Accounting 101 Financial Accounting Chapter 1 by rrn51447

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									 Accounting 101 Financial
       Accounting
   Chapter 1 Overview
 Created by: John Kelly MBA/CPA
  Assistant Professor of Accounting
Accounting 101 - Financial Accounting

            Accounting 101 Ch. 1 Center for   1
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         Accounting Equation
Assets = Liabilities + Stockholders’ Equity
Assets are items owned by a business which
  are used to conduct business.
Liabilities are bills owed by a business.
Stockholders’ Equity represents what is left
  for the owners of the business after the bills
  are paid.
The accounting equation is shown on the
  balance sheet.
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          Examples of Assets
• Cash--checking, 90 day certificate of deposit
• Accounts Receivable--credit customers
• Supplies--computer ink, paper, envelopes
• Prepaid Insurance--6, 12, 18, 24 months of
  insurance premium paid in advance
• Land--owned by the business--not rented
• Buildings--owned by the business--not rented
• Equipment--owned by the business--not rented



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      Examples of Liabilities
• Accounts Payable--bills owed to vendors
• Salaries Payable--pay owed to employees
• Unearned Revenue--revenue received in
  advance from customers--job has not been
  completed by the business and is owed to
  the business


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    Examples of Stockholders’
             Equity
• Capital Stock--represents the funds invested
  by the owners.
• Retained Earnings--represent the earnings
  from the customers not distributed to the
  owners.
• Dividends--represent the distributions of
  earnings back to the owners (holders of
  capital stock).
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   Chapter 1 Retained Earnings
+ Fees Earned are added to retained earnings
  to keep the accounting equation equal.
- Expenses are subtracted from retained
  earnings to keep the accounting equation
  equal.



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      Elements of Financial Statements
•   Assets
•   Liabilities                                Balance Sheet
•   Equity
•   Investments by Owners
                                       Statement of        Statement
•   Distributions to Owners       Changes in Stockholders’     of
•   Comprehensive Income                   Equity          Cash Flows
•   Revenues
•   Expenses
                                             Income Statement
•   Gains
•   Losses
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                          Financial Statements


                        Statement of Cashflows


Income Statement        Statement of Changes of       Balance Sheet
                          Stockholders' Equity


                             Statement of
                           Retained Earnings
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                                 Transaction examples:
Chapter 1 Illustrative Problem                   Cecil Jameson, Attorney-at-Law, P.C.
                                                General Ledger
                                                July 2001                                       Total Liabilities &
                                                   Total                                        Owner's
                   Assets                         Assets       Liabilities Owner's    Equity Equity
                  Accounts                                      Accounts Capital Retained
  Item   Cash Receivable         Supplies Land               = Payable       Stock Earnings                   Description
Balance $ 1,000 $ 3,200          $ 850 $ 10,000 $ 15,050        $ 1,530 $ 10,000 $ 3,520 $ 15,050 Balance Brought Forward
    a.     3,928                                     3,928                               3,928         3,928 Fees Earned
    b.    (1,055)                                   (1,055)        (1,055)                            (1,055) Paid old bill
    c.     3,700                                     3,700                      3,700                  3,700 Investment
    d.    (1,200)                                   (1,200)                             (1,200)       (1,200) Rent Expense
    e.                2,025                          2,025                               2,025         2,025 Fees Earned
    f.                               245                245           245                                245 Supplies on Account
    g.     3,000     (3,000)                            -                                                - Receipts from billings
    h.                                                  -           1,635               (1,635)          - Paralegal Expense
    I.      (850)                                                                         (850)         (850) Wages Expense
    I.      (250)                                                                         (250)         (250) Answering Service Expense
    I.      (325)                                                                         (325)         (325) Utilities Expense
    I.       (75)                                       (75)                               (75)          (75) Miscellaneous Expense
    j.                              (115)              (115)                              (115)         (115) Office Supplies Expense
    k.    (1,000)                                   (1,000)                             (1,000)       (1,000) Dividends
 Totals $ 6,873 $ 2,225          $ 980 $ 10,000 $ 20,078        $ 2,355 $ 13,700 $ 4,023 $ 20,078
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            Income Statement
                       Cecil Jameson, Attorney-at-Law, P.C.
                       Income Statement
                       For Month Ending July 31, 2001
Revenues:
Fees Earned                                                       $   5,953
Operating Expenses:
Rent Expense                                          $   1,200
Paralegal Expense                                         1,635
Wages Expense                                               850
Answering Service Expense                                   250
Utilities Expense                                           325
Miscellaneous Expense                                        75
Office Supplies Expense                                     115
     Total Operating Expenses                                       (4,450)
Net Income                                                        $ 1,503


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    Statement of Changes in
     Stockholders’ Equity
                       Cecil Jameson, Attorney-at-Law, P.C.
                       Statement of Changes in Stockholders' Equity
                       For Month Ending July 31, 2001
                                  Capital Retained
   Item                            Stock Earnings           Totals
Balances 7/1/01                 $ 10,000 $ 3,520            $ 13,520
Investments                           3,700                     3,700
Net Income                                        1,503         1,503
Dividends                                        (1,000)       (1,000)
Balances 7/31/01                $ 13,700 $ 4,023            $ 17,723
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                           Balance Sheet
                      Cecil Jameson, Attorney-at-Law, P.C.
                      Balance Sheet
                      July 31, 2001

Assets                                       Liabilities
Cash                           $  6,873      Accounts Payable                           $ 2,355
Accounts Receivable               2,225      Stockholders' Equity
Supplies                            980      Capital Stock                     13,700
Land                             10,000      Retained Earnings                   4,023
Total Assets                   $ 20,078      Total Stockholders' Equity                   17,723
                                             Total Liabilities and Stockholders' Equity $ 20,078
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Objectives of Financial Reporting
1.Help investors, creditors, and other users in
  making rational investment, credit, and
  similar decisions. The information should
  be understandable to those who have a
  reasonable understanding of business and
  economic activities and are willing to study
  the information with reasonable diligence.

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Objectives of Financial Reporting
2. Help present and potential investors and
  creditors evaluate the amounts, timing, and
  uncertainty of prospective cash inflows to
  the related enterprise.
3. Help present and potential investors and
  creditors evaluate the economic resources
  (assets) and claims to those resources
  (liabilities) and the ability of the enterprise
  to transfer resources to customers, creditors,
  and owners.
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                                        Hierarchy of Accounting Qualities


Users of Accounting                                  Users
                                                Decision Makers
Information

Constraints                                        Materiality          Costs Vs Benefits


                                                Understandibility
User Specific Qualities

Pervasive Criterion                           Decision Usefulness


                       Relevance                                                  Reliability
                                       Primary Qualities
  Predictive Value   Feedback Value      Timeliness          Verifiability    Representational   Neutrality
                                                                                faithfulness


                      Comparability                                             Consistency
                                       Secondary Qualities
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                                      Accounting and Capital Allocation


      Financial Reporting                          Users                       Capital Allocation
                                           (Present and Potential)


    The financial information        Creditors, management and investors   The process of determining
     a company provides to                  use financial reports to       how and at what cost money
help users with capital allocation       make their capital allocation         is allocated among
 decisions about the company.                      decisions.                 competing interests




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   Challenges Facing Financial Accounting
• Non-financial measurements
  -customer satisfaction index
  -backlog order information
  -reject rates on goods purchased
• Forward-looking Information (See above)
  -Current Statements show the past.
  -Management’s analysis and outlook on the future.
• Soft Assets                               -
  Intangible Assets (brand-name,software, new
  products)
• Timeliness
  -little real-time data was available
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          Financial Reporting in the Future
1.Financial and non-financial data
   -Financial statements and related disclosures.
   -High-level operating data and performance measurements that
    management uses to manage the business.
2.Management’s analysis
   -Why the company performed as reported.
3.Forward-looking information
   -Opportunities/risks resulting from key trends.
   -Management’s plans.
   -Comparison of performance to prior forward-looking information.
4.Information about management and stockholders
   -Directors, Management, Compensations, Related parties
5.Background about the company
   -Objectives/strategies,Scope and Description of Company
   -Competitors/Industry structure--Are we no. 1?


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