1. ACG 2021 Financial Accounting
Chapter One:
The Financial Statements

2. The Accounting System

3. What is accounting Been in place for hundreds of years System Language
1494 Luca Pacioli's Summa de Arithmetica Geometria Proportionalita (A Review of Arithmetic, Geometry and Proportions)
First written description of double-entry accounting
Incan khipus
cryptic assemblages of string and knots
May have been used for record-keeping (i.e. accounting) Gary Urton and Carrie Brezine
Annotated Khipu on Flickr
System
Of recording business transactions
Language
Whether knots
Debits or Credits written in a journal
Digital values stored on a computer
We’ve been accounting for many, many years

4. Information System Model

5. The Accounting System An Information System
Inputs to the system are business events
Sales
Purchases
Inventory (things to re-sell, things to use in building), buildings
Payroll
Processing takes place in the various Journals and General Ledger where transactions are stored
Financial Statements are the Outputs and represent Summary Information
Income Statement
Statement of Retained Earnings
Balance Sheet
Cash Flows

6. Accounting Information System
Procedures, Techniques and Resources to
Collect & Disseminate
Relevant Business Information to Interested Users
Individuals (Management)
Investors & Creditors
Taxing Authorities
Non-Profit Organizations

7. Accounting (The Language of Business) Is...
The process of identifying, measuring, and communicating economic information (via reports) to permit informed judgments and decisions by users of the information.
Balance Sheet – Resources
Income Statement – Results of Operations
Cash Flow – Management of Asset

8. Language Dialects Financial Accounting Managerial Accounting
Tax Accounting
Governmental (non-profit) Accounting

9. ACG 2021 Who are we Accounting for: Business Forms And
Accounting Rules and Assumptions

10. Accounting Assumptions
Business activity occurs via distinct entities
Sole Proprietorship
Partnerships
Corporations
Business activity is conducted via measurable, observable transactions
Transactions can be described using standard units of measurement ($’s) in accounts (Valuation)

11. Forms of Business Organization
Proprietorship
Has a single owner
Proprietor is personally liable
for debts of the business
Not a separate legal entity
For accounting, the proprietorship is a separate entity from the proprietor

12. Forms of Business Organization
Partnerships
Two or more partners are co-owners
Each partner can be liable for all the debts of the partnership
Not a separate legal entity
For accounting, the partnership is a separate entity from its partners

13. Forms of Business Organization
Corporations
May have many owners (stockholders)
Stockholders are not personally liable for debts of the business
Is a separate legal entity
Stockholders elect a Board of Directors to appoint corporate officers and set policies

14. Accounting Guidelines
Formulated by the Financial Accounting Standards Board (FASB)
Generally Accepted Accounting Principles (GAAP)
The Entity Concept
A business is separate & distinct from it’s owners
The Reliability Principle
Accounting records are based on the most objective evidence available
The Historical Cost Principle
$’s are recorded at time of transaction (actual cost)
$’s that a willing buyer paid a willing seller
Not some point in the future
The Going-Concern Principle
The Entity will not go Out-of-Business
The Stable-Monetary-Unit Concept
the monetary unit’s ($’s) purchasing power is stable (ignores inflation)

15. ACG 2021 Financial Accounting
The Accounting Equation
Assets = Liabilities + Owners Equity

16. The Accounting Equation
Assets =
Liabilities + Owner’s Equity
Claims against
Economic
Resources
Economic
Resources
If assets are 100,000 and liabilities are 70,000.. …..OE? 30,000

17. Assets Economic resources (value, $’s)
Owned and Controlled by business entity
Expected to produce a benefit in the future
Cash
Investments
Accounts Receivable
Inventory
Buildings, Equipment, Gold Mines, Patents
Identify some assets

18. Liabilities Economic obligations (debt) of a business
Accounts Payable
Notes Payable
Accrued Expenses:
Payroll that we owe
Taxes that we owe
Rent, Insurance, etc. that we owe
Money we borrowed and of course owe
Claims by Creditors
Convey Assets
This means that the creditor expects an asset (most often cash) be given for what is owed
Perform Service
This means that the creditor expects a service (like prepare a tax return, or provide rental retail space) be given for what is owed

19. Owner’s Equity The owner’s claim on the entity’s assets
Capital (for Proprietorship or Partnership)
Stockholders’ equity (for Corporation)
Share’s of Stock
Net assets
Assets – liabilities = owner’s equity

20. Stockholders’ Equity
For a corporation, stockholders’ equity is divided into two main categories.
Paid in capital
The amount that investors have given to the corporation
In exchange for shares of stock
Retained earnings
The amount of Earnings the company has either earned (profit) or lost over time
The amount of dividends that have been paid to investors

21. The Accounting Equation Expanded
Assets = Liabilities + Owners Equity
Replace Owners Equity with:
Paid-in capital - amount invested by its owners - common stock
Increases Owners Equity
Retained earnings - amount earned by income-producing activities and kept for use in the business
Dividends – distributions of assets to stockholders
Decreases Retained Earnings
Assets = Liabilities + Paid-in capital + Retained earnings

22. The Accounting Equation
Retained Earnings accumulate Revenues and Expenses of an Organization and Dividends that have been paid
Revenues – Sales of Product or Services
increases Retained Earnings from delivering goods or services to customers
Measured by corresponding increase in Asset received as payment
Expenses – goods or services Consumed from Revenue Generation
decreases Retained Earnings that result from operations
Measured by historical cost of assets given up in the sale or consumed to make the sale

23. Components of Retained Earnings
Revenues for
the period –
Expenses for
the period
Start of
the period
Ending
balance of
retained
earnings
End of
the period =
Beginning
balance of
retained
earnings + or –
Net income
(or Net loss)
for the
period –
Dividends
for the
period =

24. Accounting Equation Expanded (again)
Assets = Liabilities + Paid-in Capital – Dividends + Revenue – Expenses
Retained Earnings

25. Transactions
A simultaneous exchange between one accounting entity and another accounting entity:
Customers
Suppliers
Employees
Owners
Each party Gives and Receives something of value ($’s)

26. Chapter 1
Exercise 1-4

27. ACG 2021 Financial Accounting
The Financial Statements

28. The Financial Statements
Balance Sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows

29. Assets = Liabilities + Owner’s Equity
Balance Sheet
Rank
Place
Situation
Standing
Assets used to reach company objectives
$’s represent One Particular Point in Time
Snapshot
What is the company’s financial position at the end of a period?
Assets = Liabilities + Owner’s Equity

30. Balance Sheet Assets appear in order of Liquidity Why?
Easily Turned into Cash
Why?
So Creditors can quickly ascertain if a company has enough “Cash” to pay back what is owed
So Creditors can quickly ascertain what collateral a company has against possible loans that might be made
Liabilities appear in order in which they will be paid
Within 1 year or less
Greater then 1 year
Stockholders Equity shows the amount contributed by investors & the amount of Income retained by the company
Dividends are paid out of this retained amount (but NOT with it)

31. Income Statement Presents information about profitability
How well did the company perform during the period?
Revenue – Amount paid or promised to pay for goods or services of the firm, increase of assets
Expenses – Costs of providing goods or services to the customer, using up of assets
Temporary (periodic) Retained Earnings accounts
Revenues
– Expenses
Net Income (Loss)

32. Statement of Retained Earnings
The portion of a firms Net Income retained by the business
Why did the company's retained earnings change during the year?
Beginning retained earnings
+Net income or (-Net loss)
- Dividends
Ending retained earnings

33. Statement of Cash Flows
Changes to Cash during a specific time period
How much cash did the company generate and spend during the year?
Operating cash flows
+ Investing cash flows
+ Financing cash flows
Increase (decrease) in cash

34. Information Reported in the F/S

35. Relationships Among the Financial Statements
ABC Company
Income Statement –
Year Ended December 31, 2006
Revenues $700,000
Expenses 670,000
Net income $ 30,000

36. Relationships Among the Financial Statements
ABC Company
Statement of Retained Earnings
Year Ended December 31, 2006
Beginning retained earnings $180,000
Net income ,000
Cash dividends (10,000)
Ending retained earnings $200,000

37. Relationships Among the Financial Statements
ABC Company
Balance Sheet
December 31, 2006
Assets
Cash $ 25,000
All other assets ,000
Total assets $300,000
Liabilities
Total liabilities $120,000
Stockholders’ equity
Common stock ,000
Retained earnings ,000
Other equity (60,000)
Total liabilities and stockholders’ equity $300,000

38. Relationships Among the Financial Statements
ABC Company
Statement of Cash Flows
Year Ended December 31, 2006
Net cash provided by operating activities $ 90,000
Net cash used for investing activities (110,000)
Net cash provided by financing activities 40,000
Net increase in cash ,000
Beginning cash balance 5,000
Ending cash balance $ 25,000