Chapter ppt 2
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Transcript of Chapter ppt 2
Chapter 2
From Scorekeeping to Financial Statements
Learning Objectives for Chapter 2
See syllabus
Financial Accounting Statements
Balance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date
Income Statement - reports the results of operations for a specific period of time
Retained Earnings Statement - reports the changes in retained earnings for a specific period of time
Statement of Cash Flows - reports the cash receipts and payments for a specific period of time
Brief Introduction to the Balance Sheet and Income Statement
Balance sheet – snapshot of a company’s financial position at a certain point in time.
Income statement – summarizes financial activity of a company for a certain period of time.
Relationship between the balance sheet and income statement
Basic Terms
Assets - resources owned by a business Liabilities - debts and obligations of the business - represents
claims of creditors on the assets of the business Common stock - stock representing the primary ownership interest
in a corporation
Practice With the Balance Sheet and Income Statement
Wiggler Company
Tuesday, June 21
Email – use your COB account. To find your account:• Go to the computer lab in the basement
• Log in under your ONID account and open Outlook
• Open a screen to send a new email, type your last name in the address space, then key ’Ctrl +k’
• A list of email addresses will appear, find your COB address Access to course materials folder
• Go to the computer lab in the basement and log in under your COB username and password. Passwords can be obtained in BX 204C, if you forgot yours or need one.
• Now, the URL \\cob-storage\classes\BA215wong can be used in the Explorer web browser
Debit and Credit Conventions and T-accounts
T-accounts are a convenient way to record transaction information and keep running totals of accounts.
Debits represent the left hand side of a T-account. Credits represent the right hand side of a T-account.
See Fig 2.2 of text
Balance Sheet Accts. Income Stmt. Accts.
↑ Assets | Liabilities ↑ ↑ Expenses | Revenues ↑
| Equity ↑
Recording Transactions
Note for every transaction:• $debits = $credits
For every transaction involving only balance sheet accounts: A = L + E
Balance sheet for Wiggler, up to transaction #5, using T-accounts for assistance.
The Trial Balance
A listing of all debit and credit balances as of the balance sheet date
Used to insure that debits = credits for recorded transactions Checks whether the accounting equation was maintained No assurance that transactions have been recorded properly
Trial Balance for Wiggler transactions #1 to #5
Put together a trial balance for these transactions.
Debit Credit
Cash $3,250
Inventory (worms) 220
Land & Farm 750
Accounts Payable $120
Note Payable 2,100
Common Stock 2,000
Total $4,220 $4,220
Balance Sheet: Classification and Some Common Accounts
The balance sheet classifies assets and liabilities according to whether they are short- or long-term.
Generally:• Short-term assets are those which will be consumed or
converted to cash in a year or less. All other assets are long-term.
• Short-term liabilities are those which will be paid in a year or less. All other liabilities are long-term.
Common balance sheet accounts – see sample balance sheet, and text pp. 54-58.
Income Statement
Classified income statement Definition of elements
• Revenues – resource inflows earned from the sale of products or services that are the main activities of the organization
• Expenses - resource outflows incurred in the sale of products or services that are the main activities of the organization
• Gains – similar to revenues, only from ancillary activities of the organization
• Losses – similar to expenses, only from ancillary activities of the organization
Table 2.3 From the Text Sample Income Statement: Operating Section
Net sales $2,500,000
Cost of goods sold 1,900,000
Gross margin 600,000
(Discussion of these three accounts on pp. 50-51)
Table 2.3 From the Text Sample Income Statement: Operating Section
Operating Expenses:
Selling expenses
Sales salaries $140,000
Advertising expenses 20,000 160,000
Administrative expenses
Office salaries 170,000
Rent 20,000
Depreciation 40,000 230,000
Total operating expenses 210,000
(Discussion of these accounts on p. 51)
Table 2.3 From the Text Sample Income Statement: Non-Operating Section* to end
Other income $20,000
Other expenses (interest) 35,000 55,000
Income before taxes 195,000
Income taxes 97,500
Net Income (Income after taxes) $97,500
* This is the section where gains and losses would also appear
(Discussion of these accounts on pp. 50-51)
Statement of Retained Earnings
Helps to link the balance sheet with the income statement.
Closes the results of the income statement (net income) to Retained Earnings
Accounts for dividends paid from Retained Earnings. Overview of the statement:
Beginning Retained Earnings
+ Net income (Net loss)
- Dividends paid or declared and payable
= Ending Retained Earnings
Homework
Finish recording the transactions in the Wiggler exercise
After recording the transactions• Make a trial balance, balance sheet, and income statement
for Wiggler
Wednesday, June 22
Web-based course materials access is now available Selected T/F and multiple choice questions from
Ch. 2
GAAP and Accrual-Based Accounting Consistency of accounting practices is achieved by
companies adhering to GAAP (Generally Accepted Accounting Principles)
Accrual-based accounting means that we recognize:• Revenues when earned, regardless of when the cash is
collected.• Revenues are generally earned when services or goods
are provided to customers.
• Expenses when incurred, regardless of when the cash is collected.• Expenses are generally incurred when services or goods
are provided by others.
Cash-based accounting vs. accrual-based accounting
Specific Instances of Accrual-Based Accounting
Inventory is not expensed as Cost of Good Sold until a sale is made.
Sales made on credit are recorded even though cash has not been collected from the customer.(Debit Accounts receivable, Credit Sales)
Wages expense can be recorded, even if cash has not yet been paid to employees.(Debit Wages Expense, Credit Wages Payable)
Accounting for Depreciation of Long Term Assets – General Concept
Depreciation is taken on assets over time in an attempt to match the expense to the time period that the assets help to generate revenues.
How to record the transaction:• Debit Depreciation Expense (Income Statement)
• Credit Accumulated Depreciation
Accounting for Depreciation of Long Term Assets – Example
A truck is purchased for $40,000 that has a 5 year life and will be depreciated using the straight line method.
At the end of each year for the next 5 years, $8,000 of depreciation expense is recognized ($8,000 / 5yrs)
Effect of this transaction:• Increase in Depreciation Expense (debit)
• Increase in Accumulated Depreciation, a ‘contra-asset’ (credit)
Accounting for Depreciation of Long Term Assets – Example
Impact on the balance sheet:Long-Term Assets
Equipment – Truck $40,000
Accumulated depreciation (8,000)
Equipment, net 32,000
Impact on the income statement:Depreciation Expense $8,000
Specific Items in Chapter 2 to Skip
Auditor’s report, p. 61 Any type of depreciation method other than straight
line, pp. 65-66 Deferred taxes, pp. 66-67