ACG 2021 Financial Accounting

1. ACG 2021Financial Accounting Chapter One: The Financial Statements

2. The Accounting System

3. 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 • We’ve been accounting for many, many years

4. Information System Model

5. 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

6. 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

7. 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

8. Language Dialects • Financial Accounting • Managerial Accounting • Tax Accounting • Governmental (non-profit) Accounting

9. ACG 2021 Who are we Accounting for: Business Forms And Accounting Rules and Assumptions

10. 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)

11. 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

12. 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

13. 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

14. Accounting Guidelines • Formulated by the Financial Accounting Standards Board (FASB) • Generally Accepted Accounting Principles (GAAP) • The Entity Concept • A business is separate & distinct from it’s 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) • $’s that a willing buyer paid a willing seller • Not some point in the future • The Going-Concern Principle • The Entity will not go Out-of-Business • The Stable-Monetary-Unit Concept • the monetary unit’s ($’s) purchasing power is stable (ignores inflation)

15. ACG 2021Financial Accounting The Accounting Equation Assets = Liabilities + Owners Equity

16. Economic Resources Claims against Economic Resources The Accounting Equation Assets Liabilities + Owner’s Equity =

17. 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

18. 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

19. Owner’s Equity The owner’s claim on the entity’s assets • Capital (for Proprietorship or Partnership) • Stockholders’ equity (for Corporation) • Share’s of Stock • Net assets Assets – liabilities = owner’s equity

20. Stockholders’ Equity • For a corporation, stockholders’ equityis 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

21. 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

22. 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

23. End of the period Ending balance of retained earnings 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 – –

24. Accounting Equation Expanded (again) • Assets = Liabilities + Paid-in Capital – Dividends + Revenue – Expenses Retained Earnings

25. 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)

26. Chapter 1 Exercise 1-4

27. ACG 2021Financial Accounting The Financial Statements

28. The Financial Statements • Balance Sheet • Income Statement • Statement of Retained Earnings • Statement of Cash Flows

29. Balance Sheet Rank Place Situation Standing • Assets used to reach company objectives • $’s represent One Particular Point in Time • Snapshot • What is the company’s financial position at the end of a period? Assets = Liabilities + Owner’s Equity

30. 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) Balance Sheet

31. 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)

32. 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

33. 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

34. Information Reported in the F/S

35. Relationships Amongthe Financial Statements ABC Company Income Statement – Year Ended December 31, 2006 Revenues $700,000 Expenses 670,000 Net income $ 30,000

36. 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

37. 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

38. 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