Principles of Accounting Syllabus--Read this carefully. It is a contract.

Professor Daly’s class materials Syllabus, lecture notes,etc. posted on Graduate School of Business Bulletin Board http://graduatebusiness.sejong.ac.kr/Eng/

Classroom Conduct Class starts promptly at: 9:00 on Tuesday and Thursday

Classroom Conduct Read the chapter in textbook You are expected to prepare for class: Read the chapter in textbook Write answers to assigned questions, exercises and problems.

Classroom Conduct Bring your textbook and a calculator to class. No computer use during class. Show respect for me and your classmates by turning off your cell phone prior to class.

Required text: Principles of Accounting 19th edition, John J. Wild, Ken W. Shaw, Barbara Chiappetta

Online Learning Center See page viii for list of features for each chapter of the text: Power Point lectures, quizzes, videos, etc. www.mhhe.com/wildFAP19e

ACCOUNTING IN BUSINESS Chapter 1 Chapter 1: Accounting in business.

Transaction Analysis and the Accounting Equation Assets = Liabilities + Equity The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because in a general way it states that assets must be equal to the claims against those assets. If you have an asset we can have two broad categories of claims against that asset. First, we may have claims by creditors (liabilities). Finally, after all creditor claims are satisfied, the residual owners, and stockholders, have a claim on those assets.

Expanded Accounting Equation Liabilities Equity Assets = + Liabilities Equity Assets = + Revenues Expenses Owner Capital Owner Withdrawals _ + Equity for a noncorporate entity, commonly called owner’s equity, increases with owner investments and revenues and decreases with owner withdrawals and expenses. Here is a breakdown of the equity section of the accounting equation to show the mathematical signs we will be using to keep track of investments, withdrawals, revenues and expenses. Owner's Equity

Transaction Analysis Equation The accounting equation MUST remain in balance after each transaction. Liabilities Equity Assets = + During the process of recording business transactions, it is important that we always keep the accounting equation in balance. We can’t let our books get out of balance. You have probably heard this term before, but may not have been sure what we meant by keeping the books in balance.

The accounts involved are: Transaction Analysis A2 Textbook Page 14: Chuck Taylor invests $30,000 cash to start a consulting business. The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity) Let’s look at the identification and recording of business transactions. We can begin by analyzing a transaction where Chuck Taylor contributes $30,000 cash to get the business started. First, we have to identify the assets, liability or equity accounts involved in this transaction. We can see that the cash account will increase by $30,000 and the Owner Capital will increase by $30,000. Let’s see how the books of the company will appear after we record this transaction. 21

Chuck Taylor invests $30,000 cash to start a consulting business. Transaction Analysis A2 Chuck Taylor invests $30,000 cash to start a consulting business.   Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable C. Taylor Capital (1) $ 30,000 $ - $ - $ - Here we show the increase in the asset account, cash, and the increase in the equity account, C. Taylor Capital, by $30,000. Our basic accounting equation is in balance. Assets have a total balance of $30,000 and liabilities plus equity have a total balance of $30,000. Let’s move on to another transaction. 21

Purchased supplies paying $2,500 cash. Transaction Analysis A2 Purchased supplies paying $2,500 cash. The accounts involved are: (1) Cash (asset) (2) Supplies (asset) In this transaction, the company purchases general office supplies by paying $2,500 cash. The asset account, cash, will decrease by the $2,500 paid. The asset account, supplies, will increase by $2,500, the cost of the supplies. In this transaction we are giving up one asset, cash, and receiving another asset, supplies. Let’s look at our books after this transaction is recorded. 25

Purchased supplies paying $2,500 cash. Transaction Analysis A2 Purchased supplies paying $2,500 cash.   Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable C. Taylor Capital (1) $ 30,000 (2) (2,500) $ 2,500 $ 27,500 $ - $ - $ - We can see the decrease in cash and the increase in supplies. The total assets are still equal to $30,000 but are divided between cash and supplies. There is no change on the liabilities plus equity section of our books. 25

Purchased equipment for $26,000 cash. Transaction Analysis A2 Purchased equipment for $26,000 cash. The accounts involved are: (1) Cash (asset) (2) Equipment (asset) This transaction is similar to the last one we recorded. Here we purchase equipment by paying $26,000 cash. The asset account, cash, will decrease by $26,000. The asset account, equipment, will increase by $26,000. Once again, we are exchanging one asset for another. Can you predict what our books will look like after recording this transaction? 29

Purchased equipment for $26,000 cash. Transaction Analysis A2 Purchased equipment for $26,000 cash.   Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable C. Taylor Capital (1) $ 30,000 (2) (2,500) $ 2,500 (3) (26,000) $ 26,000 $ 1,500 $ - $ - $30,000 Cash is reduced by $26,000 and equipment is increased by $26,000. The balance in our cash account is now $1,500. We have a current balance in supplies of $2,500, and equipment of $26,000. The three asset accounts total $30,000. Once again, there has been no change in the liabilities plus equity side of the equation. 29

Purchased Supplies of $7,100 on account. Transaction Analysis A2 Purchased Supplies of $7,100 on account. The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability) In this transaction, the company purchases supplies of $7,100 on account. The company has only $1,500 cash available for expenses. We do not pay cash, but agree to pay off the account at some point in the future. The asset account, supplies, increases by $7,100 and the liability account, accounts payable, increases by $7,100. Let’s see what our books look like now. 30

Purchased Supplies of $7,100 on account. Transaction Analysis A2 Purchased Supplies of $7,100 on account.   Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable C. Taylor Capital (1) $ 30,000 (2) (2,500) $ 2,500 (3) (26,000) $ 26,000 (4) 7,100 $ 7,100 $ 1,500 $ 9,600 $ - $ 37,100 You can see the balance in the cash, supplies and equipment accounts. The total on the asset side of the equation is $37,100. We acquired the assets without paying cash. If you use a credit card to purchase gas for your car, you receive an asset, gas, and incur an account payable to the credit card company. The balance in the liabilities account is now $7,100, and the Owner Capital account balance is still $30,000. 30

Provided consulting services receiving $4,200 cash. Transaction Analysis A2 Provided consulting services receiving $4,200 cash. The accounts involved are: (1) Cash (asset) (2) Revenues (equity) The company rendered consulting services to a customer receiving $4,200 cash in full payment. The asset account, cash, will increase by $4,200. The equity account, revenues, will also increase by the same amount. Let’s look at our expanded book balances. 32

Provided consulting services receiving $4,200 cash. Transaction Analysis A2 Provided consulting services receiving $4,200 cash.   Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable C. Taylor Capital Revenue (1) $ 30,000 (2) (2,500) $ 2,500 (3) (26,000) $ 26,000 (4) 7,100 $ 7,100 (5) 4,200 $ 4,200 $ 5,700 $ 9,600 $ - $ 41,300 You see that our cash account increases by $4,200, to a current balance of $5,700. Total assets amount to $41,300. The revenue account also increased by $4,200. Recall that from our expanded accounting equation that revenues increase equity and expenses decrease equity. The total of our liabilities plus equity is now $41,300. You can follow the remaining transaction in the text. Be careful with accounts receivable and payable and withdrawals and expenses. 32

Financial Statements Income Statement Statement of Owner’s Equity P1 Let’s prepare the Financial Statements reflecting the transactions we have recorded. Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows There are four fundamental financial statements used in accounting. 1. Income statement—describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. Statement of owner’s equity—explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time. 3. Balance sheet—describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows—identifies cash inflows (receipts) and cash outflows (payments) over a period of time. The first financial statement that we prepare is the income statement. Let’s get started. 34

Net income is the difference between Revenues and Expenses. Income Statement P1 Net income is the difference between Revenues and Expenses. Net income is defined as the difference between revenues and expenses. If expenses exceed revenues, we have a net loss rather than net income. Financial statements have a three line title with the company name, the name of the statement, and the period covered by the report. In our case, we had total revenues of $6,100 and total expenses of $1,700, so net income for the month ended December 31, 2009, was $4,400. After completing the income statement, we may prepare the statement of Owner's Equity. The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

STATEMENT OF OWNER’S EQUITY P1 The net income of $4,400 increases Owner's Equity by $4,400. FastForward Statement of Owner's Equity For Month Ended December 31, 2009 C, Taylor, Capital December 1, 2009   $ - Plus: Investment by ower $ 30,000 Net income 4,400 34,400 Less: Withdrawals by owner 200 C. Taylor, Capital, December 31, 2009 $ 34,200 In the statement of Owner's Equity, we start with the balance at the beginning of the period, add new owner investments and net income earned during the period, and deduct any withdrawals paid, resulting in the ending balance in Owner's Equity. The company was started this month, so the beginning balance in Owner's Equity was zero. Chuck Taylor invested $30,000 in the company at the beginning of the month. During December net income of $4,400 was earned. In addition, $200 withdrawal was made by Chuck Taylor, so the ending balance in Owner's Equity is $34,200. After we complete this statement, we can prepare the balance sheet.

Balance Sheet P1 The Balance Sheet describes a company’s financial position at a point in time. The balance sheet is an inventory of assets, liabilities and equity at the end of the month. Our total assets are equal to $40,400. This includes cash of $4,800, supplies of $9,600, and equipment of $26,000. Liabilities include accounts payable of $6,200. Equity is composed of C. Taylor, Capital of $34,200. You can see that the books are in balance because total assets are equal to total liabilities plus equity. Creditors have claims against our assets of $6,200. The owner has claims to assets of $34,200.

Statement of Cash Flows P1 We will cover the statement of cash flows in detail in a later chapter. Notice that the statement is divided into three major sections: (1) cash flows from operating activities; (2) cash flows from investing activities; and (3) cash flows from financing activities. The statement reconciles to the ending cash balance of $4,800.

1A - RETURN AND RISK ANALYSIS Return on assets (ROA) is stated in ratio form as income divided by assets invested. Return on Assets 30 Year Bonds Risk is the uncertainty about the return we will earn. Return on assets (ROA) is stated in ratio form as income divided by assets invested. Risk is the uncertainty about the return we will earn. The lower the risk of our investment, the lower is our expected return. Here is a table to illustrate this point using 30 year bonds for comparison.

END OF CHAPTER 1 End of chapter 1.