ACG 2021 Financial Accounting

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ACG 2021Financial Accounting

• Chapter One
• The Financial Statements

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The Accounting System
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What is accounting

• Been in place for hundreds of years
• 1494 Luca Pacioli's Summa de Arithmetica
  Geometria Proportionalita (A Review of
  Arithmetic, Geometry and Proportions)
• First written description of double-entry
  accounting
• Incan khipus
• cryptic assemblages of string and knots
• May have been used for record-keeping (i.e.
  accounting) Gary Urton and Carrie Brezine
• Annotated Khipu on Flickr
• System
• Of recording business transactions
• Language
• Whether knots
• Debits or Credits written in a journal
• Digital values stored on a computer
• Weve been accounting for many, many years

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Information System Model
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The Accounting System

• An Information System
• Inputs to the system are business events
• Sales
• Purchases
• Inventory (things to re-sell, things to use in
  building), buildings
• Payroll
• Processing takes place in the various Journals
  and General Ledger where transactions are stored
• Financial Statements are the Outputs and
  represent Summary Information
• Income Statement
• Statement of Retained Earnings
• Balance Sheet
• Cash Flows

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Accounting Information System

• Procedures, Techniques and Resources to
• Collect Disseminate
• Relevant Business Information to Interested Users
• Individuals (Management)
• Investors Creditors
• Taxing Authorities
• Non-Profit Organizations

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Accounting (The Language of Business) Is...

• The process of identifying, measuring, and
  communicating economic information (via reports)
  to permit informed judgments and decisions by
  users of the information.
• Balance Sheet Resources
• Income Statement Results of Operations
• Cash Flow Management of Asset

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Language Dialects

• Financial Accounting
• Managerial Accounting
• Tax Accounting
• Governmental (non-profit) Accounting

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ACG 2021

• Who are we Accounting for
• Business Forms
• And
• Accounting Rules and Assumptions

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Accounting Assumptions

• Business activity occurs via distinct entities
• Sole Proprietorship
• Partnerships
• Corporations
• Business activity is conducted via measurable,
  observable transactions
• Transactions can be described using standard
  units of measurement (s) in accounts (Valuation)

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Forms of Business Organization

• Proprietorship
• Has a single owner
• Proprietor is personally liable
• for debts of the business
• Not a separate legal entity
• For accounting, the proprietorship is a separate
  entity from the proprietor

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Forms of Business Organization

• Partnerships
• Two or more partners are co-owners
• Each partner can be liable for all the debts of
  the partnership
• Not a separate legal entity
• For accounting, the partnership is a separate
  entity from its partners

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Forms of Business Organization

• Corporations
• May have many owners (stockholders)
• Stockholders are not personally liable for debts
  of the business
• Is a separate legal entity
• Stockholders elect a Board of Directors to
  appoint corporate officers and set policies

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Accounting Guidelines

• Formulated by the Financial Accounting Standards
  Board (FASB)
• Generally Accepted Accounting Principles (GAAP)
• The Entity Concept
• A business is separate distinct from its
  owners
• The Reliability Principle
• Accounting records are based on the most
  objective evidence available
• The Historical Cost Principle
• s are recorded at time of transaction (actual
  cost)
• s that a willing buyer paid a willing seller
• Not some point in the future
• The Going-Concern Principle
• The Entity will not go Out-of-Business
• The Stable-Monetary-Unit Concept
• the monetary units (s) purchasing power is
  stable (ignores inflation)

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ACG 2021Financial Accounting

• The Accounting Equation
• Assets Liabilities Owners Equity

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The Accounting Equation
Assets

Liabilities Owners Equity
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Assets

• Economic resources (value, s)
• Owned and Controlled by business entity
• Expected to produce a benefit in the future
• Cash
• Investments
• Accounts Receivable
• Inventory
• Buildings, Equipment, Gold Mines, Patents

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Liabilities

• Economic obligations (debt) of a business
• Accounts Payable
• Notes Payable
• Accrued Expenses
• Payroll that we owe
• Taxes that we owe
• Rent, Insurance, etc. that we owe
• Money we borrowed and of course owe
• Claims by Creditors
• Convey Assets
• This means that the creditor expects an asset
  (most often cash) be given for what is owed
• Perform Service
• This means that the creditor expects a service
  (like prepare a tax return, or provide rental
  retail space) be given for what is owed

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Owners Equity

• The owners claim on the entitys assets
• Capital (for Proprietorship or Partnership)
• Stockholders equity (for Corporation)
• Shares of Stock
• Net assets
• Assets liabilities owners equity

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Stockholders Equity

• For a corporation, stockholders equity is
  divided into two main categories.
• Paid in capital
• The amount that investors have given to the
  corporation
• In exchange for shares of stock
• Retained earnings
• The amount of Earnings the company has either
  earned (profit) or lost over time
• The amount of dividends that have been paid to
  investors

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The Accounting Equation Expanded

• Assets Liabilities Owners Equity
• Replace Owners Equity with
• Paid-in capital - amount invested by its owners -
  common stock
• Increases Owners Equity
• Retained earnings - amount earned by
  income-producing activities and kept for use in
  the business
• Dividends distributions of assets to
  stockholders
• Decreases Retained Earnings

Assets Liabilities Paid-in capital Retained
earnings
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The Accounting Equation

• Retained Earnings accumulate Revenues and
  Expenses of an Organization and Dividends that
  have been paid
• Revenues Sales of Product or Services
• increases Retained Earnings from delivering goods
  or services to customers
• Measured by corresponding increase in Asset
  received as payment
• Expenses goods or services Consumed from
  Revenue Generation
• decreases Retained Earnings that result from
  operations
• Measured by historical cost of assets given up in
  the sale or consumed to make the sale

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Components of Retained Earnings
Revenues for the period

Expenses for the period
Start of the period

Net income (or Net loss) for the period
Dividends for the period

Beginning balance of retained earnings
or

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Accounting Equation Expanded (again)

• Assets Liabilities Paid-in Capital
  Dividends Revenue Expenses
• Retained Earnings

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Transactions

• A simultaneous exchange between one accounting
  entity and another accounting entity
• Customers
• Suppliers
• Employees
• Owners
• Each party Gives and Receives something of value
  (s)

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Chapter 1

• Exercise 1-4

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ACG 2021Financial Accounting

• The Financial Statements

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The Financial Statements

• Balance Sheet
• Income Statement
• Statement of Retained Earnings
• Statement of Cash Flows

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Balance Sheet
Rank Place Situation Standing

• Assets used to reach company objectives
• s represent One Particular Point in Time
• Snapshot
• What is the companys financial position at the
  end of a period?
• Assets Liabilities Owners Equity

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Balance Sheet

• Assets appear in order of Liquidity
• Easily Turned into Cash
• Why?
• So Creditors can quickly ascertain if a company
  has enough Cash to pay back what is owed
• So Creditors can quickly ascertain what
  collateral a company has against possible loans
  that might be made

• Liabilities appear in order in which they will be
  paid
• Within 1 year or less
• Greater then 1 year
• Stockholders Equity shows the amount contributed
  by investors the amount of Income retained by
  the company
• Dividends are paid out of this retained amount
  (but NOT with it)

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Income Statement

• Presents information about profitability
• How well did the company perform during the
  period?
• Revenue Amount paid or promised to pay for
  goods or services of the firm, increase of assets
• Expenses Costs of providing goods or services
  to the customer, using up of assets
• Temporary (periodic) Retained Earnings accounts
• Revenues
• Expenses
• Net Income (Loss)

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Statement of Retained Earnings

• The portion of a firms Net Income retained by the
  business
• Why did the company's retained earnings change
  during the year?
• Beginning retained earnings
• Net income or (-Net loss)
• - Dividends
• Ending retained earnings

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Statement of Cash Flows

• Changes to Cash during a specific time period
• How much cash did the company generate and spend
  during the year?
• Operating cash flows
• Investing cash flows
• Financing cash flows
• Increase (decrease) in cash

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Information Reported in the F/S
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Relationships Amongthe Financial Statements
ABC Company Income Statement Year Ended
December 31, 2006 Revenues 700,000 Expenses
670,000 Net income 30,000
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Relationships Amongthe Financial Statements
ABC Company Statement of Retained Earnings Year
Ended December 31, 2006 Beginning retained
earnings 180,000 Net income 30,000 Cash
dividends (10,000) Ending retained
earnings 200,000
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Relationships Amongthe Financial Statements
ABC Company Balance Sheet December 31,
2006 Assets Cash 25,000 All other
assets 275,000 Total
assets 300,000 Liabilities Total
liabilities 120,000 Stockholders
equity Common stock 40,000 Retained
earnings 200,000 Other
equity (60,000) Total liabilities and
stockholders equity 300,000
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Relationships Amongthe Financial Statements
ABC Company
Statement of Cash Flows
Year Ended December 31, 2006 Net cash
provided by operating activities 90,000 Net
cash used for investing activities (110,000) Net
cash provided by financing activities
40,000 Net increase in cash 20,000 Beginning
cash balance 5,000 Ending cash balance
25,000