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Chapter ppt 2

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  • 1. Chapter 2 From Scorekeeping to Financial Statements
  • 2. Learning Objectives for Chapter 2
    • See syllabus
  • 3. Financial Accounting Statements
    • Balance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date
    • Income Statement - reports the results of operations for a specific period of time
    • Retained Earnings Statement - reports the changes in retained earnings for a specific period of time
    • Statement of Cash Flows - reports the cash receipts and payments for a specific period of time
  • 4. Brief Introduction to the Balance Sheet and Income Statement
    • Balance sheet – snapshot of a company’s financial position at a certain point in time.
    • Income statement – summarizes financial activity of a company for a certain period of time.
    • Relationship between the balance sheet and income statement
  • 5. Basic Terms
    • Assets - resources owned by a business
    • Liabilities - debts and obligations of the business - represents claims of creditors on the assets of the business
    • Common stock - stock representing the primary ownership interest in a corporation
  • 6. Practice With the Balance Sheet and Income Statement
    • Wiggler Company
  • 7.  
  • 8. Tuesday, June 21
    • Email – use your COB account. To find your account:
      • Go to the computer lab in the basement
      • Log in under your ONID account and open Outlook
      • Open a screen to send a new email, type your last name in the address space, then key ’Ctrl +k’
      • A list of email addresses will appear, find your COB address
    • Access to course materials folder
      • Go to the computer lab in the basement and log in under your COB username and password. Passwords can be obtained in BX 204C, if you forgot yours or need one.
      • Now, the URL ob-storageclassesBA215wong can be used in the Explorer web browser
  • 9. Debit and Credit Conventions and T-accounts
    • T-accounts are a convenient way to record transaction information and keep running totals of accounts.
    • Debits represent the left hand side of a T-account.
    • Credits represent the right hand side of a T-account.
    • See Fig 2.2 of text
    • Balance Sheet Accts. Income Stmt. Accts.
    • ↑ Assets | Liabilities ↑ ↑ Expenses | Revenues ↑
    • | Equity ↑
  • 10. Recording Transactions
    • Note for every transaction:
      • $debits = $credits
    • For every transaction involving only balance sheet accounts: A = L + E
    • Balance sheet for Wiggler, up to transaction #5, using T-accounts for assistance.
  • 11. The Trial Balance
    • A listing of all debit and credit balances as of the balance sheet date
    • Used to insure that debits = credits for recorded transactions
    • Checks whether the accounting equation was maintained
    • No assurance that transactions have been recorded properly
  • 12. Trial Balance for Wiggler transactions #1 to #5
    • Put together a trial balance for these transactions.
    • Debit Credit
    • Cash $3,250
    • Inventory (worms) 220
    • Land & Farm 750
    • Accounts Payable $120
    • Note Payable 2,100
    • Common Stock 2,000
    • Total $4,220 $4,220
  • 13. Balance Sheet: Classification and Some Common Accounts
    • The balance sheet classifies assets and liabilities according to whether they are short- or long-term.
    • Generally:
      • Short-term assets are those which will be consumed or converted to cash in a year or less. All other assets are long-term.
      • Short-term liabilities are those which will be paid in a year or less. All other liabilities are long-term.
    • Common balance sheet accounts – see sample balance sheet, and text pp. 54-58.
  • 14. Income Statement
    • Classified income statement
    • Definition of elements
      • Revenues – resource inflows earned from the sale of products or services that are the main activities of the organization
      • Expenses - resource outflows incurred in the sale of products or services that are the main activities of the organization
      • Gains – similar to revenues, only from ancillary activities of the organization
      • Losses – similar to expenses, only from ancillary activities of the organization
  • 15. Table 2.3 From the Text Sample Income Statement: Operating Section
    • Net sales $2,500,000
    • Cost of goods sold 1,900,000
    • Gross margin 600,000
    • (Discussion of these three accounts on pp. 50-51)
  • 16. Table 2.3 From the Text Sample Income Statement: Operating Section
    • Operating Expenses:
    • Selling expenses
    • Sales salaries $140,000
    • Advertising expenses 20,000 160,000
    • Administrative expenses
    • Office salaries 170,000
    • Rent 20,000
    • Depreciation 40,000 230,000
    • Total operating expenses 210,000
    • (Discussion of these accounts on p. 51)
  • 17. Table 2.3 From the Text Sample Income Statement: Non-Operating Section* to end
    • Other income $20,000
    • Other expenses (interest) 35,000 55,000
    • Income before taxes 195,000
    • Income taxes 97,500
    • Net Income (Income after taxes) $97,500
    • * This is the section where gains and losses would also appear
    • (Discussion of these accounts on pp. 50-51)
  • 18. Statement of Retained Earnings
    • Helps to link the balance sheet with the income statement.
    • Closes the results of the income statement (net income) to Retained Earnings
    • Accounts for dividends paid from Retained Earnings.
    • Overview of the statement:
      • Beginning Retained Earnings
      • + Net income (Net loss)
      • - Dividends paid or declared and payable
      • = Ending Retained Earnings
  • 19. Homework
    • Finish recording the transactions in the Wiggler exercise
    • After recording the transactions
      • Make a trial balance, balance sheet, and income statement for Wiggler
  • 20.  
  • 21. Wednesday, June 22
    • Web-based course materials access is now available
    • Selected T/F and multiple choice questions from
    • Ch. 2
  • 22. GAAP and Accrual-Based Accounting
    • Consistency of accounting practices is achieved by companies adhering to GAAP (Generally Accepted Accounting Principles)
    • Accrual-based accounting means that we recognize:
      • Revenues when earned, regardless of when the cash is collected.
        • Revenues are generally earned when services or goods are provided to customers.
      • Expenses when incurred, regardless of when the cash is collected.
        • Expenses are generally incurred when services or goods are provided by others.
    • Cash-based accounting vs. accrual-based accounting
  • 23. Specific Instances of Accrual-Based Accounting
    • Inventory is not expensed as Cost of Good Sold until a sale is made.
    • Sales made on credit are recorded even though cash has not been collected from the customer.
      • (Debit Accounts receivable, Credit Sales)
    • Wages expense can be recorded, even if cash has not yet been paid to employees.
      • (Debit Wages Expense, Credit Wages Payable)
  • 24. Accounting for Depreciation of Long Term Assets – General Concept
    • Depreciation is taken on assets over time in an attempt to match the expense to the time period that the assets help to generate revenues.
    • How to record the transaction:
      • Debit Depreciation Expense (Income Statement)
      • Credit Accumulated Depreciation
  • 25. Accounting for Depreciation of Long Term Assets – Example
    • A truck is purchased for $40,000 that has a 5 year life and will be depreciated using the straight line method.
    • At the end of each year for the next 5 years, $8,000 of depreciation expense is recognized ($8,000 / 5yrs)
    • Effect of this transaction:
      • Increase in Depreciation Expense (debit)
      • Increase in Accumulated Depreciation, a ‘contra-asset’ (credit)
  • 26. Accounting for Depreciation of Long Term Assets – Example
    • Impact on the balance sheet:
      • Long-Term Assets
      • Equipment – Truck $40,000
      • Accumulated depreciation (8,000)
      • Equipment, net 32,000
    • Impact on the income statement:
      • Depreciation Expense $8,000
  • 27. Specific Items in Chapter 2 to Skip
    • Auditor’s report, p. 61
    • Any type of depreciation method other than straight line, pp. 65-66
    • Deferred taxes, pp. 66-67
  • 28.  
  • 29.