Homework – Ch 1-2

Name ______________________________________________________ACCT 223
Homework – Chapter 1-2
Complete the following questions – answers must be from the textbook and/or slides:
1. Describe the main differences (4-5) between financial accounting and
managerial accounting.
2. List the 5 major users of financial information.
3.
List the 4 main financial statements & other names/titles they could be called.
4. What is the accounting equation?
5. What 3 categories of accounts are found on the balance sheet?
6. What are the 3 main categories found on the income statement?
7. Describe assets, and give five examples.
8.
Describe liabilities, and give five examples.
9. Fill in the missing blanks (b & d):
a. Assets = $500,000
b. Liabilities: ??
c. Stockholders’ Equity = $200,000
d. Assets = ??
e. Liabilities = $400,000
f. Stockholders’ Equity = $600,000
Chapter 2
Financial Statements and
Accounting Concepts/Principles
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
22
LO 1
Transactions→Accounts→F/S
Cash
Accounts
Receivable
Accounts
Payable
McGraw-Hill/Irwin
Transactions are
summarized in accounts.
Accounts are used to
organize like-kind
transactions.
Account balances are then
used in the preparation of
financial statements (F/S).
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Examples of Transactions
◼ Sale of product or service
◼ Purchase of inventory or supply
◼ Receipt of cash for sale of product/service
◼ Payment of cash for purchase of asset
◼ Purchase of a building, computer, desk
◼ Sale of land, equipment, or vehicle
◼ Payment for wages, utilities, or insurance
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Examples of Accounts
◼ Cash, Investments, Inventory
◼ Accounts Receivable, Prepaid Assets
◼ Land, Building, Equipment
◼ Accounts Payable, Wages Payable
◼ Stockholders’ Equity, Common Stock
◼ Revenue, Interest Income, Gains
◼ Expenses, Losses
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4 Main Financial Statements
◼ Balance Sheet
◼ Statement of Financial Position
◼ Assets, Liabilities, Equity
◼ Income Statement
◼ Statement of Earnings, or Profit & Loss Stmt
◼ Income/Revenues/Gains, Expenses/Losses,
Net Income (Profit or Loss)
◼ Statement of Cash Flows (CFS)
◼ Statement of Changes in Stockholders’
Equity (or just Owners’ Equity)
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Financial Statements
LO 2
Required Disclosure
Financial position at the end of
the period
Earnings for the period
Cash flows during the period
Investments by and
distributions to owners during
the period
Financial Statement that
Satisfies Requirement
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Changes in
Stockholders’ Equity
In addition to the financial statements, the annual report will
probably include several accompanying notes or
explanations of the accounting policies used and detailed
information about many of the amounts and captions shown
in the financial statements.
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Balance Sheet
◼ aka: Statement of Financial Position
◼ Reports balances as of a moment in time
◼ 3 Sections:
◼ Assets
◼ Liabilities
◼ Equity (Net Assets, Fund Balance,
Stockholders’ Equity, Owners’ Equity)
◼ Assets = Liabilities + Equity
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Balance Sheet
LO 3
Assets represent the amount of resources
owned by the entity.
Liabilities are
amounts owed
to other entities.
Equity is the
ownership right
of the owner(s) of
the entity in the
assets that
remain after
deducting the
liabilities.
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Balance Sheet
LO 3
Assets
McGraw-Hill/Irwin
=
Liabilities
+
Equity
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LO 4
Some Balance Sheet Accounts
Account
Definition
Cash
Cash on hand and in the bank
Accounts receivable
Amounts due from customers
Merchandise inventory
Cost of merchandise acquired and not yet sold
Equipment
Cost of equipment purchased and used in business
Accumulated depreciation Portion of the cost of equipment that is estimated to have
been used up in the process of operating the business
Short-term debt
Amounts borrowed that will be repaid within one year of the
balance sheet date
Accounts payable
Amounts due to suppliers
Other accrued liabilities
Amounts owed to various creditors
Long-term debt
Amounts borrowed from banks or other creditors that will
not be repaid within one year from the balance sheet date
Stockholders’ equity
Residual claim of owners, computed as “assets minus
liabilities”
McGraw-Hill/Irwin
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LO 4
Balance Sheet
Current assets (short-term) are those assets that are
likely to be converted into cash or used to benefit the
entity within one year.
Non-Current
(Long-Term)
Assets include
plant and
equipment that
will benefit the
entity over
several years.
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LO 4
Balance Sheet
Long-term liabilities (non-current) will not be repaid
within one year of the balance sheet date.
Current
liabilities
(shortterm) are
those
liabilities
to be
paid
within
one year.
McGraw-Hill/Irwin
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Income Statement
◼ aka: Statement of Operations, Profit &
Loss Statement, P&L Statement
◼ Reports balances for a period ended
◼ 3 Sections:
◼ Revenues (Sales)
◼ Expenses (Costs)
◼ Net Income (profit or loss)
◼ Revenues – Expenses = Net Income/loss
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Income Statement
LO 4
The income statement shows the profit (or loss) for the
period of time under consideration.
Revenues result from the
entity’s operating
activities (e.g., selling
merchandise).
McGraw-Hill/Irwin
Costs and expenses
are incurred in generating
revenues and operating
the entity.
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LO 4
Some Income Statement
Accounts
Captions
Net sales
Cost of goods sold
Gross profit
Selling, general, and
administrative expenses
Income from operations
Interest expense
Income taxes
Net income per share of
common stock
outstanding
McGraw-Hill/Irwin
Explanation
Amount of sales of merchandise to customers, less the
amount of customer returns of merchandise
Represents the total cost of merchandise removed from
inventory and delivered to customers as a result of sales
Difference between net sales and cost of goods sold;
Represents the seller’s maximum amount of “cushion”
from which all other expenses of the business must be
deducted before it is possible to have net income
Represents the operating expenses of the entity
Represents one of the most important measures of the
firm’s activities
Represents the cost of using borrowed funds
Shown after all of the other income statement items have
been reported because income taxes are a function of the
firm’s income before taxes
A significant item in evaluating the market value of a share
of common stock; Often referred to as “earnings per
share” or EPS
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216
LO 4
Income Statement
The income statement shows the profit (or loss) for the
period of time under consideration.
Gains and losses are also reported on the income statement and result
from non-operating activities, rather than from the day-to-day operating
activities that generate revenues and expenses.
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Statement of Changes in
Owners’ Equity
◼ aka: Equity Statement, Stmt. Of Changes
in Stockholders’ Equity
◼ Reports changes in Equity account for the
period ended (more detail than Bal Sheet)
◼ Various Sections:
◼ Retained Earnings (Profits, Losses, Dividends)
◼ Paid–in Capital (Common Stock Preferred
Stock, Treasury Stock, Addt’l Pd-in Capital)
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LO 4
Statement of Changes
in Stockholders’ Equity
This financial statement shows the detail of stockholders’
equity and explains the changes that occurred in the
components of stockholders’ equity during the year.
McGraw-Hill/Irwin
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LO 4
Statement of Changes
in Stockholders’ Equity
Accounts
Captions
Paid-in capital
Common stock
219
Explanation
Represents the total amount invested in the entity by the
stockholders
Reflects the number of shares authorized by the corporation’s
charter, the number of shares issued to stockholders, and the
number of shares still held by the stockholders
Additional paid-in capital
Difference between the total amount invested by the
stockholders and the par value or stated value of the stock
Retained earnings
Represents the cumulative net income of the entity that has
been retained for use in the business
Dividends
McGraw-Hill/Irwin
Distributions of earnings to the stockholders
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220
Statement of Cash Flows
◼ aka: Cash Flow Statement
◼ Reports cash inflows & outflows for a
period of time
◼ 3 Sections:
◼ Operating Activities
◼ Investing Activities
◼ Financing Activities
◼ Beg. Cash + Cash increase/decrease =
Ending Cash
McGraw-Hill/Irwin
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LO 4
Statement of Cash Flows
The purpose of this financial statement is to identify the
sources and uses of cash during the year.
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LO 4
Statement of Cash Flows
Captions
Explanation
Cash flows from operating Shown first; Net income is the starting point for this
activities
measure of cash generation
Depreciation expense
Added back to net income because it is subtracted to
arrive at net income, but does not require the use of cash
Increase in accounts
receivable
Increase in merchandise
inventory
Increase in current
liabilities
Deducted because it reflects sales revenues, included in
net income, but not yet received in cash
Deducted because cash was spent to acquire the
increase in inventory
Added because cash has not yet been paid for the
products and services that have been received during the
current fiscal period
Cash flows from investing Shows the cash sources and uses related to long-lived
activities
assets
Cash flows from financing Shows the cash sources and uses related to transactions
activities
with creditors and stockholders
McGraw-Hill/Irwin
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LO 4
McGraw-Hill/Irwin
Time-Line Model
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LO 4
McGraw-Hill/Irwin
Financial Statement
Relationships
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LO 5
Accounting Concepts and
Principles
Now
Future
Accounting Entity
Every economic entity can be
separately identified and
accounted for.
Going Concern Concept
The presumption that the entity
will continue to operate in the
future—it’s not being liquidated.
Unit of Measurement
Only transactions denominated
in dollars (currency) are recorded
in the accounting records.
Cost Principle
Transactions are recorded at
their original cost to the entity as
measured in dollars.
McGraw-Hill/Irwin
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LO 5
Accounting Concepts and Principles
Consistency
Provides meaningful trend
comparisons over several years.
Full Disclosure
Circumstances and events that
make a difference to financial
statement users should be
disclosed.
Materiality
The benefit of increased accuracy
should outweigh the cost of
achieving the increased accuracy.
Conservatism
When in doubt, make judgments
and estimates that result in lower
profits and asset valuations.
McGraw-Hill/Irwin
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LO 6
Accrual Accounting Vs. Cash
Flows
Revenue Recognition -Timing is the Key
Accrual accounting
recognizes:
Cash flow
recognizes:
Revenue
Revenue
when revenue is earned,
at the point of sale of
services or products.
when payment is received
for services rendered
or products sold.
Expenses
Expenses
when they are incurred.
when they are paid.
McGraw-Hill/Irwin
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LO 8
The Corporation’s Annual
Report
The annual report is
distributed to
shareholders (and others).
It contains the financial
statements, together with
the report of the external
auditor’s examination of
the financial statements.
It also contains
Management’s Discussion
and Analysis (MD&A).
McGraw-Hill/Irwin
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End of Chapter 2
McGraw-Hill/Irwin
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Chapter 1
Accounting—Present and Past
PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin
Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
1-2
What is Accounting?
LO 1
Accounting is the process of:
McGraw-Hill/Irwin
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LO 2
Users and Uses of
Accounting Information
User
Management
Investors/Shareholders
Creditors/Suppliers
Employees
Securities and Exchange
Commission
McGraw-Hill/Irwin
Decision/Informed Judgment
Made
Planning, directing, and controlling
Assessing amounts, timing, and
uncertainty of future cash returns on
their investment
Assessing probability of collection and
the risk of late (or non-) payment
Planning for retirement and future job
prospects
Reviewing for compliance of all
required information
1-3
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1-4
Financial Accounting
LO 3
Financial accounting generally refers to
the process that results in the preparation
and reporting of financial statements for
an entity. (Controller/CFO/CPA)
Financial accounting is primarily
externally oriented and concerned with
the historical results of an entity’s
performance.
McGraw-Hill/Irwin
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Managerial Accounting/
Cost Accounting
LO 3
Managerial accounting is concerned with the use
of economic & financial information to plan &
control many of the activities of the entity & to
support the management decision-making
process (budgeting & forecasting). It’s for
internal use & is more real-time. (CMA)
Cost accounting relates to the determination &
accumulation of product, process, or service
costs.
McGraw-Hill/Irwin
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Managerial Accounting versus
Financial Accounting
Learning Objective 12-2: Identify the major differences between financial accounting and managerial accounting.
McGraw-Hill/Irwin
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Careers in Accounting
◼ High demand, esp. for CPA & MBA
◼ External auditor – public accounting
◼ Internal auditor
◼ Income tax preparer
◼ Governmental / NFP accountant
◼ Controller, CFO of organization
◼ Accounting professor
◼ Bookkeeper – also in high demand
McGraw-Hill/Irwin
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LO 3
Auditing—Public
Accounting
Public accounting firms and
individual Certified Public
Accountants (CPA’s) provide
auditing services and issue an
independent auditor’s report.
They can also provide tax,
consulting, financial planning,
and bookkeeping services.
An independent auditor’s report states whether the financial statements
are prepared in conformity with generally accepted accounting
principles (GAAP). An auditor’s report can be unmodified (a “clean
opinion) or modified.
McGraw-Hill/Irwin
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LO 3
Internal Auditing
Certified Internal
Auditors (CIA’s) are
professional
accountants who
perform functions much
like those of an external
auditor. However,
internal auditors are
employed in industry
rather than public
accounting.
McGraw-Hill/Irwin
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LO 3
Governmental and Not-forProfit Accounting
Governmental units (e.g.,
municipal, state, and
federal agencies) and notfor-profit entities (e.g.,
universities, hospitals, and
religious organizations)
require the same
accounting functions to be
performed as do other
accounting entities.
McGraw-Hill/Irwin
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LO 3
Income Tax Accounting
Tax practitioners often
develop specialties in
the taxation of
individuals,
partnerships,
corporations, trusts
and estates, or
international tax law
issues.
McGraw-Hill/Irwin
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Standards Boards
◼ FASB – Financial
◼ GASB – Governmental
◼ CASB – Cost
◼ IASB – International
◼ ASB – Auditing
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LO 3
Financial Accounting
Standards Board (FASB)
FASB is the authoritative standard-setting body
within the accounting profession. They create
SFAS (Statements of Financial Accounting
Standards), which have since been replaced with
ASU’s (Accounting Standards Updates).
New regulations created by FASB are now
referred to as FASB Updates (ASU’s).
McGraw-Hill/Irwin
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LO 6
Standards for Other Types
of Accounting
Managerial/Cost
Accounting
Auditing/Public
Accounting
State and Local
Governments or
Public Colleges &
Universities
McGraw-Hill/Irwin
Cost Accounting
Standards Board (CASB)
for government contracts
ASB or Auditing
Standards Board (part of
AICPA)
Governmental
Accounting Standards
Board (GASB)
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LO 6
International Accounting
Standards
The goal of the International Accounting
Standards Board (IASB) is to develop a single
set of high-quality, understandable, enforceable
and globally accepted financial reporting
standards based upon clearly articulated
principles.
The IASB has
issued 41 IASs and
13 IFRSs.
McGraw-Hill/Irwin
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LO 7
Ethics and the Accounting
Profession
Integrity – honest and
forthright in dealings
and communications
with others
Objectivity –
impartiality and
freedom from conflict
of interest
Independence – in
both appearance and
fact (auditor)
Competence –
knowledge and
professional skills
McGraw-Hill/Irwin
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End of Chapter 1
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