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Chapter 2

Chapter 2. Accounting Principles. 2-1 Conceptual Framework. CONSTRAINTS. Objectives of Financial Reporting. Qualitative Characteristics of Accounting Information. Elements of Financial Statements. Operating Guidelines. Assumptions. Principles. CONSTRAINTS.

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Chapter 2

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  1. Chapter 2 Accounting Principles

  2. 2-1 Conceptual Framework CONSTRAINTS Objectives of Financial Reporting Qualitative Characteristics of Accounting Information Elements of Financial Statements Operating Guidelines Assumptions Principles CONSTRAINTS

  3. 2-2 Qualitative Characteristics of Accounting Information Useful Financial Information has: Relevance Reliability 1. Predictive value 2. Feedback value 3. Timely 1. Verifiable 2. Faithful representation 3. Neutral Comparability and Consistency

  4. 2-3 Operating Guidelines Detailed Guidelines for Solving Practical Problems ASSUMPTIONS PRINCIPLES 1. Economic Entity 1. Revenue Recognition 2. Monetary Unit 2. Matching 3. Time Period 3. Full Disclosure 4. Going Concern 4. Cost CONSTRAINTS and Materiality Conservatism

  5. 2-4 Recording Business Transactions • Invested $8,000 in his business in exchange for common stock. • Purchased $500 of supplies for cash. • Purchased $4,000 of equipment on account. • Received $3,000 cash for consulting services. • Paid salaries of $800 • Paid the first month’s rent of $200. • Paid $1,000 owned to a creditor. • The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder. A. Review of Selected Transactions Mr. Sam Doty opened and incorporated a hospitality consulting firm during the month of September and provided you with the following data. Instructions: Prepare the tabular summary for the transactions above.

  6. 2-4 Recording Business Transactions (continued) Summary of Transactions Month of September 2008 Answer:

  7. 2-4 Recording Business Transactions (continued) B. Financial Statement Relationship to Transactions and Balances • Prepare the Income Statement and Retained Earnings Statement from the Stockholders’ Equity Column of the Summary of Transactions for the month of September. Stockholders’ Equity

  8. 2-4 Recording Business Transactions (continued) Answer:

  9. 2-4 Recording Business Transactions (continued) • Prepare the Balance Sheet from the Month-end Balances of the Summary of Transactions. Assets Liabilities Stockholders’ Equity = + Cash + Supplies + Equip. $7,000 + $500 + $4,000 Accounts Payable $3,000 Common Stock $8,000 R.E. $500 = + + = + +

  10. 2-4 Recording Business Transactions (continued) Answer:

  11. 2-4 Recording Business Transactions (continued) • Prepare the Statement of Cash Flows from the Cash Column of the Summary of Transactions for the month of September.

  12. 2-5 Analyzing Transactions Identify the various transactions indicated by the information provided: • CASH ACCOUNTS RECEIVABLEincreased………………….. decreased_________________ • RENT EXPENSE CASHincreased………………….. decreased_________________ • SUPPLIES ACCOUNTS PAYABLEincreased………………….. decreased_________________ • EQUIPMENT CASHincreased………………….. decreased_________________ • ACCOUNTS RECEIVABLE REVENUEincreased………………….. decreased_________________ • DIVIDENDS CASHincreased………………….. decreased_________________

  13. 2-5 Analyzing Transactions (continued) Continue exercise by asking students for a transaction which increases the following: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock Continue exercise by asking students for a transaction which decreases the following: Cash, Accounts Receivable, Supplies, and Accounts Payable

  14. 2-5 Analyzing Transactions (continued) • Collection of an accounts receivable. • Payment of the current month’s rent. • Purchase of supplies on account. • Purchase of equipment for cash. • Rendering of services for a customer on account. • The declaration of a cash dividend. Answer:

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