Unit 1 - Chapter 1 & 2 Finance & Accounting (PDF)

Finance & Accounting Accounting Information - Basic Financial Statements Chapter 1 + 2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education....

Finance & Accounting Accounting Information - Basic Financial Statements Chapter 1 + 2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-1 2-2  Attendance rules — We start on time ! — Not allowed to eat/drink during sessions on campus ! — Mobile phone - please mute ! — Please be prepared for questions….and discussion ! — Exam: presentations alone will not be sufficient ! 3 2-3  Accounting Information for Decision Making Chapter 1 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-4  What is Accounting ? Public Perception: Source: Pathway Commission, American Accounting Association / AICPA, Pathways Vision Model, 2013. 5 2-5  What is Accounting ? Our understanding: Source: Pathway Commission, American Accounting Association / AICPA, Pathways Vision Model, 2013. 6 2-6  The Accounting Process Accounting links decision makers with economic Accounting Economic activities ¾ and Information Activities with the results of their decisions. Reported Decision Results of Actions Actions (decisions) Makers (decisions) 2-7 Types of Accounting Information Financial Tax Management 2-8 Accounting Systems An accounting system consists of the personnel, procedures, technology, and records used by an organization to develop accounting information and to communicate this information to decision makers. 2-9  Characteristics of Externally Reported Information A Means to an End Usefulness Broader than Enhanced via Financial Explanation Statements Based on General- Purpose Historical in Assumption Nature Results from Inexact and Approximate Measures 2-10  Owners Typical Board of Directors Simple Organization Chief Executive Officer Chart (CEO) Business V.P. V.P. Chief V.P Unit Human Information Financial Ethics Managers Resources Services Officer (CFO) Plant Plant Managers Managers Controller Treasurer Plant Plant Accountants Accountants 2-11 1-11  Basic Financial Statements Chapter 2 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2-12  Forms of Business Organization Sole Proprietorships Partnerships Corporations 2-13  Reporting Ownership Equity in the Statement of Financial Position Owner's equity: Sole Proprietorships Mic ha e l Mc Brya n, Ca pita l $ 80,800 Partners' equity: Michael McBryan, Capital $ 40,400 Partnerships Rebecca McBryan, Capital 40,400 Total partners' equity $ 80,800 Owners' equity: Corporations Capital Stock $ 80,000 Retained Earnings 800 Total stockholders' equity $ 80,800 2-14  Introduction to Financial Statements Balance Sheet Three primary Income Statement financial Statement of Cash Flows statements. We will use a corporation to describe these statements. 2-15  Introduction to Financial Statements Balance Sheet Describes where the Income Statement enterprise stands at a Statement of Cash Flows specific date. 2-16  Introduction to Financial Statements Balance Sheet Income Statement Depicts the revenue and Statement of Cash Flows expenses for a designated period of time. 2-17  Introduction to Financial Statements Balance Sheet Income Statement Statement of Cash Flows Depicts the ways cash has changed during a designated period of time. 2-18  A Starting Point: Statement of Financial Position VAGABOND TRAVEL AGENCY STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2015 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes Receivable 10,000 Notes Payable $ 41,000 Accounts Receivable 60,500 Accounts Payable 36,000 Supplies 2,000 Salaries Payable 3,000 Office Equipment 15,000 Total Liabilities $ 80,000 Building 90,000 Owners' Equity: Land 100,000 Capital Stock 150,000 Retained Earnings 70,000 Total $300,000 Total $300,000 2-19 The Concept of the Business Entity A business entity is Vagabond separate from Travel the personal Agency affairs of its owner. 2-20  Assets VAGABOND TRAVEL AGENCY STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2015 Assets Liabilities & Owners' Equity Cash Assets are $ 22,500 Liabilities: Notes Receivable 10,000 Notes economic Payable $ 41,000 Accounts Receivable 60,500 resources Accounts Payablethat 36,000 are Supplies 2,000 Salaries Payable 3,000 Office Equipment 15,000 owned Total Liabilitiesby the $ 80,000 Building business 90,000 Owners' Equity: and are Land 100,000 Capital Stock 150,000 expected Retained Earnings to benefit 70,000 Total future operations. $300,000 Total $300,000 2-21 Assets These accounting principles support cost as the basis for asset valuation. Cost Stable-Dollar Principle Assumption Going-Concern Objectivity Assumption Principle 2-22  Liabilities VAGABOND TRAVEL AGENCY STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2015 Assets Liabilities & Owners' Equity Liabilities are Cash $ 22,500 Liabilities: debts that Notes Receivable Accounts Receivable 10,000 60,500 Notes Payable Accounts Payable $ 41,000 36,000 represent Supplies 2,000 Salaries Payable 3,000 Office Equipment 15,000 Total Liabilities $ 80,000 negative future Building 90,000 Owners' Equity: cash flows for Land 100,000 Capital Stock Retained Earnings 150,000 70,000 the enterprise. Total $300,000 Total $300,000 2-23  Owners’ Equity VAGABOND TRAVEL AGENCY STATEMENT OF FINANCIAL POSITION DECEMBER 31, 2015 Assets Liabilities & Owners' Equity Owners’ equity Cash $ 22,500 Liabilities: represents the Notes Receivable Accounts Receivable 10,000 60,500 Notes Payable Accounts Payable $ 41,000 36,000 owners’ claims Supplies 2,000 Salaries Payable 3,000 Office Equipment 15,000 Total Liabilities $ 80,000 on the assets of Building 90,000 Owners' Equity: the business. Land 100,000 Capital Stock 150,000 Retained Earnings 70,000 Total $300,000 Total $300,000 2-24  The Accounting Equation Assets VAGABOND = Liabilities + AGENCY TRAVEL Owners’ Equity STATEMENT OF FINANCIAL POSITION $300,000 = DECEMBER $80,000 31,+ 2015 $220,000 Assets Liabilities & Owners' Equity Cash $ 22,500 Liabilities: Notes Receivable 10,000 Notes Payable $ 41,000 Accounts Receivable 60,500 Accounts Payable 36,000 Supplies 2,000 Salaries Payable 3,000 Office Equipment 15,000 Total Liabilities $ 80,000 Building 90,000 Owners' Equity Land 100,000 Capital Stock 150,000 Retained Earnings 70,000 Total $300,000 Total $300,000 2-25 Let’s analyze transactions for Overnight Auto Service. 2-26  On January 20, Michael McBryan started Overnight Auto Service. He and his family invested $80,000 and received 8,000 shares of stock at $10 per share. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 20, 2015 Assets Owners' Equity Cash $ 80,000 Capital Stock $ 80,000 Total $ 80,000 Total $ 80,000 2-27  On January 21, Overnight purchased the land from the city for $52,000 cash. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 21, 2015 Assets Owners' Equity Cash $ 28,000 Capital Stock $ 80,000 Land 52,000 Total $ 80,000 Total $ 80,000 2-28  On January 22, Overnight purchased an old garage for $36,000. Overnight paid $6,000 down in cash and issued a 90-day note payable for the remaining $30,000 owed. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 22, 2015 Assets Liabilities and Owners' Equity Cash $ 22,000 Liabilities: Land 52,000 Notes Payable $ 30,000 Building 36,000 Owners' Equity: Capital Stock 80,000 Total $110,000 Total $110,000 2-29  On January 23, Overnight purchased tools and automotive repair equipment for $13,800 on account, due within 60 days. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 23, 2015 Assets Liabilities and Owners' Equity Cash $ 22,000 Liabilities: Tools & Equipment 13,800 Notes Payable $ 30,000 Building 36,000 Accounts Payable 13,800 Land 52,000 Total Liabilities $ 43,800 Owners' Equity: Capital Stock 80,000 Total $123,800 Total $123,800 2-30  Overnight realized that the company had purchased more tools and equipment than it needed. On January 24, Overnight sold some of the new tools to Ace Towing for $1,800, a price equal to Overnight’s cost. Ace agreed to pay the amount within 45 days. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 24, 2015 Assets Liabilities and Owners' Equity Cash $ 22,000 Liabilities: Accounts Receivable 1,800 Notes Payable $ 30,000 Tools & Equipment 12,000 Accounts Payable 13,800 Building 36,000 Total Liabilities $ 43,800 Land 52,000 Owners' Equity: Capital Stock 80,000 Total $123,800 Total $123,800 2-31  On January 26, Ace Towing pays Overnight $600 as a partial settlement of its accounts receivable. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 26, 2015 Assets Liabilities and Owners' Equity Cash $ 22,600 Liabilities: Accounts Receivable 1,200 Notes Payable $ 30,000 Tools & Equipment 12,000 Accounts Payable 13,800 Building 36,000 Total Liabilities $ 43,800 Land 52,000 Owners' Equity: Capital Stock 80,000 Total $123,800 Total $123,800 2-32  On January 27, Overnight made a partial payment of $6,800 on its account payable to Snappy Tools. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 27, 2015 Assets Liabilities and Owners' Equity Cash $ 15,800 Liabilities: Accounts Receivable 1,200 Notes Payable $ 30,000 Tools & Equipment 12,000 Accounts Payable 7,000 Building 36,000 Total Liabilities 37,000 Land 52,000 Owners' Equity: Capital Stock 80,000 Total $117,000 Total $117,000 2-33  On January 31, Overnight recorded auto repair services provided for the last week of January of $2,200, received in cash. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 31, 2015 Assets Liabilities and Owners' Equity Cash $ 18,000 Liabilities: Accounts Receivable 1,200 Notes Payable $ 30,000 Tools & Equipment 12,000 Accounts Payable 7,000 Building 36,000 Total Liabilities 37,000 Land 52,000 Owners' Equity: Capital Stock 80,000 Retained Earnings 2,200 Total $119,200 Total $119,200 2-34  On January 31, Overnight paid operating expenses of $1,400 in cash. OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 31, 2015 Assets Liabilities and Owners' Equity Cash $ 16,600 Liabilities: Accounts Receivable 1,200 Notes Payable $ 30,000 Tools & Equipment 12,000 Accounts Payable 7,000 Building 36,000 Total Liabilities 37,000 Land 52,000 Owners' Equity: Capital Stock 80,000 Retained Earnings 800 Total $117,800 Total $117,800 2-35 2-36 Let’s prepare the Income Statement and Statement of Cash Flows for Overnight Auto Service for the period of January 20-31, 2015. These transactions impact the Statement of Cash Flows. These transactions impact the Income Statement. 2-37  OVERNIGHT AUTO SERVICE INCOME STATEMENT FOR THE PERIOD JANUARY 20 - 31, 2015 Sales Revenues $ 2,200 Operating Expenses: Wages $ 1,200 Utilities 200 $ 1,400 Net Income $ 800 Investments by and payments to the owners are not included on the Income Statement. 2-38  OVERNIGHT AUTO SERVICE STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 20-31, 2015 Cash flows from operating activities: Cash received from revenue transactions $ 2,200 Cash paid for expenses (1,400) Net cash provided by operating activities $ 800 Cash flows from investing activities: Purchase of land $ (52,000) Purchase of building (6,000) Purchase of tools (6,800) Sale of tools 600 Net cash used by investing activities (64,200) Cash flows from financing activities: Sale of Capital Stock 80,000 Increase in cash for the period $ 16,600 Cash balance, January 20, 2015 - Cash balance, January 31, 2015 $ 16,600 2-39  OVERNIGHT AUTO SERVICE STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 20-31, 2015 Cash flows from operating activities: Cash received from revenue transactions $ 2,200 Cash paid for expenses (1,400) Net cash provided by operating activities $ 800 Cash flows from investing activities: Operating Purchase of land activities include the cash $ (52,000) effects Purchase of revenue and expense of building (6,000) Purchase of tools transactions. (6,800) Sale of tools 600 Net cash used by investing activities (64,200) Cash flows from financing activities: Sale of Capital Stock 80,000 Increase in cash for the period $ 16,600 Cash balance, January 20, 2015 - Cash balance, January 31, 2015 $ 16,600 2-40  OVERNIGHT AUTO SERVICE STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 20-31, 2015 Cash flows from operating activities: Cash received from revenue transactions $ 2,200 Cash paid for expenses (1,400) Net cash provided by operating activities $ 800 Cash flows from investing activities: Purchase of land $ (52,000) Purchase of building (6,000) Purchase of tools (6,800) Sale of tools 600 Net cash used by investing activities (64,200) Cash flows from financing activities: Investing Sale of Capital Stock activities include the cash 80,000 effects Increase ofthepurchasing in cash for period and selling $ 16,600 Cash balance, January 20, 2015 assets. - Cash balance, January 31, 2015 $ 16,600 2-41  OVERNIGHT AUTO SERVICE STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 20-31, 2015 Cash flows from operating activities: Cash received from revenue transactions $ 2,200 Cash paid for expenses (1,400) Net cash provided by operating activities $ 800 Cash flows from investing activities: Financing Purchase of land activities include the cash $ (52,000) Purchase of building (6,000) effects of transactions with the Purchase of tools owners (6,800) Sale of tools and creditors. 600 Net cash used by investing activities (64,200) Cash flows from financing activities: Sale of Capital Stock 80,000 Increase in cash for the period $ 16,600 Cash balance, January 20, 2015 - Cash balance, January 31, 2015 $ 16,600 2-42 Now, let’s prepare the Balance Sheet for Overnight Auto Service for January 20-31, 2015. These balances will appear on the Balance Sheet. 2-43  OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 31, 2015 Assets Liabilities Cash $ 16,600 Notes payable $ 30,000 Accounts receivable 1,200 Accounts payable 7,000 Tools & equipment 12,000 Owners' Equity Building 36,000 Capital stock 80,000 Land 52,000 Retained earnings 800 Total assets $ 117,800 Total liabilities & equity $ 117,800 Assets = Liabilities + Owners’ Equity $117,800 = $37,000 + $80,800 2-44  Relationships Among Financial Statements Date at Date at beginning of end of period period Time Statement of Financial Statement of Financial Position (Balance Sheet) Position (Balance Sheet) Income Statement Statement of Cash Flows 2-45  Financial Statement Articulation OVERNIGHT AUTO SERVICE STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 20-31, 2015 OVERNIGHT AUTO SERVICE Cash flows from operating activities: Cash received from revenue transactions $ 2,200 INCOME STATEMENT Cash paid for expenses Net cash provided by operating activities (1,400) $ 800 FOR THE PERIOD JANUARY 20 - 31, 2015 Cash flows from investing activities: Purchase of land $ (52,000) Sales Revenues $ 2,200 Purchase of building Purchase of tools (6,000) (6,800) Operating Expenses: Sale of tools 600 Net cash used by investing activities (64,200) Wages $ 1,200 Cash flows from financing activities: Sale of Capital Stock 80,000 Utilities 200 $ 1,400 Increase in cash for the period $ 16,600 Cash balance, January 20, 2015 Cash balance, January 31, 2015 - $ 16,600 Net Income $ 800 OVERNIGHT AUTO SERVICE BALANCE SHEET JANUARY 31, 2015 Assets Liabilities Cash $ 16,600 Notes payable $ 30,000 Accounts receivable 1,200 Accounts payable 7,000 Tools & equipment 12,000 Owners' Equity Building 36,000 Capital stock 80,000 Land 52,000 Retained earnings 800 Total assets $ 117,800 Total liabilities & equity $ 117,800 2-46  Financial Reporting and Financial Statements Financial statements are just one source of financial accounting Income information. Statement Balance Sheet Statement of Cash Flows Other Information: Nonfinancial disclosures Management interpretation Industry Competitors National economy 2-47 The Use of Financial Statements by External Parties Two concerns: Creditors Liquidity Profitability Investors 2-48  The Need for Adequate Disclosure Balance Sheet Notes to the financial Income Statement statements Statement of Cash Flows often provide facts necessary for the proper interpretation of the statements. 2-49 Management’s Interest in Financial Statements Creditors are more likely to extend credit if financial statements show a strong statement of financial position—that is, relatively little debt and large amounts of liquid assets. Window dressing occurs when management takes measures to make the company appear as strong as possible in it financial statements. 2-50 End of Chapter 2 2-51