LLS Ch2 Power Point

8/11/2019 LLS Ch2 Power Point

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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

CHAPTER 2

INVESTING AND FINANCING DECISIONSAND THE ACCOUNTING SYSTEM

McGraw-Hill/I

rwin

Copyright 2014 by The McGraw-Hill Companies, Inc. All rights reserved.


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UNDERSTANDING THE BUSINESS

To understand amounts appearing

on a companys balance sheet we

need to answer these questions:

What

business

activities cause

changes in

the balance

sheet?

How do

specific

activitiesaffect each

balance?

How do

companies

keep track ofbalance sheet

amounts?


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THE CONCEPTUAL FRAMEWORK


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ELEMENTS OF THE BALANCE SHEET

A = L + SE(Assets) (Liabilities) (Stockholders Equity)

Economic resourceswith probable futurebenefits owned orcontrolled by theentity. Measured by

the historical costprinciple.

Probable debts orobligations (claimsto a companys

resources) thatresult from a

companys pasttransactions and willbe paid with assetsor services. Entitiesthat a companyowes money to are

called creditors.

The financingprovided by theowners and bybusiness operations.Often referred to as

contributed capital.


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WHAT BUSINESS ACTIVITIES CAUSECHANGES IN THE FINANCIAL STATEMENT

AMOUNTS?

External Events: Exchanges

between entity and one or moreparties.Ex: Purchase of a machine from a supplier.

Internal Events: Events that arenot exchanges between parties butthat have a direct and measurableeffect on the entity.

Ex: Using up insurance paid in advance.

Nature of Business Transactions


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ACCOUNTS

Cash

Equipment

Inventory

NotesPayable

An organized format used by companiesto accumulate the dollar effects of

transactions.


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TYPICAL ACCOUNT TITLES

A chart of accounts lists all account titles and

their unique numbers.


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PRINCIPLES OF TRANSACTIONANALYSIS

Every transaction affects at least twoaccounts (duality of effects).

The accounting equation must remain inbalance after each transaction.

A = L + SE(Assets) (Liabilities) (Stockholders Equity)


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BALANCING THE ACCOUNTINGEQUATION

Step 1: Ask--What was received and what wasgiven?

Identify the accounts (by title) affected and make sure atleast two accounts change.

Classify them by type of account. Was each account anasset (A), a liability (L), or a stockholders equity (SE)?

Determine the direction of the effect. Did the accountincrease [+] or decrease [-]?

Step 2: Verify--Is the accounting equation inbalance?

Verify that the accounting equation (A = L + SE).


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ANALYZING CHIPOTLESTRANSACTIONS

(a) Chipotle issued 10,000 additional shares of common stock, receiving $62,300 incash from investors.

A = L + SE

$62,300 $62,300= 0 +


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A = L + SE

$64,300 $2,000 $62,300= +


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A = L + SE

$72,300 $10,000 $62,300= +


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A = L + SE$71,900 $9,600 $62,300= +


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$71,900 $9,600 $62,300

A = L + SE

= +


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2-16


A = L + SE$71,900 $12,600 $59,300

=+


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THE ACCOUNTING CYCLE

During the Period(Chapters 2 and 3)

1. Analyzetransactions2. Recordjournal entries in the general journal3. Postamounts to the general ledger

Start of new period

At the End of the Period(Chapter 4)

4. Prepare a trial balance to determine if debits equal credits

5. Adjustrevenues and expenses and related balance sheetaccounts (record in journal and post to ledger)

6. Preparea complete set of financial statements and disseminateit to users

7. Closerevenues, gains, expenses, and losses to RetainedEarnings (record in journal and post to ledger)


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HOW DO COMPANIES KEEP TRACKOF ACCOUNT BALANCES?

General Journal

T-accounts

GeneralLedger

A = L + SE


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TRANSACTION ANALYSIS MODELT-Account

(Any account)

debit credit

T-account is merely a shorthand term for

the entire ledger account. The T-account hasa left side, called the debit side, and a rightside, called the credit side.


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SUMMARY


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ANALYTICAL TOOL: THE JOURNALENTRY


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POSTING TRANSACTION EFFECTS


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THE T-ACCOUNT

After journal entries are prepared, theaccountant posts (transfers) the dollar

amounts to each account affected by thetransaction.


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TRANSACTION ANALYSISILLUSTRATED


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TRANSACTION ANALYSISILLUSTRATED


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TRANSACTION ANALYSISILLUSTRATEDAfter analyzing all transactions from (a) though (f) the balance in ourT-accounts will appear as follows:


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TRIAL BALANCE

The trial balance is alisting of all accounts in

the general ledger. Thepurpose of the trialbalance is to makesure the debits andcredits are equalbefore we prepare thebalance sheet.


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CLASSIFIED BALANCE SHEET

In a classified balance sheet assets and liabilitiesare classified into two categoriescurrentand

noncurrent.

Current assets arethose to be used or

turned into cash within

the upcoming year,

whereas noncurrent

assets are those thatwill last longer than

one year.

Current liabilities are

those obligations to be

paid or settled within

the next 12 monthswith current assets.

CLASSIFIED


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k

CLASSIFIEDBALANCESHEET


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KEY RATIO ANALYSIS

CurrentRatio

Current AssetsCurrent Liabilities

=

The 2011 current ratio for Chipotle:

The current ratio for Chipotle shows a high level of liquidity, wellabove 1.0, and the ratio has varied slightly around the 3.1 levelsince 2009. Chipotle has high growth strategies requiring cashto fund expansion.

$501,200$157,500

= 3.182


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END OF CHAPTER 2

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