Download CHAPTER 02 AA Accounting for Business

Welcome Back
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Welcome Back
Time for Any
Question
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CHAPTER # 01
REVIEW
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Chapter 01
Accounting in Business
Importance of Accounting
For example, the sale
by Apple of an
iPhone.
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Keep a chronological
log of transactions.
Prepare reports such
as financial
statements.
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Users of Financial Information
Accounting is called the language of business because all
organizations set up an accounting information system to
communicate data to help people make better decisions.
Accounting serves many users who can be divided into two groups:
external users and internal users.
C2
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Opportunities in Accounting
Accounting information is in all aspects of our lives. When
we earn money, pay taxes, invest savings, budget
earnings, and plan for the future, we use accounting.
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NEED-TO-KNOW 1-1
Identify the following users of accounting information as either
an (a) external or (b) internal user.
Regulator
CEO
Shareholder
Controller
Executive Employee
External Auditor
Production Manager
Nonexecutive Employee
a) External user
b) Internal user
a) External user
b) Internal user
b) Internal user
a) External user
b) Internal user
a) External user
External users of accounting information are NOT directly involved
in running the organization.
Internal users of accounting information ARE directly involved in
managing and operating an organization.
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Ethics – A Key Concept
The goal of accounting is to provide useful information for
decisions. For information to be useful, it must be trusted. This
demands ethics in accounting. Ethics are beliefs that distinguish
right from wrong. They are accepted standards of good and bad
behavior.
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Fraud Triangle
Three factors must exist for a person to commit fraud:
opportunity, pressure, and rationalization.
Envision a way to commit
fraud with a low perceived
risk of getting caught
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Fails to see the criminal
nature of the fraud or
justifies the action
Must have some pressure to
commit fraud, like unpaid
bills
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Generally Accepted
Accounting Principles (GAAP)
Financial accounting is governed by concepts and rules known
as generally accepted accounting principles (GAAP). GAAP
aims to make information relevant, reliable, and comparable.
Reliable information is
trusted by users.
Relevant information
affects decisions
of users.
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Comparable
information is helpful
in contrasting
organizations.
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International Standards
In today’s global economy, there is increased demand by external
users for comparability in accounting reports. This demand often
arises when companies wish to raise money from lenders and
investors in different countries.
International Accounting
Standards Board (IASB)
International Financial
Reporting Standards (IFRS)
An independent group
(consisting of individuals
from many countries), issues
International Financial
Reporting Standards (IFRS)
Identify preferred accounting
practices
Differences between U.S. GAAP and IFRS are decreasing as the
FASB and IASB pursue a convergence process aimed to achieve
a single set of accounting standards for global use.
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Accounting Principles
Measurement Principle
(or Cost Principle)
Accounting information is based
on actual cost.; Actual cost is
considered objective.
Expense Recognition Principle
(or Matching Principle)
A company must record its expenses
incurred to generate the revenue
reported.
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Revenue Recognition Principle
1. Recognize revenue when it is
earned.
2. Proceeds need not be in cash.
3. Measure revenue by cash received
plus cash value of items received.
Full Disclosure Principle
A company is required to report the
details behind financial statements that
would impact users’ decisions.
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Accounting Assumptions
Going-Concern Assumption
Reflects assumption that the
business will continue operating
instead of being closed or sold.
Monetary Unit Assumption
Express transactions and events
in monetary, or money, units.
Business Entity Assumption
Time Period Assumption
Presumes that the life of a company
can be divided into time periods,
such as months and years.
C4
A business is accounted for
separately from other business
entities, including its owner.
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Proprietorship, Partnership,
and Corporation
A business entity can take one of three legal forms:
proprietorship, partnership, or corporation
Here are some of the major attributes of proprietorships,
partnerships, and corporations:
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Sarbanes–Oxley (SOX)
Congress passed the Sarbanes–Oxley Act to help curb financial abuses at
companies that issue their stock to the public. SOX requires that these public
companies apply both accounting oversight and stringent internal controls.
The desired results include more transparency, accountability, and
truthfulness in reporting transactions.
Here are
some recent
accounting
scandals.
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Transaction Analysis and the
Accounting Equation
The Accounting Equation
Assets
=
Liabilities
+
Equity
Expanded Accounting Equation:
Equity
Assets = Liabilities + Contributed Capital
+
Retained Earnings
= Liabilities + Common Stock - Dividends + Revenues - Expenses
A1
Net Income
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NEED-TO-KNOW (1-3)
Use the accounting equation to compute the missing financial statement amounts.
Bose
Vogue
Assets = Liabilities + Equity
$150 =
$30 + $120
$400 =
$100 + $300
Use the expanded accounting equation to compute the missing financial statement amounts.
Assets = Liabilities + Equity
Nikon
YouTube
$200
$400
$80
$160
$120
$240
+Common - Dividends + Revenues - Expenses
Stock
$100
$0
$60
($40)
$220
($10)
$120
($90)
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Analyze Business
Transactions Using the
Accounting Equation.
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Transaction Analysis
Chas Taylor invests $30,000 cash to
start a company.
The accounts involved are:
(1) Cash (asset)
(2) Common Stock (equity)
P1
Let’s use the Accounting Equation:
Chas Taylor invests $30,000 cash to start
the business, Fast Forward.
Assets
Cash
(1) $ 30,000
$ 30,000
P1
Supplies Equipment
Liabilities
Accounts
Notes
Payable
Payable
$
$
-
$ 30,000
=
$
=
-
$
-
$ 30,000
+
Equity
Common
Stock
$ 30,000
$ 30,000
Let’s try another transaction. .
Company purchased supplies paying
$2,500 cash.
The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
P1
Transaction Analysis
Company purchased supplies paying
$2,500 cash. . .
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
$ 27,500 $ 2,500 $
P1
$ 30,000
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 30,000
Accounting Equation
must remain in
balance!!
-
$
=
-
$
-
$ 30,000
$ 30,000
Let’s try another
transaction. . .
Purchased equipment for $26,000 cash.
The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
P1
Using the Accounting Equation:
Purchased equipment for $26,000 cash.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
(3) (26,000)
$ 26,000
$ 1,500
$ 2,500
$ 30,000
P1
Liabilities
Accounts
Notes
Payable Payable
+
Equity
Common
Stock
$ 30,000
Accounting Equation
still remains in
balance!!
$ 26,000
$
=
-
$
-
$ 30,000
$ 30,000
Transaction Analysis
Purchased supplies of $7,100 on account.
The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
P1
Using the Accounting Equation
Purchased Supplies of $7,100 on account.
Assets
=
Cash
Supplies Equipment
(1) $ 30,000
(2)
(2,500) $ 2,500
(3) (26,000)
$ 26,000
(4)
7,100
$ 1,500
$ 9,600
$ 37,100
P1
Liabilities
Accounts
Notes
Payable
Payable
+
Equity
Common
Stock
$ 30,000
Accounting Equation still
remains in balance!!
$ 26,000
=
$
7,100
$
7,100
$
-
$ 37,100
$ 30,000
Transaction Analysis
Now, let’s look at transactions involving revenues,
expenses and dividends.
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Transaction Analysis
Provided consulting services to a customer
and received $4,200 cash right away.
The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
P1
Transaction Analysis
Provided consulting services to a customer
and received $4,200 cash right away.
Assets
=
Cash
Supplies Equipment
Bal. $ 1,500 $ 9,600 $ 26,000
(5)
4,200
$ 5,700 $ 9,600 $ 26,000
$ 41,300
P1
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 7,100
Common
Stock
Revenue
$ 30,000
$ 4,200
$ 7,100 $
$ 30,000 $ 4,200
-
$ 41,300
Transaction Analysis
Paid rent of $1,000 and
salaries of $700 to employees.
The accounts involved are:
(1) Cash (asset)
(2) Rent expense
(equity)
(3) Salaries expense
(equity)
Remember that the balance
in the Expense accounts
actually increase.
P1
But, total Equity
decreases, because
expenses reduce equity.
Transaction Analysis
Paid rent of $1,000 and
salaries of $700 to employees.
Assets
=
Cash
Supplies Equipment
Bal. $ 5,700 $ 9,600 $ 26,000
(6)
(1,000)
(7)
(700)
$ 4,000 $ 9,600 $ 26,000
$ 39,600
P1
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 7,100
Common
Stock
Revenue Expenses
$ 30,000 $ 4,200
(1,000)
$
(700)
$ 7,100 $
$ 30,000 $ 4,200 $ (1,700)
-
$ 39,600
Remember that expenses decrease equity.
Transaction Analysis
Dividends of $200 are paid to shareholders.
The accounts involved are:
(1) Cash (asset)
(2) Dividends (equity)
Remember that the
Dividend account
actually increases (just
like our Expenses
account . . . )
P1
But, total Equity
decreases because
dividends cause
equity to go down !!
Transaction Analysis
Dividends of $200 are paid to shareholders.
Assets
=
Cash
Supplies Equipment
Bal. $ 5,700 $ 9,600 $ 26,000
(6)
(1,000)
(7)
(700)
(8)
(200)
$ 3,800 $ 9,600 $ 26,000
$ 39,400
=
Liabilities
+
Equity
Accounts Notes
Payable Payable
$ 7,100
Common
Stock
$ 30,000
$ 7,100 $
$
$ 30,000 $
$
-
Dividends
Revenue Expenses
$ 4,200
$ 3,000 $ (1,000)
$
(700)
(200)
(200) $ 7,200 $ (1,700)
39,400
Remember that dividends decrease equity.
P1
NEED-TO-KNOW (1-4)
Assume Tata began operations on January 1 and completed the following transactions during its first month of
operations.
Jan. 1
Jan. 5
Jan. 14
Jan. 21
Jamsetji invested $4,000 cash in the Tata Company in exchange of common stock.
The company purchased $2,000 of equipment on credit.
The company provided $540 of services for a client on credit.
The company paid $250 cash for an employee’s salary
Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Equipment;
Accounts Payable; Common Stock; Dividends; Revenues; and Expenses.
Jan. 1
Jan. 5
Jan. 14
Jan. 21
Assets
= Liabilities
+ Equity
Cash
Accounts Equipment Accounts + Common - Dividends + Revenues - Expenses
Receivable
Payable
Stock
$4,000
$4,000
$2,000
$2,000
$540
$540
($250)
($250)
$3,750
$540
$2,000
$2,000
$4,000
$0
$540
($250)
Total Assets
Total Liabilities
Total Equity
$6,290
2,000
$4,290
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Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a period
of time due to earnings activities.
2. Statement of retained earnings— explains changes in equity
from net income (or loss) and from any dividends over a period of
time.
3. Balance sheet — describes a company’s financial position (types
and amounts of assets, liabilities, and equity) at a point in time.
4. Statement of cash flows — identifies cash inflows (receipts) and
cash outflows (payments) over a period of time.
P2
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NEED-TO-KNOW (1-5)
Prepare the (a) income statement, (b) statement of retained earnings, and (c) balance sheet, for Apple using the following
condensed data from its fiscal year ended September 28, 20X3.
Accounts payable
Other liabilities
Cost of sales (expense)
Cash
Retained Earnings, Sept. 29, 20X2
Dividends in fiscal year 20X3
Revenues
$22,367
61,084
119,724
14,259
101,289
34,070
170,910
Income Statement
Assets
Liabilities
Equity:
+ Common stock
- Dividends
+ Revenues
- Expenses
Detail of Revenues
Detail of Expenses
Net income (loss)
Investments and other assets
Land and equipment
Selling and other expense
Accounts receivable
Net income
Retained Earnings, Sept. 28, 20X3
Common stock
Statement of Retained Earnings
Beginning Retained Earnings
± Net income (loss)
- Dividends
$163,042
16,597
14,149
13,102
37,037
104,256
19,293
Balance Sheet
Detail of Assets
Detail of Liabilities
Common stock
+ Ending Retained Earnings
Ending Retained Earnings
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NEED-TO-KNOW
Accounts payable
Other liabilities
Cost of sales (expense)
Cash
Retained Earnings, Sept. 29, 20X2
Dividends in fiscal year 20X3
Revenues
$22,367
61,084
119,724
14,259
101,289
34,070
170,910
APPLE
Income Statement
For Fiscal Year Ended September 28, 20X3
Revenues
$170,910
Expenses
Cost of sales (expense)
$119,724
Selling and other expense
14,149
Total expenses
133,873
Net income
$37,037
Investments and other assets
Land and equipment
Selling and other expense
Accounts receivable
Net income
Retained Earnings, Sept. 28, 20X3
Common stock
$163,042
16,597
14,149
13,102
37,037
104,256
19,293
APPLE
Statement of Retained Earnings
For Fiscal Year Ended September 28, 20X3
Retained Earnings, Sept. 29, 20X2
$101,289
Plus: Net income
37,037
Less: Dividends
(34,070)
Retained Earnings, Sept. 28, 20X3
$104,256
APPLE
Balance Sheet
September 28, 20X3
Assets
Cash
Accounts receivable
Land and equipment
Investments and other assets
Liabilities
$14,259
13,102
16,597
163,042
Accounts payable
Other liabilities
Total liabilities
$22,367
61,084
83,451
Equity
Common Stock
Retained earnings
Total equity
Total assets
$207,000
Total liabilities and equity
19,293
104,256
123,549
$207,000 38
1) Return on Assets
Return on assets (ROA) is stated in ratio form as net
income divided by the average of total assets invested.
Return on assets =
A2
Net income
Average total assets
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Business Activities and the Accounting
Equation
Three major types of business activities:
1) Financing activities provide the means organizations use to
pay for resources such as land, buildings, and equipment to
carry out plans.
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 Owner financing—resources contributed by the owner
along with any income the owner leaves in the
organization.
 Nonowner financing—resources contributed by creditors
(lenders).
 Financial management —the task of planning how to
obtain these resources and to set the right mix between
owner and creditor financing.
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Business Activities and the Accounting
Equation
Three major types of business activities:
2) Investing activities are the acquiring and disposing of
resources (assets) that an organization uses to acquire and
sell its products or services.
 Asset management—determining the amount and type of
assets for operations.
 Assets—invested amounts.
 Liabilities—creditors’ claims.
 Equity—owner’s claim.
C5
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Business Activities and the Accounting
Equation
Three major types of business activities:
3) Operating activities involve using resources to research,
develop, purchase, produce, distribute, and market products and
services.
 Strategic management —the process of determining the right
mix of operating activities for the type of organization, its plans,
and its market.
C5
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Business Activities and the Accounting
Equation
C5
43
Welcome Back
Atef Abuelaish
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Welcome Back
Time for Any
Question
Atef Abuelaish
45
Chapter 02
Accounting for
Business Transactions
Explain the steps in
processing transactions
and the role of source
documents.
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Analyzing and Posting Process
The accounting process identifies business transactions and
events, analyzes and records their effects, and summarizes
and presents information in reports and financial statements.
These reports and statements are used for making investing,
lending, and other business decisions.
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Source Documents
Checks
Employee
Earnings
Records
Bills from
Suppliers
Purchase
Orders
Bank
Statements
Sales
Tickets
C1
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Describe an account and its
use in recording
transactions.
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The Account and Its Analysis
An account is a
record of
increases and
decreases in a
specific asset,
liability, equity,
revenue, or
expense item.
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The general
ledger is a record
containing all
accounts used
by the company.
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The Account and Its Analysis
Dividends
Common Stock
C2
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Asset Accounts
Cash
Land
Buildings
Asset
Accounts
Accounts
Receivable
Notes
Receivable
Prepaid
Accounts
Equipment
Supplies
C2
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Liability Accounts
Accounts
Payable
Notes
Payable
Liability
Accounts
Accrued
Liabilities
C2
Unearned
Revenue
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Equity Accounts
Common
Stock
Dividends
Equity
Accounts
Revenues
C2
Expenses
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The Account and Its Analysis
Revenues and owner’s contributions increase equity.
Expenses and owner’s withdrawals decrease equity.
C2
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NEED-TO-KNOW
Classify each of the following as assets (A), liabilities (L), or equity (EQ).
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
(A) Asset
(EQ) Equity
(A) Asset
(L) Liability
(A) Asset
(A) Asset
(L) Liability
(L) Liability
(A) Asset
(A) Asset
Prepaid Rent
Common Stock
Note Receivable
Accounts Payable
Accounts Receivable
Equipment
Interest Payable
Unearned Revenue
Land
Prepaid Insurance
Key words to look for in account titles:
Prepaid
Receivable
Payable
Unearned
C2
Always
Always
Always
Always
an asset
an asset
a liability
a liability
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Describe a ledger and chart
of accounts
58
Ledger and Chart of Accounts
The ledger is a collection of all accounts for an
information system. A company’s size and diversity
of operations affect the number of accounts needed.
The chart of accounts is a list of all accounts and includes an
identifying number for each account.
C3
59
Define debits and credits
and explain double-entry
accounting.
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Debits and Credits
A T-account represents a ledger account and is a tool used
to understand the effects of one or more transactions.
C4
61
Double-Entry Accounting
Assets
C4
=
Liabilities
+
Equity
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Double-Entry Accounting
Here is the expanded accounting equation
showing the equity section.
C4
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Double-Entry Accounting
An account balance is the difference between the increases
and decreases in an account. Notice the T-Account.
C4
64
NEED-TO-KNOW
Identify the normal balance (debit [Dr] or credit [Cr]) for each of the following accounts.
1)
2)
3)
4)
5)
6)
7)
8)
9)
10)
Dr. Debit
Cr. Credit
Dr. Debit
Cr. Credit
Dr. Debit
Dr. Debit
Cr. Credit
Cr. Credit
Dr. Debit
Dr. Debit
Assets
Increase Decrease
Debits
Credits
Normal
Prepaid Rent
Common Stock
Note Receivable
Accounts Payable
Accounts Receivable
Equipment
Interest Payable
Unearned Revenue
Land
Prepaid Insurance
=
Liabilities
Decrease Increase
Debits
Credits
+
Equity
Decrease Increase
Debits
Credits
Dividends
Expenses
Normal
Dividends
↓ Equity
Common Stock
↑ Equity
Dividends
Investments
Normal
Normal
Expenses
↓ Equity
C4
Investments
Revenues
Revenues
↑ Equity
Expenses
Revenues
Normal
Normal
65
Record transactions in a
journal and post entries to a
ledger.
66
Journalizing and Posting Transactions
P1
67
Journalizing Transactions
a. Transaction
Date
b. Titles of Affected
Accounts
Common stock
P1
d. Transaction
explanation
c. Dollar amount of debits
and credits
68
Balance Account Column
T-accounts are useful illustrations, but balance
column ledger accounts are used in practice.
P1
69
Posting Journal Entries
P1
70
Analyze the impact of
transactions on
accounts and financial
statements
71
Analyzing Transactions
Double-entry accounting is useful in analyzing and
processing transactions. Analysis of each transaction
follows these four steps.
A1
72
Analyzing Transactions
A1
73
Analyzing Transactions
A1
74
Analyzing Transactions
A1
75
Analyzing Transactions
A1
76
Analyzing Transactions
A1
77
NEED-TO-KNOW
Assume Tata began operations on January 1 and completed the following transactions during its first month of
operations.
Jan. 1
Jan. 5
Jan. 14
Jamsetji invested $4,000 cash in the Tata company in exchange for common stock.
The company purchased $2,000 of equipment on credit.
The company provided $540 of services for a client on credit.
For each transaction, (a) analyze the transaction using the accounting equation, (b) record the transaction in
journal entry form, and c) post the entry using T-accounts to represent the general ledger accounts.
A1
78
NEED-TO-KNOW
Jan. 1
Jamsetji invested $4,000 cash in the Tata company in exchange for common stock.
a) Analyze
Assets = Liabilities + Equity
+ $4,000
+ $4,000
b) Record
Date
Jan. 1
General Journal
Cash
Common Stock
c) Post
A1
4,000
4,000
Common Stock
Jan. 1
Normal
Credit
Cash
Jan. 1
Assets
Increase Decrease
Debits
Credits
Debit
4,000
=
Liabilities
Decrease Increase
Debits
Credits
Normal
4,000
+
Equity
Decrease Increase
Debits
Credits
Dividends
Expenses
Common stock
Revenues
79
NEED-TO-KNOW
Jan. 5
The company purchased $2,000 of equipment on credit.
a) Analyze
Assets = Liabilities + Equity
+ $2,000
+ $2,000
b) Record
Date
Jan. 5
c) Post
Jan. 5
General Journal
Equipment
Accounts Payable
Normal
A1
=
Credit
2,000
Equipment
2,000
Accounts Payable
Jan. 5
Assets
Increase Decrease
Debits
Credits
Debit
2,000
Liabilities
Decrease Increase
Debits
Credits
Normal
2,000
+
Equity
Decrease Increase
Debits
Credits
Dividends
Expenses
Common stock
Revenues
80
NEED-TO-KNOW
Jan. 14
The company provided $540 of services for a client on credit.
a) Analyze
Assets = Liabilities + Equity
+ $540
+ $540
b) Record
Date
Jan. 14
c) Post
Jan. 14
General Journal
Accounts receivable
Services revenue
Normal
A1
=
Credit
540
Accounts receivable
540
Services revenue
Jan. 14
Assets
Increase Decrease
Debits
Credits
Debit
540
Liabilities
Decrease Increase
Debits
Credits
Normal
540
+
Equity
Decrease Increase
Debits
Credits
Dividends
Expenses
Common stock
Revenues
81
Prepare and explain the
use of a Trial Balance
82
Preparing the Trial Balance
Preparing a trial balance involves three steps:
1. List each account title and its amount (from ledger) in
the trial balance. If an account has a zero balance, list it
with a zero in the normal balance column (or omit it
entirely).
2. Compute the total of debit balances and the total of
credit balances.
3. Verify (prove) total debit balances equal total credit
balances.
P2
83
After processing its remaining transactions for
December, FastForward’s Trial Balance is prepared.
The trial
balance lists
all account
balances in
the general
ledger. If the
books are in
balance, the
total debits
will equal the
total credits.
P2
84
Searching for and Correcting
Errors
If the trial balance does not balance, the error(s)
must be found and corrected.
 Make sure the trial
balance columns are
correctly added.
 Re-compute each
account balance in the
ledger.
 Make sure account
balances are correctly
entered from the ledger.
 Verify that each journal
entry is posted correctly.
 See if debit or credit
accounts are mistakenly
placed on the trial balance.
 Verify that each
original journal entry has
equal debits and credits.
P2
85
NEED-TO-KNOW (2-4)
Prepare a trial balance for Apple using the following condensed data from its fiscal year-ended
September 29, 20X2.
Common stock
Accounts payable
Other liabilities
Cost of sales (expense)
Cash
Revenues
$16,422
21,175
36,679
101,876
10,746
156,508
Dividends
Investments and other assets
Land and equipment
Selling and other expense
Accounts receivable
Retained earnings
APPLE
Trial Balance
September 29, 20X2
Debit
Assets
Normal
Normal
Common Stock
Normal
Retained Earnings
Normal
Normal
Revenues
P2
Credit
Liabilities
Dividends
$2,523
138,936
15,452
12,899
10,930
62,578
Normal
Expenses
Normal
Totals
Debits = Credits
86
NEED-TO-KNOW (2-4)
Prepare a trial balance for Apple using the following condensed data from its fiscal year-ended
September 29, 20X2.
Common stock
$16,422
Dividends
$2,523
Accounts payable
21,175
Investments and other assets 138,936
Other liabilities
36,679
Land and equipment
15,452
Cost of sales (expense)
101,876
Selling and other expense
12,899
Cash
10,746
Accounts receivable
10,930
Revenues
156,508
Retained earnings
62,578
APPLE
Trial Balance
September 29, 20X2
Debit
Credit
Cash
$10,746
Accounts receivable
10,930
Land and equipment
15,452
Investments and other assets
138,936
Accounts payable
$21,175
Other liabilities
36,679
Common stock
16,422
Retained earnings
62,578
Dividends
2,523
Revenues
156,508
Cost of sales (expense)
101,876
Selling and other expense
12,899
Totals
$293,362 $293,362
P2
87
Prepare financial
statements from
business transactions.
88
Using a Trial Balance to Prepare
Financial Statements
P3
89
Financial Statements
The four financial statements and their purposes are:
1. Income statement — describes a company’s revenues and
expenses along with the resulting net income or loss over a
period of time due to earnings activities.
2. Statement of retained earnings— explains changes in the
retained earnings from net income (or loss) and from any
dividends declared over a period of time.
3. Balance sheet — describes a company’s financial position
(types and amounts of assets, liabilities, and equity) at a
point in time.
4. Statement of cash flows —identifies cash inflows (receipts)
and cash outflows (payments) over a period of time.
P3
90
1) Income Statement
P3
91
2) Statement of Retained Earnings
P3
92
3) Balance Sheet
P3
93
Presentation Issues
1. Dollar signs are not used in journals and ledgers.
2. Dollar signs appear in financial statements and
other reports such as trial balances. The usual
practice is to put dollar signs beside only the first
and last numbers in a column.
3. When amounts are entered in the journal, ledger,
or trial balance, commas are optional to indicate
thousands, millions, and so forth.
4. Commas are always used in financial statements.
5. Companies commonly round amounts in reports to
the nearest dollar, or even to a higher level.
P3
94
Global View
Both U.S. GAAP and IFRS prepare the same four
basic financial statements. A few differences are
found within each statement, but over time these
differences are likely to be eliminated. Here is a
typical IFRS balance sheet presentation.
95
Global View
Accounting systems depend on control procedures that
assure the proper principles were applied in processing
accounting information. The passage of SOX legislation
strengthened U.S. control procedures in recent years.
The percentage of employees in information technology that
report observing specific types of misconduct in 2009.
96
Compute the debt
ratio and describe its
use in analyzing
financial condition.
97
2) Debt Ratio
Total Liabilities
Debt Ratio =
Total Assets
Evaluates the level of debt risk.
A higher ratio indicates that there is a
greater probability that a company will
not be able to pay its debt in the future.
A2
98
Homework assignment
 Using Connect – 6 Questions for 60 Points.
 Log in Connect web site and do “Connect Orientation” for
10 Points before 2/15/2016.
3 “Adjusting Accounting
for Financial Statements.”
 Prepare chapter
Happiness is having all
homework up to date
Atef Abuelaish
99
Thank you and See
You Wednesday at the
Same Time, Take Care
Atef Abuelaish
100