BMGT 220 Principles of Accounting I

Dr. Progyan BasuR.H. Smith School of

BusinessVan Munching Hall 4333Rpbasu@rhsmith.umd.edu

• Online Homework on WileyPLUS due every Friday at 8 am, starting February 1 – no deadline extensions will be provided

• Inclass Quizzes will be given every Friday (starting January 25) - based on the Schedule of Assignments

• There are no makeups for inclass quizzes to be given during your Friday discussion sections (see course syllabus for slack to accommodate classes that you may need to miss for reasons beyond your control)

• Exam Schedule: Exam 1 - Thursday, February 21 (7 pm to 8:15 pm)Exam 2 - Thursday, April 4 (7 pm to 8:15 pm)Final Exam - Tuesday, May 14(10:30 am to 12:30 pm)(refer to Syllabus for dates and times for alternate exams)

Classroom etiquette policy:You will be NOT be allowed to use your laptops/tablets/smartphones

during class.

Highlights from Course Syllabus:Highlights from Course Syllabus:Highlights from Course Syllabus:Highlights from Course Syllabus:

FALL 2012 Semester Grade Distribution in BMGT 220

Total Points (out of 1000) Grade % of Class % of class

970 and above A+ 3.08% Total As = 21.88%

Between 900 and 969 A 10.26%

Between 870 and 899 A- 8.55%

Between 850 and 869 B+ 7.35% Total Bs = 34.7%

Between 800 and 849 B 18.46%

Between 770 and 799 B- 8.89%

Between 750 and 769 C+ 6.67% Total Cs = 27.01%

Between 700 and 749 C 14.53%

Between 670 and 699 C- 5.81%

Between 650 and 669 D+ 4.27% Total Ds = 15.21%

Between 600 and 649 D 6.67%

Between 400 and 599 D- 4.27%

Below 400 F 1.2% F = 1.2%

FALL 2012 Semester Grade Distribution in BMGT 220

Accounting in Action

Financial Accounting, Seventh Edition

Chapter 1

Why do we study Accounting?Why do we study Accounting?Why do we study Accounting?Why do we study Accounting?An investment in GROUPON of $1,000 on November 4, 2011 (Price per share = $26.11)

Is worth $197.63 on January 24, 2013 (Price per share = $5.16)

Why did this happen??

7

In his introductory note to the company’s public-offering filing, founder

Andrew Mason wrote, “Life is too short to be a boring

company.”

A few Wall Street Journal headlines about GROUPON:A few Wall Street Journal headlines about GROUPON:A few Wall Street Journal headlines about GROUPON:A few Wall Street Journal headlines about GROUPON:Groupon Bows to Pressure

Yielding to SEC, Web Coupon Firm Removes Unusual Measure From IPO ReportThe Wall Street Journal, August 11, 2011)

The unusual measure, which the e-commerce had invented, paints a more robust picture of its performance. Removal of the measure was in response to pressure from the Securities and Exchange Commission, a person

familiar with the matter said.

More Trouble for Groupon IPO The Wall Street Journal, September 24, 2011

On Friday, Groupon said it would change what it books as revenue after discussions with the Securities and Exchange Commission. It will now only count as revenue its commission on sales, rather than the total value of an online coupon. Previously, when it sold a restaurant gift certificate for $10, for instance, it would book the full amount, even though a

portion went to the business owner

GROUPON Accounting Obscures Value of Goods Business The Wall Street Journal, August 15, 2012

Groupon aggregated the Goods revenue under “direct revenues,” a category which included revenue from other items such as movie tickets and travel vouchers. The company also didn’t disclose the cost of its Goods inventory and rolled the

cost of goods sold into its broad cost of revenue metric, moves that some said that will make it difficult to gauge how sustainable profits are from that business.

What do these numbers mean ? Where do they come from?What do these numbers mean ? Where do they come from?What do these numbers mean ? Where do they come from?What do these numbers mean ? Where do they come from?

Accounting in Action

Financial Accounting, Seventh Edition

Chapter 1

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

The purpose of accounting is to:

(1)(1) identifyidentify, recordrecord, and communicatecommunicate

the economic events of an

(2) organization to

(3) interested users.

Three Activities

What is Accounting?What is Accounting?What is Accounting?What is Accounting?

The accounting process involves all three activities.

Identifies / Analyzes

Identifies / Analyzes

Records (Bookkeeping)

Records (Bookkeeping)

Communicates (Financial

Statements)

Communicates (Financial

Statements)

RelevantRelevant

ReliableReliable

ComparableComparable

AccountingAccountingis a

system that

information

that is

to help users make better decisions.

to help users make better decisions.

Importance of AccountingImportance of AccountingImportance of AccountingImportance of Accounting

External Users

Financial Accounting provides external users with financial statements.

Internal Users

Managerial Accounting provides information needs for internal decision

makers.

Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information

SEC

Creditors

Investors

IRS

Customers

Labor Unions

Management

Human Resources

Finance

Marketing

Various users need financial information

Various users need financial information

The accounting profession has attempted to develop a set of standards that are generally accepted and universally practiced.

Financial Statements

Balance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Financial Statements

Balance SheetIncome StatementStatement of Owner’s EquityStatement of Cash FlowsNote Disclosure

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)

Generally Generally Accepted Accepted

Accounting Accounting Principles Principles

(GAAP)(GAAP)

The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accounting

S.E.C.S.E.C.

Securities and Exchange

Commission:Federal agency to ensure that investors are provided with full and fair

information on publicly traded

companies.

F.A.S.B. F.A.S.B.

Financial Accounting

Standards Board:Responsible for

setting accounting standards for all US

companies.

I.A.S.B. I.A.S.B.

International Accounting

Standards Board:Responsible for

issuing international

financial reporting standards (I.F.R.S.)

Who determines “Generally Accepted Accounting Principles”?Who determines “Generally Accepted Accounting Principles”?Who determines “Generally Accepted Accounting Principles”?Who determines “Generally Accepted Accounting Principles”?

Cost Principle:

Accounting information is based

on actual cost.

Measurement Principles of AccountingMeasurement Principles of AccountingMeasurement Principles of AccountingMeasurement Principles of Accounting

Fair Value Principle:

Indicates that Assets and Liabilities should

be reported at fair market value

Monetary Unit Assumption:

Accounting transactions can

ONLY be expressed in financial terms.

Assumptions of AccountingAssumptions of AccountingAssumptions of AccountingAssumptions of Accounting

Economic Entity Assumption:

Requires that a business be accounted

for separately from other businesses,

including its owner/s.

Sole Proprietorship

Sole Proprietorship

PartnershipPartnership CorporationCorporation

Forms of Business Entities based on OwnershipForms of Business Entities based on OwnershipForms of Business Entities based on OwnershipForms of Business Entities based on Ownership

Proprietorship Partnership Corporation

Owned by two or more persons.

Often retail and service-type businesses

Generally unlimited personal liability

Partnership agreement

Ownership divided into shares of stock

Separate legal entity organized under state corporation law

Limited liability

Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business Ownership

Generally owned by one person.

Often small service-type businesses

Owner receives any profits, suffers any losses, and is personally liable for all debts.

Knowledge Check # 1:

The Maximum Experience Company acquired a building for $500,000. Maximum Experience had an appraisal done, and found that the building was worth $575,000. The seller had paid $300,000 for the building 6 years ago. Which accounting principle/assumption would prescribe that Maximum Experience record the building on its records at $500,000?

1. Cost principle.

2. Fair Value principle.

3. Monetary Unit Assumption.

4. Economic Entity Assumption

Assets Liabilities & Equity

LiabilitiesLiabilitiesStockholders’

EquityStockholders’

EquityAssetsAssets = +

The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting Equation

Knowledge Check # 2:

A company has twice as much owners’ equity as it does liabilities. If total liabilities are $50,000, what amount of assets are owned by the company?

1. $ 50,000.2. $100,000.3. $150,000.4. $200,000.

LandLand

EquipmentEquipment

BuildingsBuildings

CashCash

VehiclesVehicles

Store SuppliesStore

Supplies

Notes Receivable

Notes Receivable

Accounts ReceivableAccounts

ReceivableResources owned or

controlled by a company

Resources owned or

controlled by a company

ASSETSASSETSASSETSASSETS

Taxes PayableTaxes

PayableWages

PayableWages

Payable

Notes PayableNotes

PayableAccounts Payable

Accounts Payable

Creditors’ claims on

assets

Creditors’ claims on

assets

LIABILITIESLIABILITIESLIABILITIESLIABILITIES

Owner’sclaim on

assets

Owner’sclaim on

assets

Contributed Capital

Contributed Capital

Retained Earnings

Retained Earnings

STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY

Knowledge Check # 3:

A company's balance sheet shows: Cash $22,000, Accounts Receivable $16,000, Office equipment $50,000, and Accounts

Payable $17,000. What is the amount of stockholders’ equity?

1. $ 29,000. 2. $ 71,000. 3. $ 88,000.4. $105,000.

Revenues are resources generated by a business through selling of products or providing services.

Expenses are the costs of generating revenues. They could be resources (such as, cash) that have been used up, or they could increase the liabilities for the business.

Dividends are the distribution of cash or other assets to stockholders. Dividends reduce retained earnings. However, dividends are not an expense.

Changes to Stockholders’ EquityChanges to Stockholders’ EquityChanges to Stockholders’ EquityChanges to Stockholders’ Equity

LiabilitiesLiabilities Stockholders’

Equity Stockholders’

EquityAssetsAssets = +

RevenuesRevenues ExpensesExpensesCommon

StockCommon

StockDividendsDividends

__++ __

Retained Earnings

Expanded Accounting EquationExpanded Accounting EquationExpanded Accounting EquationExpanded Accounting Equation

++

How does Stockholders’ Equity change during a year?How does Stockholders’ Equity change during a year?How does Stockholders’ Equity change during a year?How does Stockholders’ Equity change during a year?

Knowledge Check # 4:

Fran Company has beginning equity of $257,000, net income of $51,000, dividends of $40,000 and investments by owners in exchange for stock of $6,000. Its ending equity is:

1. $223,0002. $240,000.3. $268,000.4. $274,000.

Using The Accounting Equation to record transactionsUsing The Accounting Equation to record transactionsUsing The Accounting Equation to record transactionsUsing The Accounting Equation to record transactions

Transactions are a business’s economic events recorded by

accountants.

Generally, are exchanges that can be measured in monetary terms.

Not all economic events represent transactions (such as natural disasters).

Each transaction has a dual effect on the accounting equation.

The accounting equation must remain in balance after each transaction.

LiabilitiesLiabilities EquityEquityAssetsAssets = +10,000 - 5,000 ???

10,000 - 5,000 +15,000

1. On December 1, 2011, Scott invests $10,000 cash to start a management consulting business

(Scott Company).

Transaction Analysis Example 1Transaction Analysis Example 1Transaction Analysis Example 1Transaction Analysis Example 1

2. Scott Company purchased office supplies paying $1,000 cash.

Transaction Analysis Example 2Transaction Analysis Example 2Transaction Analysis Example 2Transaction Analysis Example 2

3. Scott Company purchased Supplies of $600 and Computer Equipment of $3,000 on account.

Transaction Analysis Example 3Transaction Analysis Example 3Transaction Analysis Example 3Transaction Analysis Example 3

4. Scott Company borrowed $4,000 from Bank of Maryland.

Transaction Analysis Example 4Transaction Analysis Example 4Transaction Analysis Example 4Transaction Analysis Example 4

5. During the month of December 2011 , Scott Company provided consulting services for $3,500. The company receives cash of $1,000, and bills the balance $2,500 to the customers.

Transaction Analysis Example 5Transaction Analysis Example 5Transaction Analysis Example 5Transaction Analysis Example 5

6. During the month of December 2011 , Scott Company paid cash of $800 for Rent, and $1,200 for Salaries to its only employee.

Transaction Analysis Example 6Transaction Analysis Example 6Transaction Analysis Example 6Transaction Analysis Example 6

7. During the month of December 2011 , Scott Company received a bill for $300 from the electric company, but decides to pay the bill at a later date.

Transaction Analysis Example 7Transaction Analysis Example 7Transaction Analysis Example 7Transaction Analysis Example 7

8. Scott Company received a check for $1,500 form a customer who was billed earlier.

Transaction Analysis Example 8Transaction Analysis Example 8Transaction Analysis Example 8Transaction Analysis Example 8

9. Scott Company paid $2,500 for the computer equipment that it had purchased in transaction (3).

Transaction Analysis Example 9Transaction Analysis Example 9Transaction Analysis Example 9Transaction Analysis Example 9

10. Scott Company paid a dividend of $500 to its owner/stockholder.

Transaction Analysis Example 10Transaction Analysis Example 10Transaction Analysis Example 10Transaction Analysis Example 10

Let’s prepare the Financial Statements reflecting the transactions we have recorded.

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

4. Statement of Cash Flows

1. Income Statement

2. Statement of Retained Earnings

3. Balance Sheet

4. Statement of Cash Flows

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Net income is the

difference between Revenues

and Expenses.

Net income is the

difference between Revenues

and Expenses.

The income statement describes a company’s revenues and expenses along with the resulting net income or loss

over a period of time due to earnings activities.

The income statement describes a company’s revenues and expenses along with the resulting net income or loss

over a period of time due to earnings activities.

Income StatementIncome StatementIncome StatementIncome Statement

Statement of Retained EarningsStatement of Retained EarningsStatement of Retained EarningsStatement of Retained Earnings

The Balance Sheet describes a company’s financial position at a

point in time.

The Balance Sheet describes a company’s financial position at a

point in time.

Balance SheetBalance SheetBalance SheetBalance Sheet

Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows

Knowledge Check # 5:A corporation purchased a $40,000 delivery truck by paying 4,000 cash and signing a $36,000 note payable. Immediately prior to this transaction the corporation had liabilities of $52,000, and owners’ equity $23,000. What is the total amount of the corporation’s assets

after this transaction has been recorded?

1. $115,0002. $111,0003. $ 79,0004. $ 71,000

Knowledge Check # 6:On January 1, 2012, Kroger company’s Stockholder’s Equity account had a balance of $23,500. During the year 2012, the company issued additional stock for $6,000, generated revenues of $92,200, and recorded expenses of $64,100. They also paid dividends to their shareholders. If the Stockholders’ Equity had a balance of $55,600 on December 31, 2012, determine the amount of dividends paid by Kroger Company during 2012.

1. $4,0002. $3,0003. $2,0004. $1,000

End of Chapter 1End of Chapter 1End of Chapter 1End of Chapter 1