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Financial Accounting, 5e Weygandt, Kieso, Kimmel

Financial Accounting, 5e Weygandt, Kieso, Kimmel. John Wiley & Sons, Inc. CHAPTER 1 ACCOUNTING MATTERS!. STUDY OBJECTIVES After studying this chapter, you should understand:. STUDY OBJECTIVE 1 WHY STUDY ACCOUNTING?. Accounting scandals and corporate misdeeds prevails .

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Financial Accounting, 5e Weygandt, Kieso, Kimmel

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  1. Financial Accounting, 5e Weygandt, Kieso, Kimmel John Wiley & Sons, Inc.

  2. CHAPTER 1 ACCOUNTING MATTERS! STUDY OBJECTIVES After studying this chapter, you should understand:

  3. STUDY OBJECTIVE 1 WHY STUDY ACCOUNTING? Accounting scandals and corporate misdeeds prevails. • Enron (虛增5億美元盈餘) • Worldcom (浮誇資產近市值100億美元) • Xeron Corp. (60億美元營收錯誤認列) • 博達科技(63億現金不翼而飛) • … Accounting is important. Good accounting is essential to sound business and investing decision. Bad accounting cannot be tolerated.

  4. STUDY OBJECTIVE 1 WHAT IS ACCOUNTING? Accounting is an information system that identifies, records, and communicates the economic events (transactions) of an organization to interested users.

  5. Accounting Reports SOFTBYTE Annual Report THE ACCOUNTING PROCESS Communication Identification Recording Prepare accounting Reports (in the aggregate) Select economic events (transactions) 認定與特定經濟個體有關的經濟活動 Record, classify and summarize 以有系統及有順序的方式予以記錄 Analyze and interpret for users

  6. STUDY OBJECTIVE 2 USERS AND USES OF ACCOUNTING Internal Users Investors Creditors Tax authorities Regulatory agencies Customers Labor unions Marketing managers Production supervisors Finance directors Company officers External Users

  7. QUESTIONS ASKED BY INTERNAL USERS Internal Reports What is the cost of manufacturing each unit of product? (Pricing) Is cash sufficient to pay bills? (Budget planning) Can we afford to give employee pay raises this year? (Compensation) Which product line is the most profitable? (Capital budgeting)

  8. How does the company compare in size and profitability with its competitors? Is the company earning satisfactory income? What do we do if they catch us? Will the company be able to pay its debts as they come due? QUESTIONS ASKED BY EXTERNAL USERS

  9. STUDY OBJECTIVE 3 ETHICS: A FUNDAMENTAL BUSINESS CONCEPT ETHICS: A set of standards by which one’s actions are deemed right or wrong, honest or dishonest.

  10. STUDY OBJECTIVE 3ETHICS: A FUNDAMENTAL BUSINESS CONCEPT • Steps for solving an ethical dilemma: • Recognize an ethical situation and the issues involved. (認清道德情況和所涉及的道德爭議) • Identify the principal elements of the situation (辨認並分析情況中的主要因素) • Identify alternatives: weigh the impact on stakeholders (辨認替代方案並權衡每個替代方案對各利害關係人的影響)

  11. STUDY OBJECTIVE 4 GAAP (Generally Accepted Accounting Principles) What is GAAP? A set of standards generally accepted and universally practiced by accountants Indicates how economic events are reported Generated by the Financial Accounting Standards Board (FASB) and Securities & Exchange Commission (SEC)

  12. STUDY OBJECTIVE 4 GAAP (Generally Accepted Accounting Principles) A main purpose of GAAP is to make information in financial statements relevant(攸關), reliable(可靠), and comparable(可比較性). • Relevant information affects the decisions of its users. • Reliable information is trusted by users. • Comparable information is helpful in contrasting organization.

  13. STUDY OBJECTIVE 5 BASIC ACCOUNTING ASSUMPTIONS MONETARY UNIT ASSUMPTION Only transaction data that can be expressed in terms of money is included in the accounting records. The unit of measure (the dollar in the USA) is assumed to remain constant in value • ECONOMIC ENTITY • ASSUMPTION • An economic entity • includes any organization • or unit in society. • All activities of an • entity are kept separate • from the activities • of its owners and • other economic entities.

  14. BUSINESS ENTERPRISES • A business owned by one person is generally a proprietorship. • A business owned by two or more persons associated as partners is a partnership. • A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation.

  15. STUDY OBJECTIVE 5 BASIC ACCOUNTING ASSUMPTIONS • GOING CONCERN • ASSUMPTION • Accounting information • reflects an assumption that • the business will continue • operating instead of being • closed or sold. • TIME PERIOD • CONVENTIONS • (時間單位慣例)

  16. STUDY OBJECTIVE 5 BASIC ACCOUNTING PRINCIPALS COST PRINCIPAL Cost is the value exchanged at the time something is acquired. It makes no difference If cost and fair market Value vary subsequently. • REVENUE RECOGNITION • PRINCIPAL • To recognize means to • record it. • (1)Revenue is recognized • when earned. • (2)Proceeds need not to be • in cash. • (3)Proceeds is measured • by the cash received • plus the cash value of • any other items received.

  17. STUDY OBJECTIVE 6 THE BASIC ACCOUNTING EQUATION Assets Liabilities Stockholders’ Equity = + resources owned by a business claims against those assets owners’ residual claim on total assets

  18. REVIEW QUESTION THE BASIC ACCOUNTING EQUATION As of December 31, 2005, Tetrick Company has assets of $3,500 and stockholders’ equity of $2,000. What are the liabilities for Tetrick Company as of December 31, 2005? Answer: $1,500 Assets – Liabilities = Stockholders’ Equity $3,500 = Liabilities + $2,000 Liabilities = $1,500

  19. STOCKHOLDERS’ EQUITY • Stockholders’ equityis equal to total assets minus total liabilities. It is also referred to as residual equity.There are two general categories of stockholders’ equity: PAID-IN CAPITAL and RETAINED EARNINGS

  20. PAID-IN CAPITAL • Paid in Capitalrepresents the total amount invested by stockholders in a corporation. • Stockholders invest cash or other assets in exchange for common or preferred stock.

  21. RETAINED EARNINGS • Retained earnings represents cumulative profits (or losses) retained in the business over time. • Three items make up the balance in retained earnings: REVENUES EXPENSES DIVIDENDS

  22. REVENUES • Revenuesare the gross increases in stockholders’ equity from engaging in business activities entered into for the purpose of earning income. • Revenues result from sales of merchandise, performance of services, rental of property, or lending of money. • Revenues usually result in an increase in an asset.

  23. EXPENSES • Expenses are the decreases in stockholders’ equity that result from operating the business. • They are the cost of assets consumed or services used in the process of earning revenue. • Examples are: utility expense, rent expense, supplies expense, tax expense, insurance expense, depreciation expense.

  24. DIVIDENDS • When a company is successful, it generates Net Income. • Dividends: the distribution of cash or other assets to stockholders that are available as a result of Net Income. • Dividends are NOT considered an expense of the corporation.

  25. INCREASES & DECREASES IN STOCKHOLDERS’ EQUITY Increases Decreases Investments by stockholders Dividends to stockholders Stockholders’ Equity Revenues Expenses

  26. REVIEW QUESTION STOCKHOLDERS’ EQUITY Rebecca Sherrick, Inc., had a stockholders’ equity balance of $164,000 at the beginning of the period. At the end of the period, the stockholders’ equity balance was $198,000. Assuming no additional investment or distributions During the period, what is the net income for the period?

  27. STUDY OBJECTIVE 7 HOW BUSINESS TRANSACTIONS AFFECT THE ACCOUNTING EQUATION • Transaction: 係指會計人員所記錄的經濟事項。 • Every transaction must have a dual effect on the accounting equation. Thus, if an asset is increased, there must be a corresponding: • Decrease in another asset, or • Increase in a liability, or • Increase in stockholders’ equity

  28. Don’t Record Record Record TRANSACTION IDENTIFICATION PROCESS Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed? Purchase computer Answer telephone Pay rent Yes No Yes

  29. TRANSACTION ANALYSIS TRANSACTION 1 • Ray and Barbara Nealdecide to open a computer programming company to be incorporated as Softbyte, Inc. • They invest $15,000 cash in exchange for $15,000 of common stock.

  30. Assets = Liabilities + Stockholders’ Equity Common Cash Stock TRANSACTION ANALYSIS TRANSACTION 1 SOLUTION (1)+15,000 = +15,000 Investment There is an increase in the asset Cash, $15,000, and an equal increase in the stockholders’ equity, Common Stock, $15,000.

  31. TRANSACTION ANALYSIS TRANSACTION2 Softbytepurchases computer equipment for $7,000 cash.

  32. TRANSACTION ANALYSIS TRANSACTION 2 SOLUTION (2)-7,000 +$7,000 Stockholders’ Assets = Liabilities + Equity Common Cash + Equipment = Stock Old Bal. $15,000 $15,000 New Bal. $ 8,000 + $7,000 = $15,000 $15,000 Cash is decreased $7,000 and the asset Equipment is increased $7,000.

  33. Acme Supply Company Softbyte, Inc. TRANSACTION ANALYSIS TRANSACTION3 • Softbytepurchases computer paper and other supplies expected to last several months from Acme Supply Company for $1,600. • Acme Supply Company agrees to allow Softbyteto pay this bill in October, a month later. • This transaction is often referred to as a purchase on account or a credit purchase.

  34. TRANSACTION ANALYSIS TRANSACTION 3 SOLUTION (3)+$1,600 +$1,600 Stockholders’ Assets = Liabilities + Equity Accounts Common Cash + Supplies + Equipment = Payable + Stock Old Bal. $8,000 $7,000 $15,000 New Bal. $8,000 + $1,600 + $7,000 = $1,600 + $15,000 $16,600 $16,600 The asset Supplies is increased $1,600 and the liability Accounts Payable is increased by the same amount.

  35. Softbyte, Inc. TRANSACTION ANALYSIS TRANSACTION4 • Softbytereceives $1,200 cash from customers for programming services it has provided. • This transaction represents the principal revenue-producing activity of Softbyte.

  36. TRANSACTION ANALYSIS TRANSACTION 4 SOLUTION (4) +1,200 +1,200 Service Revenue Assets = Liabilities + Stockholders’ Equity Accounts Common Retained Cash + Supplies + Equipment = Payable + Stock Earnings Old Bal. $8,000 $1,600 $7,000 $1,600 $15,000 $9,200 New Bal. + $1,600 + $7,000 = $1,600 + $15,000 $1,200 $17,800 $17,800 Cash is increased $1,200 and Retained Earnings is increased $1,200.

  37. Bill Softbyte, Inc. Daily News TRANSACTION ANALYSIS TRANSACTION5 Softbytereceives a bill for $250 from the Daily News for advertising the opening of its business but postpones payment of the bill until a later date.

  38. TRANSACTION ANALYSIS TRANSACTION 5 SOLUTION (5) +250 -250 Advertising Expense Assets = Liabilities + Stockholders’ Equity Accounts Common Retained Cash + Supplies + Equipment = Payable + Stock Earnings Old Bal. $9,200 $1,600 $7,000 $1,600 $15,000 $1,200 New Bal. $9,200 + $1,600 + $7,000 = $1,850 + $15,000 $ 950 $17,800 $17,800 Accounts Payable is increased $250, and Retained Earnings is decreased $250.

  39. Softbyte, Inc. Bill TRANSACTION ANALYSIS TRANSACTION6 • Softbyteprovides programming services of $3,500 for customers. • Cash amounting to $1,500 is received from customers, and the balance of $2,000 is billed to customers on account.

  40. TRANSACTION ANALYSIS TRANSACTION 6 SOLUTION (6) +1,500 +2,000 +3,500 Service Revenue Assets = Liabilities + Stockholders’ Equity $21,300 $21,300 Cash is increased $1,500; Accounts Receivableis increased $2,000; andRetained Earnings is increased $3,500.

  41. $600 $900 Softbyte, Inc. $200 TRANSACTION ANALYSIS TRANSACTION7 Expenses paid in cash for September are store rent, $600, salaries of employees, $900, and utilities, $200.

  42. Assets = Liabilities + Stockholders’ Equity TRANSACTION ANALYSIS TRANSACTION 7 SOLUTION (7) -1,700 -600 Rent -900 Salaries -200 Utilities $19,600 $19,600 Cash is decreased $1,700 andRetained Earnings is decreased by $1,700.

  43. Softbyte, Inc. Daily News TRANSACTION ANALYSIS TRANSACTION8 Softbytepays its Daily News advertising bill of $250 in cash.

  44. Assets = Liabilities + Stockholders’ Equity TRANSACTION ANALYSIS TRANSACTION 8 SOLUTION (8) -250 -250 $19,350 $19,350 Cash is decreased $250 andAccounts Payable is decreased by $250.

  45. Softbyte, Inc. TRANSACTION ANALYSIS TRANSACTION9 The sum of $600 in cash is received from customers who have previously been billed for services in Transaction 6.

  46. Assets = Liabilities + Stockholders’ Equity TRANSACTION ANALYSIS TRANSACTION 9 SOLUTION (9) +600 -600 $19,350 $19,350 Cash is increased $600 andAccounts Receivable is decreased by the same amount.

  47. $1,300 Softbyte, Inc. TRANSACTION ANALYSIS TRANSACTION10 The corporation pays a dividend of $1,300 in cash to Ray and Barbara Neal, the stockholders of Softbyte, Inc.

  48. Assets = Liabilities + Stockholders’ Equity TRANSACTION ANALYSIS TRANSACTION 10 SOLUTION (10) -1,300 -1,300 Dividends $18,050 $18,050 Cash is decreased $1,300 andStockholders’ Equity is decreased by the same amount.

  49. STUDY OBJECTIVE 8 BASIC FINANCIAL STATEMENTS After all transactions for the period are recorded, financial data is summarized, and that summary data is used to generate the basic financial statements Balance Sheet Statement of Cash Flows Income Statement Statement of Stockholders’ Equity

  50. ILLUSTRATION 1-10FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS $ 2,750 Net income of $2,750 shown on the income statement is added to the beginning balance of retained earnings in the retained earnings statement. SOFTBYTE, INC. Net income of $2,750 is determined from the information in the retained earnings column of the Summary of Transactions (Illustration 1-7). Income Statement For the Month Ended September 30, 2005 Revenues Service revenue $ 4,700 Expenses Salaries expense $ 900 Rent expense 600 Advertising expense 250 Utilities expense 200 Total expenses 1,950 Net income SOFTBYTE, INC. Retained Earnings Statement For the Month Ended September 30, 2005 Retained earnings, September 1 $ –0– $ 2,750 Add: Net income 2,750 Less: Dividends 1,300 Retained earnings, September 30 $ 1,450

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