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Chapter One
An Introduction
to Accounting
© 2015 McGraw-Hill Education.
Role of Accounting in Society
Accounting provides
information that is useful in answering
questions about
resource allocation.
Should I invest
money in IBM or
General Motors?
1-2
1-3
1-4
Elements of Financial Statements
1. Assets—Cash, Equipment, Buildings, Land
2. Liabilities
3. Equity
4. Contributed Capital
5. Revenue
6. Expenses
7. Distributions
8. Net Income
9. Gains
10. Losses
Subclassifications of the
elements are frequently called
accounts.Accounts are
reported in the financial
statements.
1-5
Accounting Equation
Claims on the assets are from two sources:
1. Creditors (liabilities)
2. Investors or owners (equity).
1-6
Event 1: RCS (formed on Jan. 1, 2014) acquired cash through $120,000 common stock issue.
1. Increase assets (cash).
2. Increase equity (common stock).
Asset Source Transaction
= Liab. +
Cash + Land = N. Pay + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income Cash Flow
120,000 + n/a = n/a + 120,000 + n/a n/a - n/a = n/a 120,000 FA
Assets Stockholders' Equity
Event 2: RCS acquired $400,000 cash by borrowing from a creditor.
1. Increase assets (cash).
2. Increase liabilities (notes payable).
Asset SourceTransaction
Cash + Land = N. Pay + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income Cash Flow
400,000 + n/a = 400,000 + n/a + n/a n/a - n/a = n/a 400,000 OA
1-7
Event 3: RCS paid $500,000 cash to purchase land.
1. Decrease assets (cash).
2. Decrease equity (selling expenses).
Asset ExchangeTransaction
= Liab. +
Cash + Land = N. Pay. + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income Cash Flow
(500,000) + 500,000 = n/a + n/a + n/a - n/a = n/a (500,000) IA
Assets Stockholders' Equity
Event 4: RCS obtained $85,000 cash by leasing camp sites to customers.
1. Increase assets (cash)
2. Increase stockholders’ equity (revenue).
Asset Source Transaction
= Liab. +
Cash + Land = N. Pay. + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
Cash Flow
85,000 + n/a = n/a + n/a + 85,000 85,000 - n/a = n/a 85,000 OA
Assets Stockholders' Equity
1-8
Event 5: RCS paid $50,000 cash for operating expenses.
1. Decrease assets (cash).
2. Decrease equity (operating expenses).
Asset UseTransaction
= Liab. +
Cash + Land = N. Pay. + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income Cash Flow
(50,000) + n/a = n/a + n/a + (50,000) n/a - 50,000 = (50,000) (50,000) OA
Assets Stockholders' Equity
1. Decrease assets (cash).
2. Decrease stockholders’ equity (retained earnings).
Asset UseTransaction
= Liab. +
Cash + Land = N. Pay. + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
Cash Flow
(4,000) + n/a = n/a + n/a + (4,000) n/a - n/a = n/a (4,000) FA
Assets Stockholders' Equity
Event 6: RCS paid $4,000 in cash dividends to its owners.
1-9
Event 7: The land that RCS purchased for $500,000 cash had an appraised value of $525,000 on Dec. 31, 2014.
1. Not Recognized due to Historical Cost concept Non-Transaction
Historical Cost Concept
1-10
Summary of Accounting Events
1-11
Two Views of the The Right Side of the Accounting Equation
Sources of the company’s assets.
Stewardshipmeans to protect and use assets for the benefit of the owners.
Obligations of the company to return
creditor assets.Commitments of the company to investor-
provided assets.
View Two
View One
1-12
Distributions in Business Liquidations
Creditors have Priority.
If there are any assets left over, they are distributed to investors
Going ConcernAssumes that a business is able to continue operations into the
foreseeable future. 1-13
Recap: Types of Transactions
The described transactions have been classified into one of three
categories:Asset Source
Asset Exchange
AssetUse
Increase total assets,
increase total claims
Increase one asset, decrease another
asset
Decrease total assets,
decrease total claims
1-14
Preparing Financial Statements
Net Loss
Accounting Period
Rental revenue (asset increases) 85,000$ Operating expenses (asset decreases) (50,000) Net income 35,000$
Beginning common stock -$ Plus: Common stock issued 120,000 Ending common stock 120,000$ Beginning retained earnings -$ Plus: Net income 35,000 Less: Dividends (4,000) Ending retained earnings 31,000 Total stockholders' equity 151,000$
RUSTIC CAMP SITESIncome Statement
For the Year Ended December 31, 2014
Matching Concept
results when expenses exceed revenues.
Revenues exceeded expenses.Income is
measured for a span of time
called the
{
Revenues are matched to expenses.
1-15
Revenue (asset increases) 85,000$ Operating Expenses (asset decreases) (50,000) Net Income 35,000$
Beginning Common Stock -$ Plus: Common Stock Issued 120,000 Ending Common Stock 120,000$ Beginning Retained Earnings -$ Plus: Net Income 35,000 Less: Dividends (4,000) Ending Retained Earnings 31,000 Total Stockholders' Equity 151,000$
RUSTIC CAMP SITESStatement of Changes in Stockholders' Equity
For the Year Ended December 31, 2014
RUSTIC CAMP SITESIncome Statement
For the Year Ended December 31, 2014
Preparing Financial Statements
1-16
AssetsCash 51,000$ Land 500,000 Total Assets 551,000$
LiabilitiesNotes Payable 400,000$
Stockholders' EquityCommon Stock 120,000$ Retained Earnings 31,000 Total Stockholders' Equity 151,000 Total Liabilities and Stockholders' Equity 551,000$
Balance SheetAs of December 31, 2014
RUSTIC CAMP SITES
Preparing Financial Statements
equal
Assets are
displayed in
order of liquidity.
1-17
Cash Flows from Operating ActivitiesCash Receipts from Revenue 85,000$ Cash Payments for Expenses (50,000)
Net Cash Flow from Operating Activities 35,000$ Cash Flows for Investing ActivitiesCash Payments to Purchase Land (500,000) Cash Flows from Financing ActivitiesCash Receipts from Borrowing Funds 400,000 Cash Receipts from Issuing Common Stock 120,000 Cash Payments for Dividends (4,000) Net Cash Flow from Financing Activities 516,000 Net Increase in Cash 51,000 Plus Beginning Cash Balance - Ending Cash Balance 51,000$
Statement of Cash FlowsFor the Year Ended December 31, 2014
RUSTIC CAMP SITES
Operating
Investing
Financing
Preparing Financial Statements
1-18
The Closing Process
Transfers net income (or loss) and dividends to Retained Earnings.
Establishes zero balances in all
revenue, expense, and dividend accounts.
1-19
Horizontal Financial Statements Model
1-20
Annual Reports
(1)Financial Statements
(2)Notes
(3)Auditor’s Report –Chapter 6
(4)Management’s Discussion and Analysis (MD&A)
Traditionally, large companies have distributed expensive
annual reports with many color photographs.
Increasingly, however, companies are issuing more modest annual reports or are simply distributing their 10-K
reports.
1-21
End of Chapter One
1-22