Transcript zandi.cpmsco.com.my

The Accounting Environment
Accounting and The Business Environment
By:
Associate Professor Dr. GholamReza Zandi
[email protected]
The Definition of Business
• Businesses are legal
• A business must exchange a product for money or
money substitute
– A product can be goods or services
– Money or money substitutes can be cash, a promise
to pay cash later, or something else of value
• Businesses create value
– For customers who receive the product
– For owners who receive profits
– For employees who receive wages
– For lenders who receive interest
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The General Concept of Value
• Value is what someone is willing to pay for an item and
depends on:
– what the owner of an item expects to receive
– when the owner expects to receive it
– how certain the owner is about what they’ll receive
and when they’ll receive it
• Businesses try to sell products to customers at a higher
value (revenue) than their cost, which creates a profit
• Accounting measures revenue, costs, and profits
• Must consider risk of uncertain results
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Business Owners and Other Stakeholders
• Stakeholders should believe they are receiving value
from the business
– Owners
– Customers
– Employees
– Suppliers
– Lenders
– Regulators
– Society
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The Goal of Business
• Create value for its owners
• Generate profit for owners as compensation for using
their money over time and for risk assumed
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Resources
Resources needed to start and operate a business
• Borrowings from lenders called liabilities
– Owed to a party that is not an owner
• Investments from owners called shareholders’ equity
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Operating the Business
Businesses use money to acquire assets and hire people:
• Assets – economic resources business owns:
– Cash
– Inventory
– Buildings
• Employees
– People hired to operate the business
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Operating the Business
• Goods or services are sold to create profit or net income
– The return to owners
Revenue
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Expenses
Net Income
8
The Cost of Money
• Lenders are paid interest
– Amount borrowed is repaid in the future
• Owners receive net income
• Expected returns are a function of the risk taken
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Stakeholders of the Business
Suppliers
Lenders
Employees
Customers
Salaries
Debt
Labor
Principal & Interest
Payments
Goods or Services
Net Income
Expenses
Revenues
Equity
Assets
Owners
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Types of Businesses
Service
Merchandising
• Sells services to
customers
• Sells products to
customers
• Examples:
• Examples:
• Accounting or Law firms
• Painting companies
• Automotive repair shops
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• Grocery stores
• Automobile dealerships
• Sporting goods stores
11
Types of Businesses
Manufacturing
• Produces goods
• Examples:
• Automobiles
• Clothing
• Soft drinks
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The Legal Forms of Business
Sole
Proprietorship
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Partnership
Corporation
Limited
Liability
Company
13
Sole Proprietorship
• Business that has one owner
• Owner is personally responsible for debts of business
• Income earned by business is reported on owner’s
personal tax return
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Partnership
• Similar to sole proprietorship, except has two or more
owners (partners)
• Business income is divided among partners
– Partners report their share of partnership income on
their personal tax returns
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Corporation
• Separate legal entity
• Limits owners’ personal liability
– Owners = stockholders
• Corporation is taxed separately
• Dividends paid to stockholders are also taxed
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S-Corporation
• Similar to corporation
– Separate legal entity
– Limited liability of owners
• Similar to partnership
– Corporate income reported on owners’ personal
tax returns
• Small corporations can elect to be taxed as an
S-Corporation
– Corporate earnings must be distributed based on
ownership percentage
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Limited Liability Company
• Similar to corporation
– Separate legal entity
– Limited liability of owners
• Similar to partnership
– Corporate income reported on owners’ personal tax
returns
– Flexibility in how earnings are distributed among
owners
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Summary of Business Organizations
TYPE OF
BUSINESS
LEGAL STATUS
TAX STATUS
BENEFITS
DRAWBACKS
Proprietorship Business and
owner are same
entity
Income
allocated
to owner
Partnership
Income
Easy to form
Unlimited liability
allocated No double taxation Partner disagreements
to owners Shared investment Limited life
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Business and
owner are same
entity
Easy to form
Unlimited liability
No double taxation Difficult to raise capital
Limited Life
19
Summary of Business Organizations
TYPE OF
BUSINESS
LEGAL STATUS
TAX STATUS
BENEFITS
Corporation
Business and
Income
owners are
taxed at
separate entities corporate
level
S-Corporation
Business and
owners are
separate entities
Income
Limited liability
Difficult to form
allocated No double taxation Costly to form
to owners Unlimited life
Regulation
Limited
Liability
Company
Business and
owners are
separate entities
Income
Limited liability
Difficult to form
allocated No double taxation Costly to form
to owners More flexible than Limited life
S-Corp
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Limited liability
Easy to raise
capital
Unlimited life
DRAWBACKS
Difficult to form
Costly to form
Double taxation
Regulation
20
Generally Accepted Accounting Principles
• Common acronym is GAAP
• Rules, principles and concepts that govern financial
accounting in the United States
• Financial Accounting Standards Board (FASB)
– Primarily responsible for establishing GAAP
– Objective is to provide useful information for lending
and investing decisions
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International Financial Reporting Standards
• Common acronym is IFRS
• Principles and standards increasingly used throughout
the world
• International Accounting Standards Board (IASB)
– Responsible for establishing IFRS
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Accounting Principles and Concepts
Business
Entity
Reliability
• Business kept
separate from
owners
• Information
verifiable and
confirmable
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Cost
• Acquired
assets and
services
recorded
at cost
23
Accounting Ethics
• Provide understandable, relevant, and reliable
information
• Provide clear and complete information; do not
manipulate information
• Try to prevent fraud
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Role of Accounting in a Business
• Recognize business transactions
– When does a transaction occur
• Measure business transactions
– What value does the transaction have
• Record business transactions
• Report business transactions for a period of time
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The
Accounting
Process
Economic
Activities
Actions
(decisions)
Accounting links
decision makers
with economic
activities and
with the results of
their decisions.
Decision
Makers
Accounting
Information
Reported
Results of
Actions
(decisions)
Types of Accounting Information
Financial
Management
Tax
Accounting Systems
An accounting system consists of the
personnel, procedures, technology, and
records used by an organization to
develop accounting information and to
communicate this information to
decision makers.
Information System







Information
Users
Investors
Creditors
Managers
Owners
Customers
Employees
Regulators
- SEC
- IRS
- FTC
Financial
Information
Provided
 Profitability
 Financial
position
 Cash flows







Decisions
Supported
Performance
evaluations
Stock
investments
Tax strategies
Labor
relations
Resource
allocations
Lending
decisions
Borrowing
Basic Functions of an Accounting System
Interpret
and record
business
transactions.
 Classify
similar
transactions
into useful
reports.
Summarize
and
communicate
information to
decision
makers.
Components of Internal Control
Control
Environment
Risk
Assessment
Control
Activities
Information and
Communication
Monitoring
External Users of Accounting Information
•
•
•
•
•
•
•
•
•
Owners
Creditors
Potential investors
Labor unions
Governmental agencies
Suppliers
Customers
Trade associations
General public
Objectives of External Financial Reporting
Provide specific information about
economic resources, claims to resources,
and changes in resources and claims.
Provide information useful in assessing
amount, timing and uncertainty of future
cash flows.
Provide general information useful in
making investment and credit decisions.
Objectives of External Financial Reporting
The primary financial statements.
Balance
Sheet
Income
Statement
Statement
of Cash
Flows
Characteristics of Externally Reported Information
A Means to an
End
Usefulness
Enhanced via
Explanation
Broader than
Financial
Statements
Based on GeneralPurpose
Assumption
Historical in
Nature
Results from Inexact and
Approximate Measures
Users of Internal Accounting Information
• Board of directors
• Chief executive officer (CEO)
• Chief financial officer (CFO)
• Vice presidents
• Business unit managers
• Plant managers
• Store managers
• Line supervisors
Owners
Board of
Directors
Chief Executive
Officer
(CEO)
V.P
Ethics
Business
Unit
Managers
V.P.
Human
Resources
Plant
Managers
Plant
Managers
Plant
Accountants
Plant
Accountants
Typical
Simple
Organization
Chart
V.P.
Information
Services
Chief
Financial
Officer (CFO)
Controller
Treasurer
1-37
Objectives of Management Accounting Information
To help achieve
goals and
missions
To help evaluate
and reward
decision makers
Characteristics of Management Accounting Information
Timeliness
A Means to an
End
Measures of
Efficiency and
Effectiveness
Identify
Decision Maker
Oriented Toward
Future
Accounting as a Stepping-Stone
An accounting background is invaluable for
key positions in management or
administration, as well as helpful in many
aspects of your personal lives, including
personal budgeting, retirement decisions, and
avoiding investment fraud.
Introduction to Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Three primary
financial
statements.
We will use a corporation to describe these
statements.
Introduction to Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Describes
where the
enterprise
stands at a
specific date.
Introduction to Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Depicts the
revenue and
expenses for a
designated
period of time.
Introduction to Financial Statements
Balance Sheet
Income Statement
Statement of Cash Flows
Depicts the
ways cash has
changed during
a designated
period of time.
A Starting Point: Statement of Financial Position
VAGABOND TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes Receivable
10,000
Notes Payable
$ 41,000
Accounts Receivable
60,500
Accounts Payable
36,000
Supplies
2,000
Salaries Payable
3,000
Office Equipment
15,000
Total Liabilities
$ 80,000
Building
90,000 Owners' Equity:
Land
100,000
Capital Stock
150,000
Retained Earnings
70,000
Total
$300,000 Total
$300,000
The Concept of the Business Entity
Vagabond
Travel
Agency
A business
entity is
separate from
the personal
affairs of its
owner.
Assets
VAGABOND TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Assets
Liabilities & Owners' Equity
Assets are
Cash
$ 22,500 Liabilities:
Notes Receivable
10,000
Notes economic
Payable
$ 41,000
Accounts Receivable
60,500
Accounts Payablethat 36,000
resources
are
Supplies
2,000
Salaries Payable
3,000
owned
Office Equipment
15,000
Total
Liabilitiesby the
$ 80,000
Building
90,000 Owners'
Equity: and are
business
Land
100,000
Capital Stock
150,000
expected
to benefit
Retained Earnings
70,000
Total
$300,000 Total
$300,000
future operations.
Assets
These accounting principles support
cost as the basis for asset valuation.
Stable-Dollar
Assumption
Cost
Principle
Objectivity
Principle
Going-Concern
Assumption
Liabilities
VAGABOND TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes Receivable
10,000
Notes Payable
$ 41,000
Accounts Receivable
60,500
Accounts Payable
36,000
Supplies
2,000
Salaries Payable
3,000
Office Equipment
15,000
Total Liabilities
$ 80,000
Building
90,000 Owners' Equity:
Land
100,000
Capital Stock
150,000
Retained Earnings
70,000
Total
$300,000 Total
$300,000
Liabilities are
debts that
represent
negative future
cash flows for
the enterprise.
Owners’ Equity
VAGABOND TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes Receivable
10,000
Notes Payable
$ 41,000
Accounts Receivable
60,500
Accounts Payable
36,000
Supplies
2,000
Salaries Payable
3,000
Office Equipment
15,000
Total Liabilities
$ 80,000
Building
90,000 Owners' Equity:
Land
100,000
Capital Stock
150,000
Retained Earnings
70,000
Total
$300,000 Total
$300,000
Owners’ equity
represents the
owners’ claims on
the assets of the
business.
Recognizing Business Transactions
Cash
Accounting
• Recognition when cash
is received or disbursed
• Non-GAAP
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Accrual Accounting
• Recognition when the
transaction occurs
• GAAP
51
Measuring Business Transactions
• Apply conservative perspective using GAAP
• Estimate reductions
– Uncollectible amounts owed
• Use historical costs
– What was paid vs. current market value
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Recording Business Transactions
• Fundamental Accounting Equation
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Assets
Liabilities
Stockholders’
Equity
Resources
business
owns that
have value
Amount of
assets
financed by
lenders
Amount of
assets
financed by
stockholders
53
Accounting Equation Exercise
Assets
Liabilities
Stockholders’
Equity
DECEMBER 31, 2012
$91,000
???
84,000
$ 7,000
DECEMBER 31, 2013
$145,000
???
72,000
$73,000
12,000
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Transaction Analysis
• Transaction
– Any event that has a financial impact on the business
• Transaction analysis
– Recording effect of transaction on the assets and the
financing of the assets
– Uses accounting equation
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Accounting Equation
Assets
Liabilities
Common
Stock
Retained Earnings
Revenues
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Stockholders’
Equity
Expenses
Dividends
56
The Accounting Equation
Assets = Liabilities + Owners’ Equity
$300,000 =
$80,000 +
$220,000
VAGABOND TRAVEL AGENCY
STATEMENT OF FINANCIAL POSITION
DECEMBER 31, 2015
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes Receivable
10,000
Notes Payable
$ 41,000
Accounts Receivable
60,500
Accounts Payable
36,000
Supplies
2,000
Salaries Payable
3,000
Office Equipment
15,000
Total Liabilities
$ 80,000
Building
90,000 Owners' Equity
Land
100,000
Capital Stock
150,000
Retained Earnings
70,000
Total
$300,000 Total
$300,000
On January 20, Michael McBryan started Overnight Auto Service.
He and his family invested $80,000 and received 8,000 shares of
stock at $10 per share.
ASSETS
LIABILITIES
STOCKHOLDERS’ EQUITY
Jan.
Cash
Common Stock
20
$80,000
$80,000
Bal.
80,000
=
Total
$80,000
=
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0
+
80,000
$80,000
58
Cash
Total
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 20, 2015
Assets
Owners' Equity
$ 80,000 Capital Stock
$ 80,000
$ 80,000 Total
$ 80,000
2-59
On January 21, Overnight purchased the
land from the city for $52,000 cash.
ASSETS
LIABILITIES
STOCKHOLDERS’ EQUITY
Jan.
Cash
Land
Common
Stock
21
$80,000
-$52,000
$52000
$80,000
Bal.
28,000
$52000
Total
4/28/2020
$80,000
=
=
0
+
80,000
$80,000
60
Cash
Land
Total
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 21, 2015
Assets
Owners' Equity
$ 28,000 Capital Stock
$ 80,000
52,000
$ 80,000 Total
$ 80,000
2-61
On January 22, Overnight purchased an old
garage for $36,000. Overnight paid $6,000
down in cash and issued a 90-day note
payable for the remaining $30,000 owed.
ASSETS
LIABILITIES
STOCKHOLDERS’
EQUITY
Common
Stock
$80,000
Jan.
Cash
Land
Building
Note
Payable
22
$28,000
-$6,000
$52000
$36,000
$30,000
Bal.
22,000
$52,000
$36,000
Total
4/28/2020
$110,000
=
=
$30,000
+
80,000
$110,000
62
Cash
Land
Building
Total
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 22, 2015
Assets
Liabilities and Owners' Equity
$ 22,000
Liabilities:
52,000
Notes Payable
$ 30,000
36,000
Owners' Equity:
Capital Stock
80,000
$110,000
Total
$110,000
2-63
On January 23, Overnight purchased tools
and automotive repair equipment for
$13,800 on account, due within 60 days.
ASSETS
Jan.
Cash
Tools &
Equipment
23
$22,000 $13,800
Bal.
$22,000
Total
4/28/2020
$13,800
LIABILITIES
STOCKHOLDERS’
EQUITY
Land
Note
Payable
Accounts
Payable
Common
Stock
$36,000
$52,000
$30,000
$13,800
$80,000
$36,000
$52,000
Building
$110,000 + $13,800
$123,800
=
$30,000
$13,800 +
=
=
$30000
$123,800
13,800 +
80,000
$80,000
64
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 23, 2015
Assets
Liabilities and Owners'
Cash
$ 22,000 Liabilities:
Tools & Equipment
13,800 Notes Payable
$
Building
36,000 Accounts Payable
Land
52,000
Total Liabilities
$
Owners' Equity:
Capital Stock
Total
$123,800 Total
Equity
30,000
13,800
43,800
80,000
$123,800
2-65
Overnight realized that the company had purchased more
tools and equipment than it needed.
On January 24, Overnight sold some of the new tools to Ace
Towing for $1,800, a price equal to Overnight’s cost. Ace
agreed to pay the amount within 45 days.
ASSETS
Jan.
Cash
Accounts
Receivable
24
$22,000
$1,800
$22,000
$1,800
Bal.
Total
Tools &
Equipment
Note
Payable
Building
Land
$13,800
-$1,800
$36,000
$52000
$12,000
$36,000
$52,000 =
$123,800
4/28/2020
LIABILITIES
$30,000
STOCKHOLDERS’
EQUITY
Accounts
Payable
Common
Stock
$13,800
$80,000
$30,000 $13,800
80,000
= $123,800
66
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 24, 2015
Assets
Liabilities and Owners'
Cash
$ 22,000 Liabilities:
Accounts Receivable
1,800 Notes Payable
$
Tools & Equipment
12,000 Accounts Payable
Building
36,000
Total Liabilities
$
Land
52,000 Owners' Equity:
Capital Stock
Total
$123,800 Total
Equity
30,000
13,800
43,800
80,000
$123,800
2-67
On January 26, Ace Towing pays Overnight
$600 as a partial settlement of its accounts
receivable.
ASSETS
Accounts
Receivable
Tools &
Equipment
Jan.
Cash
26
$22,000
+$600
$1,800
-$600
$12,000
Bal.
$22,600
$1,200
$12,000
Total
4/28/2020
$123,800
LIABILITIES
Building
$36,000
$36,000
Land
$52,000
STOCKHOLDERS’
EQUITY
Note
Payable
Accounts
Payable
Common
Stock
$30,000
$13,800
$80,000
$52,000
$30,000
=
$13,800
+
80,000
$123,800
68
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 26, 2015
Assets
Liabilities and Owners'
Cash
$ 22,600 Liabilities:
Accounts Receivable
1,200 Notes Payable
$
Tools & Equipment
12,000 Accounts Payable
Building
36,000
Total Liabilities
$
Land
52,000 Owners' Equity:
Capital Stock
Total
$123,800 Total
Equity
30,000
13,800
43,800
80,000
$123,800
2-69
On January 27, Overnight made a partial
payment of $6,800 on its account payable
to Snappy Tools.
ASSETS
LIABILITIES
Accounts
Receivable
Tools &
Equipment
Building
Land
Jan.
Cash
27
$22,600
-$6,800
$1,200
$12,000
$36,000
$52,000
Bal.
$15,800
$1,200
$12,000
$36,000
$52,000
Total
4/28/2020
$117,000
Note
Payable
$30,000
=
$30,000
STOCKHOLDERS’
EQUITY
Accounts
Payable
Common
Stock
$13,800
-$6,800
$80,000
$7,000
+
80,000
= $117,000
70
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 27, 2015
Assets
Liabilities and Owners'
Cash
$ 15,800 Liabilities:
Accounts Receivable
1,200 Notes Payable
$
Tools & Equipment
12,000 Accounts Payable
Building
36,000
Total Liabilities
Land
52,000 Owners' Equity:
Capital Stock
Total
$117,000 Total
Equity
30,000
7,000
37,000
80,000
$117,000
2-71
On January 31, Overnight recorded auto
repair services provided for the last week
of January of $2,200, received in cash.
ASSETS
Jan.
31
Cash
Accounts
Tools &
Receivable Equipment
LIABILITIES
Building
Land
$52,000
Note
Payable
Accounts
Payable
Common Retained
Stock
Earning
Revenue
$30,000
$13,800
-$6,800
$80,000
$15,800
+$2,200
$1,200
$12,000
$36,000
Bal. $18,000
$1,200
$12,000
$36,000 $52,000 $30,000
Total
4/28/2020
$119,200
STOCKHOLDERS’
EQUITY
$7,000 +
$2,200
80,000 +$2,200
$119,200
72
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 31, 2015
Assets
Liabilities and Owners' Equity
Cash
$ 18,000 Liabilities:
Accounts Receivable
1,200 Notes Payable
$ 30,000
Tools & Equipment
12,000 Accounts Payable
7,000
Building
36,000
Total Liabilities
37,000
Land
52,000 Owners' Equity:
Capital Stock
80,000
Retained Earnings
2,200
Total
$119,200 Total
$119,200
2-73
On January 31, Overnight paid operating
expenses of $1,400 in cash.
ASSETS
LIABILITIES
Accounts
Receivable
Tools &
Equipment
Building
Land
STOCKHOLDERS’ EQUITY
Note
Payable
Accounts Common
Payable
Stock
Jan.
Cash
31
$18,000
-$1,400
$1,200
$12,000
$36,000
$52,000
$30,000
$13,800
-$6,800
$80,000
Bal.
$16,600
$1,200
$12,000
$36,000
$52,000
$30,000
$7,000
80,000
Total
$117,800
4/28/2020
=
Retained
Earning
Revenue
Retained
Earning
Expenses
$2,200
- $1,400
+ $2,200
- $1,400
$117,800
74
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 31, 2015
Assets
Liabilities and Owners' Equity
Cash
$ 16,600 Liabilities:
Accounts Receivable
1,200 Notes Payable
$ 30,000
Tools & Equipment
12,000 Accounts Payable
7,000
Building
36,000
Total Liabilities
37,000
Land
52,000 Owners' Equity:
Capital Stock
80,000
Retained Earnings
800
Total
$117,800 Total
$117,800
2-75
2-76
Let’s prepare the Income Statement and Statement of Cash
Flows for Overnight Auto Service for the period of January
20-31, 2015.
These transactions
impact the
Statement of Cash
Flows.
These transactions
impact the Income
Statement.
2-77
OVERNIGHT AUTO SERVICE
INCOME STATEMENT
FOR THE PERIOD JANUARY 20 - 31, 2015
Sales Revenues
Operating Expenses:
Wages
$ 1,200
Utilities
200
Net Income
$
2,200
$
$
1,400
800
Investments by and payments to the owners
are not included on the Income Statement.
The Statement of Retained Earnings
Beginning Retained
Earnings
• Shows changes to
retained earnings over
time
Net Income
or Loss
Dividends
Ending
Retained Earnings
4/28/2020
79
OVERNIGHT AUTO SERVICE
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 20-31, 2015
Cash flows from operating activities:
Cash received from revenue transactions
$
2,200
Cash paid for expenses
(1,400)
Net cash provided by operating activities
$
800
Cash flows from investing activities:
Purchase of land
$ (52,000)
Purchase of building
(6,000)
Purchase of tools
(6,800)
Sale of tools
600
Net cash used by investing activities
(64,200)
Cash flows from financing activities:
Sale of Capital Stock
80,000
Increase in cash for the period
$ 16,600
Cash balance, January 20, 2015
Cash balance, January 31, 2015
$ 16,600
OVERNIGHT AUTO SERVICE
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 20-31, 2015
Cash flows from operating activities:
Cash received from revenue transactions $
2,200
Cash paid for expenses
(1,400)
Net cash provided by operating activities
$
800
Cash flows from investing activities:
Purchase of land
$ (52,000)
Purchase of building
(6,000)
Purchase of tools
(6,800)
Sale of tools
600
Net cash used by investing activities
(64,200)
Cash flows from financing activities:
Sale of Capital Stock
80,000
Increase in cash for the period
$ 16,600
Cash balance, January 20, 2015
Cash balance, January 31, 2015
$ 16,600
OVERNIGHT AUTO SERVICE
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 20-31, 2015
Cash flows from operating activities:
Cash received from revenue transactions
$
2,200
Cash paid for expenses
(1,400)
Net cash provided by operating activities
$
800
Cash flows from investing activities:
Purchase of land
$ (52,000)
Purchase of building
(6,000)
Purchase of tools
(6,800)
Sale of tools
600
Net cash used by investing activities
(64,200)
Cash flows from financing activities:
Sale of Capital Stock
80,000
Increase in cash for the period
$ 16,600
Cash balance, January 20, 2015
Cash balance, January 31, 2015
$ 16,600
OVERNIGHT AUTO SERVICE
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 20-31, 2015
Cash flows from operating activities:
Cash received from revenue transactions
$
2,200
Cash paid for expenses
(1,400)
Net cash provided by operating activities
$
800
Cash flows from investing activities:
Purchase of land
$
(52,000)
Purchase of building
(6,000)
Purchase of tools
(6,800)
Sale of tools
600
Net cash used by investing activities
(64,200)
Cash flows from financing activities:
Sale of Capital Stock
80,000
Increase in cash for the period
$ 16,600
Cash balance, January 20, 2015
Cash balance, January 31, 2015
$ 16,600
Now, let’s prepare the Balance Sheet for Overnight
Auto Service for January 20-31, 2015.
These balances will
appear on the
Balance Sheet.
2-84
The Balance Sheet
• Lists assets, liabilities, and stockholders’ equity at a
specific date
Assets
4/28/2020
Liabilities
Stockholders’
Equity
85
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 31, 2015
Assets
Liabilities
Cash
$ 16,600 Notes payable
$ 30,000
Accounts receivable
1,200 Accounts payable
7,000
Tools & equipment
12,000
Owners' Equity
Building
36,000 Capital stock
80,000
Land
52,000 Retained earnings
800
Total assets
$ 117,800 Total liabilities & equity
$ 117,800
Assets = Liabilities + Owners’ Equity
$117,800 =
$37,000
+
$80,800
Relationships Among Financial Statements
Income Statement
Net Income
Statement of Retained Earnings
Ending balance
Balance Sheet
Statement of Cash Flows
4/28/2020
87
Relationships Among Financial Statements
Date at
beginning of
period
Statement of Financial
Position (Balance Sheet)
Date at
end of
period
Time
Statement of Financial
Position (Balance Sheet)
Income Statement
Statement of Cash Flows
Financial Statement Articulation
OVERNIGHT AUTO SERVICE
STATEMENT OF CASH FLOWS
FOR THE PERIOD JANUARY 20-31, 2015
Cash flows from operating activities:
Cash received from revenue transactions $
2,200
Cash paid for expenses
(1,400)
Net cash provided by operating activities
$
800
Cash flows from investing activities:
Purchase of land
$ (52,000)
Purchase of building
(6,000)
Purchase of tools
(6,800)
Sale of tools
600
Net cash used by investing activities
(64,200)
Cash flows from financing activities:
Sale of Capital Stock
80,000
Increase in cash for the period
$ 16,600
Cash balance, January 20, 2015
Cash balance, January 31, 2015
$ 16,600
OVERNIGHT AUTO SERVICE
INCOME STATEMENT
FOR THE PERIOD JANUARY 20 - 31, 2015
Sales Revenues
Operating Expenses:
Wages
$ 1,200
Utilities
200
Net Income
$
2,200
$
$
1,400
800
OVERNIGHT AUTO SERVICE
BALANCE SHEET
JANUARY 31, 2015
Assets
Liabilities
Cash
$ 16,600 Notes payable
$ 30,000
Accounts receivable
1,200 Accounts payable
7,000
Tools & equipment
12,000
Owners' Equity
Building
36,000 Capital stock
80,000
Land
52,000 Retained earnings
800
Total assets
$ 117,800 Total liabilities & equity
$ 117,800
Financial Reporting and Financial Statements
Financial statements are
just one source of
financial accounting
information.
Statement
of Cash
Flows
Income
Statement
Balance
Sheet
Other Information:
•Nonfinancial disclosures
•Management interpretation
•Industry
•Competitors
•National economy
Reporting Ownership Equity in the Statement of Financial
Position
Sole
Proprietorships
Owner's equity:
Mic ha e l Mc Brya n, Ca pita l
$
80,800
Partners' equity:
Michael McBryan, Capital
Partnerships
Corporations
$
Reb ecca M cBryan , Cap ital
40,400
40,400
Total partners' equity
$ 80,800
Owners' equity:
Capital Stock
$ 80,000
Retained Earnings
800
Total stockholders' equity
$ 80,800
The Use of Financial Statements by External Parties
Creditors
Investors
Two concerns:
Liquidity
Profitability
The Need for Adequate Disclosure
Balance Sheet
Income Statement
Statement of Cash Flows
Notes to the
financial
statements
often provide
facts necessary
for the proper
interpretation of
the statements.
Management’s Interest in Financial Statements
Creditors are more likely to extend credit if
financial statements show a strong statement of
financial position—that is, relatively little debt
and large amounts of liquid assets.
Window dressing occurs when management
takes measures to make the company appear
as strong as possible in it financial statements.
The End
Further Discussion & Exercises:
2
Business Entity Concept
Under the business entity
concept, the activities of a
business are recorded
separately from the activities
of its owners, creditors, or
other businesses.
2
Cost Concept
Under the cost concept,
amounts are initially recorded
in the accounting records at
their cost or purchase price.
2
Objectivity Concept
The objectivity concept requires
that the amounts recorded in the
accounting records be based on
objective evidence.
2
Unit of Measure Concept
The unit of measure concept
requires that economic data
be recorded in dollars.
2
Example Exercise 1-1
Cost Concept
On August 25, Gallatin Repair Service extended an
offer of $125,000 for land that had been priced for sale
at $150,000. On September 3, Gallatin Repair Service
accepted the seller’s counteroffer of $137,000. On
October 20, the land was assessed at a value of
$98,000 for property tax purposes. On December 4,
Gallatin Repair Service was offered $160,000 for the
land by a national retail chain. At what value should
the land be recorded in Gallatin Repair Service’s
records?
1-28
Example Exercise 1-1 (continued)
$137,000. Under the cost concept, the land should be
recorded at the cost to Gallatin Repair Service.
1-29
2
3
Example Exercise 1-2
Accounting Equation
John Joos is the owner and operator of You’re A Star, a
motivational consulting business. At the end of its
accounting period, December 31, 2009, You’re A Star has
assets of $800,000 and liabilities of $350,000. Using the
accounting equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.
b. Owner’s equity, as of December 31, 2010,
assuming that assets increased by $130,000 and
liabilities decreased by $25,000 during 2010.
1-34
Example Exercise 1-2 (continued)
3
Assets = Liabilities + Owner’s Equity
$800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
b. First, determine the change in Owner’s Equity during 2010 as
follows:
Assets = Liabilities + Owner’s Equity
$130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
a.
Next, add the change in Owner’s Equity on December 31, 2009
to arrive at Owner’s Equity on December 31, 2010, as shown
below:
$605,000 = $450,000 + $155,000
1-35
4
Business Transaction
A business transaction is an
economic event or condition that
directly changes an entity’s
financial condition or its results
of operations.
4
Transaction A
On November 1, 2009, Chris Clark
deposits $25,000 in a bank account in
the name of NetSolutions in return for
shares of stock in the corporation.
4
Transaction A (continued)
Assets
CASH
a.
25,000
=
=
Stockholders’
Equity
Share Capital-Ordinary
25,000
4
Transaction B
On November 5, 2009, NetSolutions
paid $20,000 for the purchase of land
as a future building site.
4
Transaction B (continued)
Assets
CASH
Bal. 25,000
b. –20,000
Bal.
5,000
+
=
Stockholders’
Equity
Share Capital-Ordinary
LAND
=
25,000
+20,000
20,000
25,000
4
Transaction C
On November 10, 2009,
NetSolutions purchased supplies
for $1,350 and agreed to pay the
supplier in the near future.
4
Transaction C (continued)
Assets
=
CASH + SUPPLIES + LAND
Bal. 5,000
20,000
c.
+1,350
Bal. 5,000
1,350
20,000
=
Stockholders’
Liabilities + Equity
ACCOUNTS
PAYABLE +
CAPITAL
STOCK
25,000
+1,350
1,350
25,000
4
Beginning with Transaction D
the asset section will be shown
first, then the liabilities and
stockholders’ equity will be
shown in the following slide.
4
Transaction D
On November 18, 2009, NetSolutions
received cash of $7,500 for providing
services to customers. A business
earns money by selling goods or
services to its customers. This amount
is called Revenue.
4
Transaction D (continued)
Assets
Bal.
d.
CASH
5,000
+7,500
Bal.
12,500
+
SUPPLIES +
1,350
1.350
LAND
20,000
20,000
4
Transaction D (continued)
Liabilities +
Bal.
d.
Bal.
ACCOUNTS
PAYABLE
1,350
Stockholders’ Equity
+
CAPITAL
STOCK
25,000
FEES
+ EARNED
+7,500
1,350
25,000
7,500
4
Expenses
During the month, NetSolutions
spent cash or used up other assets
in earning revenue. Assets used in
this process of earning revenue
are called expenses.
4
Transaction E
On November 30, 2009, NetSolutions
paid the following expenses during
the month: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous,
$275.
4
Transaction E (continued)
Assets
Bal.
e.
Bal.
CASH +
12,500
–3,650
8,850
SUPPLIES +
1,350
1.350
LAND
20,000
20,000
4
Transaction E (continued)
Liabilities +
Bal.
ACCOUNTS
PAYABLE +
1,350
Stockholders’ Equity
CAPITAL
STOCK
25,000
FEES
WAGES RENT UTIL. MISC.
+ EARNED – EXP. – EXP. – EXP. – EXP.
7,500
e.
Bal.
1,350
25,000
7,500
–2,125
–800
–450 –275
–2,125
–800
–450 –275
4
Transaction F
On November 30, 2009,
NetSolutions paid creditors on
account, $950.
4
Transaction F (continued)
Assets
Bal.
f.
CASH
8,850
–950
Bal.
7,900
+
SUPPLIES +
1,350
1.350
LAND
20,000
20,000
4
Transaction F (continued)
Liabilities
+
ACCOUNTS
PAYABLE +
Stockholders’ Equity
CAPITAL
STOCK
FEES
WAGES RENT UTIL. MISC.
+ EARNED – EXP. – EXP. – EXP. – EXP.
Bal.
f.
1,350
–950
25,000
7,500
Bal.
400
25,000
7,500
–2,125
–800
–450
–275
4
Transaction G
On November 30, 2009, Chris Clark
determined that the cost of supplies
on hand at the end of the period was
$550.
4
Transaction G (continued)
Assets
Bal.
g.
Bal.
CASH +
7,900
7,900
SUPPLIES
1,350
–800
550
+
LAND
20,000
20,000
4
Transaction G (continued)
Liabilities
+
ACCOUNTS
PAYABLE +
Bal.
g.
400
Bal.
400
Stockholders’ Equity
CAPITAL
FEES
WAGES RENT SUP. UTIL. MISC.
STOCK
+ EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
25,000
7,500
–2,125
–800
–450 –275
–800
25,000
7,500
–2,125
–800 –800
–450 –275
4
Transaction H
On November 30, 2009, NetSolutions
pays $2,000 to stockholders (Chris
Clark) as dividends.
4
Transaction H (continued)
Assets
Bal.
h.
Bal.
CASH +
7,900
–2,000
5,900
SUPPLIES
550
550
+
LAND
20,000
20,000
4
Transaction H (continued)
Liabilities +
Stockholders’ Equity
ACCTS.
CAPITAL, DIVIFEES
WAGES RENT SUP. UTIL. MISC.
PAY. + STOCK – DENDS + EARNED – EXP. – EXP. – EXP. – EXP. – EXP.
Bal. 400
h.
25,000
Bal.400
25,000
7,500
–2,125
–800 –800 –450 –275
7,500
–2,125
–800 –800 –450 –275
–2,000
–2,000
4
Summary
4
Exhibit 5
Effects of Transactions on
Stockholders’ Equity
4
Example Exercise 1-3
Transactions
Salvo Delivery Service is owned and operated by Joel
Salvo. The following selected transactions were
completed by Salvo Delivery Service during February:
1. Received cash from owner as additional investment
in exchange for share capital-ordinary, $35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account,
$11,250.
4. Received cash from customers on account, $6,740.
5. Paid dividends, $1,000.
1-63
(continued)
Example Exercise 1-3 (continued)
Indicate the effect of each transaction on the
accounting equation elements (Assets, Liabilities,
Stockholders’ Equity, Dividends, Revenue, and
Expense) by listing the numbers identifying the
transactions, (1) through (5). Also, indicate the specific
item within the accounting equation element that is
affected. To illustrate, the answer to (1) is shown below.
(1) Asset (Cash) increases by $35,000; Stockholders’
Equity (share capital-ordinary) increases by
$35,000.
1-64
4
Example Exercise 1-3 (continued)
Follow My Example 1-3
(2) Asset (Cash) decreases by $1,800; Liability
(Accounts Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250;
Revenue (Delivery Service Fees) increases by
$11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts
Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Dividends
increases by $1,000.
1-65
4
5
Matching Concept
The matching concept is
applied by matching the
expenses with the revenue
generated during a period
by those expenses.
5
Exhibit 6
Financial Statements for NetSolutions
Net income is carried
to the statement of
retained earnings.
5
Example Exercise 1-4
statement of comprehensive income
The assets and liabilities of Chickadee Travel Service at April
30, 2010, the end of the current year, and its revenue and
expenses for the year are listed below. The share capitalordinary was $50,000 and the retained earnings was $30,000
at May 1, 2009, the beginning of the current year.
Accounts payable
$ 12,200
Accounts receivable
31,350
Cash
53,050
Fees earned
263,200
Land
80,000
Miscellaneous expense $ 12,950
Office expense
63,000
Supplies
3,350
Wages expense
131,700
Prepare an statement of comprehensive income for the
current year ended April 30, 2010.
1-72
Example Exercise 1-4 (continued)
5
Follow My Example 1-3
CHICKADEE TRAVEL SERVICE
statement of Comprehensive Income
For the Year Ended April 30, 2010
Fees earned
Expenses:
Wages expense
Office expense
Miscellaneous expense
Total expenses
Net income
1-73
$263,200
$131,700
63,000
12,950
207,650
$ 55,550
5
Statement of Retained Earnings
The statement of retained
earnings reports the changes in
the retained earnings for a
specific period of time, such as a
month or a year.
5
Exhibit 6
Financial Statements for NetSolutions (continued)
From the statement of
comprehensive income
To the statement of
financial position
5
Example Exercise 1-5
Statement of Retained Earnings
Using the data for Chickadee Travel Service
shown in Example Exercise 1-4, prepare a
statement of retained earnings for the current year
ended April 30, 2010. Adam Cellini invested an
additional $50,000 in the business in exchange for
share capital-ordinary, and dividends of $30,000
were paid during the year.
1-76
Example Exercise 1-5 continued
5
CHICKADEE TRAVEL SERVICE
Statement of Retained Earnings
For the Year Ended April 30, 2010
Retained earnings, May 1, 2009
$ 30,000
Net income for the year
$55,550
Less dividends
30,000
Increase in retained earnings
25,550
Retained earnings, April 30, 2010
$55,550
1-77
5
Account Form
The account form of a statement
of Balance Sheet (Financial
Position) lists the assets on the
left and the liabilities and
stockholders’ equity on the
right—similar to the design of an
account.
5
Exhibit 6
Financial Statements for NetSolutions (continued)
This amount is compared
to the net cash flow on the
statement of cash flows.
From the statement
of retained earnings
5
Example Exercise 1-6
Statement of Balance Sheet (Financial Position)
Using the data for Chickadee Travel Service shown in
Example Exercises 1-4 and 1-5, prepare the statement
of balance Sheet as of April 30, 2010.
1-81
Example Exercise 1-6 (continued)
Follow My Example 1-3
1-82
5
5
Statement of Cash Flows
A statement of cash flows is a summary
of the cash receipts and payments for a
specific period of time. It consists of three
sections: (1) operating activities, (2)
investing activities, and (3) financing
activities.
5
Exhibit 6
Financial Statements for NetSolutions (continued)
This amount should match
Cash on the statement of
financial position.
5
Operating Activities
The cash flows from operating
activities section reports a
summary of cash receipts and cash
payments from operations.
5
Investing Activities
The cash flows from investing
activities section reports the cash
transactions for the acquisition and
sale of relatively permanent assets.
5
Financing Activities
The cash flows from financing
activities section reports the cash
transactions related to cash
investments by stockholders,
borrowings, and cash dividends.
5
Example Exercise 1-7
Statement of Cash Flows
A summary of cash flows for Chickadee Travel Service for the
year ended April 30, 2010, is shown below.
Cash receipts:
Cash received from customers
Cash received from issuing
share capital-ordinary
Cash payments:
Cash paid for expenses
Cash paid for land
Cash paid for dividends
1-88
$251,000
50,000
210,000
80,000
30,000
The cash balance as of May 1, 2009, was $72,050.
Prepare a statement of cash flows for Chickadee Travel Service
for the year ended April 30, 2010.
Example Exercise 1-7 (continued)
5
Follow
My Example 1-3
Follow My Example 1-7
Cash flows from operating activities:
Cash received from customers
Deduct cash payments for expenses
Net cash flows from operating activities
Cash flows from investing activities:
Cash payments for purchase of land
Cash flows from financing activities:
Cash received from issuing share
capital-ordinary
Deduct cash dividends
Net cash flows from financing activities
Net decrease in cash during year
Cash as of May 1, 2009
Cash as of April 30, 2010
1-89
$251,000
210,000
$ 41,000
(80,000)
$ 50,000
30,000
20,000
$(19,000)
72,050
$ 53,050
5
Interrelationships Among
Financial Statements
• The statement of comprehensive
income and the statement of retained
earnings are interrelated.
Net income or net loss appears on the
statement of comprehensive income and is
also reported on the statement of retained
earnings as either an addition to or a
deduction from the beginning retained
earnings balance.
5
Interrelationships Among
Financial Statements
• The statement of retained earnings and
the statement of financial position are
interrelated.
Retained earnings at the end of the
period reported on the statement of
retained earnings is also reported
on the statement of Balance Sheet
as retained earnings.
5
Interrelationships Among
Financial Statements
• The statement of Balance Sheet and the
statement of cash flows are interrelated.
The cash reported on the
statement of Balance Sheet is
also reported as the end-ofperiod cash on the statement of
cash flows.