Financial Accounting, 5e Weygandt, Kieso, Kimmel Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles John Wiley & Sons, Inc

Financial Accounting, 5e Weygandt, Kieso, Kimmel

Financial Accounting, 5e Weygandt, Kieso, Kimmel

Prepared byKurt M. Hull, MBA CPA

California State University, Los Angeles

John Wiley & Sons, Inc.

What accounting is Monetary unit & economic

entity assumptions

Uses and users of accounting The accounting equation

Ethics as a fundamental business concept

How business transactions affect the accounting equation

GAAP Basic financial statements

CHAPTER 1

ACCOUNTING MATTERS!

CHAPTER 1

ACCOUNTING MATTERS!

STUDY OBJECTIVES

After studying this chapter, you should understand:

Accounting is an information system that

identifies, records, and communicates

the economic events (transactions)

of an organization to interested users.

STUDY OBJECTIVE 1

WHAT IS ACCOUNTING?STUDY OBJECTIVE 1

WHAT IS ACCOUNTING?

Identification

Select economic events

(transactions)

Recording

Record, classify and summarize

Accounting Reports

SOFTBYTEAnnual Report

Prepare accountingreports

Analyze and interpretfor users

Communication

THE ACCOUNTING PROCESS THE ACCOUNTING PROCESS

STUDY OBJECTIVE 2

USERS AND USES OF ACCOUNTINGSTUDY OBJECTIVE 2

USERS AND USES OF ACCOUNTING

Marketing managersProduction supervisors

Finance directorsCompany officers

InvestorsCreditors

Tax authoritiesRegulatory agencies

CustomersLabor unions

Internal Users

External Users

QUESTIONS ASKED BY INTERNAL USERS

Is cash sufficient to pay bills?

What is the cost of manufacturing each unit of product?

Can we afford to give employee pay raises this year?

Which product line is the most profitable?

Is the company earning satisfactory income?

Will the company be able to pay its debts as they come due?

How does the company compare in size and profitability with its competitors? What do we

do if they catch us?

QUESTIONS ASKED BY INTERNAL USERS

STUDY OBJECTIVE 3ETHICS: A FUNDAMENTAL BUSINESS CONCEPT


ETHICS: A set of standards by

which one’s actions are deemed right or wrong,

honest or dishonest.


Steps for solving an ethical dilemma:

1. Recognize an ethical situation and the issues involved.

2. Identify the principal elements of the situation

3. Identify alternatives: weigh the impact on stakeholders

STUDY OBJECTIVE 4

GAAP(Generally Accepted Accounting Principles)

STUDY OBJECTIVE 4

GAAP(Generally Accepted Accounting Principles)

What is GAAP?

A set of standards generally accepted and universally practiced by accountants

1. Indicates how economic events are reported

2. Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)

STUDY OBJECTIVE 5

BASIC ACCOUNTING ASSUMPTIONSSTUDY OBJECTIVE 5

BASIC ACCOUNTING ASSUMPTIONS

MONETARY UNIT ASSUMPTION

Only transaction datathat can be expressed

in terms of moneyis included in the

accounting records.

The unit of measure (the dollar in the USA)is assumed to remain

constant in value

ECONOMIC ENTITY ASSUMPTION

An economic entity includes any organization

or unit in society.

All activities of an entity are kept separate

from the activitiesof its owners and

other economic entities.

BUSINESS ENTERPRISESBUSINESS ENTERPRISES

A business owned by one person is generally a proprietorship.

A business owned by two or more persons associated as partners is a partnership.

A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation.

STUDY OBJECTIVE 6THE BASIC ACCOUNTING EQUATION

STUDY OBJECTIVE 6THE BASIC ACCOUNTING EQUATION

Assets Assets LiabilitiesLiabilities Stockholders’ Equity

Stockholders’ Equity

= +

resources owned bya business

claimsagainstthose assets

owners’ residual claim on

total assets

REVIEW QUESTIONTHE BASIC ACCOUNTING EQUATION

REVIEW QUESTIONTHE BASIC ACCOUNTING EQUATION

As of December 31, 2005, Tetrick Company has assets of $3,500 and stockholders’

equity of $2,000. What are the liabilities for Tetrick Company as of December 31, 2005?

Answer: $1,500Assets – Liabilities = Stockholders’ Equity

$3,500 = Liabilities + $2,000Liabilities = $1,500

Stockholders’ equity is equal to total assets minus total liabilities. It is also referred to as residual equity. There are two general categories of stockholders’ equity:

STOCKHOLDERS’ EQUITY STOCKHOLDERS’ EQUITY

PAID-IN CAPITALand

RETAINED EARNINGS

PAID-IN CAPITALPAID-IN CAPITAL

Paid in Capital represents the total amount invested by stockholders in a corporation.

Stockholders invest cash or other assets in exchange for common or preferred stock.

Retained earnings represents cumulative profits (or losses) retained in the business over time.

Three items make up the balance in retained earnings:

RETAINED EARNINGSRETAINED EARNINGS

REVENUES EXPENSES DIVIDENDS

REVENUESREVENUES

Revenues are the gross increases in stockholders’ equity from engaging in business activities entered into for the purpose of earning income.

Revenues result from sales of merchandise, performance of services, rental of property, or lending of money.

Revenues usually result in an increase in an asset.

EXPENSES EXPENSES

Expenses are the decreases in stockholders’ equity that result from operating the business.

They are the cost of assets consumed or services used in the process of earning revenue.

Examples are: utility expense, rent expense, supplies expense, tax expense, insurance expense, depreciation expense.

DIVIDENDS DIVIDENDS

When a company is successful, it generates Net Income.

Dividends: the distribution of cash or other assets to stockholders that are available as a result of Net Income.

Dividends are NOT considered an expense of the corporation.

INCREASES & DECREASES

IN STOCKHOLDERS’ EQUITY

INCREASES & DECREASES

IN STOCKHOLDERS’ EQUITY

Investments by stockholders

Revenues

Stockholders’ Equity

Dividends to stockholders

Expenses

Increases Decreases

REVIEW QUESTION

STOCKHOLDERS’ EQUITY

REVIEW QUESTION

STOCKHOLDERS’ EQUITY

Rebecca Sherrick, Inc., had a stockholders’ equity balance of $164,000 at the beginning of the period. At the end of

the period, the stockholders’ equity balance was $198,000.

Assuming no additional investment or distributionsDuring the period, what is the net income for the period?

Beginning balance $164,000

Add: investments 0

net income ($198,000-$164,000) $34,000

Less: dividends 0

Ending balance $198,000

STUDY OBJECTIVE 7HOW BUSINESS TRANSACTIONS

AFFECT THE ACCOUNTING EQUATION

STUDY OBJECTIVE 7HOW BUSINESS TRANSACTIONS

AFFECT THE ACCOUNTING EQUATION

• Every transaction must have a dual effect on the accounting equation. Thus, if an asset is increased, there must be a corresponding:

1. Decrease in another asset, or

2. Increase in a liability, or

3. Increase in stockholders’ equity

TRANSACTION IDENTIFICATION PROCESSTRANSACTION IDENTIFICATION PROCESS

Answer telephone

Purchase computer

Pay rent

Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed?Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed?

Yes No Yes

RecordDon’t

RecordRecord

TRANSACTION ANALYSIS TRANSACTION 1


There is an increase in the asset cash, $15,000, and an equal increase in the equity common stock.

There is an increase in the asset cash, $15,000, and an equal increase in the equity common stock.

Ray and Barbara Neal open Softbyte, Inc., a programming company by investing $15,000 in exchange for common stock.

Assets = Liabilities + Stockholders Equity

Common Cash Stock

+15000 +15000



Cash is decreased $7,000, and the asset Equipment is increased $7,000. After transaction #2, total assets =total liabilities + equity.

Cash is decreased $7,000, and the asset Equipment is increased $7,000. After transaction #2, total assets =total liabilities + equity.

Assets = Liabilities + Stockholders’ Equity

Accounts Common Cash + Supplies + Equipment = Payable + Stock Old Bal. $15,000 $15,000 (2) -7000 +7000 New Bal. $8,000 + + $7,000 = + $15,000 $15,000 $15,000

Softbyte purchases computer equipment for $7,000 cashSoftbyte purchases computer equipment for $7,000 cash



The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount.

The asset Supplies is increased $1,600, and the liability Accounts Payable is increased by the same amount.

Assets = Liabilities + Stockholders’ Equity

Accounts Common Cash + Supplies + Equipment = Payable + Stock

Old Bal.

$8,000 $7,000 $15,000

(3) +1600 +1600 New Bal.

$8,000 + $1,600 + $7,000 = $1,600 + $15,000

$16,600 $16,600

Softbyte purchases for $1,600 of supplies from Acme Supply. The supplies will last several months. Softbyte will pay the bill next month. Softbyte purchases for $1,600 of supplies from Acme Supply. The supplies will last several months. Softbyte will pay the bill next month.



Cash is increased $1,200, and retained earnings is increased $1,200. (Retained earnings is indirectly increased because revenue is increased).

Cash is increased $1,200, and retained earnings is increased $1,200. (Retained earnings is indirectly increased because revenue is increased).

Assets = Liabilities + Stockholders EquityAccounts Common

Cash + Supplies + Equipment = Payable + StockOld Bal. $8,000 $1,600 $7,000 $1,600 $15,000

New Bal. $9,200 + $1,600 + $7,000 = $1,600 + $16,200

$17,800 $17,800(4) +1,200 +1,200

Softbyte receives $1,200 cash from customers, for providing programming services.

Retained Earnings

STUDY OBJECTIVE 8BASIC FINANCIAL STATEMENTS

STUDY OBJECTIVE 8BASIC FINANCIAL STATEMENTS

Balance Sheet

Income Statement

Statement ofCash Flows

Statement of Stockholders’ Equity

After all transactions for the period are recorded, financial data is summarized (Illustration 1-8), and that summary

data is used to generate the basic financial statements

SOFTBYTE, INC.

Income Statement

For the Month Ended September 30, 2006

Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900

Rent expense 600 Advertising expense 250

Utilities expense 200

Total expenses 1,950

Net income

2,750

Net income of $2,750 will be added to retained earnings. Net income of $2,750 will be added to retained earnings.

FINANCIAL STATEMENTSFINANCIAL STATEMENTS

SOFTBYTE, INC.

Statement of Retained Earnings


Retained earnings, September 1 $ –0– Add: Net income 2,750 2,750 Less: Dividends 1,300 Retained earnings, September 30 $ 1450


Dividends of $1,300 is deducted from retained earnings. The net change in retained earnings for the period is $1,450.Dividends of $1,300 is deducted from retained earnings. The net change in retained earnings for the period is $1,450.

Cash of $8,050 will be shown in the statement of cash flows. Cash of $8,050 will be shown in the statement of cash flows.

SOFTBYTE, INC.

Balance Sheet

September 30, 2006

Assets Cash $ 8,050 Accounts receivable 1,400 Supplies 1,600 Equipment 7,000 Total assets $ 18,050

Liabilities and Owner’s Equity Liabilities Accounts payable $ 1,600 Stockholders’ Equity Common Stock $15,000 Retained Earnings $1,450 16,450 Total liabilities and owner’s equity $ 18,050


SOFTBYTE, INC.

Statement of Cash Flows


Cash flows from operating activities Cash receipts from revenues $ 3,300 Cash payments for expenses (1,950) Net cash provided by operating activities 1,350 Cash flows from investing activities Purchase of equipment (7,000) Cash flows from financing activities Sale of common stock $ 15,000 Payment of cash dividends (1,300) Net cash provided by financing activities 13,700 Net increase in cash 8,050 Cash at the beginning of the period –0– Cash at the end of the period

$ 8,050

Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-8).Cash of $8,050 on the balance sheet and statement of cash flows is shown as the final total of the cash column of the Summary of Transactions (Illustration 1-8).

FINANCIAL STATEMENTS

COPYRIGHT

Copyright © 2006 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

CHAPTER 1 ACCOUNTING IN ACTION

Documents

Financial Accounting, 5e Weygandt, Kieso, Kimmel Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles John Wiley & Sons, Inc