Chapter 2 Investing and Financing Decisions and the Balance Sheet Zining Li ACCT 2301 FALL 2009 Cox School of Business, SMU ACCT 2301 Zining Li Cox, SMU

Chapter 2Investing and Financing Decisions and the Balance Sheet

Zining LiACCT 2301 FALL 2009

Cox School of Business, SMU

ACCT 2301Zining Li

Cox, SMUFall 2009

Acct 2301 Li Fall 09 2

What do we hope to learn

Characteristics of Financial Accounting Information

How does a company record business transactions (Transactional Analysis)

How does a company keep track of accounting records


Accounting – Who Sets the Rules?

Securities and Exchange Commission (SEC) Legal authority to set accounting rules for publicly traded

companies Delegated responsibility to the accounting profession

Financial Accounting Standards Board (FASB) Currently the standards setting body GAAP


Qualitative Characteristics of Financial Accounting Information Relevant

Specific / Timely Reliable

Representational faithfulness Verifiable

Comparable For same company Across different company

Consistent Same rules over time


Elements Assets: economic resources that are measurable;

owned or controlled by the company that will bring future benefits

Liabilities: economic obligations Stockholders’ equity (contributed capital +

retained earnings) Revenues: inflow of assets or settlement of liabilities from

on-going business

Expenses: decreases (increases) in assets (liabilities) from on-going business

Gains (Losses): from peripheral activities


Assumptions

Separate-entity assumption Unit-of-measure Continuity (going-concern) Time period


Principles

Historical Cost (the Balance Sheet) Revenue Recognition (the Income

Statement) Matching(the Income Statement) Full disclosure


Constraints

Cost benefit Materiality Conservatism Industry practice


How does a Company Record Business Transactions? (1)

Definition of Transaction Economic events that impact a business entity

External v.s. Internal NOT all economic events are reflected in

financial statements!


How does a Company Record Business Transactions? (2)

Let’s start with A= L + SE Duality of Effects

Each transaction affects at least two items (accounts)

The accounting equation always remains in balance after each transaction


Determining the Financial Statement Effects of Following Transactions

• Received investment of $24,000 cash by organizers and distributed stock to them

• Purchased $8,000 of equipment, paying $1,000 in cash and signing a note for the rest

• Loaned $500 to an employee who signed a note• Borrowed $7,000 cash from a bank by signing a

note• Purchased $15,000 of land; paid $4,000 in cash

and signed a mortgage note for the balance


Event Assets = Liabilities + Stockholders’ Equity

a. 1)Cash (F) +24,000 1)Contri. capital

+24,000

b. 2)Equipment

2)Cash (I)

+8,000

–1,000

2)Notes payable

+7,000

c. 3)Note receivable

3)Cash (I)

+500

–500

d. 4)Cash (F) +7,000 4)Notes payable

+7,000

e. 5)Land

5)Cash (I)

+15,000

–4,000

5)Mortgage note payable

+11,000

Assets = Liabilities + Stockholders’ Equity $49,000 $25,000 $24,000


Debits, Credits and T-accounts?

T-account: We can use a “T” to represent an account Debit (Dr)

Means the left side of an account Numbers put on the left side of an account are debits

Credit (Cr) Means the right side of an account Numbers put on the right side of an account are credits

What do we mean when we say “to credit (debit) an account”?


Debits, Credits, &Accounting Equation

Assets = Liabilities + Shareholders’ Equity

+Dr.

-Dr.

+Cr.

-Cr.

+Cr.

-Dr.

(Contr. Cap. + R/E)


Record Journal Entries

Information recorded in a journal entry: Date of transaction Accounts affected Dollar amounts of debits and credits A brief explanation of the transaction (can be

skipped for our purposes) Remember:

Assets = Liabilities + Owner’s Equity Debits = Credits

In every journal entry there are equal dollar amounts of debits and credits.


Received investment of $24,000 cash by organizers and distributed stock to them

Transaction Account Titles Debits Credits

#1 Dr. Cash 24,000

Cr. Contributed Capital 24,000


Purchased $8,000 of equipment, paying $1,000 in cash and signing a note for the rest


#2 Dr. Equipment 8,000

Cr. Notes Payable Cr. Cash

7,0001,000


Loaned $500 to an employee who signed a note


#3 Dr. Notes Receivable 500

Cr. Cash 500


Borrowed $7,000 cash from a bank by signing a note


#4 Dr. Cash 7,000

Cr. Notes Payable 7,000


Purchased $15,000 of land; paid $4,000 in cash and signed a mortgage note for the balance


#5 Dr. Land 15,000

Cr. Mortgage notes payable

Cr. Cash 11,000

4,000


T-account

Cash Notes Receivable

0 0

24,000 500

1,000 500

500

7,000 4,000

25,500


Land Equipment

0 0

15,000 8,000

15,000 8,000


Notes PayableMortgage Notes

Payable

0 0

7,000 11,000

7,000 11,000

14,000


Contributed Capital

0

24,000

24,000


Record Transactions: Summary

To record a transaction, Identify items (accounts) that are affected Determine the direction of impact on each account

(increase or decrease) Verify that the accounting equation (A=L+SE) remains

in balance

Example To start, focus on investing and financing activities


How is the Cash Flow Statement affected by Investing and Financing Activities?

Investing Cash Flows Outflows: cash paid for acquisition of long-term assets Inflows: cash proceeds from sale of long-term assets

Financing Cash Flows Inflows: cash received from issues of common stock

and long-term debts Outflows: cash paid directly related to issues of

common stock and long-term debts. E.g. retirement of long-term debts, repurchase of common stock, and cash dividend

Documents

Chapter 2 Investing and Financing Decisions and the Balance Sheet Zining Li ACCT 2301 FALL 2009 Cox School of Business, SMU ACCT 2301 Zining Li Cox, SMU