financial accounting notes 4

7/29/2019 Financial Accounting Notes 4

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PRE-PARED BY: AZHAR AHMED 1-1

CHAPTER 4

The Financial Statements


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ACCOUNTING - THE BASIS

OF DECISION MAKING Accounting is the language of

business

Accounting is the information systemthat

Measures business activities

Processes that information into reports

Communicates the results to decision

makers


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THE ACCOUNTING SYSTEM:

THE FLOW OF INFORMATION1. People make decisions

2. Business transactions occur

3. Businesses prepare reports to show theresults of their operations


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ACCOUNTING VS.

BOOKKEEPING Bookkeeping is the procedural element

of accounting that processes the

accounting data


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Individuals

Businesses Investors and Creditors

Government Regulatory Agencies

Taxing Authorities Nonprofit Organizations

DECISION MAKERS WHO USE

ACCOUNTING INFORMATION


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Financial accounting providesinformation to managers and peopleoutside the firm

Financial accounting information mustmeet certain standards of relevance andreliability

Management accounting generates

confidential information for internaldecision makers, e.g.,

Top executives

Department heads

FINANCIAL ACCOUNTING AND

MANAGEMENT ACCOUNTING


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ETHICAL CONSIDERATIONS

Ethical standards in accounting are

designed to produce accurate

information for decision making The result of ethical behavior by

accountants is information that people

can rely on for decision making


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TYPES OF BUSINESS

ORGANIZATIONS Proprietorships

Have a single owner who is generally the

managerAre business entities, but not legal entities

Have debt for which the proprietor is

personally liable


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TYPES OF BUSINESS

ORGANIZATIONS Partnerships

Join two or more persons together as co-

ownersAre business entities, but not legal entities

Have debt for which each partner is

personally liable


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TYPES OF BUSINESS

ORGANIZATIONS Corporations

Are owned by stockholders or

shareholdersAre business entities and legal entities

Are liable for all debts

Stockholders have no personal obligation forcorporation debts


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ACCOUNTING PRINCIPLES

AND CONCEPTS Generally accepted accounting

principles (GAAP) are

The rules that govern how accountantsoperate

Based upon a conceptual framework

written by the Financial AccountingStandards Board (FASB)


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AND CONCEPTS The FASB works with the SEC

(Securities and Exchange Commission)

and the AICPA (American Institute ofCertified Public Accountants)


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KEY ACCOUNTING ORGANIZATIONS

Private Sector

The FASB determines

generally accepted

accounting principles

Public Sector

Law creates the SEC to

regulate the stock and

bond market in the U.S.

GAAP governs

accounting

information

Private Sector

Accountants apply

GAAP through

the AICPA


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AND CONCEPTS The entity concept

States that an organization is an

economic entity that keeps its affairsseparate from those of the owner(s)

The reliability (objective) principle

States that accounting records andstatements are based on the most reliable

data available and documented by

objective evidence


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AND CONCEPTS The cost principle

States that acquired assets and services

should be recorded at their actual(historical) cost and should maintain that

historical cost for as long as they are

owned

The going-concern concept

States that the entity will remain in

operation for the foreseeable future


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AND CONCEPTS The stable-monetary-unit concept

States that each dollar has the same

purchasing power as any other dollar atany other time


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THE ACCOUNTING EQUATION

The accounting equation presents the

resources of the business and the

claims to those resources

Economic Resources = Claims to Economic Resources

Assets = Liabilities + Owners Equity

or


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Assets are the economic resources of a

business that are expected to be of

benefit in the future Claims to assets come from

Liabilities

Economic obligations - debts payable tooutsiders, called creditors

Owners equity (capital)

Assets held by the owners of the business



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For a corporation, stockholders

(owners) equity consists of two main

categories Paid-in capital

Retained earnings


Assets = Liabilities + Stockholders Equity

Assets = Liabilities + Paid-in Capital + Retained Earnings

or


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Paid-in (contributed) capital is

The amount invested in the corporation by

its owners Comprised basically of common stock



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Retained earnings

Is the amount earned by income-producing

activities and kept for use in the business Is affected by

Revenues - increases in retained earnings

from delivering goods or services

Expenses - decreases in retained earnings that

result from operations



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Net income (net earnings)

Total revenues exceed total expenses

Net loss

Total expenses exceed total revenues

Dividends

Distributions to stockholders (usually cash)

generated by net income



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Beginning Balance

of Retained

Earnings

+- - =

Net Income (Loss)

for the Period

Dividends for the

Period

Ending Balance of

Retained

Earnings

Revenues for the

Period

Expenses for the

Period

-

=

COMPONENTS OF RETAINED EARNINGS

Start of the

Period

End of the

Period


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The owners equity of proprietorships

and partnerships

Makes no distinction between paid-incapital and retained earnings

Accounts for the equity of each owner

under the single heading of Capital



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INFORMATION REPORTED

ON THE FINANCIALSTATEMENTS

Q ti A Fi i l St t t


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How well did thecompany performduring the period?

Revenues-ExpensesNet income (loss)

Income statement(Statement ofoperations or

Statement ofearnings)

Why did thecompanys retainedearnings changeduring the period?

Beginning R.E.+Net income (-loss)-DividendsEnding R.E.

Statement of retainedearnings (Statementof stockholdersequity)

What is thecompanys financialposition at the end ofthe period?

Assets = Liabilities +OwnersEquity

Balance sheet(Statement offinancial position)

How much cash didthe companygenerate and spendduring the period?

Operating cash flows+ Investing cash flow+Financing cash flowIncrease (decrease)

in cash during theperiod

Statement of cashflows

Question Answer Financial Statement

1.

2.

3.

4.


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INCOME STATEMENT

The income statement(statement of

earnings)reports the companys

revenues, expenses, and net income ornet loss for the period


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AIR & SEA TRAVEL, INC.Income Statement

Month Ended April 30, 2001

Revenue:Service revenue $8,500

Expenses:Salary expense $1,200

Rent expense 1,100Utilities 400Total expenses 2,700

Net Income $5,800

INCOME STATEMENT


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Revenues are

Increases in retained earnings from

delivering goods or services to customersor clients

Expenses are

Decreases in retained earnings that resultfrom operations

INCOME STATEMENT


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Expenses include

Cost of goods sold(cost of sales)

The cost of the goods that a company sold toits customers

Operating expenses

The costs of operating the business

INCOME STATEMENT


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Operating expenses

Advertising

The cost to promote the companys products

Depreciation

The expense of using company-owned

buildings, equipment, and furniture

Other operating expenses The costs of salaries, utilities, rent, and

supplies

Interest expense

The cost of borrowed money

INCOME STATEMENT


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STATEMENT OF

RETAINED EARNINGS The statement of retained earnings

reports that portion of net income the

company has retained, or kept for use inthe business

Net income increases retained earnings

Dividends paid to stockholders decreaseretained earnings


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STATEMENT OF

RETAINED EARNINGSAIR & SEA TRAVEL, INC.

Statement of Retained Earnings


Retained earnings, April 1, 2001 $ 0Add: Net income for the month 5,800

$5,800

Less: Dividends (2,100)Retained Earnings, April 30, 2001 $3,700


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BALANCE SHEET

The balance sheet(statement of

financial position)reports the companys

assets, liabilities, and owners equity


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AIR & SEA TRAVEL, INC.

Balance SheetApril 30, 2001

Assets Liabilities

Cash $33,300 Accounts payable $ 100Accounts receivable 2,000Office supplies 500 Stockholders EquityLand 18,000 Common stock 50,000

Retained earnings 3,700Total stockholders equity 53,700

Total liabilities andTotal assets $53,800 stockholders equity $53,800

BALANCE SHEET


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ASSETS

Current assets are Those assets which the company expects

to convert to cash, sell, or consume during

the next 12 months or within the business's

normal operating cycle if longer than a year

Current assets include

Cash

Accounts receivable

Merchandise inventory

Prepaid expenses


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ASSETS

Long-term assets are

Those assets which the company expects

to hold longer then the next 12 months orthe businesss normal operating cycle if

longer than one year

Long-term assets include

Property

Equipment


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ASSETS

Intangible assets are

Those with no physical form

Trademarks Patents

Other assets are

Those with small values which do not fallwithin any other standard asset category


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LIABILITIES Current liabilities are

Debts payable within one year or within the

businesss normal operating cycle if longer

than a year

Current liabilities include

Notes payable, short term

Accounts payableAccrued expenses payable

Income taxes payable


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LIABILITIES

Long-term liabilities are

Debts not payable within one year or within

the businesss normal operating cycle iflonger than a year

Long-term liabilities include

Notes payable, long term Bonds payable


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OWNERS EQUITY

Owners equity

Represents the shareholders ownership of

the assets of the business Owners equity of a corporation consists

of

Common stock Retained earnings


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STATEMENT OF CASH FLOWS

The statement of cash flows reports the

companys cash inflows and outflows

from operating, investing, and financingactivities



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PRE-PARED BY: AZHAR AHMED1-43

Statement of Cash FlowsMonth Ended April 30, 2001

Cash flows from operating activities:

Collections from customers $ 6,500Payments to suppliers and employees (3,100)

Net cash inflow from operating activities 3,400Cash flows from investing activities:

Acquisition of land $(40,000)

Sale of land 22,000Net cash outflow from investing activities (18,000)

Cash flows from financing activities:Issuance (sale) of stock $ 50,000Payment of dividends (2,100)

Net cash inflow from financing activities 47,900Net increase in cash $ 33,300Cash balance, April 1, 2001 0Cash balance, April 30, 2001 $ 33,300


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Operating activities

Companies operate by buying goods and

services, which are sold to customers

Investing Activities

Companies invest in long-term assets that

are used to run the business

Financing Activities

Companies finance themselves by issuing

stock and borrowing money

STATEMENT OF CASH FLOWS


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RELATIONSHIPS AMONG THE

FINANCIAL STATEMENTS


AIR & SEA TRAVEL INC


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Statement of Cash FlowsMonth Ended April 30, 2001

Cash flows from operating activities:Collections from customers $ 6,500Payments to suppliers and employees (3,100)

Net cash inflow from operating activities 3,400

Cash flows from investing activities:Acquisition of land $(40,000)Sale of land 22,000

Net cash outflow from investing activities (18,000)Cash flows from financing activities:

Issuance (sale) of stock $ 50,000Payment of dividends (2,100)

Net cash inflow from financing activities 47,900Net increase in cash $ 33,300

Cash balance, April 1, 2001 0Cash balance, April 30, 2001 $ 33,300

AIR & SEA TRAVEL, INC.Statement of Retained Earnings


Retained earnings, April 1, 2001 $ 0Add: Net income for the month 5,800

$5,800Less: Dividends (2,100)Retained Earnings, April 30, 2001 $3,700

AIR & SEA TRAVEL, INC.Income Statement


Revenue:Service revenue $8,500

Expenses:Salary expense $1,200Rent expense 1,100Utilities 400Total expenses 2,700

Net Income $5,800

AIR & SEA TRAVEL, INC.Balance SheetApril 30, 2001

Assets Liabilities

Cash $33,300 Accounts payable $ 100

Accounts receivable 2,000Office supplies 500 Stockholders EquityLand 18,000 Common stock 50,000

Retained earnings 3,700Total stockholders equity 53,700

_______ Total liabilities and _______Total assets $53,800 stockholders equity $53,800


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PRE-PARED BY: AZHAR AHMED

END OF CHAPTER 3

financial accounting notes 4

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