts owed by customers from prior sales.
Inventories Partial and completed but unsold product.
Plant and equipment Factories and production machinery.
Land Property on which factories are located.
1-15
11
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Liabilities are debts or
obligations of the business
that result from past
transactions.
Accounts payable
Amounts owed to suppliers for prior purchases.
Notes payable
Amounts owed on written debt contracts.
12
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(In thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Accounts payable
Amounts owed to suppliers for prior purchases.
Notes payable
Amounts owed on written debt contracts.
1-16
13
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Contributed capital
Amounts invested in the business by stockholders.
Retained earnings
Past earnings not distributed to stockholders.
Equity is the amount of financing
provided by owners of the business and
earnings.
14
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(In thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Contributed capital
Amounts invested in the business by stockholders.
Retained earnings
Past earnings not distributed to stockholders.
1-17
15
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(In thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
Use $ on the first item in a
groupand on the group total.
Assets = Liabilities + Stockholders’ Equity
1-18
16
1. Name of entity2. Title of statement 3. Specific date (Unlike the balance sheet, this statement covers a specified period of time.)4. Unit of measure
17
1-20
18
Revenues are earnings from the sale of goods or services to customers.
Revenue is recognized in the period in whichgoods and services are sold, not necessarily
the period in which cash is received.
19
Expenses are the dollar amount of resources usedup by the entity to earn revenues during a period.
An expense is recognized in the period in whichgoods and services are used, not necessarily
the period in which cash is paid.
20
If expenses exceed revenues,we report net loss.
21
MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 2014(In thousands of dollars)
Retained earnings, January 1, 2014 6,805$ Net income for 2014 3,300 Dividends for 2014 (1,000) Retained earnings, December 31, 2014 9,105$
1-32
22
MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 2014(in thousands of dollars)
Retained earnings, January 1, 2014 6,805$ Net income for 2014 3,300 Dividends for 2014 (1,000) Retained earnings, December 31, 2014 9,105$
1. Name of entity2. Title of statement 3. Specific date (Like the income statement, this statement covers a specified period of time.)4. Unit of measure
23
MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 2014(in thousands of dollars)
Retained earnings, January 1, 2014 6,805$ Net income for 2014 3,300 Dividends for 2014 (1,000) Retained earnings, December 31, 2014 9,105$
The Statement of Retained Earnings reports the way that net income and the distribution of dividends affect the financial position of the company during a period.
24
MAXIDRIVE CORP.Statement of Cash Flows
For the Year Ended December 31, 2014(In thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (156)$ Cash at beginning of the year 5,051 Cash at end of the year 4,895$
1-35
25
MAXIDRIVE CORP.Statement of Cash Flows
For the Year Ended December 31, 2014(in thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (156)$ Cash at beginning of the year 5,051 Cash at end of the year 4,895$
1. Name of entity2. Title of statement 3. Specific date (Like the income statement and statement of retained earnings, this statement covers a specified period of time.)4. Unit of measure
26
MAXIDRIVE CORP.Statement of Cash Flows
For the Year Ended December 31, 2014(in thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (156)$ Cash at beginning of the year 5,051 Cash at end of the year 4,895$
The Statement of Cash Flows reports the inflows and outflows of cash during the period in the
categories of operating, investing, and financing.
27
MAXIDRIVE CORP.Statement of Cash Flows
For the Year Ended December 31, 2014(in thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (156)$ Cash at beginning of the year 5,051 Cash at end of the year 4,895$
The statement ends with a reconciliation of Cash.
28
Relationship Among the Financial Statements
MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 2014(in thousands of dollars)
Retained earnings, January 1, 2014 6,805$ Net income for 2014 3,300 Dividends for 2014 (1,000) Retained earnings, December 31, 2014 9,105$
Net income from the income statement increases ending
retained earnings on the statement of retained
earnings.
29
Relationship Among the Financial Statements
MAXIDRIVE CORP.Statement of Retained Earnings
For the Year Ended December 31, 2014(in thousands of dollars)
Retained earnings, January 1, 2014 6,805$ Net income for 2014 3,300 Dividends for 2014 (1,000) Retained earnings, December 31, 2014 9,105$
Ending retained earnings from the statement of
retained earnings is one of the components of
stockholders’ equity on the balance sheet.
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
30
Relationship Among the Financial Statements
The change in cash on the statement of cash flows added to the beginning of the year balance in cash equals the ending
balance in cash on the balance sheet.
MAXIDRIVE CORP.Balance Sheet
At December 31, 2014(in thousands of dollars)
AssetsCash 4,895$ Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets 27,261$
Liabilities and Stockholders' EquityLiabilities
Accounts payable 7,156$ Notes payable 9,000 Total liabilities 16,156$
Stockholders' EquityContributed capital 2,000$ Retained earnings 9,105 Total stockholders' equity 11,105 Total liabilities and stockholders' equity 27,261$
MAXIDRIVE CORP.Statement of Cash Flows
For the Year Ended December 31, 2014(in thousands of dollars)
Cash flows from operating activities: Cash collected from customers 33,563$ Cash paid to suppliers and employees (30,854) Cash paid for interest (450) Cash paid for taxes (1,190) Net cash flow from operating activities 1,069$ Cash flow from investing activities: Cash paid to purchase equipment (1,625)$ Net cash flow from investing activities (1,625) Cash flow from financing activities: Cash received from bank loan 1,400$ Cash paid for dividends (1,000) Net cash flow from financing activities 400 Net decrease in cash during the year (156)$ Cash at beginning of the year 5,051 Cash at end of the year 4,895$
31
The Rules of the Game
GAAP
FASB
SEC
AICPA
The rulesThe rule makersThe rule enforcersThe CPA regulators
32
Financial Statement Assumptions
EconomicEntity
CostPrinciple
GoingConcern
MonetaryUnit
TimePeriod
33
Economic Entity Concept
Each entity has its own books, records and financial statements that are separate from owners
No intermingling of personal and business assets and liabilities or income and expenses
BusinessBooks &Records
Owners’Books &Records
34
Cost Principle
Record assets at cost paid to acquire them
Continue to value assets at historical cost until sold
More objective than market value
35
Going Concern
Assume business will continue indefinitely into the foreseeable future
Justifies use of historical cost
36
Monetary Unit
How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.)
Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements
37
Time Period Assumption Assumes it is possible to break up an
entity’s earnings in discrete time periods (a month, quarter, year)
Necessary to provide users with financial results on a timely basis
Requires use of estimates 1 2 3
4 5 6 7 8 9 10
11 12 13 14 15 16 17
18 19 20 21 22 23 24
25 26 28 29 30 3127
38
Where Accountants Work Private Business Nonprofit Organizations Public Accounting
– audit– tax– management consulting
Educational Institutions
39
End of Chapter 1