Chapter One

An Introduction

to Accounting

© 2015 McGraw-Hill Education.

Role of Accounting in Society

Accounting provides

information that is useful in answering

questions about

resource allocation.

Should I invest

money in IBM or

General Motors?

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Elements of Financial Statements

1. Assets—Cash, Equipment, Buildings, Land

2. Liabilities

3. Equity

4. Contributed Capital

5. Revenue

6. Expenses

7. Distributions

8. Net Income

9. Gains

10. Losses

Subclassifications of the

elements are frequently called

accounts.Accounts are

reported in the financial

statements.

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Accounting Equation

Claims on the assets are from two sources:

1. Creditors (liabilities)

2. Investors or owners (equity).

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Event 1: RCS (formed on Jan. 1, 2014) acquired cash through $120,000 common stock issue.

1. Increase assets (cash).

2. Increase equity (common stock).

Asset Source Transaction

= Liab. +

Cash + Land = N. Pay + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income Cash Flow

120,000 + n/a = n/a + 120,000 + n/a n/a - n/a = n/a 120,000 FA

Assets Stockholders' Equity

Event 2: RCS acquired $400,000 cash by borrowing from a creditor.

1. Increase assets (cash).

2. Increase liabilities (notes payable).

Asset SourceTransaction

Cash + Land = N. Pay + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income Cash Flow

400,000 + n/a = 400,000 + n/a + n/a n/a - n/a = n/a 400,000 OA

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Event 3: RCS paid $500,000 cash to purchase land.

1. Decrease assets (cash).

2. Decrease equity (selling expenses).

Asset ExchangeTransaction

= Liab. +

Cash + Land = N. Pay. + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income Cash Flow

(500,000) + 500,000 = n/a + n/a + n/a - n/a = n/a (500,000) IA

Assets Stockholders' Equity

Event 4: RCS obtained $85,000 cash by leasing camp sites to customers.

1. Increase assets (cash)

2. Increase stockholders’ equity (revenue).

Asset Source Transaction

= Liab. +

Cash + Land = N. Pay. + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income

Cash Flow

85,000 + n/a = n/a + n/a + 85,000 85,000 - n/a = n/a 85,000 OA

Assets Stockholders' Equity

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Event 5: RCS paid $50,000 cash for operating expenses.

1. Decrease assets (cash).

2. Decrease equity (operating expenses).

Asset UseTransaction

= Liab. +

Cash + Land = N. Pay. + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income Cash Flow

(50,000) + n/a = n/a + n/a + (50,000) n/a - 50,000 = (50,000) (50,000) OA

Assets Stockholders' Equity

1. Decrease assets (cash).

2. Decrease stockholders’ equity (retained earnings).

Asset UseTransaction

= Liab. +

Cash + Land = N. Pay. + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income

Cash Flow

(4,000) + n/a = n/a + n/a + (4,000) n/a - n/a = n/a (4,000) FA

Assets Stockholders' Equity

Event 6: RCS paid $4,000 in cash dividends to its owners.

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Event 7: The land that RCS purchased for $500,000 cash had an appraised value of $525,000 on Dec. 31, 2014.

1. Not Recognized due to Historical Cost concept Non-Transaction

Historical Cost Concept

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Summary of Accounting Events

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Two Views of the The Right Side of the Accounting Equation

Sources of the company’s assets.

Stewardshipmeans to protect and use assets for the benefit of the owners.

Obligations of the company to return

creditor assets.Commitments of the company to investor-

provided assets.

View Two

View One

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Distributions in Business Liquidations

Creditors have Priority.

If there are any assets left over, they are distributed to investors

Going ConcernAssumes that a business is able to continue operations into the

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Recap: Types of Transactions

The described transactions have been classified into one of three

categories:Asset Source

Asset Exchange

AssetUse

Increase total assets,

increase total claims

Increase one asset, decrease another

asset

Decrease total assets,

decrease total claims

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Preparing Financial Statements

Net Loss

Accounting Period

Rental revenue (asset increases) 85,000$ Operating expenses (asset decreases) (50,000) Net income 35,000$

Beginning common stock -$ Plus: Common stock issued 120,000 Ending common stock 120,000$ Beginning retained earnings -$ Plus: Net income 35,000 Less: Dividends (4,000) Ending retained earnings 31,000 Total stockholders' equity 151,000$

RUSTIC CAMP SITESIncome Statement

For the Year Ended December 31, 2014

Matching Concept

results when expenses exceed revenues.

Revenues exceeded expenses.Income is

measured for a span of time

called the

{

Revenues are matched to expenses.

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Revenue (asset increases) 85,000$ Operating Expenses (asset decreases) (50,000) Net Income 35,000$

Beginning Common Stock -$ Plus: Common Stock Issued 120,000 Ending Common Stock 120,000$ Beginning Retained Earnings -$ Plus: Net Income 35,000 Less: Dividends (4,000) Ending Retained Earnings 31,000 Total Stockholders' Equity 151,000$

RUSTIC CAMP SITESStatement of Changes in Stockholders' Equity

For the Year Ended December 31, 2014

RUSTIC CAMP SITESIncome Statement

For the Year Ended December 31, 2014

Preparing Financial Statements

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AssetsCash 51,000$ Land 500,000 Total Assets 551,000$

LiabilitiesNotes Payable 400,000$

Stockholders' EquityCommon Stock 120,000$ Retained Earnings 31,000 Total Stockholders' Equity 151,000 Total Liabilities and Stockholders' Equity 551,000$

Balance SheetAs of December 31, 2014

RUSTIC CAMP SITES

Preparing Financial Statements

equal

Assets are

displayed in

order of liquidity.

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Cash Flows from Operating ActivitiesCash Receipts from Revenue 85,000$ Cash Payments for Expenses (50,000)

Net Cash Flow from Operating Activities 35,000$ Cash Flows for Investing ActivitiesCash Payments to Purchase Land (500,000) Cash Flows from Financing ActivitiesCash Receipts from Borrowing Funds 400,000 Cash Receipts from Issuing Common Stock 120,000 Cash Payments for Dividends (4,000) Net Cash Flow from Financing Activities 516,000 Net Increase in Cash 51,000 Plus Beginning Cash Balance - Ending Cash Balance 51,000$

Statement of Cash FlowsFor the Year Ended December 31, 2014

RUSTIC CAMP SITES

Operating

Investing

Financing

Preparing Financial Statements

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The Closing Process

Transfers net income (or loss) and dividends to Retained Earnings.

Establishes zero balances in all

revenue, expense, and dividend accounts.

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Horizontal Financial Statements Model

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Annual Reports

(1)Financial Statements

(2)Notes

(3)Auditor’s Report –Chapter 6

(4)Management’s Discussion and Analysis (MD&A)

Traditionally, large companies have distributed expensive

annual reports with many color photographs.

Increasingly, however, companies are issuing more modest annual reports or are simply distributing their 10-K

reports.

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End of Chapter One

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