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B USINESS A CTIVITIES – T HE S OURCE OF A CCOUNTING I NFORMATION

Chapter F2. B USINESS A CTIVITIES – T HE S OURCE OF A CCOUNTING I NFORMATION. Electronic Presentation by Douglas Cloud Pepperdine University. Objectives. 1. Identify financing activities and explain why they are important to a business.

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B USINESS A CTIVITIES – T HE S OURCE OF A CCOUNTING I NFORMATION

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  1. Chapter F2 BUSINESS ACTIVITIES –THE SOURCE OF ACCOUNTING INFORMATION Electronic Presentationby Douglas Cloud Pepperdine University

  2. Objectives 1.Identify financing activities and explain why they are important to a business. 2.Demonstrate how accounting measures and records business activities. 3.Identify investing activities and explain why they are important to a business. 4.Identify operating activities and explain how they create profits for a company. Once you have completed this chapter, you should be able to: Continued

  3. Objectives 5. Describe how financial reports summarize business activities and provide information for business decisions.

  4. Objective 1 Identify financing activities and explain why they are important to a business.

  5. Financing Activities A business is an organization that exists for the purpose of making a profit for its owners.

  6. Financing Activities A contribution by owners to a business, along with any profits that are kept in the business, is known as owners’ equity.

  7. Financing Activities Business activities are events that occur when a business acquires, uses, or sells resources or claims to those resources.

  8. Financing Activities Financing activities occur when owners or creditors provide resources to a company or when a company transfers resources to owners or creditors.

  9. Financing from Owners and Creditors Exhibit 1

  10. Objective 2 Demonstrate how accounting measures and records business activities.

  11. An account is a record of increases and decreases in the dollar amount associated with a specific resource or activity.

  12. Accounting transactions are descriptions of business activities (or events) that are measured in dollar values and recorded in accounts.

  13. Assets = The Accounting Equation Resources controlled by the business

  14. Assets Liabilities Owners’ Equity + = The claims of creditors to a company’s resources Owners’ claims on the company’s assets The Accounting Equation

  15. Financing Activities On January 2, 2004, Mom’s Cookie Company received $10,000 from the company’s owners. On January 3, 2004, the company received $8,000 from the bank.

  16. Accounting Representation of Financing Activities Exhibit 3 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 0 = 0 + 0 1/2 Cash 10,000 Contributed Capital 10,000 1/3 Cash 8,000 Notes payable 8,000 Ending Amounts 18,000 = 8,000 + 10,000 Cash refers to financial resources in the form of coins and currency, bank deposits, and short-term investments that can be converted easily into currency.

  17. Accounting Representation of Financing Activities Exhibit 3 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 0 = 0 + 0 1/2 Cash 10,000 Contributed Capital 10,000 1/3 Cash 8,000 Notes payable 8,000 Ending Amounts 18,000 = 8,000 + 10,000 Contributed capital is an owners’ equity account and identifies amounts contributed to a company by its owners.

  18. Accounting Representation of Financing Activities Exhibit 3 Notes payable is a liability account used to identify amounts a company owes to creditors with whom a formal agreement, or note, has been signed. ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 0 = 0 + 0 1/2 Cash 10,000 Contributed Capital 10,000 1/3 Cash 8,000 Notes payable 8,000 Ending Amounts 18,000 = 8,000 + 10,000

  19. Objective 3 Identify investing activities and explain why they are important to a business.

  20. Investing Activities Investing activities involve the acquisition and disposal of long-term resources used by a business.

  21. Business Activities: Investing in Long-Term Resources Exhibit 4

  22. Investing Activities On January 5, Mom’s Cookie Company paid $6,000 for office equipment. On January 6, the company bought a delivery van for $25,000. It paid $3,000 in cash and financed the remaining $22,000 of the purchase price with a note payable.

  23. Accounting Representation of Investing Activities Exhibit 5 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000 Cash –6,000 On January 5, one asset increased (Equipment) and another asset decreased (Cash) by the same amount, so the accounting equation remained unchanged. Continued

  24. Accounting Representation of Investing Activities Exhibit 5 Continued ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000 Cash –6,000 1/6 Equipment 25,000 Cash –3,000 Notes Payable 22,000 Ending Amounts 40,000 = 30,000 + 10,000 On January 6, the company acquired a delivery van for $25,000.

  25. Accounting Representation of Investing Activities Exhibit 5 Continued ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000 Cash –6,000 1/6 Equipment 25,000 Cash –3,000 Notes Payable 22,000 Ending Amounts 40,000 = 30,000 + 10,000 The company paid $3,000 in cash.

  26. Accounting Representation of Investing Activities Exhibit 5 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000 Cash –6,000 1/6 Equipment 25,000 Cash –3,000 Notes Payable 22,000 Ending Amounts 40,000 = 30,000 + 10,000 The balance of $22,000 was financed by issuing a note payable.

  27. Objective 4 Identify operating activities and explain how they create profits for a company.

  28. Operating Activities Operating activities are those activities necessary to acquire goods and services.

  29. Operating Activities Revenue is the amount a company expects to receive when it sells goods or services.

  30. Operating Activities Expense is the amount of resources consumed in the process of acquiring and selling goods and services.

  31. Purchase of Goods for Sale Exhibit 6

  32. Operating Activities Merchandise inventory is an asset account and identifies the cost of goods a company has purchased for sale.

  33. Operating Activities On January 7, Mom’s Cookie Company purchased cookies from the bakery at a cost of $9,000. Mom’s Cookie Co.

  34. Accounting Representation of Purchase of Merchandise Exhibit 7 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 40,000 = 30,000 + 10,000 Jan. 7 Merchandise Inven. 9,000 Cash –9,000 Ending Amounts 40,000 = 30,000 + 10,000 The company now has $9,000 of goods for sale. Continued

  35. Accounting Representation of Purchase of Merchandise Exhibit 7 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 40,000 = 30,000 + 10,000 Jan. 7 Merchandise Inven. 9,000 Cash –9,000 Ending Amounts 40,000 = 30,000 + 10,000 The firm spent $9,000 to acquire the merchandise. Continued

  36. Accounting Representation of Purchase of Merchandise Exhibit 7 ASSETS = LIABILITIES + OWNERS’ EQUITY Date Accounts Beginning Amounts 40,000 = 30,000 + 10,000 Jan. 7 Merchandise Inven. 9,000 Cash –9,000 Ending Amounts 40,000 = 30,000 + 10,000 The ending amount of assets remains the same.

  37. Operating Activities: Selling Goods to Customers Exhibit 8

  38. Operating Activities Mom’s Cookie Company sells 380 boxes of cookies (cost to make = $7,600) to grocery stores during the month for $11,400, receiving cash.

  39. Accounting Representation of Operating Activities Exhibit 9 Continued ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts Beginning Amounts 0 +40,000 30,000 10,000 1/31 Cash 11,400 Sales Revenue 11,400 1/31Cost of Goods Sold -7,600 Merchan. Inventory -7,600 Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800 Sold 380 boxes of cookies at $30 each. Cash increases $11,400.

  40. Accounting Representation of Operating Activities Exhibit 9 Continued ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts Beginning Amounts 0 +40,000 30,000 10,000 1/31 Cash 11,400 Sales Revenue 11,400 1/31Cost of Goods Sold -7,600 Merchan. Inventory -7,600 Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800 Sales Revenue increases Retained Earnings by $11,400.

  41. Accounting Representation of Operating Activities Exhibit 9 Continued ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts A second entry is required to record the cost of $7,600… Beginning Amounts 0 +40,000 30,000 10,000 1/31 Cash 11,400 Sales Revenue 11,400 1/31Cost of Goods Sold -7,600 Merchan. Inventory -7,600 Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

  42. Accounting Representation of Operating Activities Exhibit 9 ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts …and a reduction in the amount of inventory. Beginning Amounts 0 +40,000 30,000 10,000 1/31 Cash 11,400 Sales Revenue 11,400 1/31Cost of Goods Sold -7,600 Merchan. Inventory -7,600 Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800

  43. Accounting Representation of Expenses Exhibit 10 On January 6, paid $300 for supplies used during January. ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts 1/6 Supplies Expense -300 Cash -300 Continued on Slide 45

  44. Operating Activities Did you notice that revenues increase owners’ equity and expenses decrease owners’ equity?

  45. Accounting Representation of Expenses Exhibit 10 On January 8, paid $600 for rent for January. ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts 1/8 Rent Expense -600 Cash -600 Continued

  46. Accounting Representation of Expenses Exhibit 10 On January 31, paid $1,000 for wages for January. ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts 1/31 Wages Expense -1,000 Cash -1,000 Continued

  47. Ending Amounts 9,300 +32,400 = 30,000 + 10,000 + 1,700 Accounting Representation of Expenses Exhibit 10 On January 31, paid $200 for utilities for January. ASSETS = LIABILITIES + OWNERS’ EQUITY Cash Contributed Capital Retained Earnings Other Assets Date Accounts 1/31 Utilities Expense -200 Cash -200

  48. Objective 5 Describe how financial reports summarize business activities and provide information for business decisions.

  49. Financial statements are reports that summarize the results of a company’s accounting transactions for a fiscal period.

  50. Slide 51 is a summary of balances for Mom’s Cookie Company at January 31 (Exhibit 12).

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