Wey ap 8e_ch01-1

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Accounting: An Overview and Analysis

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  • 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Question 1 (textbook) Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.
  • Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
  • Question 18 (Chapter 1) No, this treatment is not proper. While the transactions does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transactions is simply an additional investment made by the owner in the business.
  • Question 19 (textbook) Y e s . Net income does appear on the income statement — it is the result of subtracting expenses from revenues. In addition, net income appears in the statement of owner’s equity—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet.
  • Wey ap 8e_ch01-1

    1. 1. Chapter1-1CHAPTERCHAPTER 11Accounting: AnAccounting: AnOverview andOverview andAnalysisAnalysisAccounting Principles, Eighth Edition
    2. 2. Chapter1-21. Explain what accounting is.2. Identify the users and uses of accounting.3. Understand why ethics is a fundamental business concept.4. Explain generally accepted accounting principles and thecost principle.5. Explain the monetary unit assumption and the economicentity assumption.6. State the accounting equation, and define assets, liabilities,and owner’s equity.7. Analyze the effects of business transactions on theaccounting equation.8. Understand the four financial statements and how they areprepared.Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
    3. 3. Chapter1-3Accounting in ActionAccounting in ActionAccounting in ActionAccounting in ActionEthics inEthics infinancialfinancialreportingreportingGenerallyGenerallyacceptedacceptedaccountingaccountingprinciplesprinciplesAssumptionsAssumptionsWhat isWhat isAccounting?Accounting?What isWhat isAccounting?Accounting?The BuildingThe BuildingBlocks ofBlocks ofAccountingAccountingThe BuildingThe BuildingBlocks ofBlocks ofAccountingAccountingThe BasicThe BasicAccountingAccountingEquationEquationThe BasicThe BasicAccountingAccountingEquationEquationUsing theUsing theBasicBasicAccountingAccountingEquationEquationUsing theUsing theBasicBasicAccountingAccountingEquationEquationFinancialFinancialStatementsStatementsFinancialFinancialStatementsStatementsThreeThreeactivitiesactivitiesWho usesWho usesaccountingaccountingdatadataAssetsAssetsLiabilitiesLiabilitiesOwner’sOwner’sequityequityTransactionTransactionanalysisanalysisSummary ofSummary oftransactionstransactionsIncomeIncomestatementstatementOwner’sOwner’sequityequitystatementstatementBalanceBalancesheetsheetStatement ofStatement ofcash flowscash flows
    4. 4. Chapter1-4What is Accounting?What is Accounting?What is Accounting?What is Accounting?LO 1 Explain what accounting is.LO 1 Explain what accounting is.The purpose of accounting is to:(1)(1) identifyidentify, recordrecord, and communicatecommunicate theeconomic events of an(2) organization to(3) interested users.
    5. 5. Chapter1-5Three ActivitiesWhat is Accounting?What is Accounting?What is Accounting?What is Accounting?LO 1 Explain what accounting is.LO 1 Explain what accounting is.Illustration 1-1Accounting processThe accounting process includesthe bookkeeping function.
    6. 6. Chapter1-6ManagementCommon QuestionsHumanResourcesIRSLaborUnionsSECMarketingFinanceInvestorsCreditorsWho Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.CustomersInternal UsersExternalUsers
    7. 7. Chapter1-7Common Questions Asked User1. Can we afford to give ouremployees a pay raise? Human Resources2. Did the company earn asatisfactory income?3. Do we need to borrow in thenear future?4. Is cash sufficient to paydividends to the stockholders?5. What price for our productwill maximize net income?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?LO 2 Identify the users and uses of accounting.LO 2 Identify the users and uses of accounting.6. Will the company be able topay its short-term debts?InvestorsManagementFinanceMarketingCreditors
    8. 8. Chapter1-8Discussion QuestionLO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.Q1. “Accounting is ingrained in our society and it isvital to our economic system.” Do you agree? Explain.See notes page for discussionWho Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?Who Uses Accounting Data?
    9. 9. Chapter1-9The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingEthics In Financial ReportingLO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.Standards of conduct by which one’s actions arejudged as right or wrong, honest or dishonest, fairor not fair, are Ethics.Recent financial scandals include: Enron,WorldCom, HealthSouth, AIG, and others.Congress passed Sarbanes-Oxley Act of 2002.Effective financial reporting depends on soundethical behavior.
    10. 10. Chapter1-10Ethics are the standards of conduct by which onesactions are judged as:a. right or wrong.b. honest or dishonest.c. fair or not fair.d. all of these options.Review QuestionReview QuestionEthicsEthicsEthicsEthicsLO 3 Understand why ethics is a fundamental business conceptLO 3 Understand why ethics is a fundamental business concept.
    11. 11. Chapter1-11Various usersneed financialinformationVarious usersneed financialinformationThe accounting professionhas attempted to developa set of standards thatare generally acceptedand universally practiced.Financial StatementsBalance SheetIncome StatementStatement of Owners’ EquityStatement of Cash FlowsNote DisclosureFinancial StatementsBalance SheetIncome StatementStatement of Owners’ EquityStatement of Cash FlowsNote DisclosureGenerally AcceptedGenerally AcceptedAccountingAccountingPrinciples (GAAP)Principles (GAAP)Generally AcceptedGenerally AcceptedAccountingAccountingPrinciples (GAAP)Principles (GAAP)The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingLO 4 Explain generally accepted accounting principles and the cost principle.LO 4 Explain generally accepted accounting principles and the cost principle.
    12. 12. Chapter1-12Organizations Involved in Standard Setting:Securities and Exchange Commission (SEC)Financial Accounting Standards Board (FASB)International Accounting Standards Board(IASB)LO 4 Explain generally accepted accounting principles and the cost principle.LO 4 Explain generally accepted accounting principles and the cost principle.The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of Accountinghttp://www.fasb.org/http://www.sec.gov/http://www.iasb.org/
    13. 13. Chapter1-13Cost Principle (Historical) – dictates that companiesrecord assets at their cost.Issues:Reported at cost when purchased and also over thetime the asset is held.Cost easily verified, whereas market value is oftensubjective.Fair value information may be more useful.The Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingThe Building Blocks of AccountingLO 4 Explain generally accepted accounting principles and the cost principle.LO 4 Explain generally accepted accounting principles and the cost principle.
    14. 14. Chapter1-14Monetary Unit Assumption – include in theaccounting records only transaction data that can beexpressed in terms of money.Economic Entity Assumption – requires thatactivities of the entity be kept separate and distinctfrom the activities of its owner and all other economicentities.Proprietorship.Partnership.Corporation.AssumptionsAssumptionsAssumptionsAssumptionsLO 5 Explain the monetary unit assumptionLO 5 Explain the monetary unit assumptionand the economic entity assumption.and the economic entity assumption.Forms ofBusiness Ownership
    15. 15. Chapter1-15Proprietorship Partnership CorporationOwned by two orOwned by two ormore persons.more persons.Often retail andOften retail andservice-typeservice-typebusinessesbusinessesGenerallyGenerallyunlimitedunlimitedpersonal liabilitypersonal liabilityPartnershipPartnershipagreementagreementOwnershipOwnershipdivided intodivided intoshares of stockshares of stockSeparate legalSeparate legalentity organizedentity organizedunder stateunder statecorporation lawcorporation lawLimited liabilityLimited liabilityForms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business OwnershipGenerally ownedGenerally ownedby one person.by one person.Often smallOften smallservice-typeservice-typebusinessesbusinessesOwner receivesOwner receivesany profits,any profits,suffers anysuffers anylosses, and islosses, and ispersonally liablepersonally liablefor all debts.for all debts.LO 5 Explain the monetary unit assumptionLO 5 Explain the monetary unit assumptionand the economic entity assumption.and the economic entity assumption.
    16. 16. Chapter1-16Combining the activities of Kellogg and GeneralMills would violate thea. cost principle.b. economic entity assumption.c. monetary unit assumption.d. ethics principle.AssumptionsAssumptionsAssumptionsAssumptionsLO 5 Explain the monetary unit assumptionLO 5 Explain the monetary unit assumptionand the economic entity assumption.and the economic entity assumption.Review QuestionReview Question
    17. 17. Chapter1-17A business organized as a separate legal entityunder state law having ownership divided intoshares of stock is aa. proprietorship.b. partnership.c. corporation.d. sole proprietorship.LO 5 Explain the monetary unit assumptionLO 5 Explain the monetary unit assumptionand the economic entity assumption.and the economic entity assumption.Forms of Business OwnershipForms of Business OwnershipForms of Business OwnershipForms of Business OwnershipReview QuestionReview Question
    18. 18. Chapter1-18AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’Owners’EquityEquityOwners’Owners’EquityEquity= +Provides the underlying framework for recording andsummarizing economic events.Assets are claimed by either creditors or owners.Claims of creditors must be paid before ownershipclaims.The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationLO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.
    19. 19. Chapter1-19AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’Owners’EquityEquityOwners’Owners’EquityEquity= +Provides the underlying framework for recording andsummarizing economic events.The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationLO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.Resources a business owns.Provide future services or benefits.Cash, Supplies, Equipment, etc.AssetsAssetsAssetsAssets
    20. 20. Chapter1-20AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’Owners’EquityEquityOwners’Owners’EquityEquity= +Provides the underlying framework for recording andsummarizing economic events.The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationLO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.Claims against assets (debts and obligations).Creditors - party to whom money is owed.Accounts payable, Notes payable, etc.LiabilitiesLiabilitiesLiabilitiesLiabilities
    21. 21. Chapter1-21AssetsAssetsAssetsAssets LiabilitiesLiabilitiesLiabilitiesLiabilitiesOwners’Owners’EquityEquityOwners’Owners’EquityEquity= +Provides the underlying framework for recording andsummarizing economic events.The Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationThe Basic Accounting EquationLO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.Ownership claim on total assets.Referred to as residual equity.Capital, Drawings, etc. (Proprietorship orPartnership).Owners’ EquityOwners’ EquityOwners’ EquityOwners’ Equity
    22. 22. Chapter1-22Owners’ EquityOwners’ EquityOwners’ EquityOwners’ EquityRevenues result from business activities entered into forthe purpose of earning income.Common sources of revenue are: sales, fees, services,commissions, interest, dividends, royalties, and rent.Illustration 1-6LO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.
    23. 23. Chapter1-23Owners’ EquityOwners’ EquityOwners’ EquityOwners’ EquityExpenses are the cost of assets consumed or servicesused in the process of earning revenue.Common expenses are: salaries expense, rent expense,utilities expense, tax expense, etc.Illustration 1-6LO 6LO 6 State the accounting equation, and defineState the accounting equation, and defineassets, liabilities, and owner’s equity.assets, liabilities, and owner’s equity.
    24. 24. Chapter1-24Using The Basic Accounting EquationUsing The Basic Accounting EquationUsing The Basic Accounting EquationUsing The Basic Accounting EquationTransactions are a business’s economic eventsrecorded by accountants.May be external or internal.Not all activities represent transactions.Each transaction has a dual effect on theaccounting equation.LO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.
    25. 25. Chapter1-25Q1-15:Q1-15: Are the following events recorded in theaccounting records?EventSupplies arepurchasedon account.Criterion Is the financial position (assets, liabilities, orowner’s equity) of the company changed?LO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.An employeeis hired.Ownerwithdrawscash forpersonal use.Record/Don’t RecordTransactions (Question?)Transactions (Question?)Transactions (Question?)Transactions (Question?)
    26. 26. Chapter1-26Discussion QuestionQ18. In February 2008, Paula King invested anadditional $10,000 in her business, King’sPharmacy, which is organized as a proprietorship.King’s accountant, Lance Jones, recorded thisreceipt as an increase in cash and revenues. Isthis treatment appropriate? Why or why not?See notes page for discussionTransactionsTransactionsTransactionsTransactionsLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.
    27. 27. Chapter1-27P1-1A:P1-1A: Barone’s Repair Shop was started on May 1 byNancy. Prepare a tabular analysis of the followingtransactions for the month of May.Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableBarone,CapitalLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.+ + = +1. Invested $10,000 cash to start the repair shop.InvestmentAssets Liabilities Equity
    28. 28. Chapter1-28Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableBarone,CapitalLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.2. Purchased equipment for $5,000 cash.-5,0002. +5,000+ + = +InvestmentAssets Liabilities Equity
    29. 29. Chapter1-29Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.3. Paid $400 cash for May office rent.-5,0002. +5,000+ + = +-4003. -400 ExpenseBarone,CapitalInvestmentAssets Liabilities Equity
    30. 30. Chapter1-30Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.4. Received $5,100 from customers for repair service.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 RevenueBarone,CapitalInvestmentAssets Liabilities Equity
    31. 31. Chapter1-31Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.5. Withdrew $1,000 cash for personal use.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 Revenue-1,0005. -1,000 DrawingsBarone,CapitalInvestmentAssets Liabilities Equity
    32. 32. Chapter1-32Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.6. Paid part-time employee salaries of $2,000.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 Revenue-1,0005. -1,000 Drawings-2,0006. -2,000 ExpenseBarone,CapitalInvestmentAssets Liabilities Equity
    33. 33. Chapter1-33Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.7. Incurred $250 of advertising costs, on account.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 Revenue-1,0005. -1,000 Drawings-2,0006. -2,000 Expense+2507. -250 ExpenseBarone,CapitalInvestmentAssets Liabilities Equity
    34. 34. Chapter1-34Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.8. Provided $750 of repair services on account.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 Revenue-1,0005. -1,000 Drawings-2,0006. -2,000 Expense+2507. -250 Expense+7508. +750 RevenueBarone,CapitalInvestmentAssets Liabilities Equity
    35. 35. Chapter1-35Transactions (Problem)Transactions (Problem)Transactions (Problem)Transactions (Problem)+10,0001. +10,000CashAccountsReceivable EquipmentAccountsPayableLO 7LO 7 Analyze the effects of business transactionsAnalyze the effects of business transactionson the accounting equation.on the accounting equation.9. Collected $120 cash for services previously billed.-5,0002. +5,000+ + = +-4003. -400 Expense+5,1004. +5,100 Revenue-1,0005. -1,000 Drawings-2,0006. -2,000 Expense+2507. -250 Expense+7508. +750 Revenue+1209. -120Barone,CapitalInvestmentAssets Liabilities Equity6,820 + 630 + 5,000 = 250 + 12,200
    36. 36. Chapter1-36Companies prepare four financial statements fromthe summarized accounting data:Companies prepare four financial statements fromthe summarized accounting data:BalanceSheetIncomeStatementStatementof CashFlowsOwners’EquityStatementFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.
    37. 37. Chapter1-37Net income will result during a time period when:a. assets exceed liabilities.b. assets exceed revenues.c. expenses exceed revenues.d. revenues exceed expenses.Financial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Review QuestionReview Question
    38. 38. Chapter1-38Income StatementFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Reports the revenuesand expenses for aspecific period of time.Net income – revenuesexceed expenses.Net loss – expensesexceed revenues.Revenues:Service revenue 5,850$Expenses:Salary expense 2,000Rent expense 400Advertising expense 250Total expenses 2,650Net income 3,200$Barone’s Repair ShopIncome StatementFor the Month Ended May 31, 2007
    39. 39. Chapter1-39Revenues:Service revenue 5,850$Expenses:Salary expense 2,000Rent expense 400Advertising expense 250Total expenses 2,650Net income 3,200$Barone’s Repair ShopIncome StatementFor the Month Ended May 31, 2007Income StatementFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Barones, Capital May 1 -$Add: Investment 10,000Net income 3,20013,200Less: Drawings 1,000Barones, Capital May 31 12,200$Barone’s Repair ShopOwners Equity StatementFor the Month Ended May 31, 2007Owners’ EquityStatementNet income is needed to determinethe ending balance in owner’s equity.
    40. 40. Chapter1-40Financial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Barones, Capital May 1 -$Add: Investment 10,000Net income 3,20013,200Less: Drawings 1,000Barones, Capital May 31 12,200$Barone’s Repair ShopOwners Equity StatementFor the Month Ended May 31, 2007Owners’ EquityStatementStatement indicates thereasons why owner’sequity has increased ordecreased during theperiod.
    41. 41. Chapter1-41Financial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Barones, Capital May 1 -$Add: Investment 10,000Net income 3,20013,200Less: Drawings 1,000Barones, Capital May 31 12,200$Barone’s Repair ShopOwners Equity StatementFor the Month Ended May 31, 2007Owners’ EquityStatementAssetsCash 6,820$Accounts receivable 630Equipment 5,000Total assets 12,450$LiabilitiesAccounts payable 250$Owners EquityBarones, capital 12,200Total liab. & equity 12,450$Balance SheetBarone’s Repair ShopMay 31, 2007The ending balance in owner’s equity isneeded in preparing the balance sheetBalance Sheet
    42. 42. Chapter1-42Balance SheetFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Reports the assets,liabilities, and owner’sequity at a specific date.Assets listed at the top,followed by liabilitiesand owner’s equity.Total assets must equaltotal liabilities andowner’s equity.AssetsCash 6,820$Accounts receivable 630Equipment 5,000Total assets 12,450$LiabilitiesAccounts payable 250$Owners EquityBarones, capital 12,200Total liab. & equity 12,450$Balance SheetBarone’s Repair ShopMay 31, 2007
    43. 43. Chapter1-43Balance SheetFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.AssetsCash 6,820$Accounts receivable 630Equipment 5,000Total assets 12,450$LiabilitiesAccounts payable 250$Owners EquityBarones, capital 12,200Total liab. & equity 12,450$Balance SheetBarone’s Repair ShopMay 31, 2007Cash flow from OperationsCash receipts from customers 5,220$Cash paid for expenses (2,400)Cash provided by operations 2,820Cash flow from InvestingPurchase of equipment (5,000)Cash flow from FinancingInvestment by owners 10,000Drawings by owners (1,000)Cash provided by financing 9,000Net increase in cash 6,820Cash balance, May 1 -Cash balance, May 31 6,820$Statement of Cash FlowsBarone’s Repair ShopFor the Month Ended May 31, 2007Statement of Cash Flows
    44. 44. Chapter1-44Financial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Cash flow from OperationsCash receipts from customers 5,220$Cash paid for expenses (2,400)Cash provided by operations 2,820Cash flow from InvestingPurchase of equipment (5,000)Cash flow from FinancingInvestment by owners 10,000Drawings by owners (1,000)Cash provided by financing 9,000Net increase in cash 6,820Cash balance, May 1 -Cash balance, May 31 6,820$Statement of Cash FlowsBarone’s Repair ShopFor the Month Ended May 31, 2007Statement of Cash FlowsInformation for aspecific period of time.Answers the following:1. Where did cash comefrom?2. What was cash usedfor?3. What was the changein the cash balance?
    45. 45. Chapter1-45Which of the following financial statements isprepared as of a specific date?a. Balance sheet.b. Income statement.c. Owners equity statement.d. Statement of cash flows.Financial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.Review QuestionReview Question
    46. 46. Chapter1-46Discussion QuestionQ19. “A company’s net income appears directlyon the income statement and the owner’s equitystatement, and it is included indirectly in thecompany’s balance sheet.” Do you agree? Explain.See notes page for discussionFinancial StatementsFinancial StatementsFinancial StatementsFinancial StatementsLO 8 Understand the four financial statements and how they are prepared.LO 8 Understand the four financial statements and how they are prepared.
    47. 47. Chapter1-47Copyright © 2006 John Wiley & Sons, Inc. All rights reserved.Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Actwithout the express written permission of the copyright owneris unlawful. Request for further information should beaddressed to the Permissions Department, John Wiley & Sons,Inc. The purchaser may make back-up copies for his/her ownuse only and not for distribution or resale. The Publisherassumes no responsibility for errors, omissions, or damages,caused by the use of these programs or from the use of theinformation contained herein.CopyrightCopyrightCopyrightCopyright

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