Chapter One Presentation 

who are the External users?

3 primary forms of business organization

All have the same goal: generate profit

1. Sole proprietorship (72% of businesses in the U.S.)

2. Partnership

3. Corporation

Characteristic 

Sole Prop.

Partnership

Corporation

# of owners

Only 1

2+

1+

Ownership acquired  via stock

No 

No

Yes

Liable for debts

Yes

Yes

No

Pay tax on business  income also

No

No 

Yes

***Notice how sole proprietorship and partnership don’t have to pay a double tax (benefit)  Financial Accounting Reports/ Financial Statements 

(Outside company) (Inside company)

    External users Internal users 

Creditors (Bank) Owners & managers 

Investors If you want to learn more check out recitance

Directors

Gov.

t

Assets (resources owned by the company) = liabilities(resources owed to creditors) +  stockholder’s equity (resources owed to stockholders) 

who are the internal users?

Separate Entity Assumption: assumes financial reports of a business only include the results of that business’s activities 

Assets include: cash, accounts receivable, supplies, software, and equipment Liabilities include: accounts payable, rent payable, wages payable, and notes payable

*Anytime you see the term “payable” with an account, you should associate it with a liability  account

Stockholder’s equity: Refers to the owner’s claims on the business 

Common stock: Equity paid in by stockholders 

  Net income/profit will increase retained earnings

A net loss will decrease it

Retained earning: Equity earned by the company 

Revenue accounts: Represent the amounts the company has earned by selling goods/services to  customers. Also known as “sales revenue” and “service revenue” 

Expenses: cost of doing business/generate revenue

what is Separate Entity Assumption?

Examples: rent expense, salary and wage expense, advertising expense  Don't forget about the age old question of cerrie rogers

Dividends: distributions to stockholders ( usually cash ) NOT CONSIDERED AN EXPENSE  At the end of every period there are FOUR financial statements. 

1. Income statement: includes all revenue accounts, expense accounts 

a. The difference between the two will result in net income/loss

b. Revenue – expense = net income/ loss 

2. Statement of retained earnings: ending balance of retained earnings 

a. Beginning RE + net income – dividends = Ending RE

3. Balance sheet: report assets, liabilities, and stockholder’s equity for a specific point in  time 

a. A = L + SE (common stock and retained earning)

b. The ending balance here will become the next periods new balance

4. Statement of cash flows: cash exchanges

a. THIS REPORTS ACTIVITITIES ONLY INVOLVING CASH 

b. Divided into 3 types 

i. Operating activities (paycheck, running the business)

ii. Investing activities (buying/selling assets)

iii. Financing activities (transactions with company’s own stock (loan) ) Sum of cash flows indicates change in cash

Ending cash balance = cash on balance sheet 

FASB: Financial Accounting Standards Board 

Determines the rules for reporting accounting information and producing financial statements.  The rules are referred to as GAAP.

GAAP: Generally Accepted Accounting Principles 

When it comes to most accounting rules, the USA has similar ones to those of the rest of the  world. They’re trying to create more similarities and they’re working with IASB Don't forget about the age old question of a population is defined as all of the inhabitants of a given country or area considered together.

IASB: International Accounting Standards

IFRS: International Financial Reporting Standards

Rules used internationally 

Financial information’s main goal is to be useful. Faithful representation & relevance ** Chapter One LearnSmart 

ORGANIZATIONAL FORMS

∙ Sole proprietorship: Owned/ operated by one person

o Get a business license and you’re good

o Profit/loss apart of owner’s tax income 

∙ Partnership: Two or more owners

o Slightly more expensive 

o Need lawyer to draw up agreement 

o More resources available, more room for growth *

∙ Corporation: Corporation, not owners, is responsible for taxes/ debts 

o Owners can’t lose more than their investment

o High legal fees

o Income tax must be paid by individual and corporation

o Can raise large amounts of money for growth 

o *Stock certificate 

o Most will start out as private and will apply to be a public company if they need a  lot of financing 

o *Issuing new stock certificates to investors*

∙ Other type: Limited Liability Company (LLC) – Combination of partnership and  corporation

Accounting: A system of analyzing, recording, and summarizing the result’s of a business’s  activities and then reporting the results to the decision makers. “Language of business” Private accountant: hired as an employee

Public accountant: works for many companies  We also discuss several other topics like natural selection favors behaviors that enhance:

1. Managerial Accounting Reports

i. Detailed financial plans

ii. Updated reports about the operating performance

iii. Only available to internal users

iv. Should we rent, built, or buy this building? Discontinue product?

2. Financial Accounting Reports/ Financial Statements 

i. Provide information to outsiders

ii. Are not given access to detailed internal records

4 TYPES OF EXTERNAL USERS 

1. Creditors (CONTRACT): Supplies, banks, anyone to whom money is owed 2. Investors (VALUE): Existing and potential stockholders

3.     Board of directors (GOVERN): Oversee company’s managers

4. Government (REGULATE) : SEC and International Revenue Service (IRS) Don't forget about the age old question of umd geography

What a company owns must equal what a company owes to its creditors and stockholders Assets = Liabilities + Stockholder’s Equity 

Basic accounting equation

∙ Separate entity assumption: The BUSINESS, not the stockholders who own the  business, own the assets and OWE the liabilities 

o Requires that a business’s financial reports include ONLY the business’s  activities

∙ Assets: An economic resource. Measurable value 

∙ Liabilities: Measurable amounts that the company owes to creditors 

∙ Stockholder’s Equity: Represents the owner’s claim If you want to learn more check out a viral species is a group of viruses that

 Common Stock: Equity paid in by stockholders

 Retained Earning: Equity earned by the company 

∙ Revenues: Earned by selling goods/services to customers 

∙ Expenses: All costs of doing business that are necessary to earn revenues (Advertising,  utilities, rent, salaries, and wages) 

∙ Net income: Revenues minus expense. By generating net income, a company increases  its stockholder’s equity 

∙ Dividends: An optional distribution of earnings to stockholders 

o Dividends are NOT an expense incurred to generate earnings 

∙ Financial Statements: Income statement, statement of retained earnings, balance sheet,  statement of cash flows 

    1.    Income Statement / Statement of Operations 

a. Heading identities who, what, and when

b. Unit of measure assumption: The United States will use U.S. dollar c. Body of income statement: Revenues – Expenses = Net Income 

2. Statement of Retained Earnings: Reports the way net income and the distribution of  dividends affected the company

3. Balance Sheet/Statement of Financial Position: Reports the amount of a business’s assets a. CASH is the first asset reported 

b. Cost principle: Assets are reported based on their ORIGINAL cost 4. Statement of Cash Flows: Activities that result in cash changing hands 

1. Operating: Related to running the business to earn profit 

a. Employee wages, rent, insurance, advertising, etc.

2. Investing: Buying/selling productive long­term resources 

3. Financing: Loans, paying dividends to stockholders 

Sarbanes­Oxley Act (SOX) : A set of laws established to strengthen corporate reporting in the  United States

Top managers of public companies have to sign certifying their responsibilities  for financial statements 

Chapter One

Problems Worked Out Solutions 

1. Accounting: A system that collects and processes financial information about an  organization and reports that information to decision makers. 

2. Unit of Measure: Measurement of information about a business in the monetary unit  (dollars or other national currency)

3. Partnership: An unincorporated business owned by two or more persons 4. Private Company: A company that sells shares of its stock privately and is not required to release its financial statements to the public. 

5. Corporation: An incorporated business that issues shares of stock as evidence of  ownership

6. Investing Activities: Buying and selling productive resources with long lives 7. Financing Activities: Transactions with lenders (borrowing and repaying cash) and  stockholders (selling company stock and paying dividends)

8. Operating Activities: Activities directly related to running the business to earn profit  9. SEC: Securities and Exchange Commission 

10. FASB: Financial Accounting Standards Board

11. Public Company: A company that has its stock bought and sold by investors on establishd stock exchanges

12. GAAP: Generally accepted accounting principles 

1. Separate Entity: The financial reports of a business are assumed to include the results of  only that business’s activities 

2. Assets: The resources owned by a business

3. Faithful Representation: Financial information that depicts the economic substance by  business activities

4. Stockholder’s Equity: The total amounts invested and reinvested in the business by its  owners 

5. Expenses: The costs of business necessary to earn revenues

6. Relevance: A feature of financial information that allows it to influence a decision 7. Revenues: Earned by selling goods or services to customers

8. Liabilities: The amounts owed by a business

1. Cash – balance sheet – asset 

2. Accounts payable – balance sheet – liability 

3. Accounts receivable – balance sheet – asset 

4. Income tax expense – income statement – expense account 

5. Sales revenue – income statement – revenue account

6. Notes payable – balance sheet – liability 

7. Retained earnings – balance sheet – stockholder’s equity 

1. Cash flows from financing activities­ statement of cash flows 

2. Expenses­ Income statement

3. Cash flows from investing activities­ statement of cash flows

4. Assets­ Balance sheet 

5. Dividends­ Statement of retained earnings 

6. Revenues­ Income statement

7. Cash flows from operating activities­ statement of cash flows

8. Liabilities­ balance sheet 

1. Cash paid for dividends­ Financing activity (outflow)

2. Cash collected from customers­ Operating activity 

3. Cash received when signing a note – Financing activity 

4. Cash paid to employees – Operating activity (outflow)

5. Cash paid to purchase equipment­ Investing activity (outflow)

6. Cash received from issuing stock – financing activity 

Ken Young and Kim Sherwood organized Reader Direct as a  corporation; each contributed $52,000 cash to start the business and  received 4,000 shares of stock. The store completed its first year of  operations on December 31, 2014. On that date, the following financial items for the year were determined: cash on hand and in the bank,  $47,500; amounts due from customers from sales of books, $28,200;  equipment, $51,000; amounts owed to publishers for books purchased, $8,700; one-year note payable to a local bank for $4,800. No dividends were declared or paid to the stockholders during the year.

Reader Direct

Balance Sheet

At December 31, 2014

Assets Liabilities

Cash $47,500

Accounts payable   $8,700

Accounts recievable $28,200

Note Payable $4,800

Equipment    $51,000

Total liabilities $13,500

Stockholder’s Equity 

Common stock $104,000

Retained Earnings $9,200

Total Stockholder’s Equity $113,200

Total Assets $126,700

Total Liabilities and Stockholder’s Equity $126,700

Assuming that Reader Direct generates net income of $9,500 and pays dividends of $3,300 in 2015, what would be the ending Retained Earnings balance at  December 31, 2015?

Ending RE = Beginning RE + Net Income – Dividends 

$15,400 = $9,200 + $9,500 

Using the following table and the equations underlying each of the four basic  financial statements, show (a) that the balance sheet is in balance, (b) that net  income is properly calculated, (c) what caused changes in the retained earnings  account, and (d) what caused changes in the cash account.

Assets $81,2

00

Liabilities 19,3

50

Stockholders' Equity 61,8

50

Revenue 33,8

00

Expenses 19,8

00

Net Income 14,0

00

Dividends 4,90

0

Beginning Retained Earnings 22,2

00

Ending Retained Earnings 31,3

00

Cash Flows from Operating  Activities

17,4 00

Cash Flows from Investing Activities (8,9 00 )

Cash Flows from Financing  Activities

(6,1

50 )

Beginning Cash 4,90 0

Ending Cash 7,25

0

A. Assets = Liabilities + Stockholder’s Equtiy 

$81,200 = $19,350 + $61,850

B. Net Income = Revenue – Expenses 

$14,000 = $33800 ­ $19,800

C. Ending RE = Beginning RE + Net Income – Dividends 

$31,300 ­ $22,200 + $14,000 – 4,900

D. Ending Cash = Beginning Cash + CF from Operating Activities + CF from Investing  Activities 

$7,250 = $4,900 + $17,400 + ($8,900) + ($6,150)

a. Coins and currency Cash

Amounts K∙Swiss owes to suppliers of watches

Amounts K∙Swiss can collect from customers

Amounts owed to bank for loan to buy building

Property on which buildings will be built

Amounts distributed from profits to stockholders

Amounts earned by K∙Swiss by selling watches

Unused paper in K∙Swiss head office

Cost of paper used up during month

Amounts contributed by stockholders for K∙Swiss stock

b. Accounts Payable c. Accounts Receivable d. Notes Payable e. Land f. Dividends g. Sales Revenue h. Supplies i. Supplies Expense j. Common Stock

A= Asset L= Liability R= Revenue E= Expense

Cheese Factory Incorporated reported the following information for the  fiscal year ended August 31, 2015.

Accounts Payable $ 165,00

0

Accounts Receivable 35,000 Cash (balance on September 1,  

2014) 95,000 Cash (balance on August 31, 2015) 124,00 0

Common Stock 100,00 0

Dividends 12,000 Equipment 775,00 0

Notes Payable 50,000 Office Expenses 195,00 0

Prepaid Rent 83,000 Retained Earnings (beginning) 430,00 0

Salaries and Wages Expense 1,055, 000

Salaries and Wages Payable 190,00 0

Sales Revenue 2,026, 000

Supplies 52,000 Utilities Expense 630,00 0

Other cash flow information:

Additional investments by stockholders $ 57,000 Cash paid to purchase equipment 64,000 Cash paid to suppliers and employees 1,545,0 00

Repayments of borrowings 175,000 Cash received from customers 1,761,0 00

Cash received from borrowings 7,000 Dividends paid in cash 12,000

Prepare an income statement for the fiscal year ended August 31st,  2015

CHEESE FACTORY INCORPORATED

INCOME STATEMENT

FOR THE YEAR ENDED AUGUST 31, 2015

Revenues

Sales Revenue

$2,026,000

Total Revenues

$2,026,000

Expenses

Salaries and Wages Expense

$1,055,000

Utilities Expense

$630,000

Office Expenses

$195,000

Total Expenses

$1,880,000

Net Income

$146,000

Prepare a statement of retained earnings for the fiscal year ended August 31,  2015.

CHEESE FACTORY INCORPORATED

Statement of Retained Earnings

For the Year Ended August 31, 2015 

Retained Earnings, Beginning

$430,000

Add: Net Income

146,000

Less: Divides

(12,000)

Retained Earnings, Ending

564,000

Prepare a balance sheet for the fiscal year ended August 31, 2015 CHEESE FACTORY INCORPORATED

Assets

Cash

Accounts Receivable Supplies

Prepaid Rent

Equipment

$

124,000

35,000

52,000

83,000

775,000

Statement of  Cash Flows For the year  ended 

august 31,  2015

Total Assets $ 1,069,000

Liabilities

$

165,000

50,000

190,000

405,000

Accounts Payable

Notes Payable

Salaries and Wages Payable

Total Liabilities

Stockholders' Equity

Prepare a  statement of  cash flows  for the fiscal  year ended  August 31,  2015

CHEESE

Common Stock

Retained Earnings

Total Stockholders' Equity

100,000

564,000

664,000

FACTORY

Total Liabilities and Stockholders' Equity $ 1,069,000

INCORPORATED  

Statement of cash flows

For the year ended august 31, 2015

Cash Flows from Operating  Activities

Cash Received from 

Customers

$

1,761,000

Cash Paid to Suppliers and Employees (1,545,000)

Cash Provided by Operating Activities

Cash Flows from Investing Activities Cash Paid to Purchase Equipment

Cash Used in Investing Activities Cash Flows from Financing Activities Additional Investments by Stockholders Cash Received from Borrowings Repayments of Borrowings

Dividends Paid to Stockholders

Cash Used in Financing Activities Increase in Cash

Cash at September 1, 2014

Cash at August 31, 2015

$

216,000

(64,000)

(64,000)

57,000

7,000

(175,000)

(12,000)

(123,000)

$

29,000

95,000

$

124,000

CHAPTER TWO TEXTBOOK NOTES

A key activity for a start-up company is to obtain financing (equity and debt) Equity refers to financing a business through owner’s contributions and  reinvestments of profit

Debt refers to financing the business through loans  

A business must repay debt financing but not equity financing  

Terms for repaying a loan are described in detail on a document called a  promissory note  

The company always receives something and gives something  Each exchange is analyzed and the dollar amount is configured. The value is  called the cost and used to measure the financial effects of the exchange, as  required by the cost principle.  

Business activities that affect the basic accounting equation are called  transactions. Transactions include two types of events

1. External exchanges: These involve assets, liabilities, an/ or  stockholders eqity between the company and someone else 2. Internal events: Events don’t involve exchanges with others outside  the business and happen within the company itself  

An exchange of only promises is not an accounting transaction  The Accounting Cycle

STEP ONE: ANALYZE TRANSACTIONS  

Here we must determine whether a transaction exists and if it does,, we  must figure out its impact on the accounting equation

1. Duality of effects: Every transaction has at least two effects on the  basic accounting equation  

2. A=L+SE  

Chart of accounts- a list that designates a name and reference number  that the company will use when accounting for each item it exchanges

CHAPTER TWO WORKED OUT SOLUTIONS  

a. ( Sample) Borrowed 4,840 from a local bank on a note due in six  months  

b. Received 5,530 cash from investors and issued common stock to  them

c. Purchased 1900 in equipment, paying 650 cash and promising  the rest on a note due in one year

d. Paid 750 cash for supplies

e. Bought and received 1150 of supplies on account

Assets

=

Liabilities

+

Stockhold er’s  

Equity

a.

4840

Notes  

payable  

(ST)  

$4840

b.

5530

Common  

stock  

$5530

c.

(650)

Notes  

payable  

(ST)  

$1250

1900

d.

(750)

750

e.

1150

Accounts  payable  

$1150

1. Transaction: An exchange or event that has a direct and  measurable financial effect

2. Separate Entity Assumption: Accounts for a business separate  from its owners

3. Balance Sheet: Reports assets, liabilities, and stockholder’s  equity  

4. Liabilities: Amounts presently owned by a business  5. Assets = Liabilities + Stockholder’s Equity: The basic accounting  equation

6. Current Assets: Economic resource to be used or tuned into cash  within one year

7. Notes payable: The account credited when money is borrowed  from a bank using a promissory note  

8. Duality of effects: Every transaction has at least 2 effects 9. Retained Earnings: Cumulative earnings of a company that are  not distributed to the owners  

10. Debit: Increase assets, decrease liabilities and stockholder’s equity

a. A company orders and receives 10 personal computers for office  use for which it signs a note promising to pay $25,000 within  three months

b. A company purchases for $21,000 cash a new delivery truck that  has a list (“sticker) price of $24,000

c. A women’s clothing retailer orders 30 new display stands for  $300 each for future delivery

d. A new company is formed and issues 100 shares of stock for $12  per share to investors

e. A company purchases a piece of land for $50,000 cash. An  appraiser for the buyer valued the land at $52,500

f. The owner of a local company uses a personal check to buy a  $10,000 car for personal use. Answer from the company’s point  of view

g. A company borrows $2,000 from a local bank and signs a six month note for the loan  

h. A company pays $1,5000 owed on its ten-year note payable  (Ignore interest)  

Given

Received

a

Notes payable (ST)

Equipment

b

Cash

Equipment

c

No exchange  

transaction

No exchange  

transaction

d

Common stock

Cash

E

Cash

Land

f

No company  

transaction

No company  

transaction

g

Notes payable (st)

Cash

h

Cash

Notes payable (LT)

At what amount would you record the delivery truck in b? 21,000

At what amount would you record the piece of land in e? 50,000

Home Comfort Furniture Company completed four transactions with the dollar effects indicatedfollowing schedule:

Assets = Liabilities + Stockholders’ Equity 

Cash Equipment Notes Payable Common Stock 

Beginni

ng$ 0 $ 0 = $ 0 $ 0

(1) +23,0

00 =+23,0

00

(2) +43,0

00 =+43,0

00

(3) –3,000+26,0

00 =+23,0

00

(4) +11,5

00 =+11,5

00

Ending $ $ = $ $

Compute the ending balance in each account  

Cash

+

Equipme nt

=

Notes  

payabl

e

+

Comm

on  

stock

Ending

74500

+

26,000

=

77500

+

23,000

Has most of the financing for home comfort’s investments in assets  come from liabilities or stockholder’s equity  

Liabilities  

a. Placed an order for office supplies costing 2200. Supplier intends  to deliver later in the month

b. Purchased equipment that cost 27000, paid 12000 cash and  signed a promissory note to pay 15000 in one month

c. Negotiated and signed a one year bank loan, and then deposited  6000 cash in the company’s checking account

d. Hired a new finance manager on the last day of the month

e. Received an investment of 15,000 cash from the company’s  owners in exchange for issuing common shares

f. Suppliers (ordered in a) were received, along with a bill for 2,200

Assets

=

Liabilities

+

Stockhold er’s equity

a

b

Cash  

(12,000)

Notes  

payable  

(ST)  

15,000

Equipmen t 27,000

c

Cash  

6,000

NP-ST  

6,000

d

e

Cash  

15,000

Common  

stock  

15,000

f

Supplies  2,200

Accounts  payable  

2,200

Totals  

38200

23,200

15,000

Accounts payable $131

Accounts receivable 15

Cash 110

Common stock 25

Equipment 300

Inventories 146

Notes Payable LT 160

Notes Payable ST 3

Prepaid Rent 27

Retained Earning 329

Salaries and Wages Payable 25

Short term investments 15

Software 60

a. Paid 40 cash for additional inventories  

b. Issued additional shares of common stock for 30 in cash

c. Purchased equipment, paid 65 in cash and signed a note to pay  the remaining 75 in two years

d. Signed a short term note to borrow 12 cash

e. Conducted negotiations to purchase a sawmill, which is expected  to cost 32

Analyze transactions (a)–(e) to determine their effects on the accounting 

equation

Assets

=

Liabilities

+

SE

a

Inventory  40

Cash (40)

b

Cash 30

Common  stock 30

c

Equipmen t 140

NP-LT 75

Cash (65)

d

Cash 12

NP-ST  

12

e

Record the transaction effects determined in part 1 using journal entries.

General Journal

Debit

Inventory

40

Cash

Cash

30

Common Stock

Equipment

140

Cash

Notes Payable (long­term)

Transaction Credit a

40

b

30

c

65

75

Cash

12

Notes Payable (short­term)

No Journal Entry Required

d

12

e

Summarize the journal entry effects from part 2 using T­accounts. Use the September 30, 2013,  ending balances as the beginning balances for the October–December 2013 quarter. (Enter your  answers in millions (i.e., 10,000,000 should be entered as 10).)