Accounting as a Form of Communication Chapter 1 Accounting as a Form of Communication Financial Accounting 4e by Porter and Norton 1 1

Decisions Made with Financial Information Add new product line?? Invest?? Build new plant?? Borrow $$?? Loan $$?? Extend credit $$?? Start new business?? Sell stocks or bonds?? 2 2

What is Accounting? Identifying Economic to Information Measuring various users Measuring Communicating

Internal and External Users of Accounting Information Creditors Current and Potential Owners Government Agencies Suppliers Trade Organizations Financial Analysts Banks Internal Users - Management 12 12

The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders' Equity) Creditors' Claims to Assets Owners' Economic Resources = + Accounts payable Notes payable Capital stock Retained earnings Examples: Cash Accounts receivable Inventory 14 14

= + Balance Sheet - snapshot of financial position Liabilities Assets Owners’ Equity (or Stockholders' Equity) Stock Certificate 15 15

Winnebago Industries, Inc. Consolidated Balance Sheets A = L + SE Winnebago Industries, Inc. Consolidated Balance Sheets Assets August 25,2001 August 26,2000 A Current assets: Cash and cash equivalents $ 93,779 $ 51,443 Receivables, less allow. for doubtful accts. ($244 and $1,168, respectively) 20,183 32,045 Dealer financing receivables, less allow. for doubtful accts ($117 and $27, respectively) 40,263 32,696 Inventories 79,815 85,707 Prepaid expenses 3,604 3,952 Deferred income taxes 6,723 7,675 Total current assets 244,367 213,518 Property, plant and equipment, net 46,536 45,455 Investment in life insurance 22,223 21,028 Deferred income taxes 21,495 19,044 Other assets 7,412 8,050 $342,033 $307,095

Winnebago Industries, Inc. Consolidated Balance Sheets A = L + SE Winnebago Industries, Inc. Consolidated Balance Sheets Liabilities and Stockholders' Equity August 25, 2001 August 26, 2000 = L Current liabilities: Accounts payable, trade $ 30,789 $ 26,212 Income taxes payable 4,938 8,790 Accrued expenses 34,392 35,242 Total current liabilities 70,119 70,244 Postretirement health care and deferred compensation benefits 64,450 61,942 + SE Stockholders' equity: Capital stock common 12,943 12,939 Additional paid-in capital 22,261 21,994 Reinvested earnings 234,139 195,556 269,343 230,489 Less treasury stock, at cost (61,879) (55,580) Total stockholders' equity 207,464 174,909 8 $ 342,033 $307,095

Income Statement Revenues $$$ Less: Expenses ($$) Net income $$ 16 16

Winnebago Industries, Inc. Consolidated Statements of Operations August 25, 2001 August 26, 2000 Revenues - Expenses = Net Income Revenues Net revenues $ 681,834 $ 753,382 Cost of manf. products 587,330 640,488 Gross profit 94,504 112,894 Selling, general and administrative expenses 39,030 42,240 Operating income 55,474 70,654 Financial income 3,754 3,338 Income before income taxes 59,228 73,992 Provision for taxes 15,474 25,593 Change in acctg. principle, net (1,050) --- Net Income $ 42,704 $ 48,399 Expenses Expenses Revenues Expenses

Statement of Retained Earnings Beginning retained earnings $$$ Add: Net income for the period $$ Deduct: Dividends for the period ($$) = Ending retained earnings $$$ 11 17 17

Winnebago Industries, Inc. Statement of Retained Earnings for 2001 Beginning balance, retained earnings $ 195,556 Add: Net income 42,704 Deduct: Cash dividends (4,121) Ending balance, retained earnings $ 234,139

Relationships among Financial Statements – Winnebago Industries Example Income Statement for 2001 Revenues $ xxx Less: Expenses xxx Net income $ 42,704 Statement of Retained Earnings for 2001 Beginning balance, retained earnings $195,556 Add: Net income 42,704 Deduct: Cash dividends (4,121) Ending balance, retained earnings $ 234,139 Balance Sheets 2001 2000 Total assets $ xxx $ xxx Liabilities xxx xxx Capital stock xxx xxx Retained earnings 234,139 195,556 Total liabilities & stockholders' equity $ xxx $ xxx

Financial Statement Assumptions Economic Entity Cost Principle Time Period Going Concern Monetary Unit 20 20

Economic Entity Concept Each entity has its own books, records and financial statements that are separate from owners No intermingling of personal and business assets and liabilities or income and expenses Business Books & Records Owners’ Books & Records 21 21

Cost Principle Record assets at cost paid to acquire them Continue to value assets at historical cost until sold More objective than market value 22 22

Going Concern Assume business will continue indefinitely into the foreseeable future Justifies use of historical cost 23 23

Monetary Unit How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

Time Period Assumption Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year) Necessary to provide users with financial results on a timely basis Requires use of estimates 25 25

The Rules of the Game The rules GAAP The rule makers FASB The rule enforcers The CPA regulators GAAP FASB SEC AICPA 26 26

Where Accountants Work Private Business Nonbusiness Organizations Public Accounting audit tax management consulting Educational Institutions 27 27

End of Chapter 1