Kimmel Accounting 4e PowerPoint Ch02

8/19/2019 Kimmel Accounting 4e PowerPoint Ch02

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A FURTHER LOOK AT

FINANCIAL STATEMENTS

Accounting, Fourth Edition

2


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1. Identify the sections of a classified balance sheet.2. Identify and compute ratios for analyzing a company’s

profitability.

3. Explain the relationship between a retained earnings statement

and a statement of stockholders’ euity.

!. Identify and compute ratios for analyzing a company’s liuidity

and sol"ency using a balance sheet.

#. $se the statement of cash flows to e"aluate sol"ency.

%. Explain the meaning of generally accepted accounting

principles.

&. 'iscuss financial reporting concepts.

Stud O!"#cti$#%Stud O!"#cti$#%

Stud O!"#cti$#%Stud O!"#cti$#%


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(atio analysis(atio analysis

$sing the income$sing the income

statementstatement

$sing the statement of$sing the statement of

stockholders’ euitystockholders’ euity

$sing a classified$sing a classifiedbalance sheetbalance sheet

$sing the statement of$sing the statement of

cash flowscash flows

Th# C'(%%i)i#dTh# C'(%%i)i#d

*('(nc# Sh##t*('(nc# Sh##t

Th# C'(%%i)i#dTh# C'(%%i)i#d

*('(nc# Sh##t*('(nc# Sh##t

)urrent assets)urrent assets

*ong+term*ong+term

in"estmentsin"estments

,roperty- plant- and,roperty- plant- and

euipmenteuipment

Intangible assetsIntangible assets)urrent liabilities)urrent liabilities

*ong+term liabilities*ong+term liabilities

tockholders’ euitytockholders’ euity

/he standard+setting/he standard+settingen"ironmenten"ironment

0ualities of useful0ualities of useful

informationinformation

ssumptions ssumptions

,rinciples,rinciples)onstraints)onstraints

U%ing th# Fin(nci('U%ing th# Fin(nci('

St(t#+#nt%St(t#+#nt%

U%ing th# Fin(nci('U%ing th# Fin(nci('

St(t#+#nt%St(t#+#nt%Fin(nci(' R#ortingFin(nci(' R#orting

Conc#t%Conc#t%

Fin(nci(' R#ortingFin(nci(' R#orting

Conc#t%Conc#t%

A Furth#r Loo At Fin(nci(' St(t#+#nt%A Furth#r Loo At Fin(nci(' St(t#+#nt%

A Furth#r Loo At Fin(nci(' St(t#+#nt%A Furth#r Loo At Fin(nci(' St(t#+#nt%


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I''u%tr(tion 2-2

Th# C'(%%i)i#d *('(nc# Sh##tTh# C'(%%i)i#d *('(nc# Sh##t

Th# C'(%%i)i#d *('(nc# Sh##tTh# C'(%%i)i#d *('(nc# Sh##t

SO 1


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I''u%tr(tion 2-2

Th# C'(%%i)i#d *('(nc# Sh##tTh# C'(%%i)i#d *('(nc# Sh##tTh# C'(%%i)i#d *('(nc# Sh##tTh# C'(%%i)i#d *('(nc# Sh##t

SO 1


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SO 1 Identify the sections of a classified balance sheet.

ssets that a company expects to con"ert to cash or

use up ithin on# #(r or the o#r(ting cc'#-

whiche"er is 'ong#r .

O#r(ting cc'# is the a"erage time it takes from the

purchase of in"entory to the collection of cash from

customers.

Curr#nt A%%#t%


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)ompanies list current asset accounts in the order they expect to

con"ert them into cash.

Curr#nt A%%#t%I''u%tr(tion 2-3


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In"estments in %toc% and !ond% of other companies that

are held for more than one year.

In"estments in 'ong-t#r+ (%%#t% such as land or buildingsnot curr#nt' !#ing u%#d in operating acti"ities.

Long-T#r+ In$#%t+#nt%

I''u%tr(tion 2-&


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6ro#rt, 6'(nt, (nd E7ui+#nt



Long u%#)u' 'i$#%.

Curr#nt' u%#d in operations.

8#r#ci(tion + allocating the cost of assets to a number

of years.

Accu+u'(t#d d#r#ci(tion + total amount of

depreciation expensed thus far in the asset’s life.


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I''u%tr(tion 2-.

6ro#rt, 6'(nt, (nd E7ui+#nt


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Int(ngi!'# A%%#t%



ssets that do not ha"e physical substance.

I''u%tr(tion 2-/


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,atents and copyrights are

a. )urrent assets.

b. Intangible assets.

c. *ong+term in"estments.

d. ,roperty- plant- and euipment.

R#$i# 5u#%tion




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bligations the company is to pay within the coming year.

$sually list notes payable first- followed by accounts

payable.

ther items follow in order of magnitude.

Curr#nt Li(!i'iti#%


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I''u%tr(tion 2-0

Curr#nt Li(!i'iti#%


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bligations a company expects to pay after one year.

I''u%tr(tion 2-

Long-T#r+ Li(!i'iti#%


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4hich of the following is not a long+term liability5

a. 6onds payable

b. )urrent maturities of long+term obligations

c. *ong+term notes payable

d. 7ortgages payable

R#$i# 5u#%tion




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I''u%tr(tion 2-2

Co++on %toc + in"estments of assets into the business by

the stockholders.

R#t(in#d #(rning% + income retained for use in the business.

Stocho'd#r%9 E7uit


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U%ing th# Fin(nci(' St(t#+#nt%U%ing th# Fin(nci(' St(t#+#nt%U%ing th# Fin(nci(' St(t#+#nt%U%ing th# Fin(nci(' St(t#+#nt%

R(tio An('%i% R(tio (n('%i% expresses the relationship among

selected items of financial statement data.

r(tio expresses the mathematical relationship between

one uantity and another.


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6ro)it(!i'it r(tio% measure the operating success of a company for a gi"en period of time.

U%ing th# Inco+# St(t#+#nt

SO 2 Identify and compute ratios for analyzing a company’s profitability.

I''u%tr(tion 2-14


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I''u%tr(tion: E(rning% #r %h(r# ;E6S


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8or 2919 toneland )orporation reported net

income :2%-999; net sales :!99-999; and a"erage shares

outstanding %-999. /here were preferred stock di"idends of:2-999. 4hat was the 2919 earnings per share5

a. :!.99

b. :9.9%

c. :1%.%&

d. :%%.%&

R#$i# 5u#%tion


SO 2 Identify and compute ratios for analyzing a company’s profitability.

:2%-999 + :2-999

%-999< :!.99


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U%ing th# St(t#+#nt o) Stocho'd#r%9 E7uit

SO 3 Explain the relationship beteen a retained earningsstatement and a statement of stoc!holders’ e"uity.

7ost companies use

a %t(t#+#nt o)

%tocho'd#r%9

#7uit- rather than ar#t(in#d #(rning%

%t(t#+#nt- so that

they can report all

changes instockholders’ euity

accounts.

I''u%tr(tion 2-12


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bser"ations from this financial statement of *#%t *u

= Co++on %toc d#cr#(%#d during the first year because the

stock issuance was much smaller than the stock repurchase.

= Co++on %toc incr#(%#d in the second year as the result of

an issuance of shares..

= *#%t *u (id di$id#nd% each year.

= 6rior to 2443- 6est 6uy did not pay di"idends- e"en though itwas profitable and could do so.

4hy didn’t 6est 6uy pay di"idends prior to 29935

U%ing th# St(t#+#nt o) Stocho'd#r%9 E7uit


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/he balance in retained earnings is not affected by

a. net income

b. net loss

c. issuance of common stock

d. di"idends

R#$i# 5u#%tion




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U%ing th#U%ing th#

Fin(nci('Fin(nci('


U%ing th#U%ing th#

Fin(nci('Fin(nci('


U%ing (

C'(%%i)i#d*('(nc# Sh##t

I''u%tr(tion 2-13


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U%ing ( C'(%%i)i#d *('(nc# Sh##t

SO # Identify and compute ratios for analyzing a company’sli"uidity and sol$ency using a balance sheet.

Li7uidit>the ability to pay obligations expected tobecome due within the next year or operating cycle.

I''u%tr(tion 2-1&

4hen oring c(it(' is positi"e- there is greater likelihood

that the company will pay its liabilities.

6est 6uy had a ?E@/IAE working capital in 299B of :2!3 million.


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Li7uidit r(tio% measure the short+term ability to pay maturingobligations and to meet unexpected needs for cash.

I''u%tr(tion 2-1.

Li7uidit

R(tio

8or e"ery dollar of current liabilities- 6est 6uy has :.B& of current assets



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U%ing ( C'(%%i)i#d *('(nc# Sh##t


So'$#nc>the ability to pay interest as it comes due and to

repay the balance of a debt due at its maturity.

So'$#nc r(tio% measure the ability of the company to

sur"i"e o"er a long period of time.



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8#!t to tot(' (%%#t% r(tio measures the percentage of totalfinancing pro"ided by creditors rather than stockholders.

I''u%tr(tion 2-1/

So'$#nc

R(tio

/he 299B ratio means that e"ery dollar of assets was financed by &1 cents of debt.



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SO #

R#$i# 5u#%tion/he following ratios are a"ailable for *eer Inc. and table Inc.

)ompared to table Inc.- *eer Inc. has

a. higher liuidity- higher sol"ency- and higher profitability.

b. lower liuidity- higher sol"ency- and higher profitability.c. higher liuidity- lower sol"ency- and higher profitability.

d. higher liuidity and lower sol"ency- but profitability cannot be

compared based on information pro"ided.


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SO % &se the statement of cash flos to e$aluate sol$ency.

In the tatement of )ash 8lows- c(%h

ro$id#d ! o#r(ting (cti$iti#% fails to

take into account that a company must

in"est in new ,,CE and must maintain di"idends at current le"els to

satisfy in"estors.

Fr## c(%h )'o is a measurement to pro"ide additional insight

regarding a company’s cash+generating ability.


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SO % &se the statement of cash flos to e$aluate sol$ency.

I''u%tr(tion: 7,) produced and sold

19-999 personal computers this year. It

reported :199-999 cash pro"ided by

operating acti"ities. In order to maintain production at 19-999

computers- 7,) in"ested :1#-999 in euipment. It chose to pay

:#-999 in di"idends. )alculate free cash flow.

)ash pro"ided by operating acti"ities :199-999

*ess Expenditures on property- plant- and euipment +1#-999

'i"idends paid #-999

8ree cash flow : D9-999


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Fin(nci(' R#ort% Conc#t%Fin(nci(' R#ort% Conc#t%Fin(nci(' R#ort% Conc#t%Fin(nci(' R#ort% Conc#t%

Th# St(nd(rd-S#tting En$iron+#nt

SO ' Explain the meaning of generally accepted accounting principles.

#n#r('' Acc#t#d Accounting 6rinci'#% ;AA6< - set of

rules and practices- ha"ing substantial authoritati"e support- that

the accounting profession recognizes as a general guide for

financial reporting purposes.

St(nd(rd-%#tting !odi#% determine these guidelines

= ecurities and Exchange )ommission ;SEC<

= 8inancial ccounting tandards 6oard ;FAS*<= International ccounting tandards 6oard ;IAS*<

= ,ublic )ompany ccounting "ersight 6oard ;6CAO*<


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@enerally accepted accounting principles are

a. a set of standards and rules that are recognized

as a general guide for financial reporting.

b. usually established by the Internal (e"enue

er"ice.

c. the guidelines used to resol"e ethical dilemmas.d. fundamental truths that can be deri"ed from the

laws of nature.

R#$i# 5u#%tion

SO ' Explain the meaning of generally accepted accounting principles.



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5u('iti#% o) U%#)u' In)or+(tion

SO (

According to th# FAS*- useful information should possess two

fundamental ualities- r#'#$(nc# and )(ith)u' r#r#%#nt(tion.

I''u%tr(tion 2-10


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Enh(ncing 5u('iti#%

Co+(r(!i'it

results when differentcompanies use thesame accounting

principles.

Con%i%t#nc meansthat a company usesthe same accounting

principles and methodsfrom year to year.

Information is$#ri)i(!'# if we areable to pro"e that itis free from error.

8or accounting information to berele"ant- it must be ti+#'.

Information has theuality of

und#r%t(nd(!i'itif it is presented in aclear and concise

fashion.

SO ( )iscuss financial reporting concepts.

5u('iti#% o) U%#)u' In)or+(tion


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A%%u+tion% in Fin(nci(' R#orting


Mon#t(r Unit 6#riodicit

Econo+ic Entit

I''u%tr(tion 2-1

(euires that only

those things that canbe expressed in

money are included inthe accounting

records.

tates that e"eryeconomic entity can be

separately identifiedand accounted for.

tates that the life of a

business can bedi"ided into artificial

time periods.


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A%%u+tion% in Fin(nci(' R#orting


oing Conc#rn

I''u%tr(tion 2-1

Accru('-*(%i%

/ransactions arerecorded in the

periods in which the

e"ents occur.

/he business willremain in operation

for the foreseeable

future.


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6rinci'#% in Fin(nci(' R#orting


M#(%ur#+#nt 6rinci'#%

Co%t F(ir B('u# Fu'' di%c'o%ur#

r historical costprinciple- dictates

that companies

record assets at

their cost.

Indicates thatassets and

liabilities should be

reported at fair

"alue the price

recei"ed to sell an

asset or settle

a liabilityF.

(euires thatcompanies disclose

all circumstances

and e"ents that

would make a

difference to

financial statement

users.


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Con%tr(int% in Fin(nci(' R#orting I''u%tr(tion 2-1

SO (

M(t#ri('it Con%tr(int

n item is material when its size makes it

likely to influence the decision of anin"estor or creditor.

Co%t Con%tr(int

ccounting standard+setters weigh the costthat companies will incur to pro"ide the

information against the benefit that

financial statement users will gain.


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Co+(r(!i'it

oing conc#rn

M(tch #(ch it#+ (!o$# ith ( d#%crition !#'o@

1@ A!i'it to #(%i' #$('u(t# on# co+(n9% r#%u't%r#'(ti$# to (noth#r9%@

2@ *#'i#) th(t ( co+(n i'' continu# to o#r(t#)or th# )or#%##(!'# )utur#@

3@ Th# "udg+#nt conc#rning h#th#r (n it#+ i%'(rg# #nough to +(tt#r to d#ci%ion +(#r%@

M(t#ri('it



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Fu'' di%c'o%ur#

6#riodicit

&@ Th# r#orting o) ('' in)or+(tion th(t ou'd+(# ( di))#r#nc# to )in(nci(' %t(t#+#nt u%#r%@

.@ Th# r(ctic# o) r#(ring )in(nci(' %t(t#+#nt%(t r#gu'(r int#r$('%@

/@ Th# 7u('it o) in)or+(tion th(t indic(t#% th#in)or+(tion +(#% ( di))#r#nc# in ( d#ci%ion@

R#'#$(nc#



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Co%t

Con%i%t#nc

0@ *#'i#) th(t it#+% %hou'd !# r#ort#d on th#!('(nc# %h##t (t th# ric# th(t (% (id to(c7uir# th# it#+@

@ A co+(n9% u%# o) th# %(+# (ccountingrinci'#% (nd +#thod% )ro+ #(r to #(r@

@ Tr(cing (ccounting #$#nt% to (rticu'(rco+(ni#%@

Econo+ic #ntit



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F(ith)u' r#r#%#nt(tion14@ Th# d#%ir# to +ini+i# #rror% (nd !i(% in)in(nci(' %t(t#+#nt%@

11@ R#orting on' tho%# thing% th(t c(n !#+#(%ur#d in do''(r%@ Mon#t(r unit



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4hat is the primary criterion by which accounting

information can be Gudged5

a. )onsistency.

b. ,redicti"e "alue.

c. $sefulness for decision making.

d. )omparability.

R#$i# 5u#%tion




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K# 6oint%

IFRS r#co++#nd% !ut do#% not r#7uir# th# u%# o) th# tit'#

D%t(t#+#nt o) )in(nci(' o%ition r(th#r th(n !('(nc# %h##t@

Th# )or+(t o) %t(t#+#nt o) )in(nci(' o%ition in)or+(tion i%

o)t#n r#%#nt#d di))#r#nt' und#r IFRS@ Mo%t co+(ni#%

th(t )o''o IFRS r#%#nt %t(t#+#nt o) )in(nci(' o%ition

in)or+(tion in thi% ord#r:

1@ Noncurr#nt (%%#t%

2@ Curr#nt (%%#t%

3@ E7uit

&@ Noncurr#nt 'i(!i'iti#%

.@ Curr#nt 'i(!i'iti#%


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K# 6oint%

IFRS r#7uir#% ( c'(%%i)i#d %t(t#+#nt o) )in(nci(' o%ition

#c#t in $#r 'i+it#d %itu(tion%@ IFRS )o''o% th# %(+#

guid#'in#% (% thi% t#t!oo )or di%tingui%hing !#t##ncurr#nt (nd noncurr#nt (%%#t% (nd 'i(!i'iti#%@

Und#r IFRS, curr#nt (%%#t% (r# u%u('' 'i%t#d in th# r#$#r%#

ord#r o) 'i7uidit@

So+# co+(ni#% r#ort th# %u!tot(' n#t (%%#t%, hich

#7u('% tot(' (%%#t% +inu% tot(' 'i(!i'iti#%@


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K# 6oint%

IFRS h(% +(n di))#r#nc#% in t#r+ino'og@ In th# in$#%t+#nt

c(t#gor %toc i% c(''#d %h(r#%, (nd co++on %toc i%

c(''#d %h(r# c(it('Gordin(r@

*oth IFRS (nd AA6 r#7uir# di%c'o%ur#% (!out ;1<

(ccounting o'ici#% )o''o#d, ;2< "udg+#nt% th(t

+(n(g#+#nt h(% +(d# in th# roc#%% o) ('ing th#

#ntit9% (ccounting o'ici#%, (nd ;3< th# # (%%u+tion%(nd #%ti+(tion unc#rt(int th(t cou'd r#%u't in ( +(t#ri('

(d"u%t+#nt to th# c(rring (+ount% o) (%%#t% (nd 'i(!i'iti#%

ithin th# n#t )in(nci(' #(r@


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K# 6oint%

Co+(r(ti$# rior-#riod in)or+(tion +u%t !# r#%#nt#d

(nd )in(nci(' %t(t#+#nt% +u%t !# r#(r#d (nnu(''@

*oth AA6 (nd IFRS (r# incr#(%ing th# u%# o) )(ir $('u# to

r#ort (%%#t%@ A% #(+'#%, und#r IFRS co+(ni#% c(n

(' )(ir $('u# to ro#rt, '(nt, (nd #7ui+#nt n(tur('

r#%ourc#% (nd in %o+# c(%#% int(ngi!'# (%%#t%@

R#c#nt', th# IAS* (nd FAS* co+'#t#d th# )ir%t h(%# o) (

"oint' cr#(t#d conc#tu(' )r(+#or@


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K# 6oint%

Th# +on#t(r unit (%%u+tion i% (rt o) #(ch )r(+#or@

Ho#$#r, th# unit o) +#(%ur# i'' $(r d##nding on th#

curr#nc u%#d ;#@g@, Chin#%# u(n, ((n#%# #n, (nd*riti%h ound


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Looing into th# Futur#

Th# IAS* (nd th# FAS* (r# oring on ( ro"#ct to con$#rg#

th#ir %t(nd(rd% r#'(t#d to )in(nci(' %t(t#+#nt r#%#nt(tion@ A

# )#(tur# o) th# roo%#d )r(+#or i% th(t #(ch o) th#%t(t#+#nt% i'' !# org(ni#d in th# %(+# )or+(t, to %#(r(t# (n

#ntit9% )in(ncing (cti$iti#% )ro+ it% o#r(ting (nd in$#%ting

(cti$iti#% (nd, )urth#r, to %#(r(t# )in(ncing (cti$iti#% into

tr(n%(ction% ith on#r% (nd cr#ditor%@

Th# %(+# c'(%%i)ic(tion% u%#d in th# %t(t#+#nt o) )in(nci('

o%ition ou'd ('%o !# u%#d in th# inco+# %t(t#+#nt (nd th#

%t(t#+#nt o) c(%h )'o%@


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Jhich o) th# )o''oing %t(t#+#nt% i% )('%#

(< Th# +on#t(r unit (%%u+tion i% u%#d und#r IFRS@

!< Und#r IFRS, co+(ni#% %o+#ti+#% n#t 'i(!i'iti#%(g(in%t (%%#t% to r#ort Dn#t (%%#t%@

c< Th# FAS* (nd IAS* (r# oring on ( "oint conc#tu('

)r(+#or ro"#ct@

d< Und#r IFRS, th# %t(t#+#nt o) )in(nci(' o%ition i%

u%u('' r#)#rr#d to (% th# %t(t#+#nt o) (%%#t% (nd

#7uit@


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A co+(n h(% urch(%#d ( tr(ct o) '(nd (nd ##ct% to

!ui'd ( roduction '(nt on th# '(nd in (roi+(t#' .

#(r%@ 8uring th# . #(r% !#)or# con%truction, th# '(nd i''

!# id'#@ Und#r IFRS, th# '(nd %hou'd !# r#ort#d (%:

(< '(nd ##n%#@

!< ro#rt, '(nt, (nd #7ui+#nt@

c< (n int(ngi!'# (%%#t@

d< ( 'ong-t#r+ in$#%t+#nt@


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Curr#nt (%%#t% und#r IFRS (r# 'i%t#d g#n#r('':

(< ! i+ort(nc#@

!< in th# r#$#r%# ord#r o) th#ir ##ct#d con$#r%ion to

c(%h@

c< ! 'ong#$it@

d< ('h(!#tic(''@


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Kimmel Accounting 4e PowerPoint Ch02