bsad 221 introductory financial accounting donna gunn, ca

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BSAD 221 Introductory Financial Accounting Donna Gunn, CA

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BSAD 221 Introductory Financial Accounting Donna Gunn, CA. Financial Statements. Balance Sheet Income Statement Cash Flow Statement Statement of Retained Earnings. Financial statements summarize the financial activities of the business. Increases. Financial Statement Relationships. - PowerPoint PPT Presentation

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Page 1: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

BSAD 221Introductory Financial

Accounting

Donna Gunn, CA

Page 2: BSAD 221 Introductory Financial Accounting Donna Gunn, CA
Page 3: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Financial Statements

• Balance Sheet

• Income Statement

• Cash Flow Statement

• Statement of Retained Earnings

Financial statements summarize the financial activities of the business.

Page 4: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Financial Statement Relationships

Net income increases retained earnings, while a net loss will decrease retained earnings.

Dividends decrease retained earnings.

DIVIDENDSDecreases RETAINED

EARNINGS

Net Income = Revenues - Expenses

Increases

Page 5: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Share Capital and R/E make up Shareholders’ Equity.

Increases

Net Income = Revenues - Expenses

Increases

Page 6: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Net Income = Revenues - Expenses

ASSETS LIABILITIES SHAREHOLDERS’ EQUITY

= +

Increases

Increases

Page 7: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Note that this statement has ONLY

revenues and expenses!

Page 8: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The income statement impacts Retained Earnings

Page 9: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Income Statement Elements

Results of continuing operations can be presented in one of the two formats

Single step format:

Revenues

(All Operating Expenses)

Operating income

Multiple step format:

Sales

(Cost of Goods Sold)

Gross Margin

(Other Operating Expenses)

Operating Income

Page 10: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Classified Balance Sheet

Includes comparatives for the prior year

Current amounts - Amounts due within / or receivable within 1 year

Non-current amounts- Amounts due or receivable outside of a

year

Page 11: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Balance Sheet

$4,800 fixed assets - $1,440 accumulated amortization.

Page 12: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Balance SheetRemember that Total liabilities and equity ($19,945) must equal Total assets ($19,945).

Page 13: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Financial Statement Relationships

SHAREHOLDERS’ EQUITY

SHARE CAPITAL

RETAINED EARNINGS

Net Income = Revenues - Expenses

ASSETS LIABILITIES SHAREHOLDERS’ EQUITY

= +

Increases

Increases

Page 14: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Closing the Books Even though the balance sheet account balances

carry forward from period to period, the income statement accounts do not.

Closing entries:

1. Transfer net income (or loss) to Retained Earnings.

2. Establish a zero balance in each of the temporary accounts to start the next accounting period.

Page 15: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing ProcessThe following accounts are called

temporary or nominal accounts and are closed at the end of the period . . .

• Revenues• Expenses• Gains• Losses, and• Dividends declared

Page 16: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing Process Assets, liabilities, and shareholders’ equity

accounts are permanent, or real accounts, and are never closed.

•Assets•Liabilities•Shareholders’ Equity

Page 17: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing Process

Three steps are used in the closing process . . .

1. Close revenues and gains to Retained Earnings

2. Close expenses and losses to Retained Earnings

3. Close Dividends (if any) to Retained Earnings

Page 18: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing Process To close Ducharme’s Revenue accounts, the following

entry is required:

Dr. Sales Revenue 35,000

Cr. Retained Earnings 35,000

Page 19: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing Process To close Ducharme’s expense accounts, the following

entry is required:

Dr. Income Summary 33,800 Cr. Cost of Goods Sold Cr. Operating Expenses

27,5006,300

Page 20: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Closing Process Finally, to close Ducharme’s dividends account, the following entry is required (only if dividends account is directly debited

in original dividend journal entry rather than Retained Earnings):

(existing ??? Closebalance)

DividendsClose ???Dividends

Retained Earnings

Dr. Retained Earnings ???? Cr. Dividends

????

Page 21: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Post-closing Trial Balance

A Post-closing Trial Balance should be prepared as the last step of the accounting cycle to

check that debits equal credits and all temporary accounts have been

closed.

Page 22: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Current Ratio

An important indicator of a company’s ability to meet its current obligations.

Current Ratio = Current Assets ÷ Current Liabilities

Page 23: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

Current Ratio

Current Ratio = Current Assets ÷ Current Liabilities

Petro-Canada has current assets of $2,826 and current liabilities of $3,348.

Current Ratio = $2,826 / $3,348

= 0.84

Page 24: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Debt-To-Equity Ratio

Debt-To-Equity Ratio =Total Liabilities

Total Shareholders’ Equity

This ratio measures the relation between total

liabilities and the shareholders’ equity that

finances the assets.

An increasing ratio over time signals more reliance on debt financing and more

risk.

Page 25: BSAD 221 Introductory Financial Accounting Donna Gunn, CA

The Debt-To-Equity Ratio

Debt-To-Equity Ratio =Total Liabilities

Total Shareholders’ Equity

Debt-To-Equity Ratio =$123,900$246,200

= 0.50