Chapter 2 From Scorekeeping to Financial Statements

Learning Objectives for Chapter 2 See syllabus

Financial Accounting Statements Balance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date Income Statement - reports the results of operations for a specific period of time Retained Earnings Statement - reports the changes in retained earnings for a specific period of time Statement of Cash Flows - reports the cash receipts and payments for a specific period of time

Brief Introduction to the Balance Sheet and Income Statement Balance sheet – snapshot of a company’s financial position at a certain point in time. Income statement – summarizes financial activity of a company for a certain period of time. Relationship between the balance sheet and income statement

Basic Terms Assets - resources owned by a business Liabilities - debts and obligations of the business - represents claims of creditors on the assets of the business Common stock - stock representing the primary ownership interest in a corporation

Practice With the Balance Sheet and Income Statement Wiggler Company

Tuesday, June 21 – use your COB account. To find your account: Go to the computer lab in the basement Log in under your ONID account and open Outlook Open a screen to send a new , type your last name in the address space, then key ’Ctrl +k’ A list of addresses will appear, find your COB address Access to course materials folder Go to the computer lab in the basement and log in under your COB username and password. Passwords can be obtained in BX 204C, if you forgot yours or need one. Now, the URL \\cob-storage\classes\BA215wong can be used in the Explorer web browser\\cob-storage\classes\BA215wong

Debit and Credit Conventions and T-accounts T-accounts are a convenient way to record transaction information and keep running totals of accounts. Debits represent the left hand side of a T-account. Credits represent the right hand side of a T-account. See Fig 2.2 of text Balance Sheet Accts.Income Stmt. Accts. ↑ Assets | Liabilities ↑ ↑ Expenses | Revenues ↑ | Equity ↑

Recording Transactions Note for every transaction: $debits = $credits For every transaction involving only balance sheet accounts: A = L + E Balance sheet for Wiggler, up to transaction #5, using T-accounts for assistance.

The Trial Balance A listing of all debit and credit balances as of the balance sheet date Used to insure that debits = credits for recorded transactions Checks whether the accounting equation was maintained No assurance that transactions have been recorded properly

Trial Balance for Wiggler transactions #1 to #5 Put together a trial balance for these transactions. DebitCredit Cash$3,250 Inventory (worms) 220 Land & Farm 750 Accounts Payable $120 Note Payable 2,100 Common Stock 2,000 Total$4,220 $4,220

Balance Sheet: Classification and Some Common Accounts The balance sheet classifies assets and liabilities according to whether they are short- or long-term. Generally: Short-term assets are those which will be consumed or converted to cash in a year or less. All other assets are long-term. Short-term liabilities are those which will be paid in a year or less. All other liabilities are long-term. Common balance sheet accounts – see sample balance sheet, and text pp

Income Statement Classified income statement Definition of elements Revenues – resource inflows earned from the sale of products or services that are the main activities of the organization Expenses - resource outflows incurred in the sale of products or services that are the main activities of the organization Gains – similar to revenues, only from ancillary activities of the organization Losses – similar to expenses, only from ancillary activities of the organization

Table 2.3 From the Text Sample Income Statement: Operating Section Net sales$2,500,000 Cost of goods sold 1,900,000 Gross margin 600,000 (Discussion of these three accounts on pp )

Table 2.3 From the Text Sample Income Statement: Operating Section Operating Expenses: Selling expenses Sales salaries $140,000 Advertising expenses 20,000160,000 Administrative expenses Office salaries 170,000 Rent 20,000 Depreciation 40,000230,000 Total operating expenses210,000 (Discussion of these accounts on p. 51)

Table 2.3 From the Text Sample Income Statement: Non-Operating Section* to end Other income $20,000 Other expenses (interest) 35,000 55,000 Income before taxes195,000 Income taxes 97,500 Net Income (Income after taxes)$97,500 * This is the section where gains and losses would also appear (Discussion of these accounts on pp )

Statement of Retained Earnings Helps to link the balance sheet with the income statement. Closes the results of the income statement (net income) to Retained Earnings Accounts for dividends paid from Retained Earnings. Overview of the statement: Beginning Retained Earnings + Net income (Net loss) - Dividends paid or declared and payable = Ending Retained Earnings

Homework Finish recording the transactions in the Wiggler exercise After recording the transactions Make a trial balance, balance sheet, and income statement for Wiggler

Wednesday, June 22 Web-based course materials access is now available Selected T/F and multiple choice questions from Ch. 2

GAAP and Accrual-Based Accounting Consistency of accounting practices is achieved by companies adhering to GAAP (Generally Accepted Accounting Principles) Accrual-based accounting means that we recognize: Revenues when earned, regardless of when the cash is collected. Revenues are generally earned when services or goods are provided to customers. Expenses when incurred, regardless of when the cash is collected. Expenses are generally incurred when services or goods are provided by others. Cash-based accounting vs. accrual-based accounting

Specific Instances of Accrual-Based Accounting Inventory is not expensed as Cost of Good Sold until a sale is made. Sales made on credit are recorded even though cash has not been collected from the customer. (Debit Accounts receivable, Credit Sales) Wages expense can be recorded, even if cash has not yet been paid to employees. (Debit Wages Expense, Credit Wages Payable)

Accounting for Depreciation of Long Term Assets – General Concept Depreciation is taken on assets over time in an attempt to match the expense to the time period that the assets help to generate revenues. How to record the transaction: Debit Depreciation Expense (Income Statement) Credit Accumulated Depreciation

Accounting for Depreciation of Long Term Assets – Example A truck is purchased for $40,000 that has a 5 year life and will be depreciated using the straight line method. At the end of each year for the next 5 years, $8,000 of depreciation expense is recognized ($8,000 / 5yrs) Effect of this transaction: Increase in Depreciation Expense (debit) Increase in Accumulated Depreciation, a ‘contra-asset’ (credit)

Accounting for Depreciation of Long Term Assets – Example Impact on the balance sheet: Long-Term Assets Equipment – Truck$40,000 Accumulated depreciation (8,000) Equipment, net 32,000 Impact on the income statement: Depreciation Expense $8,000

Specific Items in Chapter 2 to Skip Auditor’s report, p. 61 Any type of depreciation method other than straight line, pp Deferred taxes, pp