Chapter 2 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Qualitative Characteristics Relevancy Reliability Comparability Consistency Qualitative Characteristics Relevancy Reliability Comparability Consistency Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. Primary Characteristics Relevancy: predictive value, feedback value, and timeliness. Reliability: verifiability, representational faithfulness, and neutrality. Secondary Characteristics Comparability: across companies. Consistency: over time.

Assumptions __________________: Activities of the business are separate from activities of owners. _______________: The entity will not go out of business in the near future. ________________: Accounting measurements will be in the national monetary unit (i.e., $ in the U.S.). Assumptions __________________: Activities of the business are separate from activities of owners. _______________: The entity will not go out of business in the near future. ________________: Accounting measurements will be in the national monetary unit (i.e., $ in the U.S.). Principle ______________: Cash equivalent cost given up is the basis for the initial recording of elements. Principle ______________: Cash equivalent cost given up is the basis for the initial recording of elements.

 ASSET: Economic resources with probable future benefits owned or controlled by an entity as a result of past transactions.  LIABILITY: Probable debts or obligations (claims to a company’s resources) that result from an entity’s past transactions AND will be paid for with assets or services.  STOCKHOLDERS’ EQUITY: Financing provided by the owners (contributed capital) and by business operations (Retained Earnings).

 Listed in order of liquidity (how soon an asset is expected to be turned into cash or used)  Categorized as CURRENT (used or turned into cash with 1 year) and LONG-TERM.

 Listed in order of maturity (how soon the obligation will be paid)  Classified as CURRENT or LONG-TERM

 For simplicity, usually only includes two accounts: Contributed Capital and Retained Earnings  Will get more complex later in the quarter.

External events External events: exchanges of assets and liabilities between the business and one or more other parties. External events External events: exchanges of assets and liabilities between the business and one or more other parties. Borrow cash from the bank

Internal events Internal events: not an exchange between the business and other parties, but have a direct effect on the accounting entity. Internal events Internal events: not an exchange between the business and other parties, but have a direct effect on the accounting entity. Loss due to fire damage.

Assets Cash Short-Term Investment Accounts Receivable Notes Receivable Inventory (to be sold) Supplies Prepaid Expenses Long-Term Investments Equipment Buildings Land Intangibles Liabilities Accounts Payable Accrued Expenses Notes Payable Taxes Payable Unearned Revenue Bonds Payable Stockholders’ Equity Contributed Capital Retained Earnings The Balance Sheet

Revenues Sales Revenue Fee Revenue Interest Revenue Rent Revenue Expenses Cost of Goods Sold Wages Expense Rent Expense Interest Expense Depreciation Expense Advertising Expense Insurance Expense Repair Expense Income Tax Expense The Income Statement

 Every transaction affects at least two accounts (duality of effects).  The accounting equation must remain in balance after each transaction. A = L + SE (Assets)(Liabilities)(Stockholders’ Equity)

exchange gives up receives Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.

Step 1: Accounts and effects  Identify the accounts affected and classify them by type of account (A,L,SE,Rev,Exp,Div).  Determine the direction of the effect (increase or decrease) on each account. Step 2: Balancing  Verify that the accounting equation (A = L + SE) remains in balance. Step 1: Accounts and effects  Identify the accounts affected and classify them by type of account (A,L,SE,Rev,Exp,Div).  Determine the direction of the effect (increase or decrease) on each account. Step 2: Balancing  Verify that the accounting equation (A = L + SE) remains in balance.

Papa John’s issues $2,000 of additional common stock to new investors for cash. Identify & Classify the Accounts 1. _____________ 2. ________________ Identify & Classify the Accounts 1. _____________ 2. ________________ Determine the Direction of the Effect 1. ________________ 2. ________________ Determine the Direction of the Effect 1. ________________ 2. ________________

A = L + SE Papa John’s issues $2,000 of additional common stock to new investors for cash.

The company borrows $6,000 from the local bank, signing a three-year note. The company borrows $6,000 from the local bank, signing a three-year note. Identify & Classify the Accounts 1. _____________ 2. ________________ Identify & Classify the Accounts 1. _____________ 2. ________________ Determine the Direction of the Effect 1. _______________ 2. ___________________ Determine the Direction of the Effect 1. _______________ 2. ___________________

A = L + SE The company borrows $6,000 from the local bank, signing a three-year note. The company borrows $6,000 from the local bank, signing a three-year note.

Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest. Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest. Identify & Classify the Accounts 1. __________________ 2. ___________________ 3. ___________________ Identify & Classify the Accounts 1. __________________ 2. ___________________ 3. ___________________ Determine the Direction of the Effect 1. _______________ 2. ________________ 3. __________________ Determine the Direction of the Effect 1. _______________ 2. ________________ 3. __________________

A = L + SE Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest. Papa John’s purchases $10,000 of new equipment, paying $2,000 in cash and signing a two-year note payable for the rest.

Papa John’s board of directors declares and pays $3,000 in dividends to shareholders. Identify & Classify the Accounts Determine the Direction of the Effect Identify & Classify the Accounts 1. _______________ 2. ____________________ Identify & Classify the Accounts 1. _______________ 2. ____________________ Determine the Direction of the Effect 1. _________________ 2. _________________________ Determine the Direction of the Effect 1. _________________ 2. _________________________

A = L + SE Papa John’s board of directors declares and pays $3,000 in dividends to shareholders.

AccountsAccount TypeIncr./Decr.Amount Transaction Type: Operating/Investing/Financing?

Chapter 2 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

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Chapter 2 McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

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