1. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Basic Accounting Concepts Chapter 2

2. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Learning Objectives After studying this chapter, you should be able to: Describe the basic elements of a financial accounting system Analyze, record, and summarize transactions for a corporation’s first period of operations Prepare financial statements for a corporation’s first period of operations Analyze, record, and summarize transactions for a corporation’s second period of operations Prepare financial statements for a corporation’s second period of operations Financial Analysis: Describe and illustrate the use of common-sized income statements in assessing a company’s financial performance

3. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Describe the basic elements of a financial accounting system Learning Objective 1

4. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Basic Elements of a Financial Accounting System The three elements of financial accounting system are: ________ to record each economic event ________ to prepare the financial statements ________ to detect the errors in the recording process

5. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Rules of an Accounting System Rules determine: A _________ is an economic event that can affect one, two or more items in the financial statements WHAT transactions are to be recorded WHAT transactions are to be recorded WHEN transactions are to be recorded WHEN transactions are to be recorded HOW transactions are to be recorded HOW transactions are to be recorded AMOUNT of the transaction to be recorded AMOUNT of the transaction to be recorded

6. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Framework of an Accounting System Accounting Equation: __________ = _____________ + __________

7. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Template By expanding the accounting equation, transactions can be analyzed, summarized, and recorded within the integrated financial statement framework Impact of transaction on ______

8. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Controls of an Accounting System THE ACCOUNTING EQUATION MUST BALANCE THE ACCOUNTING EQUATION MUST BALANCE Ending Cash on Statement of Cash Flows = Cash on _________________ Ending Cash on Statement of Cash Flows = Cash on _________________ Net Income on Income Statement = Net Effects of ___________/___________ on ___________ ____________ Net Income on Income Statement = Net Effects of ___________/___________ on ___________ ____________

9. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Analyze, record, and summarize transactions for a corporation’s first period of operations Learning Objective 2

10. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Starting Family Health Care, P.C. Dr. Landry deposits $6,000 in a bank account in the name of Family Health Care, P.C., in return for shares of stock in the corporation

11. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Borrowing Money Family Health Care, P.C. borrows $10,000 from First National Bank finance its operations

12. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Buying Land Family Health Care buys land for $12,000 cash

13. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Earning of Fees During the first month of operations, Family Health Care earned patient fees of $5,500, receiving the fees in cash

14. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Paying of Expenses Family Health Care paid expenses during September as follows: wages, $1,125; rent, $950; utilities, $450; interest, $100; and miscellaneous, $275

15. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statement Framework: Paying of Dividends Family Health Care paid $1,500 to stockholders (Dr. Lee Landry) as dividends

16. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statements: Family Health Care, P.C.

17. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Observations from Family Health That Apply to All Companies

18. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Prepare financial statements for a corporation’s first period of operations Learning Objective 3

19. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Preparation of Financial Statements This exhibit lists Family Health’s transactions in the order they occurred; it does not group and summarize like transactions together Income Statement components Balance Sheet components Statement of Cash Flow components

20. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Income Statement

21. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Retained Earnings Statement

22. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Balance Sheet

23. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows

24. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statements

25. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Analyze, record, and summarize transactions for a corporation's second period of operations Learning Objective 4

26. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Summary of October Transactions

27. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Prepare financial statements for a corporation’s second period of operations Learning Objective 5

28. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Summary of October Transactions

29. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Income Statement

30. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Retained Earnings Statement

31. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Balance Sheet

32. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Statement of Cash Flows

33. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Integrated Financial Statements for October

34. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Financial Analysis: Describe an illustrate the use of common-sized income statements in assessing a company’s financial performance Learning Objective 6

35. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Common-Sized Income Statements Common-sized financial statements: prepared by expressing financial statement amounts as a percent of a base amount __________________________: expresses income statement amounts as a percent of sales __________________________: expresses each asset as a percent of total assets

36. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Common-Sized Income Statements Data (in millions) adapted from recent financial statements of The Kroger Co.

37. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. Common-Sized Income Statements Year 2 Year 1 Sales Cost of sales Gross profit Operating expenses: Selling and administrative Total operating expenses Other expenses Operating income Other income (expense) Interest expense Tax expense Other income (expense) Net income 100.0% 90,374 (71,494) 18,880 (15,345) (2,257) (17,602) 1,278 (435) (247) 6 602 (79.1) 20.9 (17.0) (2.5) (19.5) 1.4 (0.5) (0.2) 0.0 0.7 (77.8) 22.2 (16.9) (2.7) (19.6) 2.6 (0.7) (0.5) (0.0) 1.4 82,049 (63,803) 18,246 (13,823) (2,241) (16,064) 2,182 (601) (448) (17) 1,116 $ $ $ $ $ $ $ $ $ $ $ $ $ $ Data (in millions) adapted from recent financial statements of The Kroger Co.

38. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part. End of Chapter 2