1 / 40

The Mechanics of Financial Accounting

The Mechanics of Financial Accounting. Presentations for Chapter 4 by Glenn Owen. Key Points. Two criteria necessary for economic events to be reflected in the financial statements.

alegria-martinez
Download Presentation

The Mechanics of Financial Accounting

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Mechanics of Financial Accounting Presentations for Chapter 4 by Glenn Owen

  2. Key Points • Two criteria necessary for economic events to be reflected in the financial statements. • The accounting equation and how it relates to the balance sheet, income statement, statement of retained earnings, and statement of cash flows. • Journal entries (and T-accounts) and how they express the effect of economic events on the basic accounting equation and the financial statements. • Why managers need to understand how economic events affect the financial statements. • Why the financial statements are adjusted periodically to reflect certain economic events.

  3. Economic Events • Relevant events have economic significance to a company and include any occurrence that affects its financial condition. • The dollar values assigned to these events must be determined in an objective manner.

  4. The Fundamental Accounting Equation Assets = Liabilities + Stockholders’ Equity = +

  5. 1. What accounts are affected? Liabilities and Stockholders’ Equity = Assets Asset Accounts Liab/Stock Eq. Accounts Increase $Debit (left) $Credit (right) 2. What is the direction of the effect? 3. What is the dollar value of the transaction? Asset Accounts Liab/Stock Eq. Accounts Decrease $Credit (right) $Debit (left) The Journal Entry Box

  6. Recognizing Gains and Losses • Often investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet. • In such cases a gain or loss must be recognized.

  7. Periodic Adjustments • Accruals • Deferrals and cost expirations • Revaluation adjustments

  8. Accruals • The term accrue means to build up gradually. • Accruals refer to amounts in asset and liability accounts that build up over time. • Adjustments to record accruals are made at the end of an accounting period. • Examples include • accrued wages. • accrued interest revenue.

  9. Deferrals and Cost Expirations • Deferrals are recorded to achieve an appropriate matching of revenues and expenses and do not reflect cash exchanges. • Expense or capitalize? • Current expenses • Supplies inventory • Merchandise inventory • Prepaid expenses • Unearned revenue • Property, plant, and equipment • Intangible assets

  10. Expense or Capitalize

  11. Expense or Capitalize

  12. Revaluation Adjustments • These are adjustments that do not fall into the categories of accruals or cost expirations. • They serve to restate certain accounts to keep their reported values in line with existing facts. • Examples include the revaluation of: • short-term investments • accounts receivable • inventories

  13. Review Problem • Kelly Supply • Beginning Balance Sheet as of December 31, 2002 • Daily journal entries and T-accounts • Adjusting journal entries and T-accounts • Income Statement for the year ended December 31, 2003 • Statement of Retained Earnings for the year ended December 31, 2003 • Ending Balance Sheet as of December 31, 2003 • Statement of Cash Flows for the year ended December 31, 2003

  14. Kelly Supply Balance Sheet December 31, 2002 Assets: Cash $12,000 Accounts receivable 15,000 Merchandise inventory 12,000 Prepaid rent 3,000 Machinery $25,000 Less: Accumulated depreciation . 5,000 20,000 Patent . 5,000 Total assets $67,000

  15. Kelly Supply Balance Sheet December 31, 2002 Liabilities and Stockholders’ Equity: Accounts payable $ 8,000 Wages payable 3,000 Interest payable 1,000 Dividends payable 2,000 Unearned revenue 3,000 Short-term notes payable 5,000 Long-term notes payable 10,000 Common stock 30,000 Retained earnings . 5,000 Total liabilities and stockholders’ equity $67,000

  16. Daily Journal Entries and T-accounts Cash Accounts Receivable Sales 12,000 10,000 15,000 15,000 25,000 (1) Cash (+A) 10,000 Accounts Receivable (+A) 15,000 Sales (R, +SE) 25,000 Sold merchandise for cash and on account.

  17. Daily Journal Entries and T-accounts Cash Accounts Receivable 12,000 10,000 8,000 15,000 15,000 8,000 (2) Cash (+A) 8,000 Accounts Receivable (-A) 8,000 Received cash on account.

  18. Daily Journal Entries and T-accounts Merchandise Inv. Cash Accounts Payable 12,000 10,000 12,000 10,000 8,000 3,000 8,000 7,000 (3) Merchandise Inventory (+A) 10,000 Cash (-A) 3,000 Accounts Payable (+L) 7,000 Purchased merchandise inventory for cash and on account.

  19. Daily Journal Entries and T-accounts Accounts Payable Cash 10,000 8,000 7,000 12,000 10,000 8,000 3,000 10,000 (4) Accounts Payable (-L) 10,000 Cash (-A) 10,000 Paid cash on account.

  20. Daily Journal Entries and T-accounts Wages Payable Wages Expense Cash 3,000 3,000 7,000 12,000 10,000 8,000 3,000 10,000 10,000 (5) Wages Payable (-L) 3,000 Wages Expense (E, -SE) 7,000 Cash (-A) 10,000 Paid accrued wages.

  21. Daily Journal Entries and T-accounts Interest Payable Interest Expense Cash 1,000 1,000 1,000 12,000 10,000 8,000 3,000 10,000 10,000 2,000 (6) Interest Payable (-L) 1,000 Interest Expense (E, -SE) 1,000 Cash (-A) 2,000 Paid accrued interest.

  22. Daily Journal Entries and T-accounts S/T Notes Payable Cash 2,500 5,000 12,000 10,000 8,000 3,000 10,000 10,000 2,000 2,500 (7) Short-Term Notes Payable (-L) 2,500 Cash (-A) 2,500 Paid short-term note.

  23. Daily Journal Entries and T-accounts L/T Notes Payable Cash 10,000 10,000 12,000 10,000 8,000 10,000 3,000 10,000 10,000 2,000 2,500 (8) Cash (+A) 10,000 Long-Term Notes Payable (+L) 10,000 Issued long-term note for cash.

  24. Daily Journal Entries and T-accounts Dividends Payable Cash 2,000 2,000 12,000 10,000 8,000 10,000 3,000 10,000 10,000 2,000 2,500 2,000 (9) Dividends Payable (-L) 2,000 Cash (-A) 2,000 Paid cash dividend.

  25. Daily Journal Entries and T-accounts Machinery Cash 25,000 1,000 12,000 10,000 8,000 10,000 3,000 10,000 10,000 2,000 2,500 2,000 1,000 (10)Machinery (+A) 1,000 Cash (-A) 1,000 Acquired machinery for cash.

  26. Daily Journal Entries and T-accounts Dividends Dividends Payable 1,000 2,000 2,000 1,000 (11)Dividends (-SE) 1,000 Dividends Payable (+L) 1,000 Declared dividends.

  27. Adjusting Journal Entries and T-accounts Cost of Goods Sold Merchandise Inventory 9,000 12,000 10,000 13,000 9,000 (12)Cost of Goods Sold (E, -SE) 9,000 Merchandise Inventory (-A) 9,000 Recognized $13,000 of inventory on hand.

  28. Adjusting Journal Entries and T-accounts Unearned Revenue Sales 2,000 3,000 1,000 25,000 2,000 (13)Unearned Revenue (-L) 2,000 Sales (R, +SE) 2,000 Recognized 2/3 of goods delivered.

  29. Adjusting Journal Entries and T-accounts Interest Receivable Interest Revenue 50 50 (14)Interest Receivable (+A) 50 Interest Revenue (R,+SE) 50 Recognized accrued interest on savings account.

  30. Adjusting Journal Entries and T-accounts Accumulated Depr. 5,000 3,000 (15)Depreciation Expense (E, -SE) 3,000 Accumulated Depreciation (-A) 3,000 Recognized depreciation on machinery. Depreciation Expense 3,000

  31. Adjusting Journal Entries and T-accounts Patent 5,000 4,500 500 (16)Amortization Expense (E, -SE) 500 Patent (-A) 500 Recognized amortization of patent. Amortization Expense 500

  32. Adjusting Journal Entries and T-accounts Wage Expense Wages Payable 7,000 1,000 3,000 3,000 1,000 (17)Wage Expense (E, -SE) 1,000 Wages Payable (+L) 1,000 Recognized accrued wages.

  33. Adjusting Journal Entries and T-accounts Interest Expense Interest Payable 1,000 2,000 1,000 1,000 2,000 (18)Interest Expense (E, -SE) 2,000 Interest Payable (+L) 2,000 Recognized accrued interest on long-term note.

  34. Adjusting Journal Entries and T-accounts Rent Expense Prepaid Rent 1,000 3,000 2,000 1,000 (19)Rent Expense (E, -SE) 1,000 Prepaid Rent (-A) 1,000 Recognized 1/3 of rent period expired.

  35. Kelly Supply Income Statement For the Year Ended December 31, 2003 Revenues: Sales $27,000 Interest revenue 50 Total revenues $27,050 Expenses: Cost of goods sold $ 9,000 Wages expense 8,000 Rent expense 1,000 Interest expense 3,000 Depreciation expense 3,000 Amortization expense 500 Total expenses . 24,500 Net income $ 2,550

  36. Kelly Supply Statement of Retained Earnings For the Year Ended December 31, 2003 Beginning balance $5,000 Plus: Net income 2,550 Less: Dividends (1,000) Ending balance $6,550

  37. Kelly Supply Balance Sheet December 31, 2003 Assets: Cash $ 9,500 Accounts receivable 22,000 Interest receivable 50 Merchandise inventory 13,000 Prepaid rent 2,000 Machinery $26,000 Less: Accumulated depreciation 8,000 18,000 Patent 4,500 Total assets $69,050

  38. Kelly Supply Balance Sheet December 31, 2003 Liabilities and stockholders’ equity: Accounts payable $ 5,000 Wages payable 1,000 Interest payable 2,000 Dividends payable 1,000 Unearned revenue 1,000 Short-term notes payable 2,500 Long-term notes payable 20,000 Common stock 30,000 Retained earnings 6,550 Total liabilities and stockholders’ equity $69,050

  39. Kelly Supply Statement of Cash Flows For the Year Ended December 31, 2003 Operating activities: Collections from sales $10,000 Collections of accounts receivable 8,000 Payment for inventory purchases (3,000) Payments on accounts payable (10,000) Payments for wages (10,000) Payments for interest . (2,000) Net cash increase (decrease) $(7,000) Investing activities: Purchase of machinery $(1,000) Net cash increase (decrease) (1,000) Financing activities: Issuance of long-term notes payable $10,000 Payment of dividend (2,000) Payment of short-term notes payable . (2,500) Net cash increase (decrease) . 5,500 Net cash increase (decrease) during 2003 $(2,500) Beginning cash balance . 12,000 Ending cash balance $ 9,500

More Related