Financial Accounting, 5e Weygandt, Kieso, Kimmel Prepared by Kurt M. Hull, MBA CPA California State...
-
Upload
lilian-gregory -
Category
Documents
-
view
214 -
download
1
Transcript of Financial Accounting, 5e Weygandt, Kieso, Kimmel Prepared by Kurt M. Hull, MBA CPA California State...
Financial Accounting, 5e Weygandt, Kieso, Kimmel
Financial Accounting, 5e Weygandt, Kieso, Kimmel
Prepared byKurt M. Hull, MBA CPA
California State University, Los Angeles
John Wiley & Sons, Inc.
What accounting is Monetary unit & economic
entity assumptions
Uses and users of accounting The accounting equation
Ethics as a fundamental business concept
How business transactions affect the accounting equation
GAAP Basic financial statements
CHAPTER 1
ACCOUNTING MATTERS!
CHAPTER 1
ACCOUNTING MATTERS!
STUDY OBJECTIVES
After studying this chapter, you should understand:
Accounting is an information system that
identifies, records, and communicates
the economic events (transactions)
of an organization to interested users.
STUDY OBJECTIVE 1
WHAT IS ACCOUNTING?STUDY OBJECTIVE 1
WHAT IS ACCOUNTING?
Identification
Select economic events
(transactions)
Recording
Record, classify and summarize
Accounting Reports
SOFTBYTEAnnual Report
Prepare accountingreports
Analyze and interpretfor users
Communication
THE ACCOUNTING PROCESS THE ACCOUNTING PROCESS
STUDY OBJECTIVE 2
USERS AND USES OF ACCOUNTINGSTUDY OBJECTIVE 2
USERS AND USES OF ACCOUNTING
Marketing managersProduction supervisors
Finance directorsCompany officers
InvestorsCreditors
Tax authoritiesRegulatory agencies
CustomersLabor unions
Internal Users
External Users
QUESTIONS ASKED BY INTERNAL USERS
Is cash sufficient to pay bills?
What is the cost of manufacturing each unit of product?
Can we afford to give employee pay raises this year?
Which product line is the most profitable?
Is the company earning satisfactory income?
Will the company be able to pay its debts as they come due?
How does the company compare in size and profitability with its competitors? What do we
do if they catch us?
QUESTIONS ASKED BY INTERNAL USERS
STUDY OBJECTIVE 3ETHICS: A FUNDAMENTAL BUSINESS CONCEPT
STUDY OBJECTIVE 3ETHICS: A FUNDAMENTAL BUSINESS CONCEPT
ETHICS: A set of standards by
which one’s actions are deemed right or wrong,
honest or dishonest.
STUDY OBJECTIVE 3ETHICS: A FUNDAMENTAL BUSINESS CONCEPT
Steps for solving an ethical dilemma:
1. Recognize an ethical situation and the issues involved.
2. Identify the principal elements of the situation
3. Identify alternatives: weigh the impact on stakeholders
STUDY OBJECTIVE 4
GAAP(Generally Accepted Accounting Principles)
STUDY OBJECTIVE 4
GAAP(Generally Accepted Accounting Principles)
What is GAAP?
A set of standards generally accepted and universally practiced by accountants
1. Indicates how economic events are reported
2. Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)
STUDY OBJECTIVE 5
BASIC ACCOUNTING ASSUMPTIONSSTUDY OBJECTIVE 5
BASIC ACCOUNTING ASSUMPTIONS
MONETARY UNIT ASSUMPTION
Only transaction datathat can be expressed
in terms of moneyis included in the
accounting records.
The unit of measure (the dollar in the USA)is assumed to remain
constant in value
ECONOMIC ENTITY ASSUMPTION
An economic entity includes any organization
or unit in society.
All activities of an entity are kept separate
from the activitiesof its owners and
other economic entities.
BUSINESS ENTERPRISESBUSINESS ENTERPRISES
A business owned by one person is generally a proprietorship.
A business owned by two or more persons associated as partners is a partnership.
A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation.
STUDY OBJECTIVE 6THE BASIC ACCOUNTING EQUATION
STUDY OBJECTIVE 6THE BASIC ACCOUNTING EQUATION
Assets Assets LiabilitiesLiabilities Stockholders’ Equity
Stockholders’ Equity
= +
resources owned bya business
claimsagainstthose assets
owners’ residual claim on
total assets
REVIEW QUESTIONTHE BASIC ACCOUNTING EQUATION
REVIEW QUESTIONTHE BASIC ACCOUNTING EQUATION
As of December 31, 2005, Tetrick Company has assets of $3,500 and stockholders’
equity of $2,000. What are the liabilities for Tetrick Company as of December 31, 2005?
Answer: $1,500Assets – Liabilities = Stockholders’ Equity
$3,500 = Liabilities + $2,000Liabilities = $1,500
Stockholders’ equity is equal to total assets minus total liabilities. It is also referred to as residual equity. There are two general categories of stockholders’ equity:
STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY
PAID-IN CAPITALand
RETAINED EARNINGS
PAID-IN CAPITALPAID-IN CAPITAL
Paid in Capital represents the total amount invested by stockholders in a corporation.
Stockholders invest cash or other assets in exchange for common or preferred stock.
Retained earnings represents cumulative profits (or losses) retained in the business over time.
Three items make up the balance in retained earnings:
RETAINED EARNINGSRETAINED EARNINGS
REVENUES EXPENSES DIVIDENDS
REVENUESREVENUES
Revenues are the gross increases in stockholders’ equity from engaging in business activities entered into for the purpose of earning income.
Revenues result from sales of merchandise, performance of services, rental of property, or lending of money.
Revenues usually result in an increase in an asset.
EXPENSES EXPENSES
Expenses are the decreases in stockholders’ equity that result from operating the business.
They are the cost of assets consumed or services used in the process of earning revenue.
Examples are: utility expense, rent expense, supplies expense, tax expense, insurance expense, depreciation expense.
DIVIDENDS DIVIDENDS
When a company is successful, it generates Net Income.
Dividends: the distribution of cash or other assets to stockholders that are available as a result of Net Income.
Dividends are NOT considered an expense of the corporation.
INCREASES & DECREASES
IN STOCKHOLDERS’ EQUITY
INCREASES & DECREASES
IN STOCKHOLDERS’ EQUITY
Investments by stockholders
Revenues
Stockholders’ Equity
Dividends to stockholders
Expenses
Increases Decreases
REVIEW QUESTION
STOCKHOLDERS’ EQUITY
REVIEW QUESTION
STOCKHOLDERS’ EQUITY
Rebecca Sherrick, Inc., had a stockholders’ equity balance of $164,000 at the beginning of the period. At the end of
the period, the stockholders’ equity balance was $198,000.
Assuming no additional investment or distributionsDuring the period, what is the net income for the period?
Beginning balance $164,000
Add: investments 0
net income ($198,000-$164,000) $34,000
Less: dividends 0
Ending balance $198,000
STUDY OBJECTIVE 7HOW BUSINESS TRANSACTIONS
AFFECT THE ACCOUNTING EQUATION
STUDY OBJECTIVE 7HOW BUSINESS TRANSACTIONS
AFFECT THE ACCOUNTING EQUATION
• Every transaction must have a dual effect on the accounting equation. Thus, if an asset is increased, there must be a corresponding:
1. Decrease in another asset, or
2. Increase in a liability, or
3. Increase in stockholders’ equity
TRANSACTION IDENTIFICATION PROCESSTRANSACTION IDENTIFICATION PROCESS
Answer telephone
Purchase computer
Pay rent
Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed?Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed?
Yes No Yes
RecordDon’t
RecordRecord
TRANSACTION ANALYSIS TRANSACTION 1
TRANSACTION ANALYSIS TRANSACTION 1
There is an increase in the asset cash, $15,000, and an equal increase in the equity common stock.
There is an increase in the asset cash, $15,000, and an equal increase in the equity common stock.
Ray and Barbara Neal open Softbyte, Inc., a programming company by investing $15,000 in exchange for common stock.
Assets = Liabilities + Stockholders Equity
Common Cash Stock
+15000 +15000
TRANSACTION ANALYSIS TRANSACTION 2
TRANSACTION ANALYSIS TRANSACTION 2
Cash is decreased $7,000, and the asset Equipment is increased $7,000. After transaction #2, total assets =total liabilities + equity.
Cash is decreased $7,000, and the asset Equipment is increased $7,000. After transaction #2, total assets =total liabilities + equity.
Assets = Liabilities + Stockholders’ Equity
Accounts Common Cash + Supplies + Equipment = Payable + Stock Old Bal. $15,000 $15,000 (2) -7000 +7000 New Bal. $8,000 + + $7,000 = + $15,000 $15,000 $15,000
Softbyte purchases computer equipment for $7,000 cashSoftbyte purchases computer equipment for $7,000 cash
TRANSACTION ANALYSIS TRANSACTION 3
TRANSACTION ANALYSIS TRANSACTION 3
The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount.
The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount.
Assets = Liabilities + Stockholders’ Equity
Accounts Common Cash + Supplies + Equipment = Payable + Stock
Old Bal.
$8,000 $7,000 $15,000
(3) +1600 +1600 New Bal.
$8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 $16,600
Softbyte purchases for $1,600 of supplies from Acme Supply. The supplies will last several months. Softbyte will pay the bill next month. Softbyte purchases for $1,600 of supplies from Acme Supply. The supplies will last several months. Softbyte will pay the bill next month.
TRANSACTION ANALYSIS TRANSACTION 4
TRANSACTION ANALYSIS TRANSACTION 4
Cash is increased $1,200, and retained earnings is increased $1,200. (Retained earnings is indirectly increased because revenue is increased).
Cash is increased $1,200, and retained earnings is increased $1,200. (Retained earnings is indirectly increased because revenue is increased).
Assets = Liabilities + Stockholders EquityAccounts Common
Cash + Supplies + Equipment = Payable + StockOld Bal. $8,000 $1,600 $7,000 $1,600 $15,000
New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200
$17,800 $17,800(4) +1,200 +1,200
Softbyte receives $1,200 cash from customers, for providing programming services.
Retained Earnings
STUDY OBJECTIVE 8BASIC FINANCIAL STATEMENTS
STUDY OBJECTIVE 8BASIC FINANCIAL STATEMENTS
Balance Sheet
Income Statement
Statement ofCash Flows
Statement of Stockholders’ Equity
After all transactions for the period are recorded, financial data is summarized (Illustration 1-8), and that summary
data is used to generate the basic financial statements
SOFTBYTE, INC.
Income Statement
For the Month Ended September 30, 2006
Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900
Rent expense 600 Advertising expense 250
Utilities expense 200
Total expenses 1,950
Net income
2,750
Net income of $2,750 will be added to retained earnings. Net income of $2,750 will be added to retained earnings.
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
SOFTBYTE, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2006
Retained earnings, September 1 $ –0– Add: Net income 2,750 2,750 Less: Dividends 1,300 Retained earnings, September 30 $ 1450
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
Dividends of $1,300 is deducted from retained earnings. The net change in retained earnings for the period is $1,450.Dividends of $1,300 is deducted from retained earnings. The net change in retained earnings for the period is $1,450.
Cash of $8,050 will be shown in the statement of cash flows. Cash of $8,050 will be shown in the statement of cash flows.
SOFTBYTE, INC.
Balance Sheet
September 30, 2006
Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050
Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Stockholders’ Equity Common Stock $15,000 Retained Earnings $1,450 16,450 Total liabilities and owner’s equity $ 18,050
FINANCIAL STATEMENTSFINANCIAL STATEMENTS
SOFTBYTE, INC.
Statement of Cash Flows
For the Month Ended September 30, 2006
Cash flows from operating activities Cash receipts from revenues $ 3,300 Cash payments for expenses (1,950) Net cash provided by operating activities 1,350 Cash flows from investing activities Purchase of equipment (7,000) Cash flows from financing activities Sale of common stock $ 15,000 Payment of cash dividends (1,300) Net cash provided by financing activities 13,700 Net increase in cash 8,050 Cash at the beginning of the period –0– Cash at the end of the period
$ 8,050
Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-8).Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-8).
FINANCIAL STATEMENTS
COPYRIGHT
Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
CHAPTER 1 ACCOUNTING IN ACTION