Chapter 1 Accounting Information Lecture Video PDF

**PART A: Accounting as a Measurement/Communication Process** Who uses Accounting Information? Purpose of Accounting: measure the activities of a company and communicate it to others. BUSINESS ACTIVITIES TO MEASURE Financing -creditors -owners Investing -Long term Assets Operating Primary...

**PART A: Accounting as a Measurement/Communication Process** Who uses Accounting Information? Purpose of Accounting: measure the activities of a company and communicate it to others. BUSINESS ACTIVITIES TO MEASURE Financing -creditors -owners Investing -Long term Assets Operating Primary operations of the company -Revenue -Expenses Forms of Business Organizations -Sole proprietorship -Partnerships -Corporations COMMUNICATING THROUGH FINANCIAL STATEMENTS **The Financial Statements** 1\. Income statement (IS) 2\. Statement of Stockholders' Equity (SSE) 3\. Balance sheet (BS) 4\. Statement of Cash Flows (SCF) Financial statements **summarize** business activities. Financial Statement Heading +-----------------------------------------------------------------------+ | NAME OF ENTITY | | | | NAME of FINANCIAL STATEMENT | | | | DATE OF FINANCIAL STATEMENT AND PERIOD IT COVERS | | | | UNIT OF MEASURE | +-----------------------------------------------------------------------+ **The Income Statement (IS)** Example of a heading for an income statement ============================================ A, Inc. Income Statement **For the Year Ended** June 30, 20XB (in thousands of dollars) "Period Ending" ELEMENTS OF THE INCOME STATEMENT ================================ **Revenues (R)** Sales Service revenue **Expenses (E)** Salaries expense Rent expense **Net Income (NI)** The income statement equation is: (Revenue -- Expenses = Net Income or Net Loss) R -- E = NI ***Practice*** Rent expense \$4,500 --------------------------- --------- Wage expense 2,650 Painting supplies expense 1,950 Painting revenue 12,000 Supplies used 200 Insurance expense 700 ----------------------- ---- Determine Net income: \$ ----------------------- ---- **\ The Statement of Stockholders' Equity (SSE)** The SSE shows increases and decreases to stockholders' equity accounts over a period of time. Stockholders' Equity (*SE*) results from two basic categories: +-----------------------+-----------------------+-----------------------+ | **STOCKHOLDERS' | | | | EQUITY** | | | +=======================+=======================+=======================+ | **Common Stock** | \+ | **Retained Earnings** | +-----------------------+-----------------------+-----------------------+ | Beginning Common | | Beginning Retained | | Stock | | Earnings | | | | | | \+ [Issuance of | | \+ Net Income or -- | | common | | (Net Loss) | | stock] | | | | | | [- Dividends | | = Ending Common Stock | | Declared] | | | | | | | | = Ending Retained | | | | Earnings | +-----------------------+-----------------------+-----------------------+ ***Practice*** At the beginning of the year (January 1), Bennett Drilling has \$10,000 of common stock outstanding and retained earnings of \$7,200. During the year, Bennett reports net income of \$7,500 and pays dividends of \$2,200. In addition, Bennett issues additional common stock for \$7,000. (What is ending Common Stock, ending Retained Earnings and ending Stockholders' Equity?) +-----------------+-----------------+-----------------+-----------------+ | Bennett | | | | | Drilling | | | | | | | | | | Statement of | | | | | Stockholders' | | | | | Equity | | | | | | | | | | For the year | | | | | ended December | | | | | 31, 20XC | | | | +=================+=================+=================+=================+ | | **Common | **Retained | **Total | | | Stock** | Earnings** | Stockholders' | | | | | Equity** | +-----------------+-----------------+-----------------+-----------------+ | Beginning | \$ | \$ | \$ | | balance | | | | +-----------------+-----------------+-----------------+-----------------+ | +issuance of | | | | | common stock | | | | +-----------------+-----------------+-----------------+-----------------+ | \+ net income | | | | | (net loss) | | | | +-----------------+-----------------+-----------------+-----------------+ | \- dividends | | | | +-----------------+-----------------+-----------------+-----------------+ | Ending Balance | \$ | \$ | \$ | +-----------------+-----------------+-----------------+-----------------+ **\ ** **The Balance Sheet (BS) (aka, The statement of Financial Position)** *Example of a heading for a balance sheet* ========================================== A, Inc. Balance Sheet **At** June 30, 20XB (*in thousands of dollars*) **"AT"** ======== ELEMENTS OF THE BALANCE SHEET ============================= **Assets (A)** -Owned by the company as a result of past transactions. \- Economic resources expected to provide future benefits *to the company* *-Examples: Cash, Equipment, Buildings* **Liabilities (L)** *-Owed* by the company as a result of past transactions. -Future claims on economic resources (either assets or services) of the company. -Examples: Notes payable, Salaries payable **Stockholders' Equity (SE)** Stockholders' Equity results from two basic categories: **THE ACCOUNTING EQUATION** (**Balance Sheet Equation)** **A = L + SE** **CS + RE** Assets = Liabilities **+** Stockholders' Equity Economic resources = Sources of financing What you have = Where it came from or A - L = SE Net assets = Owners' equity or Owners' claim to resources ***\ Practice:*** ***Smith Construction has the following account balances at the end of the year:*** ***Equipment*** ***\$21,000*** ------------------------- ---------------- ***Accounts payable*** ***2,100*** ***Common stock*** ***10,000*** ***Land*** ***13,000*** ***Supplies*** ***100*** ***Long-term debt*** ***15,000*** ***Cash*** ***5,000*** ***Retained earnings*** ***?*** ***Determine Retained earnings, Total assets, Total Liabilities and Total Stockholders' Equity by preparing the balance sheet at the end of the year.*** +-----------------+-----------------+-----------------+-----------------+ | Smith | | | | | Construction | | | | | | | | | | Balance Sheet | | | | | | | | | | At December 31, | | | | | 20XC | | | | +=================+=================+=================+=================+ | **Assets** | | **Liabilities** | | +-----------------+-----------------+-----------------+-----------------+ | | \$ | | \$ | +-----------------+-----------------+-----------------+-----------------+ | | | | | +-----------------+-----------------+-----------------+-----------------+ | | | Total | \$ | | | | liabilities | | +-----------------+-----------------+-----------------+-----------------+ | | | **Stockholders\ | | | | | ' | | | | | Equity** | | +-----------------+-----------------+-----------------+-----------------+ | | | | \$ | +-----------------+-----------------+-----------------+-----------------+ | | | | | +-----------------+-----------------+-----------------+-----------------+ | | | Total | | | | | stockholders' | | | | | equity | | +-----------------+-----------------+-----------------+-----------------+ | Total assets | \$ | Total | \$ | | | | liabilities and | | | | | stockholders\' | | | | | equity | | +-----------------+-----------------+-----------------+-----------------+ **The Statement of Cash Flows** **Categories:** OPERATING ACTIVITIES INVESTING ACTIVITIES FINANCING ACTIVITIES Combining the three categories of net cash inflows and outflows indicates **the change in CASH** during the period. ***Practice:*** Lincoln Trade has the following cash transactions for the period. Identify as (O, I, F) --------------------------------------------------- ---------- ----------------------- Cash received from sale of products to customers \$35,000 Cash received from the bank for long-term loan 40,000 Cash paid to purchase factory equipment (45,000) Cash paid to merchandise suppliers (11,000) Cash received from the sale of an idle warehouse 12,000 Cash paid to workers (23,000) Cash paid for advertisement (3,000) Cash received for providing services to customers 25,000 Cash paid for dividends to stockholders (5,000) Beginning cash balance was **\$4,000**. Prepare the Statement of Cash Flows for Lincoln Trade. +-----------------------+-----------------------+-----------------------+ | Lincoln Trade | | | | | | | | Statement of Cash | | | | Flows | | | | | | | | For the year ending | | | | December 31, 20XC | | | +=======================+=======================+=======================+ | **Cash Flows from | | | | Operating | | | | Activities** | | | +-----------------------+-----------------------+-----------------------+ | Cash inflows: | | | +-----------------------+-----------------------+-----------------------+ | | \$ | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | Cash outflows: | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | Net cash flows from | \$ | | | operating activities | | | +-----------------------+-----------------------+-----------------------+ | **Cash Flows from | | | | Investing | | | | Activities** | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | Net cash flows from | | | | investing activities | | | +-----------------------+-----------------------+-----------------------+ | **Cash Flows from | | | | Financing | | | | Activities** | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | | | | +-----------------------+-----------------------+-----------------------+ | Net cash flows from | | | | financing activities | | | +-----------------------+-----------------------+-----------------------+ | Net increase in cash | | | +-----------------------+-----------------------+-----------------------+ | Cash at the beginning | | | | of the year | | | +-----------------------+-----------------------+-----------------------+ | Cash at the end of | | \$ | | the year | | | +-----------------------+-----------------------+-----------------------+ ***\ THE LINKS AMONG FINANCIAL STATEMENTS*** +-----------+-----------+-----------+-----------+-----------+-----------+ | **Income | **Stateme | **Balance | | | | | Statement | nt | Sheet** | | | | | ** | of** | | | | | | | | | | | | | | **Stockho | | | | | | | lders' | | | | | | | Equity** | | | | | +===========+===========+===========+===========+===========+===========+ | R | BCS | BRE | A = | L + | SE | +-----------+-----------+-----------+-----------+-----------+-----------+ | [-E]{.und | [+issuanc | **+NI** | | CS+**RE** | | | erline} | e]{.under | | | | | | | line} | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | **NI** | | [-DIV]{.u | | | | | | | nderline} | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | | ECS | **ERE** | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ ***Practice:*** ***A company receives cash for services performed. How does this transaction affect the financial statements?*** ***What happens to the Income Statement?*** ***What happens to the Statement of Stockholders' Equity?*** ***What happens to the Balance Sheet?*** ***What happens to the Statement of Cash Flows?*** ***\ *** ***Practice: Solve for the missing amounts:*** +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Income | ***Statem | | | | | | Statement | ent | | | | | | *** | of | | | | | | | Stockhold | | | | | | | ers' | | | | | | | Equity*** | | | | | +===========+===========+===========+===========+===========+===========+ | ***Revenu | ***\$34,0 | | ***Common | ***Retain | ***Stockh | | es*** | 00*** | | stock*** | ed | olders'** | | | | | | earnings* | * | | | | | | ** | | | | | | | | ***Equity | | | | | | | *** | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Expens | | ***Beginn | ***\$9,00 | ***\$6,00 | ***\$15,0 | | es:*** | | ing*** | 0*** | 0*** | 00*** | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Salari | ***(a)*** | ***Issuan | ***1,000* | | ***1,000* | | es*** | | ce*** | ** | | ** | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Admini | ***5,000* | ***Net | | ***(d)*** | ***(d)*** | | strative* | ** | income*** | | | | | ** | | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Utilit | ***[3,000 | ***Divide | ***\_\_\_ | ***[(2,00 | ***[(2,00 | | ies*** | ]{.underl | nds*** | \_\_\_*** | 0)]{.unde | 0)]{.unde | | | ine}*** | | | rline}*** | rline}*** | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Total | [ | ***Ending | ***\$10,0 | ***\$9,00 | ***\$19,0 | | expenses* | ***(b)*** | *** | 00*** | 0*** | 00*** | | ** | ]{.underl | | | | | | | ine} | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Net | ***(c)*** | | | | | | income*** | | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Balanc | | | | | | | e | | | | | | | Sheet*** | | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Assets | | ***Liabil | | | | | *** | | ities*** | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Cash** | ***\$3,00 | | ***Accoun | ***(e)*** | | | * | 0*** | | ts | | | | | | | payable** | | | | | | | * | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***A/R*** | ***5,500* | | ***Note | ***[41,00 | | | | ** | | payable** | 0]{.under | | | | | | * | line}*** | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Office | ***500*** | | ***Total | ***(f)*** | | | supplies* | | | Liabiliti | | | | ** | | | es*** | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Prepai | ***8,000* | | ***Stockh | | | | d | ** | | olders' | | | | rent*** | | | Equity*** | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Equipm | ***[45,00 | | ***Common | ***(g)*** | | | ent*** | 0]{.under | | stock*** | | | | | line}*** | | | | | +-----------+-----------+-----------+-----------+-----------+-----------+ | | | | ***Retain | [ | | | | | | ed | ***(h)*** | | | | | | earnings* | ]{.underl | | | | | | ** | ine} | | +-----------+-----------+-----------+-----------+-----------+-----------+ | | | | ***Total | [ | | | | | | Stockhold | ***(i)*** | | | | | | ers' | ]{.underl | | | | | | Equity*** | ine} | | +-----------+-----------+-----------+-----------+-----------+-----------+ | ***Total | ***\$62,0 | | ***Total | ***(j)*** | | | assets*** | 00*** | | Liabiliti | | | | | | | es | | | | | | | and SE*** | | | +-----------+-----------+-----------+-----------+-----------+-----------+ ***\ Other Information Reported to Outsiders*** **Management & Discussion Analysis (MD&A)** **Management is responsible for the financial statements** **The Notes** There are three basic types of notes. ***PART B: FINANCIAL ACCOUNTING INFORMATION*** ***Importance of Financial Accounting Information*** ***Rules of Financial AccountingGenerally Accepted Accounting Principles (GAAP)*** ***Rule enforcers (and authority to make the rules)Securities and Exchange Commission (SEC)*** ***Rule makers (delegated by the SEC)Financial Accounting Standards Board (FASB)*** ***International Accounting Standards Board (IASB)*** **Financial Statement Responsibility** *[Management]* is responsible for the financial statements ***Role of the Auditorprovide a seal of approval*** ***Public Company Accounting Oversight Board (PCAOB)Audits the auditors*** **OBJECTIVES OF FINANCIAL ACCOUNTING** 1. Is **useful** to present and potential **investors** and **creditors** and other users in **making** rational investment, credit and similar **decisions**. 2. Helps decision makers predict **amounts**, **timing**, and **uncertainty** of future **cash flows**. 3. Provides info about **economic resources**, **claims** to those resources, and effects of transactions which causes **changes** in those resources and claims to them. **Primary objective**: provide useful information to investors and creditors in making decisions. **Part C: Careers in Accounting** ***APPENDIX*** ***THE CONCEPTUAL FRAMEWORK: Foundation for Developing Accounting Standards.*** **Qualitative Characteristics** Decision Usefulness Relevance -predictive value -confirmatory (feedback) value -materiality (significance) Faithful Representation (aka Reliability) \- completeness -neutral -freedom of error ENHANCING QUALITATIVE CHARACTERISTICS Comparable and Consistent Verifiable Timely Understandable Cost Constraint -Cost-benefit Industry practice ***UNDERLYING ASSUMPTIONS*** ***Economic Entity assumption ("Separate Entity")*** ***Monetary Unit assumption---currently we don't take inflation into consideration*** ***Periodicity assumption*** ***Going Concern assumption***