ACG 2021 Financial Accounting
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Transcript of ACG 2021 Financial Accounting
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ACG 2021Financial 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– We’ve 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 and General Ledger where transactions are stored
– Financial Statements are the Outputs and represent SummarySummary Information
• 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 Business Information to Interested
Users• Individuals (Management)• Investors & Creditors• Taxing Authorities• Non-Profit Organizations
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Accounting (The Language of Business) Is...• The process of identifying, measuring, and
communicating economic information (via reports) to permit informed judgments and decisions 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 2021
Who 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 standard units 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 legal entity– 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 of
the partnership– Not a separate legal entity– 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 for
debts of the business– Is a separate legal entity– 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 & distinctdistinct from it’s 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 (actual actual cost)
– $’s that a willing buyer paid a willing seller– Not some point in the future
– The Going-Concern Principle• The Entity will not go Out-of-Business
– The Stable-Monetary-Unit Concept• the monetary unit’s ($’s) purchasing power is stable (ignores inflation)
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ACG 2021Financial Accounting
The Accounting Equation
Assets = Liabilities + Owners Equity
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The Accounting Equation
Assets = Liabilities + Owner’s Equity
EconomicResources
Claims againstEconomicResources
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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) be
given 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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Owner’s Equity
The owner’s claim on the entity’s assets• Capital (for Proprietorship or Partnership)• Stockholders’ equity (for Corporation)
• Share’s of Stock
• Net assets
Assets – liabilities = owner’s equity
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Stockholders’ Equity
• For a corporation, stockholders’ equity is divided into two main categories.– Paid in capital
• The amount that investors have given to the corporation
– In exchange for shares of stock
– Retained earnings• The amount of Earnings the company has either
earned (profit) or lost over time• The amount of dividends that have been paid to
investors
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The Accounting Equation Expanded
• 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 the business
• 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 and Expenses of an Organization and Dividends that have been paid– Revenues – Sales of Product or Services
• increases Retained Earnings from delivering goods or services to customers
– Measured by corresponding increase in Asset received as payment
– Expenses – goods or services Consumed Consumed from Revenue 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 Earnings
Revenues forthe period
–Expenses for
the period
=Net income(or Net loss)
for theperiod
Dividendsfor theperiod
Endingbalance ofretainedearnings
End ofthe period
Start ofthe periodBeginningbalance ofretainedearnings
+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 one accounting entity and another accounting entity:– Customers– Suppliers– Employees– Owners
• Each party GivesGives and Receives Receives something of valuevalue ($’s)
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Chapter 1
Exercise 1-4
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ACG 2021Financial 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 company’s financial positionposition at the end of a period?
Assets = Liabilities + Owner’s Equity
RankPlace
SituationStanding
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Balance Sheet
• Assets appear in order of Liquidity– Easily Turned into Cash
• Why?– So Creditors can quickly
ascertain if a company has enough “Cash” to pay back what is owed
– So Creditors can quickly ascertain what collateral a company has against possible loans that might be made
• Liabilities appear in order in which they will be paid– Within 1 year or less– Greater then 1 year
• Stockholders Equity shows the amount contributed by investors & the amount of Income retained by the company– Dividends are paid out of
this retained amount (but NOT with it)
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Income Statement
• Presents information about profitability• How well did the company perform during the period?
– Revenue – Amount paid or promised to paypromised to pay for goods or services of the firm, increase of assets
– Expenses – Costs of providing goods or services to the customer, 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 by the business
• Why did the company's retained earnings change during the year?
Beginning retained earnings+Net income or (-Net loss) - Dividends Ending 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 Amongthe Financial Statements
ABC CompanyIncome Statement –
Year Ended December 31, 2006Revenues $700,000Expenses 670,000Net income $ 30,000
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Relationships Amongthe Financial Statements
ABC CompanyStatement of Retained EarningsYear Ended December 31, 2006
Beginning retained earnings $180,000Net income 30,000Cash dividends (10,000)Ending retained earnings $200,000
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Relationships Amongthe Financial Statements
ABC CompanyBalance Sheet
December 31, 2006Assets
Cash $ 25,000All other assets 275,000Total assets $300,000
LiabilitiesTotal liabilities $120,000
Stockholders’ equityCommon stock 40,000Retained earnings 200,000Other equity (60,000)Total liabilities and stockholders’ equity $300,000
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Relationships Amongthe Financial Statements
ABC Company Statement of Cash Flows Year Ended December 31, 2006Net cash provided by operating activities$ 90,000Net cash used for investing activities (110,000)Net cash provided by financing activities 40,000Net increase in cash 20,000Beginning cash balance 5,000Ending cash balance $ 25,000