Transcript Chapter 1

Chapter 1
Accounting as a Form of
Communication
Financial Accounting 4e by Porter and Norton
1
Decisions Made with
Financial Information
Invest??
Borrow $$??
Extend credit $$??
Start new business??
Add new
product line??
Build new plant??
Loan $$??
Sell stocks or bonds??
2
What is Accounting?
Identifying
Measuring
Economic
Information
to
various
users
Communicating
3
Internal and External
Users of Accounting Information
Banks
Current
and
Potential
Owners
Creditors
Internal
Users Management
Financial
Analysts
Suppliers
Trade
Organizations
Government
Agencies
4
1-14
The Accounting Equation
Basic Accounting Equation
Assets
= Liabilities + Stockholders’ Equity
Economic
resources =
Sources of financing . . .
Liabilities: from creditors
Equity: from stockholders.
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The Accounting Equation
Assets =
Liabilities + Owners’ Equity
(or Stockholders' Equity)
Economic
Resources
=
Creditors'
Claims
to Assets
+
Owners'
Claims
to Assets
Examples:
Accounts payable
Cash
Accounts receivable Notes payable
Inventory
Capital stock
Retained earnings
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1-13
The Balance Sheet
Body of the Statement
– Assets

Economic benefits owned by the business as a result of past
transactions.
– Liabilities


Debts or obligations of the business that result from past transactions.
Stockholders’ Equity

Amount of financing provided by owners of the business and
operations.
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1. Name of entity
2. Title of statement
3. Specific date
4. Unit of measure
The
Balance
Sheet
reports the
financial
position of
an entity at
a particular
point in
time.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
Notes payable
Total liabilities and stockholders' equity
$
16,156
7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
2,000
9,105
11,105
$
27,2618
Assets are
economic
resources
owned by the
business as a
result of past
transactions.
Assets are
listed by their
ease of
conversion into
cash.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
Assets
Cash
$
4,895
Accounts receivable
5,714
Inventories
8,517
Plant and equipment
7,154
Land
981
Total assets
$
27,261
Liabilities andAmount
Stockholders'
Equity
of cash
in the company’s bank
Cash
Liabilities
accounts.
Accounts payable
$
7,156
Accounts Amounts owed by customers from prior
Notes payable
9,000
receivable sales.
Total liabilities
$
16,156
Parts and completed but unsold
Inventories
Stockholders' Equity
products.
Contributed capital
$
2,000
Plant and
Retained
earnings
Factories and production 9,105
machinery.
equipment
Total stockholders' equity
11,105
Land
on whichequity
factories are built.
TotalLand
liabilities and
stockholders'
$
27,2619
1-15
Assets are
listed by their
ease of
conversion into
cash.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(In thousands of dollars)
Assets
Cash
$
4,895
Accounts receivable
5,714
Inventories
8,517
Plant and equipment
7,154
Land
981
Total assets
$
27,261
Amount
of cash
in the company’s bank
Liabilities and
Stockholders'
Equity
Cash
account.
Liabilities
Accounts
Amounts owed by customers
Accounts
payable
$
7,156from prior
receivable
Notes
payable sales.
9,000
Partial and completed but unsold
Total liabilities
$
16,156
Inventories
product.
Stockholders'
Equity
Plant andcapital
Contributed
$
2,000
Factories and production
machinery.
equipment
Retained
earnings
9,105
Total stockholders' equity
Land
11,105
Property on which factories are located.10
Total liabilities and stockholders' equity
$
27,261
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
Assets
Liabilities are
debts or
obligations of
the business
that result from
past
transactions.
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
Notes payable
Total liabilities and stockholders' equity
$
16,156
7,156
9,000
Total liabilities
Accounts Amounts owed toStockholders'
suppliers Equity
for prior
Contributed capital
payable purchases.
Retained earnings
Notes
Amounts owed on written debt
Total stockholders' equity
payable contracts.
$
4,895
5,714
8,517
7,154
981
27,261
$
2,000
9,105
11,105
$
27,26111
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MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(In thousands of dollars)
Assets
Accounts
payable
Notes
payable
Cash
AmountsAccounts
owed toreceivable
suppliers for prior
Inventories
purchases.
Plant and equipment
Amounts Land
owed on written debt
contracts. Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
Notes payable
Total liabilities and stockholders' equity
$
16,156
7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
2,000
9,105
11,105
$
27,261 12
Equity is the
amount of
financing
provided by
owners of the
business and
earnings.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Contributed Amounts invested in the
business by
Accounts payable
capital
stockholders.
Retained
earnings
$
$
Notesnot
payable
Past earnings
distributed to
Total liabilities
stockholders.
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
16,156
7,156
9,000
$
2,000
9,105
11,105
$
27,26113
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MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(In thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Contributed Amounts invested in Liabilities
the business by
Accounts payable
capital
stockholders.
Retained
earnings
$
$
Notes payable
Past earnings
not distributed to
Total liabilities
stockholders.
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
16,156
7,156
9,000
$
2,000
9,105
11,105
$
27,26114
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Use $ on the
first item in a
group
and on the
group total.
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(In thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
Notes payable
Total liabilities and stockholders' equity
$
16,156
7,156
9,000
Assets = LiabilitiesTotal
+ liabilities
Stockholders’ Equity
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
2,000
9,105
11,105
$
15
27,261
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(in thousands of dollars)
Revenues
1. Name
of entity
Sales
revenue
$ 37,436
2. Title of statement
Expenses
3. Specific
sheet, this
Cost
of goodsdate
sold(Unlike the balance
$ 26,980
statement
covers
a specified period
of time.)
Selling,
general
and administrative
3,624
4. Unit ofand
measure
Research
development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
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MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(In thousands of dollars)
 Revenues


Sales revenue
$ 37,436
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
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MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(in thousands of dollars)
Revenues
Sales revenue
$ 37,436
Expenses
Revenues
are earnings from the sale of goods
Cost of goods sold
$ 26,980
or services to customers.
Selling, general and administrative
3,624
Research
andisdevelopment
1,982
Revenue
recognized in the period
in which
Interest
expense
450
goods
and services are sold, not necessarily
period in which cash is received. 33,036
Totalthe
expenses
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
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MAXIDRIVE CORP.
Expenses are theIncome
dollar amount
of resources used
Statement
up by the
to earn
revenues
during
a period.
Forentity
the Year
Ended
December
31, 2003
(in thousands of dollars)
An expense is recognized in the period in which
goods and services are used, not necessarily
Revenues
the period in which cash is paid.
Sales revenue
$ 37,436
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
Income tax expense
Net income
$ 4,400
1,100
$ 3,300
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MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(in thousands of dollars)
Revenues
Sales revenue
$ 37,436
Expenses
Cost of goods sold
$ 26,980
Selling, general and administrative
3,624
Research and development
1,982
Interest expense
450
Total expenses
33,036
Pretax income
$ 4,400
If tax
expenses
Income
expense exceed revenues, 1,100
we report net loss.
Net income
$ 3,300
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MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2009
(In thousands of dollars)
Retained earnings, January 1, 2009
Net income for 2009
Dividends for 2009
Retained earnings, December 31, 2009
$ 6,805
3,300
(1,000)
$ 9,105
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MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2009
(in thousands of dollars)
Retained earnings, January 1, 2009
$ 6,805
1. Name
of entity
Net
income
for 2009
3,300
2. Title of statement
Dividends
for 2009
(1,000)
3. Specificearnings,
date (LikeDecember
the income
this
Retained
31,statement,
2009 $ 9,105
statement covers a specified period of time.)
4. Unit of measure
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MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2009
(in thousands of dollars)
Retained earnings, January 1, 2009
Net income for 2009
Dividends for 2009
Retained earnings, December 31, 2009
$ 6,805
3,300
(1,000)
$ 9,105
The Statement of Retained Earnings reports the way
that net income and the distribution of dividends affect
the financial position of the company during a period.
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MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(In thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
(1,625)
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
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MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
$
33,563
1.
Name
ofsuppliers
entity and employees
Cash
paid to
(30,854)
Cash
paid
interest
(450)
2.
Title
offorstatement
Cash paid for taxes
(1,190)
3.
Specific
(Like the
income statement$ and
Net
cash flow date
from operating
activities
1,069
of retained
Cash statement
flow from investing
activities: earnings, this
Cash
paid to purchase
equipment
$
(1,625)
statement
covers
a specified period
of time.)
Net cash flow from investing activities
(1,625)
4. Unit of measure
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
(156)
5,051
$
4,895
25
CORP.
The Statement of MAXIDRIVE
Cash Flows
reports the inflows
Statement of Cash Flows
and outflows
of cash during the period in the
For the Year Ended December 31, 2009
categories of operating,
investing,
(in thousands
of dollars) and financing.
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
(1,625)
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
26
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(in thousands of dollars)
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
The statement ends with a
Cash received from bank loan
$
1,400
of Cash.
Cash paidreconciliation
for dividends
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
(1,625)
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
27
Relationship Among the Financial
Statements
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(in thousands of dollars)
Revenues
Sales revenue
Expenses
Cost of goods sold
Selling, general and administrative
Research and development
Interest expense
Total expenses
Pretax income
Income tax expense
Net income
$ 37,436
$ 26,980
3,624
1,982
450
33,036
$ 4,400
1,100
$ 3,300
Net income from the
income statement
increases ending
retained earnings on the
statement of retained
earnings.
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2009
(in thousands of dollars)
Retained earnings, January 1, 2009
$ 6,805
Net income for 2009
3,300
Dividends for 2009
(1,000)
Retained earnings, December 31, 2009 $ 9,105
28
Relationship Among the Financial
Statements
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
Notes payable
Total liabilities and stockholders' equity
$
16,156
7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
$
4,895
5,714
8,517
7,154
981
27,261
$
Ending retained earnings
from the statement of
retained earnings is one
of the components of
stockholders’ equity on
the balance sheet.
2,000
9,105
11,105
$
MAXIDRIVE CORP.
Statement of Retained Earnings
For the Year Ended December 31, 2009
(in thousands of dollars)
27,261
Retained earnings, January 1, 2009
$ 6,805
Net income for 2009
3,300
Dividends for 2009
(1,000)
Retained earnings, December 31, 2009 $ 9,105
29
Relationship Among the Financial
Statements
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(in thousands of dollars)
Assets
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
Liabilities and Stockholders' Equity
Liabilities
Accounts payable
$
$
$
Notes payable
7,156
9,000
Total liabilities
Stockholders' Equity
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
4,895
5,714
8,517
7,154
981
27,261
$
16,156
Cash flows from operating activities:
Cash collected from customers
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Cash flow from investing activities:
Cash paid to purchase equipment
Net cash flow from investing activities
Cash flow from financing activities:
Cash received from bank loan
Cash paid for dividends
$
2,000
9,105
$
33,563
(30,854)
(450)
(1,190)
$
$
(1,625)
(1,625)
$
1,400
(1,000)
Net cash flow from financing activities
Net decrease in cash during the year
11,105
$
27,261
400
$
Cash at beginning of the year
Cash at end of the year
1,069
(156)
5,051
$
4,895
The change in cash on the statement of cash flows added to
the beginning of the year balance in cash equals the ending
30
balance in cash on the balance sheet.
The Rules of the Game
The
rules
The
rule makers
The
rule enforcers
The
CPA regulators
 GAAP
 FASB
 SEC
 AICPA
31
Financial Statement Assumptions
Economic
Entity
Cost
Principle
Time
Period
Going
Concern
Monetary
Unit
32
Economic Entity Concept
 Each
entity has its own books, records and
financial statements that are separate from
owners
 No intermingling of personal and business
assets and liabilities or income and expenses
Business
Books &
Records
33
Cost Principle
 Record
assets at cost paid to
acquire them
 Continue
to value assets at
historical cost until sold
 More
objective than market
value
34
Going Concern
 Assume
business will
continue indefinitely
into the foreseeable
future
 Justifies
use of
historical cost
35
Monetary Unit
 How
we measure (e.g. U.S. dollar,
Japanese yen, Mexican peso, etc.)
 Assumes economic measure is
relatively stable; no adjustment
for inflation made in financial
statements
36
Time Period Assumption
 Assumes
it is possible to break up an entity’s
earnings in discrete time periods (a month,
quarter, year)
 Necessary to provide users with financial
results on a timely basis
 Requires use of estimates
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
37
Where Accountants Work
 Private
Business
 Nonprofit
 Public
Organizations
Accounting
–
audit
–
tax
–
management consulting
 Educational
Institutions
38
End of Chapter 1
39