Week 1 Slideshow

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This is a practice slideshow for one of my classes. It should not be used in any class.

Transcript of Week 1 Slideshow

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The Financial StatementsChapter 1

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Explain why accounting is the language of business

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The Language of Business

•Measures business activities•Processes data into reports•Communicates results

▫Produces financial statements

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Flow of Accounting Information

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Users of Accounting Information

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Financial Accounting Managerial Accounting

• Provides information for external users▫ Investors▫ Creditors▫ Government▫ The public

• Provides information for internal users – managers

• Includes:▫ Budgets▫ Forecasts

Kinds of Accounting

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Organizing a Business

Proprietorship Partnership

LLC Corporation

Owner(s) Proprietor -One Partners – two or more

Members Stockholders – usually many

Personal liability of owner(s) for business debts

Proprietor is personally liable

Partners are personally liable; limited partners are not

Members are NOT personally liable

Stockholders are NOT personally liable

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Proprietorships

•Single owner•Common business form for small retail stores and

professional service providers•Proprietor personally liable for business debts

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Partnerships

•Two or more parties as co-owners•Not a taxpaying entity

▫Income passes through to partners•Governed by an agreement•Mutual agency

▫Each partner can act on behalf of the entity•Unlimited liability• Involve risk

▫Limited liability partnerships lessen risk

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Limited-Liability Company (LLC)

•One or many owners (members)•Limited liability•Like a partnership, not a taxpaying entity

▫Income flows through to members•Popular form of business due to combination of

tax status and limited liability

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Corporations

•Owned by stockholders▫Stock represents share of ownership

•Ability to raise large sums of capital•Larger than proprietorship and partnerships•Formed under state law

▫Legally distinct from its owners

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Corporations

•Double taxation▫Corporate income is taxed▫Shareholders taxed on distributions of earnings

(dividends)•Stockholders elect Board of Directors

▫Set policy and appoint officers

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Explain and apply underlying accounting concepts, assumptions, and principles

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Conceptual Foundations of Accounting

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To provide financial information that is useful to existing investors, lenders, and other creditors in making decisions about providing

resources to that entity

Relevance (includes materiality)

Faithful representation

Comparability Verifiability Timeliness Understandability

Cost

Financial Reporting Standards

Objective

Fundamental

Qualitative Characterist

ics

Constraints

Enhancing Qualitative

Characteristics

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Assumptions & Principles

•Entity assumption▫A business is a separate economic unit

•Continuity (going- concern) assumption▫Entity will continue to exist indefinitely

•Historical cost principle▫Assets recorded at purchase price

•Stable monetary unit assumption▫Dollar’s purchasing power is stable over time

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International Financial Reporting Standards (IFRS)•Many countries have own versions of generally

accepted accounting principles (GAAP)▫Reports had to be restated to convert accounting

data from one country to another• IFRS developed and are used by most countries in

the world▫U.S. still follows own GAAP

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International Financial Reporting Standards (IFRS)•U.S. GAAP overseen by the Securities & Exchange

Commission (SEC)▫SEC tentatively set date for U.S. adoption of IFRS in

2015▫Will make it easier to compare financial statements

across the world•Most common accounting practices similar under

both U.S. GAAP and IFRS

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Apply the accounting equation to business organizations

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Accounting Equation Elements

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Assets

Liabilities

Owner’s equity

Assets = Liabilities + Owner’s Equity

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Assets Liabilities

• Cash• Merchandise inventory• Property, plant, and equipment

• Accounts payable• Income taxes payable• Long-term debt

Assets and Liabilities

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Owners’ equity

•Stockholders’ equity▫Paid-in capital▫Retained earnings

AssetsAssets LiabilitiesLiabilities Owners’ EquityOwners’ Equity

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Corporate Accounting Equation

Assets Liabilities Stockholders’ equity

Paid-in capitalRetained earnings

Amounts stockholders

have invested

Common stock

Amounts earned and

kept by business

+

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Transactions Affecting Retained Earnings

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Net Income

Revenues

Expenses

Net Income

If expenses

exceed revenues

If expenses

exceed revenues

A net loss results

A net loss results

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Beginning Retained Earnings

Net Income (Net Loss)

DividendsEnding Retained

Earnings

Expenses

Revenues

minus

equals

Plus or minus minus equals

The Components of Retained Earnings

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Assets = Liabilities + Owner’s Equity

• (1) If the assets of ABC Co. are $500,000 and the liabilities are $290,000, how much is there in owner’s equity?

• (2) If owner’s equity in Joe’s Car Care is $160,000 and liabilities are $240,000, how much are assets?

• (3) XYZ co. reported monthly revenues of $148,000 and expenses of $37,500. What is the results of operations of the month?

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• (4) Jody’s Bakery incurred expenses of $35,500 for the month but generated revenues of $94,000. What were the results of her efforts for the month?

• (5) If the beginning balance of retained earnings is $100,000, revenue is $55,000, expenses total $35,000, and the Company pays a $10,000 dividend, what is the ending balance of retained earnings?

Assets = Liabilities + Owner’s Equity

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Let’s Practice

•Turn to Exercise E1-16A on page 34.

•Work through the Accounting Equation for each Company.

•Which Company has the strongest financial position and why?

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More Practice

•Let’s do Exercise 1-17A on page 34.

•We’ll work through this problem together after you have had a chance to work through it first.

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Exercise 1-17A - page 34Assets $280 $430 $170

$880

Liabilities $300$170

$470

Assets Liabilities Equity$880 $470 $410

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Exercise 1-17A - page 34Assets $280 $430 $170

$880

Liabilities $300$170

$470

Assets Liabilities Equity

Assets = resources

Liabilities = amounts owed to creditors

$410Stockholder ownership

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Evaluate business operations through the financial statements

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The Financial StatementsQuestion Financial

StatementAnswer

How well did the company perform during the year?

Income statement Revenues−ExpensesNet income or (net loss)

Why did the company’s retained earnings change during the year?

Statement of retained earnings

Beginning retained earnings+ Net Income (-Net Loss)−DividendsEnding retained earnings

What is the company’s financial position at year-end?

Balance sheet Assets = Liabilities + Owners’ equity

How much cash did the company generate and spend during the year?

Statement of cash flows

Operating cash flows+/− Investing cash flows+/− Financing cash flowsIncrease(decrease) in cash

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Income Statement

Balance Sheet

Statement of Cash Flows

Statement of Retained Earnings

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The Income Statement

•Also called the Statement of Operations•Reports two main categories

▫Revenues and gains▫Expenses and losses

•Shows the “bottom line”▫Net income or net loss for the period

•Net income is the most important item in the financial statements▫

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ABC CorporationIncome Statement

Year Ended December 31, 2012

Net sales $XX,XXX

Other revenue XX,XXX

Total revenues XX,XXX

Cost of goods sold XX,XXX

Gross profit XX,XXX

Selling, general, and administrative expenses XX,XXX

Income from operations XX,XXX

Interest expense XX,XXX

Income before income taxes XX,XXX

Income tax expense XX,XXX

Net Income $XX,XXX

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Statement of Retained Earnings

•Retained earnings is portion of net income company has kept over a period of years

•Positive balance indicates revenues exceeded expenses

•Accumulated deficit indicates expenses have exceeded revenues

•Net income (or net loss) flows from the Income Statement to the Statement of Retained Earnings

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ABC CorporationStatement of Retained EarningsYear Ended December 31, 2012

Retained earnings, December 31, 2011 $XX,XXX

Plus: Net income XX,XXX

Less: Dividends XX,XXX

Retained earnings, December 31, 2012 $XX,XXX

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The Balance Sheet

•Also called the Statement of Financial Position•Reports

▫Assets▫Liabilities▫Stockholders’ equity

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Current Assets Long-term Assets

• Expected to be converted to cash, sold or consumed in the next year or within the business’s operating cycle▫ Whichever is longer

• Include▫ Cash and cash equivalents▫ Short-term investments▫ Accounts and notes

receivable▫ Inventory▫ Prepaid expenses

• Will be held longer than one year

• Include▫ Property and equipment

Land Buildings Computers Equipment

▫ Intangibles▫ Long-term investments

Assets on the Balance Sheet

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Current Liabilities Long-term Liabilities

• Debts payable in the next year or within the business’s operating cycle

• Include▫ Current maturities of long-

term debt▫ Accounts payable▫ Income taxes payable▫ Accrued expenses

• Debts payable more than one year from balance sheet date

• Include▫ Long-term notes payable▫ Bonds payable

Liabilities on the Balance Sheet

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Stockholders’ Equity on the Balance Sheet•Represents stockholders’ ownership of the

business assets•Consists of:

▫Common stock▫Additional paid-in capital▫Retained earnings▫Treasury Stock▫Accumulated other comprehensive income (loss)

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AssetsCash and cash equivalents Accounts payableMerchandise inventory Taxes payablePrepaid expenses Total current liabilities Total current assets Long-term debt

Total liabilitiesProperty and Equipment Common stockLess: accumulated depreciation Additional paid-in capital Net Property and Equipment Retained earningsOther assets Total stockholders' equityTotal assets Total liabilities & stockholders' equity

Liabilities and Stockholders' Equity

ABC CorporationBalance Sheet

December 31, 2012

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The Statement of Cash Flows

•Measures cash receipts and cash payments•Fourth required financial statement•Categorizes into three types of activities:

▫Operating▫Investing▫Financing

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Cash Flow Categories

•Operating activities▫Cash receipts and payments from selling goods and

services• Investing activities

▫Purchasing & selling long-term assets•Financing activities

▫Issuing stock, paying dividends, borrowing, and repayment of borrowed funds

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Let’s Practice!!!

•Turn to Exercise 1-20A on page 35 and we will work through this together!

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Exercise 1-20A

(a) Common stock

(b) Income tax payable

(c) Dividends

(d) Income tax expense

(e) Ending balance of retained earnings

(f) Total assets

(g) Long-term debt

(h) Revenue

Balance SheetBalance Sheet

Balance SheetBalance Sheet

Statement of Retained EarningsStatement of Retained Earnings

Income StatementIncome Statement

Balance SheetBalance Sheet

Balance SheetBalance Sheet

Balance SheetBalance Sheet

Income StatementIncome Statement

Statement of Retained EarningsStatement of Retained Earnings

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Exercise 1-20A(i) Cash spent to acquire a

building(j) Selling, general &

administrative expenses(k) Adjustments to reconcile

net income to net cash from operations

(l) Ending cash balance

(m)

Current liabilities

(n) Net income

Statement of Cash FlowsStatement of Cash Flows

Income StatementIncome Statement

Statement of Cash FlowsStatement of Cash Flows

Balance SheetBalance Sheet

Statement of Cash FlowsStatement of Cash Flows

Balance SheetBalance Sheet

Statement of Retained EarningsStatement of Retained Earnings

Income StatementIncome Statement

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Construct financial statements and analyze the relationships among them

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Income Statement

•Reports revenue and expenses▫These accounts are only reported on the Income

Statement•Shows net income or net loss

▫If revenues exceed expenses, company has net income

▫If expenses exceed revenues, company has net loss

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Statement of Retained Earnings

•Opens with beginning retained earnings balance•Adds net income (or subtracts net loss)

▫Flows from the Income Statement•Subtracts dividends•Reports ending retained earnings balance

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Balance Sheet

•Reports assets, liabilities, and stockholders’ equity▫These accounts are reported only on the balance

sheet•Shows that assets equal sum of liabilities and

stockholders’ equity•Reports retained earnings which comes from the

statement of retained earnings

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Statement of Cash Flows

•Reports cash flows from operating, investing, and financing activities▫Results in an increase or decrease

•Shows whether cash increased or decreased during the year

•Reports ending cash as shown on the balance sheet

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Relationships between Financial Statements

Income StatementYear Ended December 31, 2012

Revenues $XX,XXX

Expenses (XX,XXX)

Net income $XX,XXX

Statement of Retained EarningsYear Ended December 31, 2012

Beginning retained earnings $XX,XXX

Net income XX,XXX

Cash dividends (XX,XXX)

Ending retained earnings $XX,XXX

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Statement of Retained EarningsYear Ended December 31, 2012

Beginning retained earnings $XX,XXX

Net income XX,XXX

Cash dividends (XX,XXX)

Ending retained earnings $XX,XXX

Balance SheetDecember 31, 2012

Assets $XX,XXX

Liabilities $XX,XXX

Stockholders’ equity:

Common stock $XX,XXX

Retained earnings XX,XXX

Total liabilities and equity $XX,XXX

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Statement of Cash FlowsYear Ended December 31, 2012

Cash flows from operating activities $XX,XXX

Cash flows from investing activities XX,XXX

Cash flows from financing activities XX,XXX

Net cash flows XX,XXX

Cash balance, December 31, 2011 XX,XXX

Cash balance, December 31, 2012 $XX,XXX

Balance SheetDecember 31, 2012

Assets $XX,XXX

Liabilities $XX,XXX

Stockholders’ equity:

Common stock $XX,XXX

Retained earnings XX,XXX

Total liabilities and equity $XX,XXX

Cash from the Asset section of the Balance Sheet equals ending Cash on the Statement of Cash Flows

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Evaluating a Company

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Evaluate business decisions ethically

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Influences on Business Decisions

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Decision Framework for Making Ethical JudgmentsWhat is the issue?

Who are the stakeholders and what are the consequences of the decisions to each?

Weigh the alternatives.

Make the decision and be prepared to deal with the consequences.

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Practice Problem

•Work in teams on Practice Problem 1-62B

•Page 45 & 46 in the textbook.

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Problem 1-62B• Req. 1

Truett CorporationIncome Statement

Year Ended December 31, 2013 • Revenue:• Sales revenue $ 260,000•   Other revenue 51,000 • Total revenue $ 311,000

• Expenses: Salary expense $ 28,000 Other expenses 249,000 Total expenses 277,000

• Income before income tax 34,000

• Income tax expense ($34,000 × .40) 13,600• Net income $ 20,400

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Req. 2

• a. Faithful representation. Report revenues at their actual sale value because that represents more faithfully what happened than what management believes the goods are worth.

•  • b. Historical cost principle. Account for expenses at their actual cost, not a

hypothetical amount that the company might have incurred if the products were purchased outside.

•  • c. Historical cost principle. Account for expenses at their actual cost.•  • d. Entity assumption. Each division of the company is a separate entity, and the

company as a whole constitutes an entity for accounting purposes.•  • e. Stable-monetary-unit assumption. Accounting in the United States ignores the effect

of inflation.•  • f. Continuity (going-concern) assumption. There is no evidence that A Division of

Truett Corporation is going out of business, so it seems safe to assume that the company is a going concern.

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