Importance of Accounting is a system that Accounting Identifies Records information that is Relevant Communicates Identifying business activities requires selecting transactions and events relevant to an organization. Ex. The sale of cosmetics, such as perfume, lipsticks.. by SaSa Recording business activities requires keeping a chronological log of transactions and events measured in dollars and classified and summarized in a useful format. Communicating business activities requires preparing accounting reports such as financial statements. It also requires analyzing and interpreting such reports. The difference between bookkeeping and accounting: bookkeeping is the recording of transactions and events. This is only one part of accounting. Accounting also identifies and communicates information on transactions and events. Reliable to help users make better decisions. Comparable

Generally Accepted Accounting Principles Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations.

Principles of Accounting— General Principles Objectivity Principle Accounting information is supported by independent, unbiased evidence. It is intended to make financial statements useful by ensuring they report reliable and verifible information. Source documents.

Principles of Accounting Revenue Recognition Principle Provides guidance on when a company must recognize revenue. Recognize revenue when it is earned. Proceeds need not be in cash (Credit sales). Measure revenue by cash received plus cash value of items received.

Expanded Accounting Equation Liabilities Equity Assets = + Revenues Expenses Owner Capital Owner Withdrawals _ +

Double-Entry Accounting Liabilities Equity Assets = + Debit Credit ASSETS + - LIABILITIES - + EQUITIES Normal Balance Normal Balance Nomal Balance

Double-Entry Accounting Exh. 3.8 Double-Entry Accounting Equity Revenues Expenses Owner’s Capital Owner’s Withdrawals _ + Debit Credit Capital - + Withdrawals + - Expenses Revenues Normal Balance Normal Balance Normal Balance Normal Balance

Double-Entry Accounting When there is a debited account, there must be a credited account. The total amount debited must be equal to the total amount credited for each transaction. The left side is the normal balance side for assets, and the right side is the normal balance side for liabilities and equity. 有借必有貸，借貸必相等。

Analyzing and Recording Process Step 1: Analyze transactions and source documents. Liabilities Equity Assets = + Step 2: Apply double-entry accounting Step 3: Record journal entry Step 4: Post entry to ledger

After processing its remaining transactions for December, FastForward’s Trial Balance is prepared. Debits Credits Cash 4,400 $ Accounts receivable - Supplies Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200 Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300 FastForward Trial Balance December 31, 2004 The trial balance lists all account balances in the general ledger. If the books are in balance, the total debits will equal the total credits. 9,270

Recognizing Revenues and Expenses Revenue recognition principle requires that revenue be recorded when earned, not before or after. Matching principle intends to record expenses in the same accounting period as the revenues that are earned as a result of these expenses.

Adjusting Accounts An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Framework for Adjustments Adjustments Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Prepaid (Deferred) expenses* Unearned (Deferred) revenues Accrued expense Accrued revenues *including depreciation 12 12

Prepare adjusted trial balance. FastForward Work Sheet For Month Ended December 31, 2004 45

Sort adjusted trial balance amounts to financial statements. FastForward Work Sheet For Month Ended December 31, 2004 45

Financial Statements Income Statement: revenues and expenses together with the how much profit the firm makes. Statement of Owner’s Equity: reports information how equity changes over the reporting period. Balance Sheet: a company’s financial position at a point of time. Statement of cash flows: cash receipts and cash payments over a period of time.

Temporary and Permanent Accounts Temporary Accounts Revenues Income Summary Expenses Withdrawals Permanent Accounts Assets Liabilities Owner’s Capital The closing process applies only to temporary accounts.

Accounting cycle 1. Analyze transactions 2. Journalize 3. Post 4. Prepare unadjusted Trial balance 5. Adjust 6. Prepare adjusted 7. Prepare statements 8. Close 9. Prepare Post-closing

Merchandise available for sale Inventory Systems Beginning inventory Net cost of purchases + Merchandise available for sale = Ending Inventory Cost of Goods Sold +

Itemized Cost of Merchandise Purchased

Accounting for Merchandise Sales Sales discounts and returns and allowances are Contra Revenue accounts.

Inventory Cost Flow Assumptions First-In, First-Out (FIFO) Assumes costs flow in the order incurred. Last-In, First-Out (LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available.

Sales of Merchandise On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000.

Valuing Accounts Receivable Some customers may not pay their account. Uncollectible amounts are referred to as bad debts. There are two methods of dealing with bad debts: Direct Write-Off Method Allowance Method

Estimating Bad Debts Expense Two Methods Percent of Sales Method Accounts Receivable Methods Percent of Accounts Receivable Aging of Accounts Receivable Method

Percent of Accounts Receivable Desired balance in Allowance for Doubtful Accounts.

Computing Maturity and Interest Total interest due at May 30.

Factors in Computing Depreciation The calculation of depreciation requires three amounts for each asset: Cost. Salvage Value. Useful Life.

Straight-line Units-of-production Declining balance Depreciation Methods Straight-line Units-of-production Declining balance

Disposals of Plant Assets Update depreciation to the date of disposal. Journalize disposal by: Recording cash received (debit) or paid (credit). Recording a gain (credit) or loss (debit). Removing accumulated depreciation (debit). Removing the asset cost (credit).

Determine Gain or Loss on Disposal Selling Plant Assets If Cash > BV, record a gain (credit). If Cash < BV, record a loss (debit). If Cash = BV, no gain or loss.

Known (Determinable) Liabilities Accounts Payable Sales Taxes Payable Unearned Revenues Short-Term Notes Payable Payroll Liabilities Multi-Period Known Liabilities 2 2

Estimated Liabilities An estimated liability is a known obligation of an uncertain amount, but one that can be reasonably estimated. Warranty: Seller’s obligation to replace or correct a product (or service) that fails to perform as expected within a specified period. To conform with the matching principle, the seller reports expected warranty expense in the period when revenue from the sale is reported. 73 5

Corporation Issuing stocks: common / preferred stocks Distribute dividends: cash / stock dividends Stock splits Treasury Stock Earning Per Share

Bond Discount or Premium Prepare the entry for Jan. 1, 2005 to record the following bond issue by Rose Co. Par Value = $1,000,000 Issue Price = 92.6405% of par value Stated Interest Rate = 10% Market Interest Rate = 12% Interest Dates = 6/30 and 12/31 Bond Date = Jan. 1, 2005 Maturity Date = Dec. 31, 2009 (5 years)

Issuing Bonds at a Discount On Jan. 1, 2005 Rose Co. would record the bond issue as follows. Contra-Liability Account

Issuing Bonds at a Discount Make the following entry every six months to record the cash interest payment and the amortization of the discount. $73,595 ÷ 10 periods = $7,360 (rounded) $1,000,000 × 10% × ½ = $50,000

Issuing Bonds at a Premium On Jan. 1, 2005 Rose Co. would record the bond issue as follows. Adjunct-Liability Account

Issuing Bonds at a Premium This entry is made every six months to record the cash interest payment and the amortization of the premium. $81,145 ÷ 10 periods = $8,115 (rounded) $1,000,000 × 10% × ½ = $50,000

Classes of and Reporting for Investments Class of Investment Held-To-Maturity Trading Available-For-Sale Significant Influence Controlling Influence Amortized Cost Market Value Method Equity Method Consolidate Reporting

Classifying Cash Flows The Statement of Cash Flows includes the following three sections: Operating Activities Investing Activities Financing Activities

Analyzing the Cash Account Let’s use this Cash account to prepare B&G Company’s Statement of Cash Flows under the Direct Method.

Indirect Method of Reporting Operating Cash Flows Changes in current assets and current liabilities. Net Income Cash Flows from Operating Activities + Losses and - Gains + Noncash expenses such as depreciation and amortization. 97.5% of all companies use the indirect method.

Comparing a company’s financial condition and performance across time Tools of Analysis Horizontal Analysis Comparing a company’s financial condition and performance across time Time

Tools of Analysis V e r t i c a l Comparing a company’s financial condition and performance to a base amount

Using key relations among financial statement items Tools of Analysis Using key relations among financial statement items Ratio Analysis

Building Blocks of Analysis Ability to meet short-term obligations and to efficiently generate revenues Ability to generate future revenues and meet long-term obligations Liquidity and Efficiency Solvency Ability to provide financial rewards sufficient to attract and retain financing Ability to generate positive market expectations Market Prospects Profitability

Computing Break-Even Point How much contribution margin must this company have to cover its fixed costs (break even)? Answer: $30,000

Computing Sales (Dollars) for a Target Net Income Exh. 22-14 Target net income is income after income tax. Fixed Target net Income costs income taxes + + Dollar sales = Contribution margin ratio

Computing Multiproduct Break-Even Point Exh. 22-19 The resulting break-even formula for composite unit sales is: Fixed costs Contribution margin per composite unit Break-even point in composite units = Consider the following example: Continue

Net Present Value with Even Cash Flows Exh. 26-7 A positive net present value indicates that this project earns more than 12 percent on the investment.

Internal Rate of Return (IRR) The interest rate that makes . . . Present value of cash inflows Present value of cash outflows =  The net present value equal zero.

Relevant Costs Costs that are applicable to a particular decision. Costs that should have a bearing on which alternative a manager selects. Costs that are avoidable. Future costs that differ between alternatives. 1 2