learning objectives
DESCRIPTION
Power Notes. Introduction to Accounting and Business. 1.Nature of a Business 2.The Role of Accounting in Business 3.Business Ethics 4.Profession of Accounting 5.Generally Accepted Accounting Principles 6.Assets, Liabilities, and Owner’s Equity 7.Business Transactions - PowerPoint PPT PresentationTRANSCRIPT
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Learning Objectives
1. Nature of a Business
2. The Role of Accounting in Business
3. Business Ethics
4. Profession of Accounting
5. Generally Accepted Accounting Principles
6. Assets, Liabilities, and Owner’s Equity
7. Business Transactions
8. Financial Statements
9. Financial Analysis and Interpretation
Power Notes Introduction to Accounting and Business Introduction to Accounting and Business
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CommunicationCommunication NewsNews
FactsFacts
AccessAccess
CommentaryCommentary
Living in the Information Age
DataData
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Timeliness
Independence
Freedom-of-Expression
Living in the Information Age
CommunicationCommunication NewsNews
FactsFacts
AccessAccess
CommentaryCommentary
DataData
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BusinessSells/provides
Products
Profit
Profit
Services
Goal
Business and Investment
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Labor and EquipmentAccounting Information
Land and Building
Factors of production are the means businesses use to make profit.
Factors of production are the means businesses use to make profit.
Accounting Information
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Sales- Expenses
Profit
Sales- Expenses
Profit
Amounts earned from selling products or services
Amounts earned from selling products or services
Business Profit
Costs incurred with salesCosts incurred with sales
Amounts earned from sales less
expenses incurred
Amounts earned from sales less
expenses incurred
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ServiceService BusinessBusiness ServiceService ServiceService BusinessBusiness ServiceService
The Walt Disney Company EntertainmentDelta Air Lines TransportationMarriott International Hotels Hospitality and
lodgingBank of America Corporation Financial servicesXM Satellite Radio Satellite radio
The Walt Disney Company EntertainmentDelta Air Lines TransportationMarriott International Hotels Hospitality and
lodgingBank of America Corporation Financial servicesXM Satellite Radio Satellite radio
1-1Types of Businesses
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Merchandising BusinessMerchandising Business ProductProductMerchandising BusinessMerchandising Business ProductProduct
Wal-Mart General merchandiseGameStop Corporation Video games and accessoriesBest Buy Consumer electronicsGap Inc. ApparelAmazon.com Internet books, music,
video
Wal-Mart General merchandiseGameStop Corporation Video games and accessoriesBest Buy Consumer electronicsGap Inc. ApparelAmazon.com Internet books, music,
video
Types of Businesses 1-1
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Manufacturing BusinessManufacturing Business ProductProductManufacturing BusinessManufacturing Business ProductProduct
General Motors Corp. Cars, trucks, vansSamsung Cell phonesDell Inc. Personal computersNike Athletic shoes and apparelThe Coca-Cola CompanyBeveragesSony Corporation Stereos and televisions
General Motors Corp. Cars, trucks, vansSamsung Cell phonesDell Inc. Personal computersNike Athletic shoes and apparelThe Coca-Cola CompanyBeveragesSony Corporation Stereos and televisions
Types of Businesses 1-1
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Corporation
Law Offices
PartnershipProprietorship
Sally’sGrocery
Business
Forms of Organization
Exh.1.4
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Proprietorship Partnership Corporation Limited liability company
Common Forms of Business Organizations 1-1
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Comprises 70% of business organizations in the United States.
Requires low cost of organizing. Is limited to financial resources of
the owner. Is used by small businesses.
A proprietorship is owned by one individual and—
1-1
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Comprises 10% of business organizations in the United States.
Combines the skills and resources of more than one person.
A partnership is similar to a proprietorship except that it is owned by two or more individuals and—
1-1
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Generates 90% of the total dollars of business receipts received.
Comprises 20% of the businesses.
A corporation is organized under state or federal statues as a separate legal taxable entity and—
1-1
Continued
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Owners of a corporation are called shareholders (or stockholders).
When a corporation issues only one class of stock, we call it
common stock (or capital stock).
Corporation
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Includes ownership divided into shares of stock, sold to shareholders (stockholders).
Is able to obtain large amounts of resources by issuing stock.
Is used by large businesses.
1-1
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Is a popular alternative to a partnership.
Has tax and liability advantages to the owners.
A limited liability company (LLC) combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and—
1-1
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PrivateNonprofitGovernment
Nonbusiness
Forms of Organization
Exh.1.4
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Libraries Army
Airports Cities
Colleges
Museums Hospitals
Prisons Shelters
Schools
Accounting for these organizations is usually a fund-based system, but the basic principles are similar to
accounting for business organizations.
Accounting for these organizations is usually a fund-based system, but the basic principles are similar to
accounting for business organizations.
Nonbusiness Organization
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The Role of Accounting in Business
Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.
1
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Identifying Economic
Events
Recording Economic
Events Reporting
and Analyzing Economic
Events
Focus of Accounting
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IdentifiesIdentifies
RecordsRecords
CommunicatesCommunicatesRelevantRelevant
ReliableReliable
ComparableComparable
Influence of Accounting
AccountingAccountingis a
system that
information
that is
to help users make better decisions.
to help users make better decisions.
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• Identify users.
• Assess users’ informational needs.
• Design the accounting information system to meet users’ needs.
• Record economic data about business activities and events.
• Prepare accounting reports for users.
The process by which accounting provides information to users is as follows:
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Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
Identificationof Users
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EXTERNAL USERS
Financial AccountingFinancial Accounting
investors creditors regulators customers competitors
Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information
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EXTERNAL USERS
Financial AccountingFinancial Accounting• investors• creditors• regulators• customers• competitors
owners managers employees
INTERNAL USERS
ManagerialManagerial AccountingAccounting
Users of Accounting InformationUsers of Accounting InformationUsers of Accounting InformationUsers of Accounting Information
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1-271-2727
The area of accounting that provides external users with information is called financial accounting.
Financial Accounting
The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.
1
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1-281-2828
The area of accounting that provides internal users with information is called managerial accounting.
Managerial Accounting
The objective of managerial accounting is to provide relevant and timely information for managers’ and employees’ decision-making needs.
1
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Identificationof Users
UserInformation
Needs
AccountingSystem
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Economic Dataand Activities
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Economic Dataand Activities
Reports
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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Identificationof Users
UserInformation
Needs
AccountingSystem
Reports
Economic Dataand Activities
UserDecisions
Accounting — An Information Process Accounting — An Information Process
Accounting — An Information Process Accounting — An Information Process
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1
Exhibit 1 Users of Accounting Information
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Ethics are moral principles that guide the conduct of individuals.
Role of Ethics in Accounting and Business
1
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Beliefs that separate right
from wrong Accepted standards of
good and bad
behavior
Often coincide with laws
Ethics
Ethics and Social Responsibility
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Identify Ethical Issues
Analyze Options
Make Ethical Decision
Use personal ethics to
recognize ethical issues.
Consider both the good and bad
consequences for all affected.
Choose the best option after weighing all
consequences.
Guidelines for Ethical Decision Making
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Under the Under the business entity concept, the activities of a the activities of a business are recorded business are recorded separately from the activities separately from the activities of its owners, creditors, or of its owners, creditors, or other businesses.other businesses.
Business Entity Concept
2
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Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.
2
Cost Concept
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Cost Concept
On August 25, Gallatin Repair Service extended an offer of $125,000 for land that had been priced for sale at $150,000. On September 3, Gallatin Repair Service accepted the seller’s counteroffer of $137,000. On October 20, the land was assessed at a value of $98,000 for property tax purposes. On December 4, Gallatin Repair Service was offered $160,000 for the land by a national retail chain. At what value should the land be recorded in Gallatin Repair Service’s records?
Example Exercise 1-12
1-28
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$137,000. Under the cost concept, the land should be recorded at the cost to Gallatin Repair Service.
For Practice: PE 1-1A, PE 1-1B
1-29
2
Follow My Example 1-1
Example Exercise 1-1 (continued)
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The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.
2
Objectivity Concept
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The unit of measure concept requires that economic data be recorded in dollars.
2
Unit of Measure Concept
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Fundamental Principles of Accounting
Business Entity Principle
Business Entity Principle
Objectivity Principle
Objectivity Principle
Cost PrincipleCost Principle
Going-Concern Principle
Going-Concern Principle
Monetary Unit Principle
Monetary Unit Principle
A business is accounted for separately from its owner or owners.
A business is accounted for separately from its owner or owners.
Financial statement information is supported by independent, unbiased
evidence.
Financial statement information is supported by independent, unbiased
evidence.
Financial statements are based on actual costs incurred in business transactions.
Financial statements are based on actual costs incurred in business transactions.
A business continues operating instead of being closed or sold.
A business continues operating instead of being closed or sold.
Express transactions and events in monetary units.
Express transactions and events in monetary units.
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Resources
The Accounting EquationThe Accounting Equation
What are an organization’s resources called?
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Assets = Liabilities + Owner’s Equity
The resources owned by a
business
The Accounting Equation 1-3
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Assets
Resources = Sources
The Accounting EquationThe Accounting Equation
What are the sources of the assets?
Cost of resources usedin the business
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Assets
Liabilities
Owner’sEquity
Resources = Sources
Cost of resources usedin the business
Resources supplied by
creditors and owners
The Accounting EquationThe Accounting Equation
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The rights of the creditors,
which represent
debts of the business
Assets = Liabilities + Owner’s Equity
The Accounting Equation 1-3
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The rights of the owners
Assets = Liabilities + Owner’s Equity
The Accounting Equation 1-3
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Accounting Equation
John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2009, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts:
a. Owner’s equity, as of December 31, 2009.
b. Owner’s equity, as of December 31, 2010, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2010.
Example Exercise 1-23
1-34
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Example Exercise1-2 continued For Practice: PE 1-2A, PE 1-2B1-35
a. Assets = Liabilities + Owner’s Equity $800,000 = $350,000 + Owner’s Equity
Owner’s Equity = $450,000
Follow My Example 1-2
Example Exercise 1-2 (continued)
b. First, determine the change in Owner’s Equity during 2010 as follows:
Assets = Liabilities + Owner’s Equity $130,000 = –$25,000 + Owner’s Equity
Owner’s Equity = $155,000
Next, add the change in Owner’s Equity on December 31, 2009 to arrive at Owner’s Equity on December 31, 2010, as shown below:
$605,000 = $450,000 + $155,000
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A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations.
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Business Transaction
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On November 1, 2009, Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
Transaction A
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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNER’S EQUITY
LIABILITIES
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a. Chris Clark deposits $25,000 in a bank account for NetSolutions.
ASSETS
=
Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
OWNER’S EQUITYCash Cash 25,00025,000
LIABILITIES
Chris Clark, Chris Clark, Capital Capital 25,00025,000
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Chris Clark deposits $25,000 in a bank account for NetSolutions.
The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Capital (equity)
Transaction Analysis
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Transaction Analysis
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Transaction B
On November 5, 2009, NetSolutions paid $20,000 for the purchase of land as a future building site.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. NetSolutions buys land for $20,000.
ASSETS
=OWNER’S EQUITY
LIABILITIES
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
b. NetSolutions buys land for $20,000.
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (20,000)(20,000)
Land Land 20,00020,000
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The accounts involved are:
(1) Cash (asset)
(2) Land (asset)
Transaction AnalysisNetSolutions buys land for $20,000.
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Transaction Analysis
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On November 10, 2009, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future.
4
Transaction C
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
c. NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.
Accounts PayableAccounts Payable1,3501,350
Supplies Supplies 1,3501,350
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The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction AnalysisNetSolutions buys supplies for
$1,350, agreeing to pay the supplier in the near future.
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Transaction Analysis
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On November 18, 2009, NetSolutions received cash of $7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called Revenue.
Transaction D
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
d. NetSolutions earns fees of $7,500, receiving cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash 7,5007,500
Fees Earned Fees Earned 7,5007,500
d. NetSolutions earns fees of $7,500, receiving cash.
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction AnalysisNetSolutions earns fees of $7,500,
receiving cash.
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Transaction Analysis
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During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.
4
Expenses
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On November 30, 2009, NetSolutions paid the following expenses during the month: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Transaction E
4
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (3,650)(3,650)
ExpensesExpenses(3,650)(3,650)
e. NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
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The accounts involved are:
(1) Cash (asset)
(2) Expenses (equity)
Transaction AnalysisNetSolutions paid: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.
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Transaction Analysis
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On November 30, 2009, NetSolutions paid creditors on account, $950.
Transaction F
4
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
f. NetSolutions pays $950 to creditors on account.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (950)(950)
Accounts PayableAccounts Payable(950)(950)
f. NetSolutions pays $950 to creditors on account.
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The accounts involved are:
(1) Cash (asset)
(2) Accounts payable (liability)
Transaction AnalysisNetSolutions pays $950 to creditors
on account
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Transaction Analysis
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On November 30, 2009, Chris Clark determined that the cost of supplies on hand at the end of the period was $550.
Transaction G
4
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
g. At the end of the month, the cost of supplies on hand is $550.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Supplies Supplies (800)(800)
Supplies ExpenseSupplies Expense(800)(800)
g. At the end of the month, the cost of supplies on hand is $550.
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The accounts involved are:
(1) Supplies (asset)
(2) Supplies expense (equity)
Transaction AnalysisAt the end of the month, the cost of supplies on
hand is $550.
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Transaction Analysis
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On November 30, 2009, Chris Clark withdrew $2,000 from NetSolutions for personal use.
Transaction H
4
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
h. Chris Clark withdraws $2,000 in cash.
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Business TransactionsBusiness TransactionsBusiness TransactionsBusiness Transactions
ASSETS
=OWNER’S EQUITY
LIABILITIES
Cash Cash (2,000)(2,000)
Chris Clark, Chris Clark, DrawingDrawing(2,000)(2,000)
h. Chris Clark withdraws $2,000 in cash.
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The accounts involved are:
(1) Cash (asset)
(2) Chris Clark, Drawing (equity)
Transaction AnalysisChris Clark withdraws $2,000 in cash
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Transaction Analysis
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000
Accts. PayableAccts. Payable 400400
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Transaction SummaryTransaction SummaryTransaction SummaryTransaction Summary
ASSETS
= OWNER’S EQUITY
LIABILITIES
CashCash 5,9005,900SuppliesSupplies 550550LandLand 20,00020,000
Accts. PayableAccts. Payable 400400
C. Clark, CapitalC. Clark, Capital 25,00025,000C. Clark, DrawingC. Clark, Drawing (2,000)(2,000)Fees EarnedFees Earned 7,5007,500Wages ExpenseWages Expense (2,125)(2,125)Rent ExpenseRent Expense (800)(800)Supplies ExpenseSupplies Expense (800)(800)Utilities ExpenseUtilities Expense (450)(450)Misc. ExpenseMisc. Expense (275)(275)
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
decreased bydecreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s investments
Revenues
increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased bydecreased by increased byincreased by
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OWNER’S EQUITY
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Owner’s investments
Revenues
decreased bydecreased by increased byincreased by
NET INCOME
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4
Exhibit 5 Effects of Transactions on Owner’s Equity
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Transactions
Salvo Delivery Service is owned and operated by Joel Salvo. The following selected transactions were completed by Salvo Delivery Service during February:
1. Received cash from owner as additional investment, $35,000.
2. Paid creditors on account, $1,800.
3. Billed customers for delivery services on account, $11,250.
4. Received cash from customers on account, $6,740.
5. Paid cash to owner for personal use, $1,000.(Continued)
Example Exercise 1-34
1-63
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103
Indicate the effect of each transaction on the accounting equation elements (Assets, Liabilities, Owner’s Equity, Drawing, Revenue, and Expense) by listing the numbers identifying the transactions, (1) through (5). Also, indicate the specific item within the accounting equation element that is affected. To illustrate, the answer to (1) is shown below.
(1) Asset (Cash) increases by $35,000; Owner’s Equity (Joel Salvo, Capital) increases by $35,000.
Example Exercise 1-3 (continued) 4
1-64
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Example Exercise 1-3 (continued)
(2) Asset (Cash) decreases by $1,800; Liability (Accounts Payable) decreases by $1,800.
(3) Asset (Accounts Receivable) increases by $11,250; Revenue (Delivery Service Fees) increases by $11,250.
(4) Asset (Cash) increases by $6,740; Asset (Accounts Receivable) decreases by $6,740.
(5) Asset (Cash) decreases by $1,000; Drawing (Joel Salvo, Drawing) increases by $1,000.
Follow My Example 1-3
4
For Practice: PE 1-3A, PE 1-3B
1-65
Follow My Example 1-3
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105
After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.
5
Financial Statements
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106
The income statement reports the revenues and expenses for a period of time, based on the matching concept.
5
Income Statement
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107
The matching concept is applied by matching the expenses with the revenue generated during a period by those expenses.
5
Matching Concept
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108
The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.
5
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Net income is carried to the statement of
owner’s equity.
5
Exhibit 6 Financial Statements for NetSolutions
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2009
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2009
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
NetSolutionsIncome Statement
For the Month Ended November 30, 2009
Fees earned $7,500Operating expenses: Wages expense $2,125 Rent expense 800 Supplies expense 800 Utilities expense 450 Miscellaneous expense 275 Total operating expenses 4,450Net income $3,050
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Income Statement
The assets and liabilities of Chickadee Travel Service at April 30, 2010, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2009, the beginning of the current year.
Accounts payable $ 12,200 Miscellaneous expense $ 12,950Accounts receivable 31,350 Office expense 63,000Cash 53,050 Supplies 3,350Fees earned 263,200 Wages expense 131,700Land 80,000
Prepare an income statement for the current year ended April 30, 2010.
Example Exercise 1-45
1-72
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CHICKADEE TRAVEL SERVICEINCOME STATEMENT
For the Year Ended April 30, 2010
Fees earned $263,200Expenses:
Wages expense $131,700Office expense 63,000Miscellaneous expense 12,950 Total expenses 207,650
Net income $ 55,550
Example Exercise 1-4 (continued) 5
For Practice: PE 1-4A, PE 1-4B
1-73
Follow My Example 1-3 Follow My Example 1-4
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1-115
1-115 115
The statement of owner’s equity reports the changes in the owner’s equity for a period of time.
5
Statement of Owner’s Equity
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1-116
1-116 116
From the income statement
To the balance sheet
5
Exhibit 6 Financial Statements for NetSolutions (continued)
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2009 $ 0Investment on November 1, 2009 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2009 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2009 $ 0Investment on November 1, 2002 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2009 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2009 $ 0Investment on November 1, 2009 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2009 $26,050
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NetSolutionsStatement of Owner’s Equity
For the Month Ended November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Chris Clark, capital, November 1, 2009 $ 0Investment on November 1, 2009 $25,000Net income for November 3,050 $28,050Less withdrawals 2,000Increase in owner’s equity 26,050Chris Clark, capital, November 30, 2009 $26,050
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Statement of Owner’s Equity
Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, 2010. Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use.
Example Exercise 1-55
1-76
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CHICKADEE TRAVEL SERVICESTATEMENT OF OWNER’S EQUITY
For the Year Ended April 30, 2010
Example Exercise 1-5 continued
Follow My Example 1-5
5
For Practice: PE 1-5A, PE 1-5B
1-77
Adam Cellini, capital, May 1, 2009 $ 80,000 Additional investment by owner during year $ 50,000Net income for the year 55,550
$105,550Less withdrawals 30,000 Increase in owner’s equity 75,550Adam Cellini, capital, April 30, 2010 $155,550
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123
A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.
5
Balance Sheet
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124
The account form of a balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to the design of an account.
5
Account Form
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125
This amount is compared to the net cash flow on the statement of cash flows.
From the statement of owner’s equity
5
Exhibit 6 Financial Statements for NetSolutions (continued)
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Balance Sheet
Using the data for Chickadee Travel Service shown in Example Exercises 1-4 and 1-5, prepare the balance sheet as of April 30, 2010.
Example Exercise 1-65
1-81
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Example Exercise 1-6 (continued) 5
For Practice: PE 1-6A, PE 1-6B
CHICKADEE TRAVEL SERVICEBALANCE SHEET
April 30, 2010 Assets Liabilities
Cash $ 53,050 Accounts payable $ 12,200Accounts receivable 31,350Supplies 3,350 Owner’s EquityLand 80,000 Adam Cellini, capital 155,550Total assets $167,750 Total liab. & owner’s eq. $167,750
1-82
Follow My Example 1-3 Follow My Example 1-6
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NetSolutionsBalance Sheet
November 30, 2009
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
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NetSolutionsBalance Sheet
November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsBalance Sheet
November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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NetSolutionsBalance Sheet
November 30, 2009
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
AssetsCash $5,900Supplies 550Land 20,000 Total assets $26,450
LiabilitiesAccounts payable $ 400
Owner’s EquityChris Clark, capital 26,050 Total liabilities and owner’s equity $26,450
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132
A statement of cash flows is a summary of the cash receipts and payments for a specific period of time. It consists of three sections: (1) operating activities, (2) investing activities, and (3) financing activities.
5
Statement of Cash Flows
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The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.
5
Operating Activities
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134
The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.
5
Investing Activities
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135
The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.
5
Financing Activities
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Transaction Analysis
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2009
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
)
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
)
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000)Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
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NetSolutionsStatement of Cash Flows
For the Month Ended November 30, 2002
Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
Cash flows from operating activities: Cash received from customers $ 7,500 Deduct cash payments for expenses and payments to creditors 4,600 Net cash flow from operating activities $ 2,900Cash flows from investing activities: Cash payments for acquisition of land (20,000Cash flows from financing activities: Cash received as owner’s investment $25,000 Deduct cash withdrawal by owner 2,000 Net cash flow from financing activities 23,000Net cash flow and Nov. 30, 2002 cash balance $5,900
)
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Statement of Cash Flows
A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2010, is shown below.
Cash receipts:Cash received from customers $251,000Cash received from additional investment of owner 50,000
Cash payments:Cash paid for expenses 210,000Cash paid for land 80,000Cash paid to owner for personal use 30,000
The cash balance as of May 1, 2009, was $72,050.
Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30, 2010.
Example Exercise 1-75
1-88
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Cash flows from operating activities:Cash received from customers $251,000Deduct cash payments for expenses 210,000Net cash flows from operating activities $ 41,000
Cash flows from investing activities:Cash payments for purchase of land (80,000)
Cash flows from financing activities:Cash received from owner as investment $ 50,000Deduct cash withdrawals by owner 30,000Net cash flows from financing activities 20,000
Net decrease in cash during year $(19,000)Cash as of May 1, 2009 72,050Cash as of April 30, 2010 $ 53,050
Example Exercise 1-7 (continued) 5
1-89
For Practice: PE 1-7A, PE 1-7B
Follow My Example 1-3 Follow My Example 1-7
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• The income statement and the statement of owner’s equity are interrelated.
Net income or net loss appears on both statements.
Interrelationships Among Financial Statements
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• The statement of owner’s equity and the balance sheet are interrelated.
The owner’s capital at the end of the period on the statement of owner’s equity also appears on the balance sheet as owner’s capital.
Interrelationships Among Financial Statements
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• The balance sheet and the statement of cash flows are interrelated.
The cash reported on the balance sheet is also reported as the end-of-period cash on the statement of cash flows.
Interrelationships Among Financial Statements
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Financial Analysis and Interpretation
Ratio of Liabilities to Owner’s Equity =
Total Liabilities
Total Owner’s Equity (or Total Stockholders’ Equity)
For NetSolutions:
Ratio of Liabilities to Owner’s Equity =
$400
$26,050 = 0.015
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