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FINANCIAL ACCOUNTING A USER PERSPECTIVE

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  1. FINANCIAL ACCOUNTINGA USER PERSPECTIVE Hoskin • Fizzell • Davidson Second Canadian Edition

  2. Double Entry Accounting Systems Chapter Three

  3. Basic Accounting Equation Assets = Liabilities + Shareholders’ Equity

  4. Dual entry accounting • Uses the T-Account: Assets Liabilities + Shareholders’ Equity

  5. Individual T-AccountsExhibit 3-1 Debit Credit (Left side) (Right side) Assets Liabilities + Shareholders’ Equity L-Accounts SE-Common A-Cash Payable Shares

  6. Demo Retail Company, Ltd.Exhibit 3-2 A-Cash L-Accounts Payable 3,000 2,500 A-Accounts Receivable SE-Common Shares 0 7,500 A-Inventory SE-Retained Earnings 2,500 0 A-Equipment 4,500

  7. Entries to T-AccountsExhibit 3-3 Liabilities & Assets Shareholders’ Equity Beginning Beginning balance balance Increases Decreases Decreases Increases Ending Ending balance balance

  8. Permanent Accounts • Balance sheet accounts: assets, liabilities, and shareholders’ equity accounts • Have balances that carry over from one period to the next • Example: Retained Earnings

  9. Temporary Accounts • Used temporarily to keep track of revenues, expenses and dividends during the period • Beginning balance is zero • End of period balance is transferred to Retained Earnings

  10. Entries to T-AccountsExhibit 3-3 SE-Retained Earnings Beg.balance Decrease in Increase in Shareholders’ Wealth Shareholders’ Wealth SE-Revenues SE-Expenses SE-Dividends Declared Decr. Incr. Incr. Decr. Incr. Decr.

  11. Accounting Cycle • Determines the types of accounting information to be recorded • Summarized in the Chart of Accounts

  12. Permanent Accts Assets Cash Accounts Receivable Inventory Prepaid Insurance Land Equipment Liabilities Accounts Payable Interest Payable Bank Loan Shareholders’ Equity Common Shares Retained Earnings Chart of AccountsExhibit 3-6

  13. Temporary Accounts Income Statement Accounts Sales Revenues Cost of Goods Sold Insurance Expense Amortization Expense Dividends Declared Chart of AccountsExhibit 3-6

  14. Accounting CycleExhibit 3-7 Chart of Accounts Opening balances Closing entries Transactions or events Preparation of financial statements Transaction analysis Adjusted trial balance Journal entries Adjusting entries Posting Trial balance

  15. Accounting Cycle • Opening Balances • balances carried forward from the end of the last accounting cycle • Transactions or Events • evidenced by source documents

  16. Accounting Cycle • Transaction Analysis • which accounts are affected and by how much • Journal Entries • journal: chronological listing of events

  17. Journal EntriesExhibit 3-9

  18. Accounting Cycle • Posting to the Ledger • posting: transferring the information from the journal entry to the ledger • ledger: each account is listed separately • each page represents a specific T-account

  19. A-Accounts receivable Bal. 0 1 2,500 A-Inventory Bal. 2,500 1,800 2 SE-Sales revenue 0 Bal. 2,500 1 Se-Cost of goods sold Bal. 0 2 1,800 Posting to the Ledger

  20. Accounting Cycle • Trial Balance • List of debit and credit balances • Ensures that: Total debit balances = Total credit balances

  21. Accounting Cycle • Adjusting Entries • to corrects errors • to recognize transactions or events not recorded during the period • GAAP: report revenues earned in a period, and expenses incurred to generate that revenue

  22. Accounting Cycle • Adjusted Trial Balance • after adjusting entries • Financial Statement Preparation • income statement, balance sheet, and cash flow statement • Closing Entries • balances in temporary accounts are transferred to Retained Earnings

  23. Income Statement Format • Single-step income statement • all revenues are listed together • all expenses are listed together

  24. Income Statement Format • Multistep income statement • results of different kinds of operations are segregated • Gross profit (or margin): sales less cost of goods sold

  25. Multistep Income Statement • Income from: • Continuing operations • Nonoperating sources • Unusual or infrequent sources • Corporate income taxes • Discontinued operations • Extraordinary items

  26. Multistep Income Statement • Income from Continuing Operations • Revenues and expenses resulting from the sales of goods and services to customers

  27. Multistep Income Statement • Income from Nonoperating Sources • transactions that do not involve the normal sales of goods or services • Income from Unusual or Infrequent Events • Corporate Income Taxes

  28. Multistep Income Statement • Discontinued Operations • income or loss from the operation • gain or loss on disposal of the segment • Extraordinary Items • unusual, infrequent, and not resulting from management decisions

  29. Earnings Per Share Net income Weighted average number of common shares outstanding

  30. Balance Sheet Format • Assets and Liabilities: • listed in order of liquidity • the ability to convert into cash • separate current and noncurrent