Accounting Principles Chapter 2 Accounting Principles

2-1 Conceptual Framework CONSTRAINTS Objectives of Financial Reporting Qualitative Characteristics of Accounting Information Elements of Financial Statements Operating Guidelines Assumptions Principles CONSTRAINTS

2-2 Qualitative Characteristics of Accounting Information Useful Financial Information has: Relevance Reliability 1. Predictive value 2. Feedback value 3. Timely 1. Verifiable 2. Faithful representation 3. Neutral Comparability and Consistency

2-3 Operating Guidelines Detailed Guidelines for Solving Practical Problems ASSUMPTIONS PRINCIPLES 1. Economic Entity 1. Revenue Recognition 2. Monetary Unit 2. Matching 3. Time Period 3. Full Disclosure 4. Going Concern 4. Cost CONSTRAINTS and Materiality Conservatism

2-4 Recording Business Transactions A. Review of Selected Transactions Mr. Sam Doty opened and incorporated a hospitality consulting firm during the month of September and provided you with the following data. Invested $8,000 in his business in exchange for common stock. Purchased $500 of supplies for cash. Purchased $4,000 of equipment on account. Received $3,000 cash for consulting services. Paid salaries of $800 Paid the first month’s rent of $200. Paid $1,000 owned to a creditor. The corporation paid a dividend of $1,500 in cash to Sam Doty, the stockholder. Instructions: Prepare the tabular summary for the transactions above.

2-4 Recording Business Transactions (continued) Summary of Transactions Month of September 2008 Answer: Assets = Liabilities + Stockholders’ Equity Trans-action Cash Sup-plies Equip-ment Accounts Payable Common Stock Retained Earnings (1) +$8,000 Investment (2) -500 +500 (3) +$4,000 (4) +3,000 Service Revenue (5) -800 Salary Expense (6) -200 Rent Expense (7) -1,000 (8) -1,500 Dividends $7,000 $500 $4,000 $3,000 $8,000

2-4 Recording Business Transactions (continued) B. Financial Statement Relationship to Transactions and Balances Prepare the Income Statement and Retained Earnings Statement from the Stockholders’ Equity Column of the Summary of Transactions for the month of September. Stockholders’ Equity + $8,000 (Investment by Stockholders) 3,000 (Service Revenue) - 800 (Salary Expense) 200 (Rent Expense) 1,500 (Dividends) $8,500

2-4 Recording Business Transactions (continued) Answer: Sam Doty Hospitality Consultant Income Statement For Month Ended September 30, 2008 Revenues Service revenue $3,000 Expenses Salary expense $800 Rent expense 200 Total expenses 1,000 Net income $2,000 Sam Doty Hospitality Consultant Retained Earnings Statement For Month Ended September 30, 2008 Retained Earnings, September 1 $ -0- Add: Net income 2,000 Less: Dividends $1,500 Retained Earnings, September 30 $ 500

2-4 Recording Business Transactions (continued) Prepare the Balance Sheet from the Month-end Balances of the Summary of Transactions. Assets Liabilities Stockholders’ Equity = + Cash + Supplies + Equip. $7,000 + $500 + $4,000 Accounts Payable $3,000 Common Stock $8,000 R.E. $500 = + + = + +

2-4 Recording Business Transactions (continued) Sam Doty, Hospitality Consultant Balance Sheet September 30, 2008 Assets Cash $ 7,000 Supplies 500 Equipment 4,000 Total assets $11,500 Liabilities and Stockholders’ Equity Liabilities Accounts payable $ 3,000 Stockholders’ Equity Common stock 8,000 Retained earnings Total liabilities & stockholders’ equity Answer:

2-4 Recording Business Transactions (continued) Prepare the Statement of Cash Flows from the Cash Column of the Summary of Transactions for the month of September. Sam Doty, Hospitality Consultant Statement of Cash Flows for Month Ended September 30, 2008 Cash flows from operating activities Cash receipts from customers $3,000 Cash payments for expenses 1,000 Net cash provided by operating activities $2,000 Cash flows from investing activities Purchase of supplies (500) Payment for equipment (1,000) (1,500) Cash flows from financing activities Sale of common stock $8,000 Dividends paid 6,500 Net increase in cash 7,000 Cash at the beginning of the period Cash at the end of the period $7,000

2-5 Analyzing Transactions Identify the various transactions indicated by the information provided: CASH ACCOUNTS RECEIVABLE increased………………….. decreased_________________ RENT EXPENSE CASH increased………………….. decreased_________________ SUPPLIES ACCOUNTS PAYABLE increased………………….. decreased_________________ EQUIPMENT CASH increased………………….. decreased_________________ ACCOUNTS RECEIVABLE REVENUE increased………………….. decreased_________________ DIVIDENDS CASH increased………………….. decreased_________________

2-5 Analyzing Transactions (continued) Continue exercise by asking students for a transaction which increases the following: Cash, Accounts Receivable, Supplies, Equipment, Accounts Payable, Common Stock decreases the following: Cash, Accounts Receivable, Supplies, and Accounts Payable

2-5 Analyzing Transactions (continued) Answer: Collection of an accounts receivable. Payment of the current month’s rent. Purchase of supplies on account. Purchase of equipment for cash. Rendering of services for a customer on account. The declaration of a cash dividend.