1. 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

2. 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.

3. 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.

4. 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.

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

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

7. 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

8. 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。

9. 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

10. 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

11. 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.

12. 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

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

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

15. 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.

16. 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.

17. 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

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

19. Itemized Cost of Merchandise Purchased

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

21. 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.

22. 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.

23. 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

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

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

26. Computing Maturity and Interest
Total interest due at May 30.

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

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

29. 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).

30. 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.

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

32. 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

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

34. 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 = % 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)

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

36. 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

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

38. 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

39. 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

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

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

42. 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.

43. 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

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

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

46. 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

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

48. 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

49. 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

50. 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.

51. 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.

52. 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