slide 1-1 econ 3a ucsb-- anderson accounting as a form of communication chapter 1

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ECON 3A UCSB-- ANDERSONECON 3A UCSB-- ANDERSON

Accounting as a Form of Accounting as a Form of CommunicationCommunication

Accounting as a Form of Accounting as a Form of CommunicationCommunication

Chapter 1Chapter 1

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What is Accounting?What is Accounting?What is Accounting?What is Accounting?

Accounting is the process of identifying, measuring, and communicating economic information to various users.

Its purpose is to provide economic information about an organization that will be useful to those who need to make decisions regarding that entity.

For example, information provided by an accountant about an entity is useful to a banker in reaching a decision about whether to loan money to a business.

ACCOUNTING IS THE LANGUAGE USED TO DISCUSS BUSINESS PERFORMANCE.

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BALANCE SHEETBALANCE SHEETBALANCE SHEETBALANCE SHEET

BALANCE SHEET/ STATEMENT OF FINANCIAL BALANCE SHEET/ STATEMENT OF FINANCIAL POSITIONPOSITION

ASSET: Probable future economic benefit as a result ASSET: Probable future economic benefit as a result of a past transaction, examples: Cash, accounts of a past transaction, examples: Cash, accounts receivablereceivable

LIABILITY: Probable future economic sacrifice as a LIABILITY: Probable future economic sacrifice as a result of a past transaction, examples: accounts result of a past transaction, examples: accounts payable, accrued expensespayable, accrued expenses

EQUITY: Residual interest of owners, examples EQUITY: Residual interest of owners, examples retained earnings, common stockretained earnings, common stock

AA = L + E= L + E OR OR E = A - LE = A - L

4


INCOME STATEMENTINCOME STATEMENTINCOME STATEMENTINCOME STATEMENT

REVENUE: Reported when it is earned REVENUE: Reported when it is earned

EXPENSE: Reported when the benefit is EXPENSE: Reported when the benefit is derived. Leads to the concept of MATCHING, derived. Leads to the concept of MATCHING, which means we match the expense to the which means we match the expense to the period in which the associated revenue is period in which the associated revenue is recorded.recorded.

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Accounting is important for marketsmarkets, free enterprisefree enterprise, and competitioncompetition because it assists in providing information that leads to capital allocation.

The better the information, the more effective the process of capital allocation and then the healthier the economy.

ACCOUNTING IS A CRITICAL COMPONENT OF THE FUNCTIONING OF THE CAPITAL MARKETS!

Why is Accounting Important?Why is Accounting Important?Why is Accounting Important?Why is Accounting Important?

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Users of Financial InformationUsers of Financial InformationUsers of Financial InformationUsers of Financial Information

Management

Common Decisions?

Current and

Potential Stockholde

rs

Bankers

Financial Analyst

Government

Agencies

Employees

Supplier

Bondholders

Creditors

LO 1 Identify the primary users of accounting information and their needs.

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Needs Information About User Group

1. The profitability of each division in the company Management

2. The prospects for future dividend payments Stockholder

3. The financial status of a company issuing securities to the public for the first time

Securities and Exchange

Commission (SEC)4. The prospects that the company

will be able to pay its interest payments on time

Banker

5. The prospects that the company will be able to pay for its purchases on time

Supplier

Users of Financial InformationUsers of Financial InformationUsers of Financial InformationUsers of Financial Information

LO 1 Identify the primary users of accounting information and their needs.

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Principles of Accounting (Principles of Accounting (Econ. 3ABEcon. 3AB))

Financial Statement Analysis (Financial Statement Analysis (Econ. 118Econ. 118))

Auditing (Auditing (Econ. 132Econ. 132))

Financial Accounting (Financial Accounting (Econ. 136ABCEcon. 136ABC))

Managerial (cost) Accounting (Managerial (cost) Accounting (Econ. 137ABEcon. 137AB) )

Tax Accounting (Tax Accounting (Econ. 138ABEcon. 138AB))

Advanced Accounting (Advanced Accounting (Econ. 139Econ. 139))

International Accounting (International Accounting (Econ. 182Econ. 182))

Accounting Information Systems (Accounting Information Systems (Econ. 185Econ. 185))

Law and Ethics (Law and Ethics (Econ. 189Econ. 189))

Accounting Classes at UCSBAccounting Classes at UCSBAccounting Classes at UCSBAccounting Classes at UCSB

Which ones should I take?Which ones should I take?

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Characteristics of Financial Characteristics of Financial AccountingAccountingCharacteristics of Financial Characteristics of Financial AccountingAccounting

Financial Information

Accounting?

Identifies

and

Measures

and Communicat

es

Balance Sheet

Income Statement

Statement of Cash Flows

Statement of Retained

Earnings or Stockholders’

Equity

Footnotes

President’s letter

MD&A

SEC Reporting

News releases

Forecasts

Environmental Reports

Etc.

GAAPGAAPGAAPGAAP Not GAAPNot GAAPNot GAAPNot GAAP

Financial StatementsAdditional InformationEconomic Entity

LO 2 Explain the purpose of each of the financial statements.

http://www.winnebagoind.com/

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The purpose of accounting is to provide The purpose of accounting is to provide quantitative financial information about an quantitative financial information about an economic entity to persons interested in the economic entity to persons interested in the activities of that entity? activities of that entity?

The purpose of accounting is to provide The purpose of accounting is to provide quantitative financial information about an quantitative financial information about an economic entity to persons interested in the economic entity to persons interested in the activities of that entity? activities of that entity?

True or False?True or False?True or False?True or False?

TrueTrueTrueTrue

Objectives of Financial ReportingObjectives of Financial ReportingObjectives of Financial ReportingObjectives of Financial Reporting


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Financial accounting is the process that Financial accounting is the process that culminates in the preparation of financial culminates in the preparation of financial reports that are relative to the business and reports that are relative to the business and that are used by parties both internal and that are used by parties both internal and external to the enterprise.external to the enterprise.

Financial accounting is the process that Financial accounting is the process that culminates in the preparation of financial culminates in the preparation of financial reports that are relative to the business and reports that are relative to the business and that are used by parties both internal and that are used by parties both internal and external to the enterprise.external to the enterprise.

True or False?True or False?True or False?True or False?

TrueTrueTrueTrue

Objectives of Financial ReportingObjectives of Financial ReportingObjectives of Financial ReportingObjectives of Financial Reporting


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Assets = Liabilities + Owners’ EquityAssets = Liabilities + Owners’ Equity (or Stockholders' (or Stockholders'

Equity)Equity)

Accounts examples:CashCashAccounts receivableAccounts receivableInventoryInventory

Accounts payableNotes payable

Common stockRetained earnings

The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation

Economic Resources

Creditors’ Claim

to Assets

Owners’ Claim

to Assets= +

Financial Accounting 4e by Porter and Norton


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The accounting equation- ALGEBRAThe accounting equation- ALGEBRAThe accounting equation- ALGEBRAThe accounting equation- ALGEBRA

If A=L+E, then:If A=L+E, then:

E= A- L …. EQUITY = ASSETS - LIABILITIESE= A- L …. EQUITY = ASSETS - LIABILITIES

THEREFORE THE EQUITY IS WHAT IS THEREFORE THE EQUITY IS WHAT IS LEFTOVER FROM THE ASSETS AFTER LEFTOVER FROM THE ASSETS AFTER PAYING ALL LIABILITIES. PAYING ALL LIABILITIES.

MAY BE EASIER TO REMEMBER THIS WAY.MAY BE EASIER TO REMEMBER THIS WAY.

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FOUR BASIC FINANCIAL STATEMENTSFOUR BASIC FINANCIAL STATEMENTSFOUR BASIC FINANCIAL STATEMENTSFOUR BASIC FINANCIAL STATEMENTS

BALANCE SHEET:BALANCE SHEET: Think of it as a statement of financial position: Think of it as a statement of financial position: Summarizes the accounting equation, A=L+E;Summarizes the accounting equation, A=L+E; As of a certain date;As of a certain date; Accrual basis;Accrual basis;INCOME STATEMENT:INCOME STATEMENT: How did we do: How did we do: For a stated period;For a stated period; Accrual basis;Accrual basis;STATEMENT OF STOCKHOLDERS’ EQUITY:STATEMENT OF STOCKHOLDERS’ EQUITY: Rolls forward Rolls forward

retained earnings and other EQUITY activity:retained earnings and other EQUITY activity: For a stated period.For a stated period.

STATEMENT OF CASH FLOWS: STATEMENT OF CASH FLOWS: Where did the cash come from Where did the cash come from and where did it go:and where did it go:

Activities impacting cash; broken into activities…the “three Activities impacting cash; broken into activities…the “three buckets” (1) operating (2) investing (3) financing buckets” (1) operating (2) investing (3) financing

It’s like a cash basis income statementIt’s like a cash basis income statement

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Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004

Net income (loss)Net income (loss)

Statement of Retained Earnings

Ending balanceEnding balance

Total assetsTotal assets

Total liabilities & equityTotal liabilities & equity

Beginning balanceBeginning balance

Communicate with Financial Communicate with Financial StatementsStatementsCommunicate with Financial Communicate with Financial StatementsStatements


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IMPORTANCE OF FINANCIAL REPORTING: ETHICSIMPORTANCE OF FINANCIAL REPORTING: ETHICSIMPORTANCE OF FINANCIAL REPORTING: ETHICSIMPORTANCE OF FINANCIAL REPORTING: ETHICS

The accountants job is NOT to decide what is The accountants job is NOT to decide what is best for the user of the financial statements, best for the user of the financial statements, but to provide the user the information but to provide the user the information necessary to make informed decisions.necessary to make informed decisions.

Is it a critical function?Is it a critical function? Cost of scandals: Enron, Worldcom, etc…Cost of scandals: Enron, Worldcom, etc… Implementation of the Sarbanes-Oxley Act of Implementation of the Sarbanes-Oxley Act of

2002.2002. Sound ethical behavior is absolutely critical.Sound ethical behavior is absolutely critical.

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ASSUMPTIONSASSUMPTIONS

Economic entityEconomic entity

Going concernGoing concern

Monetary unitMonetary unit

PeriodicityPeriodicity

PRINCIPLESPRINCIPLES

Historical costHistorical cost

Revenue recognitionRevenue recognition

MatchingMatching

Full disclosureFull disclosure

CONSTRAINTSCONSTRAINTS

Cost-benefitCost-benefit

MaterialityMateriality

Industry practiceIndustry practice

ConservatismConservatism

OBJECTIVESOBJECTIVES1. Useful in 1. Useful in

investment and credit investment and credit decisionsdecisions

2. Useful in assessing 2. Useful in assessing future cash flowsfuture cash flows

3. About enterprise 3. About enterprise resources, claims to resources, claims to

resources, and resources, and changes in themchanges in them

QUALITATIVE QUALITATIVE CHARACTERISTICSCHARACTERISTICS

RelevanceRelevance

ReliabilityReliability

ComparabilityComparability

ConsistencyConsistency

ELEMENTSELEMENTSAssets, Liabilities, and Assets, Liabilities, and

EquityEquityInvestments by ownersInvestments by ownersDistribution to ownersDistribution to owners

Comprehensive incomeComprehensive incomeRevenues and Revenues and

ExpensesExpensesGains and LossesGains and LossesConceptual

Framework for Financial Reporting

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MORE ABOUT THE STATEMENTS- MORE ABOUT THE STATEMENTS- INTERRELATIONSHIPSINTERRELATIONSHIPS

MORE ABOUT THE STATEMENTS- MORE ABOUT THE STATEMENTS- INTERRELATIONSHIPSINTERRELATIONSHIPS

WHEN?-- ACCRUAL ACCOUNTING:WHEN?-- ACCRUAL ACCOUNTING:That is the big question in accounting. Things happen, but you That is the big question in accounting. Things happen, but you

need to present it in a way which is meaningful to users of the need to present it in a way which is meaningful to users of the financial statements.financial statements.

Record revenue when earned;Record revenue when earned; Match expenses to period when revenue is recorded;Match expenses to period when revenue is recorded;

Record expenses when “incurred” but DON’T use the webster’s Record expenses when “incurred” but DON’T use the webster’s definition of “incurred”- under GAAP, incurred means: “when the definition of “incurred”- under GAAP, incurred means: “when the associated benefit has been realized”associated benefit has been realized”

The balance sheet is a parking lot. Everything on the balance The balance sheet is a parking lot. Everything on the balance sheet eventually finds its way to the income and equity sheet eventually finds its way to the income and equity statements.statements.

HOW MUCH?– HISTORICAL COSTHOW MUCH?– HISTORICAL COST Assumes the Company is a “going concern”, otherwise Assumes the Company is a “going concern”, otherwise

consider utilizing “liquidation values”consider utilizing “liquidation values”

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INTERRELATIONSHIP OF STATEMENTS- BASICINTERRELATIONSHIP OF STATEMENTS- BASICINTERRELATIONSHIP OF STATEMENTS- BASICINTERRELATIONSHIP OF STATEMENTS- BASIC

BALANCE SHEET Income Statement

Assets

Liabilities

Equity

Revenues

LESS: Expenses

Other gains & losses

= NET INCOME

Owners

Contributions

Retained Earnings

Dividends

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Various Accounts:Various Accounts:Various Accounts:Various Accounts:

Financial Statements ExerciseFinancial Statements ExerciseFinancial Statements ExerciseFinancial Statements Exercise

Accounts payable 5,000$ Equipment 7,500

Accounts receivable 4,000 Rent expense 6,500

Capital stock 8,000 Retained earnings,

Cash 13,000 beg. of year 8,500

Dividends paid 3,000 Salary expense 12,000

Landscaping revenues 25,000 Supplies on hand 500


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Balance Sheet

Assets:

Liabilities:

Equity:

Landscape revenue Landscape revenue 25,00025,000

Income Statement

Revenues:

Expenses:

2004 2004

6,5006,500Net income

Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements

Accounts Accounts receivable receivable

Accounts payableAccounts payable

Capital stock 8,000Capital stock 8,000

Cash Cash EquipmentEquipment

RentRent Salary and wagesSalary and wages

SuppliesSupplies

Retained earnings Retained earnings 12,00012,000

4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500


+ Net income+ Net income 6,500 6,500

Ending balance Ending balance 12,00012,000

Retained earnings, beg. Retained earnings, beg. 8,5008,500

- Dividends 3,000- Dividends 3,000

Total assets Total assets 25,00025,000

Total liabilities & equity Total liabilities & equity 25,00025,000


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Balance Sheet

Assets:

Liabilities:

Equity:


Income Statement

Revenues:

Expenses:

2004 2004







SuppliesSupplies


4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500








Net income (loss)?Net income (loss)?Net income (loss)?Net income (loss)?


23


Balance Sheet

Assets:

Liabilities:

Equity:


Income Statement

Revenues:

Expenses:

2004 2004







SuppliesSupplies


4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500








What is Retained Earnings Balance?What is Retained Earnings Balance?What is Retained Earnings Balance?What is Retained Earnings Balance?


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Balance Sheet

Assets:

Liabilities:

Equity:


Income Statement

Revenues:

Expenses:

2004 2004







SuppliesSupplies


4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500








How much are Total Assets?How much are Total Assets?How much are Total Assets?How much are Total Assets?


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Balance Sheet

Assets:

Liabilities:

Equity:


Income Statement

Revenues:

Expenses:

2004 2004







SuppliesSupplies


4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500








How much are Total Liabilities?How much are Total Liabilities?How much are Total Liabilities?How much are Total Liabilities?


26


Balance Sheet

Assets:

Liabilities:

Equity:


Income Statement

Revenues:

Expenses:

2004 2004







SuppliesSupplies


4,0004,00013,00013,000

7,5007,500500500

5,0005,000

12,00012,0006,5006,500








How much is Stockholders’ Equity?How much is Stockholders’ Equity?How much is Stockholders’ Equity?How much is Stockholders’ Equity?

$20,000


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YOUR RENT AS AN EXAMPLEYOUR RENT AS AN EXAMPLEYOUR RENT AS AN EXAMPLEYOUR RENT AS AN EXAMPLE

RENT IS DUE ON THE?RENT IS DUE ON THE?11STST

HAVE YOU RECEIVED THE BENEFIT WHEN YOU PAY IT?HAVE YOU RECEIVED THE BENEFIT WHEN YOU PAY IT?NONO

USING THE DEFINITION OF AN EXPENSE, IS IT AN EXPENSE USING THE DEFINITION OF AN EXPENSE, IS IT AN EXPENSE WHENWHEN YOU YOU PAY IT?PAY IT?NONO

DOES IT HAVE “FUTURE ECONOMIC BENEFIT” TO YOU WHEN YOU PAY DOES IT HAVE “FUTURE ECONOMIC BENEFIT” TO YOU WHEN YOU PAY IT?IT?

YESYES

WHAT DO WE CALL SOMETHING THAT HAS FUTURE ECONOMIC WHAT DO WE CALL SOMETHING THAT HAS FUTURE ECONOMIC BENEFIT?BENEFIT?

ASSET!!!ASSET!!!

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RENT: HOW IT LOOKS, assume you start with $4k RENT: HOW IT LOOKS, assume you start with $4k in the bankin the bank

RENT: HOW IT LOOKS, assume you start with $4k RENT: HOW IT LOOKS, assume you start with $4k in the bankin the bank

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004

Net income

CashCash

Retained earnings 4,000Retained earnings 4,000

4,0004,000





PAY $700 FOR RENT ON THE 1ST

3,3003,300

4,0004,000

Prepaid rentPrepaid rent 700700

4,0004,000

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RENT CONTINUEDRENT CONTINUEDRENT CONTINUEDRENT CONTINUED

Balance Sheet

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

2004 2004

Net loss

CashCash


3,3003,300





4,0004,000

Prepaid rentPrepaid rent 700700

END OF MONTH- BECOMES EXPENSE!

Rent expenseRent expense 700700

(700)(700)

3,3003,300

Net LossNet Loss (700) (700)




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HOW DOES GAAP COME TO BE?HOW DOES GAAP COME TO BE?HOW DOES GAAP COME TO BE?HOW DOES GAAP COME TO BE?

Public Companies

Auditing

Private Companies

Advises

Generally Accepted Auditing Standards

Generally Accepted Accounting Standards

Additional Public Company Standards

Oversees independent firms via Public

Company Accounting Oversight Board

(PCAOB)

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FASBFASB Professional Organizations

Professional Organizations

Financial Community

Financial Community

GovernmentGovernment

Industry Associations

Industry Associations

Business EntitiesBusiness Entities

CPAs andAccounting Firms

CPAs andAccounting Firms

AICPA (AcSEC)AICPA (AcSEC)

AcademiciansAcademicians

Investing PublicInvesting Public

Statement of Financial Accounting Standards (SFAS)Statement of Financial Accounting Standards (SFAS)

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Accounting Standard SettingAccounting Standard SettingAccounting Standard SettingAccounting Standard Setting

The primary mission of the U.S. Securities The primary mission of the U.S. Securities and Exchange Commission (SEC) is to and Exchange Commission (SEC) is to protect investors and maintain the protect investors and maintain the integrity of the securities markets.integrity of the securities markets.

Securities and Exchange Commission established in 1934Securities and Exchange Commission established in 1934

Securities Act of 1933 and 1934Securities Act of 1933 and 1934 To restore integrity in capital marketsTo restore integrity in capital markets

33


SEC is the Enforcement Authority:SEC is the Enforcement Authority: Has legal authority to prescribe accounting Standards Has legal authority to prescribe accounting Standards

applicable to public companies.applicable to public companies. Delegated standard setting to AICPA, private sector Delegated standard setting to AICPA, private sector

organization (1939). Current standard setting body is organization (1939). Current standard setting body is the Financial Accounting Standards Board (FASB).the Financial Accounting Standards Board (FASB).

Act of 1933: Act of 1933: Requirement for Initial Public OfferingRequirement for Initial Public Offering

Act of 1933: Act of 1933: Requirement for Initial Public OfferingRequirement for Initial Public Offering

Act of 1934:Act of 1934: Reporting requirements for public companiesReporting requirements for public companies

Act of 1934:Act of 1934: Reporting requirements for public companiesReporting requirements for public companies

Accounting Standard SettingAccounting Standard SettingAccounting Standard SettingAccounting Standard Setting

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OVERSIGHT BY:

Internal & External

Audit

Employment in a Private BusinessEmployment in a Private BusinessEmployment in a Private BusinessEmployment in a Private Business

C-level ManagementC-level Managementi. E “C”EO, “C”FO, etc.i. E “C”EO, “C”FO, etc.

Chief Financial Officer (CFO)

Treasurer Tax Department Cash

Management

Controller Accounting Budget Financial

Analysis Payroll

LO 4 Describe the various roles of accountants in organizations.

BOARD OF BOARD OF DIRECTORSDIRECTORS

SSHHAARREEHHOOLLDDEERRSS

Auditor appointment approved by BOD/ then report directly to the BOD. Preferrably applies to internal audit too.

Elect by vote

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A Service ActivityA Service ActivityA Service ActivityA Service Activity

Employment in a Public Employment in a Public Business:Business: Auditing Services

Tax Services Management Consulting

ServicesOther Employment:Other Employment: Education Non-Profit Entities Governmental Entities

A Service Activity + An Analytical Discipline + An Information A Service Activity + An Analytical Discipline + An Information SystemSystem

A Service Activity + An Analytical Discipline + An Information A Service Activity + An Analytical Discipline + An Information SystemSystem


36


We have audited the accompanying consolidated balance sheets of Winnebago We have audited the accompanying consolidated balance sheets of Winnebago Industries, Inc. and subsidiaries (the Company) as of August 25, 2001 and August Industries, Inc. and subsidiaries (the Company) as of August 25, 2001 and August 26, 2000 and the related consolidated statements of income, cash flows and 26, 2000 and the related consolidated statements of income, cash flows and changes in stockholders’ equity for each of the three years in the period ended changes in stockholders’ equity for each of the three years in the period ended August 25, 2001. These consolidated financial statements are the responsibility of August 25, 2001. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.consolidated financial statements based on our audits.

We conducted our audits in We conducted our audits in accordanceaccordance with auditing standards generally accepted in with auditing standards generally accepted in the United States of America.the United States of America. Those standards require that we plan and perform Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.statements are free of material misstatement. An audit includes examining, on a An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.financial statements. An audit also includes assessing the accounting principles An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the used and significant estimates made by management, as well as evaluating the overall financial statement presentation.overall financial statement presentation. We believe that our audits provides a We believe that our audits provides a reasonable basis for our opinion.reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 25, in all material respects, the financial position of the Company as of August 25, 2001 and August 26, 2000, and the results of their operations and their cash flows 2001 and August 26, 2000, and the results of their operations and their cash flows for the three years in the period ended August 25, 2001 in conformity with for the three years in the period ended August 25, 2001 in conformity with accounting principles generally accepted in the United States of America.accounting principles generally accepted in the United States of America.

Report of Independent AuditorsReport of Independent Auditors

Deloitte & Touche Deloitte & Touche October 3, 2001October 3, 2001

To the Board of Directors and Shareholders To the Board of Directors and Shareholders Winnebago Industries, Inc.Winnebago Industries, Inc.

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1. The chief accounting officer for a company1. The chief accounting officer for a company ControlleControllerr

ControlleControllerr

2. The department responsible in a company for the review and 2. The department responsible in a company for the review and appraisal of its accounting and administrative controls.appraisal of its accounting and administrative controls. Internal Internal

AuditingAuditing

Internal Internal AuditingAuditing

3. The officer responsible in an organization for the safeguarding and efficient use 3. The officer responsible in an organization for the safeguarding and efficient use of a company’s liquid assets.of a company’s liquid assets. TreasurerTreasurerTreasurerTreasurer

4. The process of examining the financial statements and 4. The process of examining the financial statements and the underlying records of a company in order to render an the underlying records of a company in order to render an opinion as to whether the statements are fairly presented. opinion as to whether the statements are fairly presented.

AuditingAuditingAuditingAuditing

The Accounting ProfessionThe Accounting ProfessionThe Accounting ProfessionThe Accounting Profession

5. The opinion rendered by a public accounting firm 5. The opinion rendered by a public accounting firm concerning the fairness of the presentation of the financial concerning the fairness of the presentation of the financial statements. statements.

Auditors’ Auditors’ Report Report

Exhibit 1-7Exhibit 1-7

Auditors’ Auditors’ Report Report

Exhibit 1-7Exhibit 1-7


38


FLOW TO FINANCIALS- FACTSFLOW TO FINANCIALS- FACTSFLOW TO FINANCIALS- FACTSFLOW TO FINANCIALS- FACTS

NEED MONEY:Me & My partner contribute $25,000 each 50,000 Borrow 200,000

RENT SPACE:Pay deposit 10,000 Pay first month rent- AT END OF THE MONTH 2,000

EQUIPMENTBuy a copy machine (36 month life) 36,000

SALES ACTIVITYRent post office boxes per month- bill at end of the month 5,000 Photocopy use- all cash 1,250

OPEN A BUSINESS SERVICES CENTER:

39


Balance Sheet AS OF- START

Assets:

Liabilities:

Equity:

Income Statement

Revenues:

Expenses:

STARTING POINTSTARTING POINTSTARTING POINTSTARTING POINT

Net income (loss)

N/A

40


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:

11stst MONTH MONTH11stst MONTH MONTH

$50K CONTRIBUTION FROM PARTNERS$50K CONTRIBUTION FROM PARTNERS

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable

Retained earnings

50,000

50,000

50,000

50,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent

PO Box rentCopy service

Depreciation exp.

41


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


$200K SBA LOAN FUNDING$200K SBA LOAN FUNDING

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable

Retained earnings

50,000

50,000

50,000

50,000

250,000

250,000

200,000

250,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

42


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


Rent Space: Pay $10K DepositRent Space: Pay $10K Deposit

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable

Retained earnings50,000

250,000

250,000

200,000

250,000

10,000

240,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

43


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


Rent Space: Pay $2K RentRent Space: Pay $2K Rent

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable


250,000

200,000

250,000

10,000

240,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

2,000

238,000

248,000

(2,000) (2,000)

248,000

44


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


Purchase Copy Machine $36,000…36 month lifePurchase Copy Machine $36,000…36 month life

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable


200,000

10,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

2,000

238,000

248,000

(2,000) (2,000)

248,000

202,000

36,000

45


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


Rent from customers $5,000--- NOT PaidRent from customers $5,000--- NOT Paid

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable


200,000

10,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

2,000248,000

(2,000) (2,000)

248,000

202,000

36,000

5,0005,000

253,000

3,0003,000

253,000

46


Balance Sheet

END OF MONTHAssets:

Liabilities:

Equity:


Photocopy use from customers $1,250--- CASHPhotocopy use from customers $1,250--- CASH

Contributions

SBA Loan

Total Assets

Liab & Equity

Rent deposit

Cash

Equip’t (copier)

Accounts receivable


200,000

10,000

Income Statement

Revenues:

Expenses:

Net income (loss)

N/A

Space rent


Depreciation exp.

2,000

202,000

36,000

5,0005,000

253,000

3,0003,000

253,000

1,250

203,250

254,250

4,2504,250

254,250

47


PHILOSOPHYPHILOSOPHYPHILOSOPHYPHILOSOPHY

““What we learn to do, we What we learn to do, we learn by doing”learn by doing”

AUTHOR OF THIS QUOTE?AUTHOR OF THIS QUOTE?

slide 1-1 econ 3a ucsb-- anderson accounting as a form of communication chapter 1

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