1 PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 2 Basic Accounting Concepts

2 LEARNING GOALS When you finish this chapter, you should be able to

3 1.Describe basic elements of a financial accounting system. 2.Analyze, record, summarize transactions for corporation’s first period of operations. 3.Prepare financial statements for corporation’s first period of operations. LEARNING GOALS Continued

4 LEARNING GOALS 4. Analyze, record, summarize transactions for second period of operations. 5. Prepare financial statements for second period of operations. 6. Describe, illustrate vertical analysis.

5 WILLIAM J. WRIGLEY, Jr. CO. William J. Wrigley, Jr. Co.  Begun in Chicago  A leading maker of chewing gum  Identifiable headquarters seen in movies and television shows

6 LEARNING GOALS 1 Describe basic elements of financial accounting system.

7 Basic elements are Set of rules to record economic events Framework to prepare financial statements Controls to detect errors LG 1 BASIC ELEMENTS OF FINANCIAL ACCOUNTING SYSTEM

8 RULES Generally Accepted Accounting Principles (GAAP) determine What to record When to record Amount to record Generally Accepted Accounting Principles (GAAP) determine What to record When to record Amount to record LG 1

9 FRAMEWORK Integrated financial statement approach Analyzes Records Summarizes Transactions Integrated financial statement approach Analyzes Records Summarizes Transactions LG 1

10 CONTROLS Controls are built-in Balance sheet Assets = Liabilities + Stockholders’ Equity Balance sheet cash = Statement of Cash Flows cash Income statement Net income (loss) = net effects of revenues & expenses in Retained Earnings (Balance Sheet) Controls are built-in Balance sheet Assets = Liabilities + Stockholders’ Equity Balance sheet cash = Statement of Cash Flows cash Income statement Net income (loss) = net effects of revenues & expenses in Retained Earnings (Balance Sheet) LG 1

11 EXERCISE 2-1a Press “Enter” or click left mouse button for answer. X = $193,500 LG 1 Assets =Liabilities +Equity X$50,000$143,500 Click the button to skip this exercise

12 EXERCISE 2-1b Press “Enter” or click left mouse button for answer. X = $135,500 LG 1 Assets =Liabilities +Equity $165,500X$30,000 Click the button to skip this exercise

13 EXERCISE 2-1c Press “Enter” or click left mouse button for answer. X = $39,000 LG 1 Assets =Liabilities +Equity $74,000$35,000X Click the button to skip this exercise

14 LEARNING GOALS 2 LG 2 Analyze, record, summarize transactions for first period of operations.

15 TRANSACTION (a) Dr. Lee Landry starts Family Health Care, PC by investing $6,000 in her practice.

16 Assets =Liabilities +Equity Cash =+Stock Invested6,000 + Cash Flows Balance Sheet Income Statement IFSF: Starting Family Health Care, PC Financing 6,000 Dr. Landry invests $6,000 to start a practice LG 2

17 TRANSACTION (b) Family Health Care, PC borrows $10,000 to finance the practice.

18 Assets =Liabilities +Equity Cash =NoteStock Bal6,000 Loan 10,000 =10,000 Bal16,000 =10,000 +6,000 Cash Flows Balance Sheet Income Statement IFSF: Borrowed Money Financing 10,000 Family Health Care, PC borrows money LG 2

19 TRANSACTION (c) Family Health Care, PC bought land for practice.

20 Assets =Liabilities +Equity Cash + Land =Note +Stock Balance16,00010,0006,000 Land-12, ,000 Balance4, ,000 =10,000 +6,000 Cash Flows Balance Sheet Income Statement IFSF: Bought Land Investing -12,000 Family Health Care PC bought land LG 2

21 TRANSACTION (d) Family Health Care, PC earned revenue (fees) for providing services to patients.

22 Assets =Liabilities +Equity Cash + Land =Note +Stock + Ret Earn Balance4, ,000 =10,000 +6,000 Fees5,500 = 5,500 Balance9, ,000 =10,000 +6, ,500 Cash Flows Balance Sheet Income Statement IFSF: Earned Fees Operating 5,500 Family Health Care, PC earned fees Fees Earned 5,500 LG 2

23 TRANSACTION (e) Family Health Care, PC, paid wages, rent, utilities, interest and miscellaneous expenses of the practice.

24 Assets =Liabilities +Equity Cash + Land =Note +Stock + Ret Earn Balance9, ,000 =10,000 +6, ,500 Expenses-2,900 Balance6, ,000 =10,000 +6, ,600 Cash Flows Balance Sheet Income Statement IFSF: Paid Expenses Operating -2,900 Wages 1,125 Rent 950 Utilities 450 Interest 100 Misc. 275 Expenses -2,900 Family Health Care, PC paid expenses LG 2

25 TRANSACTION (f) Family Health Care, PC, paid a dividend to Dr. Landry.

26 Assets =Liabilities +Equity Cash + Land =Note +Stock + Ret Earn Balance6, ,000 =10,000 +6, ,600 Dividend-1,500 Balance 5, ,000 =10,000 +6, ,100 Cash Flows Balance Sheet Income Statement IFSF: Paid Dividend Financing –1,500 Family Health Care, PC paid dividend LG 2

27 Assets =Liabilities +Equity Cash + Land =Note +Stock + Ret Earn Invested 6,000 + Loan 10,000 =10,000 Land-12, ,000 Fees 5,500 = 5,500 Expenses -2,900 Dividend -1,500 Balance 5, ,000 =10,000 +6, ,100 Cash Flows Balance Sheet Income Statement Integrated Financial Statement Framework LG 2

28 STOCKHOLDERS’ EQUITY + + Investments Revenues ExpensesDividends Capital Stock Retained Earnings LG 2

29 Indicate whether the following transactions would increase stockholders’ equity. a)Purchased equipment b)Paid dividends c)Paid rent d)Borrowed money e)Paid creditors f)Made cash sales LG 2 EXERCISE 2-6a g)Paid interest h)Sold equipment at loss i)Received interest income j)Paid taxes Click the button to skip this exercise

30 EXERCISE 2-6b Indicate whether the following transactions would decrease stockholders’ equity. a)Purchased equipment b)Paid dividends c)Paid rent d)Borrowed money e)Paid creditors f)Made cash sales g)Paid interest h)Sold equipment at loss i)Received interest income j)Paid taxes LG 2 Click the button to skip this exercise

31 EXERCISE 2-6c Indicate whether the following transactions would have no effect on stockholders’ equity. a)Purchased equipment b)Paid dividends c)Paid rent d)Borrowed money e)Paid creditors f)Made cash sales g)Paid interest h)Sold equipment at loss i)Received interest income j)Paid taxes LG 2 Click the button to skip this exercise

32 LEARNING GOALS 3 Prepare first period financial statements.

33 FINANCIAL STATEMENTS Health Care PC prepares financial statements to summarize financial activity for September 4 Financial Statements are –Income statement –Retained earnings statement –Balance sheet –Cash flow statement LG 3

34 LG 3 EXHIBIT 4 Continued

35 LG 3 Continued EXHIBIT 4

36 LG 3 Continued EXHIBIT 4

37 LG 3 EXHIBIT 4

38 Statement of cash flows linked to cash on balance sheet Net income from income statement linked to retained earnings statement Retained earnings linked to balance sheet in stockholders’ equity INTEGRATED FINANCIAL STATEMENTS LG 4

39 LG 3 EXHIBIT 5

40 LEARNING GOALS 4 Analyze, record, summarize transactions for second period of operations.

41 TRANSACTIONS FOR OCTOBER Family Health Care, PC provided services for patients in October. LG 4

42 Assets =Liabilities +Equity Cash + Land =NoteStock + Ret Earn Bal 10/15, ,000 =10,000 +6, ,100 Fees6,400 Expenses-3,180 Dividend -1,000 Bal 10/31 7, ,000 =10,000 +6, ,220 Cash Flows Balance Sheet Income Statement IFSF: October Operating 6,400 Operating -3,180 Financing -1,000 Increase cash 2,220 Fees earned 6,400 Expenses -3,180 Net Inc 3,220 Transactions for October LG 4

43 LEARNING GOALS 5 Prepare financial statements for second period of operations.

44 LG 5 EXHIBIT 8

45 LEARNING GOALS 6 Describe, illustrate vertical analysis.

46 VERTICAL ANALYSIS Use comparative financial statements to –Compute percentage each item to total within statement –Examine trends year to year LG 6

47 WRIGLEY CO. Comparative Balance Sheets: Assets 12/0412/03 Cash$ %$ % ST Investments Acct. Receivable Inventories Prop. Plant, Eq.1, Other Total$3, %$2, % LG 6

48 ANALYSIS Assets Other assets increased from ’03 to ‘04 LG 6

49 WRIGLEY CO. Comparative Balance Sheets: Liabilities & Equity 12/0412/03 Current liabilities$ %$ % Long-term liab Total liabilities$ %$ % Total Stockholders’ Eq. $2, %$1, % Total$3, %$2, % LG 6

50 ANALYSIS Liabilities & Equity Liabilities increased as % liabilities + equity Stockholders’ equity decreased as % liabilities + equity Liabilities increased as % liabilities + equity Stockholders’ equity decreased as % liabilities + equity LG 6

51 WRIGLEY CO. Comparative Income Statements 12/0412/03 Net sales$3, %$3, % Cost of sales1, , Gross profit$2, %$1, % S&A expenses1, , Operating inc.$ %$ % Other inc/exp Inc. before tax$ %$ % Income Tax Net Income$ %$ % LG 6

52 ANALYSIS Comparative Income Statements Net income decreased slightly as % of sales Gross profit decreased as % of sales Selling & administrative costs increased slightly as % of sales Net income decreased slightly as % of sales Gross profit decreased as % of sales Selling & administrative costs increased slightly as % of sales LG 6

53 THE END CHAPTER 2