Chapter 2

1. Chapter 2 From Scorekeeping to Financial Statements

2. Learning Objectives for Chapter 2 • See syllabus

3. Financial Accounting Statements • Balance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date • Income Statement - reports the results of operations for a specific period of time • Retained Earnings Statement -reports the changes in retained earnings for a specific period of time • Statement of Cash Flows - reports the cash receipts and payments for a specific period of time

4. Brief Introduction to the Balance Sheet and Income Statement • Balance sheet – snapshot of a company’s financial position at a certain point in time. • Income statement – summarizes financial activity of a company for a certain period of time. • Relationship between the balance sheet and income statement

5. Basic Terms • Assets - resources owned by a business • Liabilities - debts and obligations of the business - represents claims of creditors on the assets of the business • Common stock - stock representing the primary ownership interest in a corporation

6. Practice With the Balance Sheet and Income Statement • Wiggler Company

7. Tuesday, June 21 • Email – use your COB account. To find your account: • Go to the computer lab in the basement • Log in under your ONID account and open Outlook • Open a screen to send a new email, type your last name in the address space, then key ’Ctrl +k’ • A list of email addresses will appear, find your COB address • Access to course materials folder • Go to the computer lab in the basement and log in under your COB username and password. Passwords can be obtained in BX 204C, if you forgot yours or need one. • Now, the URL \\cob-storage\classes\BA215wong can be used in the Explorer web browser

8. Debit and Credit Conventions and T-accounts • T-accounts are a convenient way to record transaction information and keep running totals of accounts. • Debits represent the left hand side of a T-account. • Credits represent the right hand side of a T-account. • See Fig 2.2 of text Balance Sheet Accts. Income Stmt. Accts. ↑ Assets | Liabilities ↑↑ Expenses | Revenues ↑ | Equity ↑

9. Recording Transactions • Note for every transaction: • $debits = $credits • For every transaction involving only balance sheet accounts: A = L + E • Balance sheet for Wiggler, up to transaction #5, using T-accounts for assistance.

10. The Trial Balance • A listing of all debit and credit balances as of the balance sheet date • Used to insure that debits = credits for recorded transactions • Checks whether the accounting equation was maintained • No assurance that transactions have been recorded properly

11. Trial Balance for Wiggler transactions #1 to #5 • Put together a trial balance for these transactions. Debit Credit Cash $3,250 Inventory (worms) 220 Land & Farm 750 Accounts Payable $120 Note Payable 2,100 Common Stock 2,000 Total $4,220 $4,220

12. Balance Sheet: Classification and Some Common Accounts • The balance sheet classifies assets and liabilities according to whether they are short- or long-term. • Generally: • Short-term assets are those which will be consumed or converted to cash in a year or less. All other assets are long-term. • Short-term liabilities are those which will be paid in a year or less. All other liabilities are long-term. • Common balance sheet accounts – see sample balance sheet, and text pp. 54-58.

13. Income Statement • Classified income statement • Definition of elements • Revenues – resource inflows earned from the sale of products or services that are the main activities of the organization • Expenses - resource outflows incurred in the sale of products or services that are the main activities of the organization • Gains – similar to revenues, only from ancillary activitiesof the organization • Losses – similar to expenses, only from ancillary activitiesof the organization

14. Table 2.3 From the Text Sample Income Statement: Operating Section Net sales $2,500,000 Cost of goods sold 1,900,000 Gross margin 600,000 (Discussion of these three accounts on pp. 50-51)

15. Table 2.3 From the Text Sample Income Statement: Operating Section Operating Expenses: Selling expenses Sales salaries $140,000 Advertising expenses 20,000 160,000 Administrative expenses Office salaries 170,000 Rent 20,000 Depreciation 40,000230,000 Total operating expenses 210,000 (Discussion of these accounts on p. 51)

16. Table 2.3 From the Text Sample Income Statement: Non-Operating Section* to end Other income $20,000 Other expenses (interest) 35,00055,000 Income before taxes 195,000 Income taxes 97,500 Net Income (Income after taxes) $97,500 * This is the section where gains and losses would also appear (Discussion of these accounts on pp. 50-51)

17. Statement of Retained Earnings • Helps to link the balance sheet with the income statement. • Closes the results of the income statement (net income) to Retained Earnings • Accounts for dividends paid from Retained Earnings. • Overview of the statement: Beginning Retained Earnings + Net income (Net loss) - Dividends paid or declared and payable = Ending Retained Earnings

18. In-class Work • T/F and multiple choice questions from Ch. 2

19. Homework • Finish recording the transactions in the Wiggler exercise • After recording the transactions • Make a trial balance, balance sheet, and income statement for Wiggler