1

Chapter 1Accounting as a Form of

Communication

Financial Accounting 4e by Porter and Norton

2

Decisions Made with Financial Information

Invest??

Borrow $$??

Sell stocks or bonds??

Build new plant??

Add new product line??

Start new business??

Loan $$??Extend credit $$??

3

What is Accounting?

Identifying

Measuring

Communicating

EconomicInformation

to various

users

4

Internal and ExternalUsers of Accounting Information

Internal Users -

Management

CreditorsCurrentand

PotentialOwners

GovernmentAgencies

SuppliersTrade

Organizations

FinancialAnalysts

Banks

5

The Accounting Equation

Assets = Liabilities + Owners’ Equity (or Stockholders'

Equity)Creditors'

Claimsto Assets

Owners'Claims

to Assets

EconomicResources

= +

Examples:CashAccounts receivableInventory

Accounts payableNotes payable

Capital stockRetained earnings

6

Balance Sheet

Assets Liabilities

Owners’ Equity(or Stockholders' Equity)

=

+A

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICATHE UNITED STATES OF AMERICA

L70744629F

12

1212

12

L70744629F

ONE DOLLARONE DOLLAR

WASHINGTON, D.C.

THIS NOTE IS LEGAL TENDER

FOR ALL DEBTS, PUBLIC AND PRIVATE

SERIES

1985

H 293

StockCertificate

- snapshot offinancial position

7

Current assets:Cash and cash equivalents $ 93,779 $ 51,443Receivables, less allow. for doubtful accts. ($244 and $1,168, respectively) 20,183 32,045Dealer financing receivables, less allow. for doubtful accts ($117 and $27, respectively) 40,263 32,696Inventories 79,815 85,707Prepaid expenses 3,604 3,952Deferred income taxes 6,723 7,675

Total current assets 244,367 213,518

Property, plant and equipment, net 46,536 45,455Investment in life insurance 22,223 21,028Deferred income taxes 21,495 19,044Other assets 7,412 8,050

$342,033 $307,095

Winnebago Industries, Inc.Consolidated Balance SheetsAssets August 25,2001 August 26,2000

A

A = L + SE

Winnebago Industries, Inc.Consolidated Balance Sheets

Current liabilities:Accounts payable, trade $ 30,789 $ 26,212Income taxes payable 4,938 8,790Accrued expenses 34,392 35,242

Total current liabilities 70,119 70,244

Postretirement health care and deferred compensation benefits 64,450 61,942

Liabilities and Stockholders' EquityAugust 25, 2001 August 26, 2000

Stockholders' equity:Capital stock common 12,943 12,939Additional paid-in capital 22,261 21,994Reinvested earnings 234,139 195,556

269,343 230,489Less treasury stock, at cost (61,879) (55,580)

Total stockholders' equity 207,464 174,909

$ 342,033 $307,095

= L

+ SE

A = L + SE

8

9

Income Statement

Revenues $$$

Less: Expenses ($$)

Net income $$

10

Winnebago Industries, Inc.Consolidated Statements of Operations

Net revenues $ 681,834 $ 753,382Cost of manf. products 587,330 640,488Gross profit 94,504 112,894Selling, general and administrative

expenses 39,030 42,240Operating income 55,474 70,654Financial income 3,754 3,338Income before income taxes 59,228 73,992Provision for taxes 15,474 25,593Change in acctg. principle, net (1,050) --- Net Income $ 42,704 $ 48,399

August 25, 2001 August 26, 2000

Revenues

Revenues - Expenses = Net Income

Revenues

Expenses

Expenses

Expenses

Statement of Retained Earnings

Beginning retained earnings $$$Add: Net income for the period $$Deduct: Dividends for the period ($$)= Ending retained earnings $$$

11

12

Winnebago Industries, Inc.Statement of Retained Earnings for 2001

Beginning balance, retained earnings $ 195,556

Add: Net income 42,704

Deduct: Cash dividends (4,121)

Ending balance, retained earnings $ 234,139

13

Income Statement for 2001Revenues $ xxxLess: Expenses xxxNet income $ 42,704

Statement of Retained Earnings for 2001Beginning balance, retained earnings $195,556Add: Net income 42,704Deduct: Cash dividends (4,121)Ending balance, retained earnings $ 234,139

Relationships among Financial Statements – Winnebago Industries Example

Balance Sheets 2001 2000Total assets $ xxx $ xxx Liabilities xxx xxxCapital stock xxx xxxRetained earnings 234,139 195,556Total liabilities & stockholders' equity $ xxx $ xxx

14

Financial Statement Assumptions

EconomicEntity

CostPrinciple

GoingConcern

MonetaryUnit

TimePeriod

15

Economic Entity Concept

Each entity has its own books, records and financial statements that are separate from owners

No intermingling of personal and business assets and liabilities or income and expenses

BusinessBooks &Records

Owners’Books &Records

16

Cost Principle

Record assets at cost paid to acquire them

Continue to value assets at historical cost until sold

More objective than market value

17

Going Concern

Assume business will continue indefinitely into the foreseeable future

Justifies use of historical cost

18

Monetary Unit

How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.)

Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

19

Time Period Assumption

Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year)

Necessary to provide users with financial results on a timely basis

Requires use of estimates 1 2 3

4 5 6 7 8 9 10

11 12 13 14 15 16 17

18 19 20 21 22 23 24

25 26 28 29 30 3127

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The Rules of the Game

GAAP

FASB

SEC

AICPA

The rules

The rule makers

The rule enforcers

The CPA regulators

21

Where Accountants Work Private Business

Nonbusiness Organizations

Public Accounting

– audit

– tax

– management consulting

Educational Institutions

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End of Chapter 1