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ACG 2021

Financial Accounting

Chapter One:

The Financial Statements

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The Accounting System

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What is accounting

Been in place for hundreds of years 1494 Luca Pacioli's Summa de Arithmetica Geometria Proportionalita (A Review

of Arithmetic, Geometry and Proportions) First written description of double-entry accounting

Incan khipus cryptic assemblages of string and knots

May have been used for record-keeping (i.e. accounting) Gary Urton and Carrie Brezine Annotated Khipu on Flickr

System Of recording business transactions

Language Whether knots Debits or Credits written in a journal

Digital values stored on a computer Weve been accounting for many, many years

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Information System Model

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The Accounting System

An Information System Inputs to the system are business events

Sales Purchases

Inventory (things to re-sell, things to use in building), buildings Payroll

Processing takes place in the various Journals andGeneral Ledger where transactions are stored

Financial Statements are the Outputs and represent

SummarySummaryInformation Income Statement

Statement of Retained Earnings Balance Sheet Cash Flows

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Accounting Information System

Procedures, Techniques and Resources to

Collect & Disseminate

Relevant BusinessInformation to

InterestedUsers

Individuals (Management)

Investors & Creditors

Taxing Authorities Non-Profit Organizations

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Accounting (The Language of

Business)I

s... The process of identifying, measuring, and

communicating economic information (viareports) to permit informed judgments anddecisions by users of the information.

Balance Sheet Resources

Income Statement Results of Operations

Cash Flow Management of Asset

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Language Dialects

Financial AccountingFinancial Accounting

Managerial Accounting

Tax Accounting Governmental (non-profit) Accounting

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ACG 2021Who are we Accounting for:

Business Forms

AndAccounting Rules and Assumptions

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Accounting Assumptions

Business activity occurs via distinct entities

Sole Proprietorship

Partnerships

Corporations

Business activity is conducted via measurable,observable transactions

Transactions can be described using standardunits of measurement ($s) in accounts(Valuation)

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Forms of Business Organization

Proprietorship

Has a single owner

Proprietor is personally liable for debts of the business

Not a separate legalentity

For accounting, the proprietorship is a

separate entity from the proprietor

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Forms of Business Organization

Partnerships

Two or more partners are co-owners

Each partner can be liable for all the debts ofthe partnership

Not a separate legalentity

For accounting, the partnership is a separate

entity from its partners

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Forms of Business Organization

Corporations

May have many owners (stockholders)

Stockholders are not personally liable fordebts of the business

Is a separate legalentity

Stockholders elect a Board of Directors to

appoint corporate officers and set policies

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Accounting Guidelines

Formulated by the Financial Accounting Standards Board(FASB)

Generally Accepted Accounting Principles (GAAP) The Entity Concept

A business is separateseparate & distinctdistinctfrom its owners The Reliability Principle Accounting records are based on the most objectiveobjective evidence

available

The Historical Cost Principle $s are recorded at timetime of transaction (actualactualcost)

$s that a willing buyer paid a willing seller Not some point in the future

The Going-Concern Principle The Entity will not go Out-of-Business

The Stable-Monetary-Unit Concept the monetary units ($s) purchasing power is stable (ignores inflation)

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ACG 2021

Financial Accounting

The Accounting Equation

Assets = Liabilities + Owners Equity

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The Accounting Equation

Assets = Liabilities + Owners Equity

Economic

Resources

Claims against

EconomicResources

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Assets

Economic resources (value, $s)

Owned and Controlled by business entity

Expected to produce a benefit in the future Cash

Investments

Accounts Receivable Inventory

Buildings, Equipment, Gold Mines, Patents

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Liabilities

Economic obligations (debt) of a business Accounts Payable Notes Payable Accrued Expenses:

Payroll that we owe Taxes that we owe Rent, Insurance, etc. that we owe

Money we borrowed and of course owe

Claims by Creditors Convey Assets

This means that the creditor expects an asset (most often cash) begiven for what is owed

Perform Service This means that the creditor expects a service (like prepare a tax

return, or provide rental retail space) be given for what is owed

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Owners Equity

The owners claim on the entitys assets

Capital (for Proprietorship or Partnership)

Stockholders equity (for Corporation) Shares of Stock

Net assets

Assets liabilities = owners equity

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Stockholders Equity

For a corporation, stockholders equityisdivided into two main categories. Paid in capital

The amount that investors have given to thecorporation

In exchange for shares of stock

Retained earnings

The amount of Earnings the company has eitherearned (profit) or lost over time

The amount of dividends that have been paid toinvestors

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The Accounting EquationExpanded

Assets = Liabilities + Owners Equity Replace Owners Equity with:

Paid-in capital - amount invested by its owners -

common stock Increases Owners Equity Retained earnings - amount earned by income-

producing activities and kept for use in thebusiness

Dividends distributions of assets to stockholders Decreases Retained Earnings

Assets = Liabilities + Paid-in capital + Retained earnings

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The Accounting Equation

Retained Earnings accumulate Revenues andExpenses of an Organization and Dividends thathave been paid

Revenues Sales of Product or Services increases Retained Earnings from delivering goods orservices to customers

Measured by corresponding increase in Asset received aspayment

Expenses goods or services ConsumedConsumedfromRevenue Generation

decreases Retained Earnings that result from operations Measured by historical cost of assets given up in the sale or

consumed to make the sale

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Components of Retained

EarningsRevenues for

the period

Expenses forthe period

=

Netincome(orNet loss)fortheperiod

Dividendsfortheperiod

Endingbalanceofretainedearnings

End ofthe period

Start ofthe period

Beginningbalanceofretainedearnings

+or

=

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Accounting Equation Expanded(again)

Assets = Liabilities + Paid-in Capital Dividends + Revenue Expenses

Retained Earnings

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Transactions

A simultaneous exchangesimultaneous exchange between oneaccounting entity and another accountingentity:

Customers Suppliers

Employees

Owners Each party GivesGives and ReceivesReceivessomething ofvaluevalue ($s)

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Chapter 1

Exercise 1-4

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ACG 2021

Financial Accounting

The Financial Statements

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The Financial Statements

Balance Sheet

Income Statement

Statement of Retained Earnings Statement of Cash Flows

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Balance Sheet

Assets used to reach company objectives

$s represent One Particular Point in Time

Snapshot What is the companys financial positionposition

at the end of a period?

Assets = Liabilities + Owners Equity

RankPlace

Situation

Standing

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Balance Sheet

Assets appear in order ofLiquidity Easily Turned into Cash

W

hy? So Creditors can quicklyascertain if a company hasenough Cash to pay backwhat is owed

So Creditors can quicklyascertain what collateral acompany has againstpossible loans that mightbe made

Liabilities appear in orderin which they will be paid Within 1 year or less

Greater then 1 year

Stockholders Equityshows the amountcontributed by investors &the amount ofIncome

retained by the company Dividends are paid out of

this retained amount (butNOT with it)

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Income Statement

Presents information about profitability

How well did the company perform during the period? Revenue Amount paid orpromised to paypromised to payfor goods or

services of the firm, increase of assets

Expenses Costs of providing goods or services to thecustomer, using up of assets

Temporary (periodic) Retained Earnings accounts

Revenues

Expenses

Net Income (Loss)

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Statement of Retained Earnings

The portion of a firms Net Income retained bythe business

Why did the company's retained earnings

change during the year?

Beginning retained earnings+Net income or (-Net loss)

- DividendsEnding retained earnings

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Statement of Cash Flows

Changes to Cash during a specific time period How much cash did the company generate and

spend during the year?

Operating cash flows+ Investing cash flows+ Financing cash flows

Increase (decrease) in cash

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Information Reported in the F/S

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Relationships Among

the Financial StatementsABCCompany

Income Statement

YearEndedDecember 31, 2006Revenues $700,000Expenses 670,000Netincome $ 30,000

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Relationships Among

the Financial StatementsABCCompany

StatementofRetainedEarningsYearEndedDecember 31, 2006

Beginning retainedearnings $180,000Netincome 30,000Cashdividends (10,000)Ending retainedearnings $200,000

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Relationships Among

the Financial StatementsABCCompanyBalance Sheet

December 31, 2006Assets

Cash $ 25,000All other assets 275,000Total assets $300,000

LiabilitiesTotal liabilities $120,000

StockholdersequityCommonstock 40,000Retainedearnings 200,000Otherequity (60,000)Total liabilities andstockholdersequity $300,000

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Relationships Among

the Financial StatementsABCCompanyStatementofCashFlows

YearEndedDecember 31, 2006

Netcash providedby operating activities$ 90,000Netcash used forinvesting activities (110,000)Netcash providedby financing activities 40,000Netincreaseincash 20,000Beginningcashbalance 5,000

Endingcashbalance $ 25,000