IES 342 Industrial Cost Analysis & Control |

Dr. Karndee Prichanont, SIIT

Basic Accounting

Chapter 1 – 3 (Warren et al.) Learning Objectives:  Review financial statement analysis  Read & interpret basic financial statements  Analyze typical business transactions using balance sheet equation 1



Economic Data and Activities

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Accounting: Information Process

Identification of Users User Information Needs



Accounting System



Reports User Decisions

2

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

The Need for Accounting

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform?

Major Financial Statements Balance Sheet Income Statement Where does the organization stand?

3

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Financial Statements

Balance Sheet • Also called or

statement of financial position statement of financial condition

• A snapshot of financial status at an instant of time • Month / quarter Income Statement • Measure operating performance of a firm • Match its accomplishments and its efforts • Net profit / Net loss 4

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Balance Sheet Accounting Equation

Resources = Sources Assets Liabilities Owner ’ s Equity Cost of resources used in the business Resources supplied by creditors and owners

5

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Assets

• Physical items (tangible) or rights (intangible) that have value and that are owned by the business entity • Can be converted into cash or used in operations

Current asset

• Cash • Account receivable • Inventory • Prepaid expense • Prepaid insurance • Supplies

Fixed asset

• Tangible asset • Depreciation

Intangible asset

• Goodwill 6

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Liabilities

• Debts owed to outsiders (creditors) • Item with the word “payable”

Current Liabilities

• Account payable • Accrued liabilities / accrued expenses • Income taxes payable • Current portion of long term debt • Unearned revenue / Deferred revenue

Noncurrent / Long-term Liabilities

• Secured debt • Unsecured debt 7

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Owner’s Equity

(shareholder’s equity, capital, net worth)

• The owners’ equity in a corporation • The owner’s right to the asset of the business Paid-in capital – Stockholder (owner) investments + Retained earning / retained income –Reinvested earnings –Generated from operations 8

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Effects of Transactions on Owner’s Equity OWNER ’ S EQUITY decreased by increased by Owner ’ s withdrawals Owner ’ s investments Expenses Revenues Profits ( earnings or income )

9

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Revenues vs Expense

Revenues

• Increases in owner’s equity as a result of business and professional activities that earn income • Revenues must be

earned

and

realized Expense

• Decreases in ownership claims arising from delivering goods or services or using up assets • Assets used up or services consumed in the process of generating revenues Profits (or earnings or income) excess of revenues over expenses 10

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Balance Sheet Accounting Equation

ASSET = LIABILITIES + PAID-IN CAPITAL + RETAINED EARNING ASSET = LIABILITIES + PAID-IN CAPITAL + Revenue Expense 11

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Accrual Basis / Cash Basis

Cash Basis

• Exact timing of cash receipts and disbursements

Accrual Basis

• Recognizes impact of transactions • Cash not necessarily changes hands • Match revenues and expenses • Record revenues when earned • Record expenses when incurred 12

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Income Statement

• Show a company’s ability to produce long run earnings and dividends • Summarizes revenue and expense • Matching the company’s “accomplishments” and “efforts” • Revenue – Expenses Key Items • Revenue (+) • Cost of sales (-) • Gross profit • Selling/admin expense (-) • Operating income • Other expense (-) • Income before tax • Income tax (-) • Net income  “ bottom line ” affects owner ’ s equity • Earning per share  13

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Ex 1: King

’

s Hardware

’

s Transaction in March 2004 (Adapted from Horngren et al. 2002)

1.

2.

3.

4.

5.

6.

7.

Initial investment by owners, $100,000 in cash Acquisition of inventory for $75,000 in cash Acquisition of inventory on open account $35,000 Merchandise carried in inventory at a cost of $100,000 was sold on open account for $120,000 Cash collection of account receivable, $30,000 Cash payment of account payable, $10,000 On March 1, King Hardware paid $3,000 cash for rent for March, April, and May.

Required: a) Prepare an analysis of King ’ s Hardware ’ s transaction in March b) Prepare a balance sheet as of March 31, 2004 and an income statement for the month of March 2004 (ignore income tax) 14

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Ex 2: Analysis of Transaction

(Adapted from Warren et al., 2002)

Jameson, Attorney-at-Law, is a proprietorship owned and operated by Cecil Jameson. On July 1 on the current year, C. J. has the following assets and liabilities: cash, $1000; account receivable, $3200; supplies, $850; land, $10,000; accounts payable, $1530. Office space and equipment are currently being rented, pending the construction of an office complex on land purchased last year.

15

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Business Transaction of Jameson (Ex 2, continue)

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

Received cash from clients for services, $3928 Paid creditors on account, $1055 Additional investment from C.J. $3700 in cash Paid office rent for the month, $1200 Charged clients on account, $2025 Purchase office supplies on account, $245 Received cash from clients on account, $3000 Received invoice for paralegal service (to be paid on August 10), $1635 Paid the following expenses: wages, $850; service, $250; Utilities, $325; Miscellaneous, $75 Determined that the cost of office supplies on hand was $980 C.J. withdrew $1000 in cash from the business for personal use • • • Determine the amount of owner’s equity (C.J.’s capital) as of July 1.

Analyze each transaction using the balance sheet equation Prepare an income statement of July 16

IES 342 Industrial Cost Analysis & Control |

Dr. Karndee Prichanont, SIIT

T-Account Account Adjustment

Chapter 2 -3 (Warren et al.) Learning Objectives:  Relate the measurement of expenses to the expiration of assets 17

• IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Double Entry Accounting T Account

Scale or Balance Double-entry accounting

is based on a simple concept: each party in a business transaction will receive something and give something in return. In bookkeeping terms, what is received is a debit and what is given is a credit.

Receive DEBIT Give CREDIT

• The

T account

scale or balance is a representation of a

T account

•

General journal Date Description Debit Credit

Left Side

Receive DEBIT

Right Side

Give CREDIT

18

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Account Adjustment

• Under the accrual basis of accounting,

adjustments

are used to record

implicit transactions

, in contrast to the

explicit transactions

that trigger nearly all day-to-day routine entries.

• Adjustments are generally prepared by the accountant at month or year end.

19

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT

Adjustments: Deferrals and Accruals

Revenues

Deferrals Accruals Current Period Revenue Recorded Future Period Revenue Recorded Cash Received Unearned revenues Accrued revenues

Expenses

Deferrals Accruals Current Period Expense Recorded Future Period Expense Recorded Cash Paid Prepaid expenses Accrued liability 20

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Type 1: Deferred Expenses (Prepaid expenses)

• Asset that becomes an expense in future periods – Inventory – Prepaid rent and other prepaid expense – Equipment • Some services are acquired and used up instantaneously, e.g., advertisement service – Theoretically, it is an unexpired cost • 2 steps of analysis (1) Acquire advertising service (2) Use advertising service • When assets expire decreased  become expense  asset & owner’s equity are • Example : Newspaper advertising was acquired for $1000 cash. To follow the acquisition-expiration sequence, there are 2 steps of analysis: 21

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Type 2: Deferred Revenues (unearned revenues)

• Liability created by receiving cash in advance of providing goods or services.

• Advanced collection

– magazine subscription, – rent (landlord’s view)

• How do “Prepaid Expense (type I)” and “Unearned Revenue (type II)” relate?

22

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Type 3: Accrued Expenses (Accrued Liabilities)

• Services are paid for after the service has been performed

– Wages of employees – Interest (in borrower’s view)

• Another type of liability • Ex: Wage payment of King’s Hardware

23

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Type 4: Accrued Revenues (Accrued Assets)

• Mirror image of Type 3

– Interest in lender’s view 24

IES 342 Industrial Cost Analysis & Control 2/2005 |

Dr. Karndee Prichanont, SIIT Ex 3: Transaction Analysis of King Hardware during April, 2003 (adapted from Horngren, 2002)

Balances of March 31  Beginning balance for April 1.

2.

Cash collection of accounts receivable, $88,000 Cash payments of account payable, $24,000 3.

4.

5.

6.

Acquisition of inventory on open account, $80,000 Merchandise carried in inventory at a cost of $70,000 was sold on open account for $85,000 Adjustment for recognition of rent expense for April Some customers paid $3,000 in advance for merchandise that they ordered but KH did not expect to deliver until May 7.

8.

9.

Total wages of $6000 were paid on 4 Fridays in April.

KH incurred wages of $600 near the end of April, but it did not pay the employees till after April 30.

Cash dividends of $18,000 disbursed to stockholders on April 29 25