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ACCT 201 FINANCIAL ACCOUNTING
LECTURE 1
Asst. Prof. Özlem OLGU
Room: 202
Tel No: 0212 338 1457
E-Mail: [email protected]
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ACCOUNTING AND THEBUSINESS
ENVIRONMENTChapter 1
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Chapter Objectives
1. Use accounting vocabulary
2. Apply accounting principles and concepts
3. Use the accounting equation
4. Analyse business transactions
5. Prepare financial statements
6. Evaluate business performance
7. Revision questions
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is an information system that...
measures business activities,
processes information, and...
communicates financial information.
O1:Use accounting vocabulary Accounting...
is called the language of business.
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External usersmake decisionsabout the entity.
Internal usersmake decisionsfor the entity.
Users of Accounting Information
Financial Acct Managerial Acct
İnvestors, creditors, govt
agencies
Managers, partnerts etc.
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Public Sector(SEC)
Private Sector(FASB)
Private Sector(AICPA) (IMA)
GAAP
The Authority Underlying Accounting
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AICPA’s Code ofProfessional
Conduct
Standards ofEthical
Conduct of theInstitute of
ManagementAccountants
Standards of Professional Conduct
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1. Proprietorships
2. Partnerships
3. Corporations
Types of Business Organizations
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1. Proprietorships: single owner
What are some advantages?– total undivided authority– no restrictions on type of business – must
be legal What are some disadvantages?– unlimited liability– limitation on size – fund raising power
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2. Partnerships: more than 1 owner
What are some advantages?- better credit standing – possibly– more brain power, but consultation with
partners required What are some disadvantages?– unlimited personal liability for general
partners– need for written partnership agreement
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3. Corporations: more than 2 owners or shareholders What are some advantages?– separate legal existence– limited liability of stockholders– transferability of ownership relatively easy What are some disadvantages?– taxes – possible double taxation– extensive governmental regulation
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O 2: Apply Accounting Concepts and Principles
1. GAAP
2. Entity concept
3. Reliability concept
4. Cost principle
5. Going concern principle
6. Stable monetary unit concept
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To provide information usefulfor making investment and
lending decisions
Generally AcceptedAccounting Principles (GAAP) What is the primary objective of financial
reporting?
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The Entity Concept Example
Assume that John decides to open up a gas station and coffee shop.
The gas station made $250,000 in profits, while the coffee shop lost $50,000.
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The Entity Concept Example
How much money did John make? At a first glance, we would assume that
John made $200,000. However, by applying the entity concept we
realize that the gas station made $250,000 while the coffee shop lost $50,000.
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Information mustbe reasonably
accurate.
Information mustbe free from bias.
Information must report what
actually happened.
Individuals wouldarrive at similar
conclusions usingsame data.
The Reliability (Objectivity) Principle
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Assets and servicesacquired
should be recordedat their actual cost.
The Cost Principle
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The entity will continueto operate in the future.
The Going Concern Concept
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The dollar’s purchasingpower is relatively
stable.
Stable-Monetary-Unit Concept
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EconomicResources
Claims toEconomicResources
IMPORTNAT!!!O 3: Use the Accounting Equation
Assets = Liabilities + Owner’s Equity
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What is an asset?
It is something a company owns which has future economic value.
– land– building– equipment– goodwill
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What is a liability?
It is something a company owes.– money– service – legal retainers– product – magazines
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What is owner’s equity?
It is what’s left of the assets after liabilities have been deducted.
– the same as net assets– the owner’s claim on the entity’s assets
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Transactions that AffectOwner’s Equity
OWNER’S EQUITY
INCREASES
OWNER’S EQUITYDECREASES
Owner Investmentsin the Business
Revenues Expenses
Owner Withdrawalsfrom the Business
Owner’s Equity
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Revenues
What are revenues? They are amounts received or to be received
from customers for sales of products or services.
– sales– performance of services– rent– interest
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Expenses
What are expenses? They are amounts that have been paid or will
be paid later for costs that have been incurred to earn revenue.
– salaries and wages– utilities– supplies used– advertising
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O 4: Analyze Business Transactions
What is a transaction? It is any event that both affects the financial
position of the business and can be reliably recorded.
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Accounting for Business Transactions: Example1 Gay Gillen invests $30,000 to begin Gay
Gillen eTravel.2 Gillen purchases an office location, paying
$20,000 in cash.3 She buys office supplies, agreeing to pay
$500 in 30 days.4 She earns and collects $5,500 revenues.
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Example Continues...
5 Gillen performs services, and the client agrees to pay $3,000 within one month.
6 During the month, she pays $3,300 for expenses incurred.
7 Gillen pays $300 to the store from which she purchased $500 worth of supplies.
What is the effect of these transactions on the accounting equation?
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Owner’s Assets = Liabilities + Equity
1) Cash + $30,000 + $30,0002) Cash – 20,000
Land + 20,0003) Supplies + 500 + 5004) Cash + 5,500 + 5,5005) Receivable + 3,000 + 3,0006) Cash – 3,300 – 3,3007) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200
Accounting for Business Transactions
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Important Points:
Notice that the equation always stays in balance.
Each transaction affects at least two accounts, sometimes more.
Some transactions affect only one side of the equation; some affect both sides.
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O 5: Prepare Financial Statements
Financial Statements...
– are the finalproduct of the
accounting process.
– tell how thebusiness is performing
and where it stands.
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Financial Statements
1. income statement
2. statement of owner’s equity or retained earnings
3. balance sheet
4. statement of cash flows
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O 6: Evaluate Business Performance
Income StatementRevenue:
Fees earned $8,500Expenses:
Salary expense $1,200
Utilities and telephone expense 400
Equipment rental expense 600
Office rent expense 1,100 3,300
Net income $5,200
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G. Gillen, capital, April 1, 20xx $ 0Contribution of capital 30,000Net income $ 5,200Cash distributions – 2,000G. Gillen, capital, April 30, 20xx $33,200
Statement of Owner’s Equity
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Balance Sheet
Assets
Cash $19,900
Accounts receivable 2,000
Supplies 500
Land 11,000
Total assets $ 33,400
Liabilities
Accounts payable $ 200
Owner’s equity,
G. Gillen, capital 33,200
Total liabilities and
owner’s equity $33,400
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Statement Of Cash Flows
Cash flows from operating activities:Cash receipts from services rendered $6,500Cash payments:
Supplies $ 300Operating expenses 3,300 3,600
Net cash flows fromOperating activities $2,900Cash flows from investing activitiesPurchase and sale of land ($11,000)
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Cash Flows from Financing Activities:
Investment by Owner $30,000
Withdrawals 2,000
Net Cash Flows from
Financing Activities $28,000
Cash at Beginning of Year 0
Cash at End of the Year $19,900
Statement Of Cash Flows
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A corporation with 2 stockholders goes bankrupt owing $10,000. How much does each stockholder owe the creditors?
Revision Questions: QUESTION 1
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Answer: $0.
The stockholders of a corporation have limited liability, which means that stockholders are not responsible for the debts of the corporation.
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Land was acquired for a future building site at a cost of $80,000. An appraiser placed its value at $85,000. Another company offered to buy the land for cash of $90,000. At what amount should land be reported in the financial statements?
QUESTION 2
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Answer: $80,000.
The cost principle states that assets should be recorded at their cost.
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The assumption that the entity will remain in operation for the foreseeable
future is the: A. Reliability principle B. Entity conceptC. Going concern conceptD. Cost principle
QUESTION 3
Answer: C
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A basic principle of accounting that requires activities of an entity be kept separate from other organizations and individuals as a separate economic unit is the
A. Reliability principle B. Entity conceptC. Going concern conceptD. Cost principleAnswer: B
QUESTION 4
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Which of the following is a correct
expression of the accounting equation?
A. Assets = revenues + expensesB. Assets = revenues - expensesC. Assets = liabilities – owner’s equityD. Assets = liabilities + owner’s equityAnswer: D
QUESTION 5
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If a company’s assets total $400 and owner’s equity totals $300, how much are total liabilities?
QUESTION 6
Answer: $100. The accounting equation is: Assets = liabilities + owner’s equity $400 = ? + $300
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Owner's equity can be described as
A. Creditors’ claims on total assetsB. Owner’s claim on total assetsC. Current obligations of the companyD. Economic resources of the company
QUESTION 7
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Answer: B
Creditors’claims to
assets
Assets = Liabilities + Owner’s Equity
Owner’sclaims to
assets
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What is the effect on the accounting equation if a company collects $50 of an Accounts Receivable?
A. increases an asset $50; decreases an asset $50B. decreases an asset $50; decreases a liability $50C. increases an asset $50; decreases a liability $50D. decreases a liability $50; increases owner's equity $50
QUESTION 8
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Answer: A
When a company collects on an accounts receivable, cash is increased. Accounts receivable is decreased by the same amount since customers owe the company less.
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What is the effect on the accounting equation if a company pays the monthly
rent in cash? A. Assets decrease and liabilities increase
B. Liabilities decrease and owner’s equity decreases
C. Owner's equity increases and assets increase
D. Assets decrease and owner’s equity decreases
QUESTION 9
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Answer: D
1. Assets decrease: Cash is paid and decreases.
2. Owner’s equity decreases: Costs incurred to earn revenues decrease the owner’s interest in the assets.
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The balance sheet reports:
A. Revenues and expenses on a specific date
B. Assets, liabilities, and owner’s equity for a specific period
C. Changes in owner’s equity for a specific period
D. Assets, liabilities, and owner’s equity on a specific date
QUESTION 10
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Answer: BThe balance sheet reports the amount of assets, liabilities and owner’s equity on a specific date.
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An income statement reports
A. Revenues and expenses on a specific dateB. Revenues and expenses for a specific period of timeC. Changes in owner’s equity for a specific period of timeD. Assets, liabilities, and owner’s equity on a specific date
QUESTION 11
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Answer: BThe income statement presents revenues and expenses of a company for a specific period of time.
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Determine the amount of net income (loss) given the following information:
Accounts payable…………….$ 700Service revenue………………..900Supplies expense………………300Cash……………………………800Salaries expense……………….400
QUESTION 12
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Answer:Service Revenue $900Less Expenses:
Supplies expense $300 Salaries expense 400 700
Net income $200
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At the beginning of the year, owner’s equity was $100. The owner invested $200 cash to the business during the year and earned a net income of $600. The owner also withdrew $500 during the year. What was the balance in owner’s equity at the end of the year?
QUESTION 13
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Answer:
Beginning owner’s equity $100
Add: Net income 600
Investment by owner 200
Subtotal $900
Less: Owner’s withdrawal (500)
Ending owner’s equity $400
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Presented below are balance sheet items for Alt Co.
Accounts payable…………..$200Accounts receivable……...…300Cash………………………....100Furniture……………………..500Norris, capital……….……….300Notes payable……………….400
Compute total assets
QUESTION 14
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Answer:
Cash $100
Accounts receivable 300
Furniture500
Total assets $900
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Presented below are balance sheet items for Alt Co.
Accounts payable………….. $200Accounts receivable……...… 300Cash……………………….... 100Furniture…………………….. 500Norris, capital……….………. 300Notes payable………………. 400
Compute total liabilities
QUESTION 15
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Answer:
Accounts payable $200
Notes payable 400
Total liabilities $600
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