BSAD 221 Introductory Financial Accounting Donna Gunn, CA

1. BSAD 221Introductory Financial AccountingDonna Gunn, CA

3. Financial Statements • Balance Sheet • Income Statement • Cash Flow Statement • Statement of Retained Earnings Financial statements summarize the financial activities of the business.

4. Increases Financial Statement Relationships Net incomeincreases retained earnings, while a net loss will decrease retained earnings. Dividendsdecrease retained earnings. Decreases RETAINED EARNINGS DIVIDENDS Net Income = Revenues - Expenses

5. Increases Increases Financial Statement Relationships Share Capital and R/E make up Shareholders’ Equity. SHAREHOLDERS’ EQUITY SHARE CAPITAL RETAINED EARNINGS Net Income = Revenues - Expenses

6. Financial Statement Relationships SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY = + ASSETS LIABILITIES Increases SHARE CAPITAL RETAINED EARNINGS Increases Net Income = Revenues - Expenses

7. Note that this statement has ONLY revenues and expenses!

8. The income statement impacts Retained Earnings

9. Income Statement Elements Results of continuing operations can be presented in one of the two formats Single step format: Revenues (All Operating Expenses) Operating income Multiple step format: Sales (Cost of Goods Sold) Gross Margin (Other Operating Expenses) Operating Income

10. Classified Balance Sheet Includes comparatives for the prior year Current amounts - Amounts due within / or receivable within 1 year Non-current amounts - Amounts due or receivable outside of a year

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

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

13. Financial Statement Relationships SHAREHOLDERS’ EQUITY SHAREHOLDERS’ EQUITY = + ASSETS LIABILITIES Increases SHARE CAPITAL RETAINED EARNINGS Increases Net Income = Revenues - Expenses

14. Closing the Books Even though the balance sheet account balances carry forward from period to period, the income statement accounts do not. Closing entries: • Transfer net income (or loss) to Retained Earnings. • Establish a zero balance in each of the temporary accounts to start the next accounting period.

15. The Closing Process The following accounts are calledtemporaryor nominal accounts and are closed at the end of the period . . . • Revenues • Expenses • Gains • Losses, and • Dividends declared

16. The Closing Process • Assets, liabilities, and shareholders’ equity accounts are permanent, or real accounts, and are never closed. • Assets • Liabilities • Shareholders’ Equity

17. The Closing Process Three steps are used in the closing process . . . • Close revenues and gains to Retained Earnings • Close expenses and losses to Retained Earnings • CloseDividends (if any) to Retained Earnings

18. The Closing Process To close Ducharme’s Revenue accounts, the following entry is required:

19. The Closing Process To close Ducharme’s expense accounts, the following entry is required:

20. The Closing Process Finally, to close Ducharme’s dividends account, the following entry is required (only if dividends account is directly debited in original dividend journal entry rather than Retained Earnings):

21. Post-closing Trial Balance A Post-closing Trial Balanceshould be prepared as the last step of the accounting cycle to check that debits equal credits and all temporary accounts have been closed.

22. An important indicator of a company’s ability to meet its current obligations. Current Ratio Current Ratio = Current Assets ÷ Current Liabilities

23. Current Ratio Current Ratio= Current Assets ÷ Current Liabilities Petro-Canada has current assets of $2,826 and current liabilities of $3,348. Current Ratio = $2,826 / $3,348 = 0.84

24. Total Liabilities Total Shareholders’ Equity Debt-To-Equity Ratio = The Debt-To-Equity Ratio This ratio measures the relation between total liabilities and the shareholders’ equity that finances the assets. An increasing ratio over time signals more reliance on debt financing and more risk.

25. Total Liabilities Total Shareholders’ Equity $123,900 $246,200 Debt-To-Equity Ratio = Debt-To-Equity Ratio = = 0.50 The Debt-To-Equity Ratio