Accounting Information and Decision MakingChapter 1 The silly movie is a brief summary of what’s in chapter 1. Make sure you read the chapter. The movie is available on my faculty Website http://www.elcamino.edu/faculty/khull/index.html
Financial Statements Chapter 2
Forms of Business Organization Sole Proprietorships Corporations Partnerships The form of business impacts the format of the financial statements.
Balance Sheet Income Statement Statement of Cash Flows Financial Statements Assets, Liabilities & Equity as of a specific date Revenues & Expenses for a period of time Sources and Uses of cash for a period of time There is a fourth statement, the STATEMENT OF STOCKHOLDERS’ EQUITY, which we will get to later.
Apple’s Financial Statements • Yahoo Finance • Or • Apple Site • Or • SEC/EDGAR
Fundamental Accounting Principles Note: not all of these are covered in chapter 2. Accounting Coach
Cost Principle • Amounts in the accounts and financial statements will be actual cost rather than the current value. • Certain investments will be shown at fair value. • Source: • http://www.accountingcoach.com/terms/C/cost-principle.html
Going Concern Assumption • Readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments. • Source: http://www.accountingcoach.com/terms/G/going-concern-assumption.html
Stable Dollar/Monetary Unit Assumption • The monetary unit assumption is that in the long run, the dollar is stable—it does not lose its purchasing power. • Is this true? • Source: http://blog.accountingcoach.com/monetary-unit-assumption/
Objectivity Principle • Accounting information is fair, unbiased, and objective; not subjective. • Asset valuations are factual and can be verified
The Accounting EquationCommit this to memory! ASSETS = LIABILITIES + EQUITY If you have $5,000 and no debt, your equation looks like this: If you use $1000 as a down payment on a car that costs $20,000, your equation looks like this:
Let’s start a business called Louie’s Lids and see the impact of a few TRANSACTIONS on the financial statements.
Definition of 'Transaction‘ 1. An agreement between a buyer and a seller to exchange goods, services or financial instruments.2. In accounting, the events that affect the finances of a business and must be recorded on the books. Transactions are recorded in what are known as "journal entries." Each entry describes a single transaction and states its date and amount.More: http://www.investopedia.com/terms/t/transaction.asp#ixzz24J8AKpgX
On May 1, Louie invested $20,000 of his own money in Louie’s Lids The accounting equation works: ASSETS = LIABILITIES + EQUITY Louie the person Is separate from Louie’s Lids the business.
On May 2, Louie purchased a used cash register from Goodwill for $500. May 2, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
On May 10, Louie bought a cool mini truck to deliver his hats. He paid $14,000 for the mini, with a down-payment of $2,000 and a $12,000 loan. May 10, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
On May 18, Louie purchased 100 hats for resale from Fanny’s Fedora Company. Each Fedora cost Louie $6. After reviewing Louie’s credit record, Fanny agreed to extend Louie 30 day credit. May 18, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
On May 23, a customer purchases 25 hats for $15 each, and promises to pay by the end of the month. After reviewing the customer’s credit report, Louie agrees to extend the customer 30 day credit. May 23, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
On May 28, Louie pays half of what he owes to Fanny’s Fedoras. May 28, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
On May 31, Louie’s sole customer pays the entire amount due. May 31, 2012 The accounting equation works: ASSETS = LIABILITIES + EQUITY
Transaction Analysis and Financial Statement Preparation The spreadsheet format is simply a way to visualize the impact of transactions on the accounting records. Financial statements can be prepared from here. We always prepare the INCOME STATEMENT first.
Income Statement The INCOME STATEMENT reflects revenues and Expenses from the company’s business operations.
Financial Statement Preparation The STATEMENT OF CASH FLOWS can be prepared by examining the transactions in the cash column.
CASH FLOW STATEMENT reflects the cash coming in and cash going out, categorized by activity.
Financial Statement Preparation The BALANCE SHEET summarizes the totals in each column, and categorizes them as assets, liabilities or equity.
Balance Sheet May 31, 2012 The BALANCE SHEET is a formal, point in time summary of what the business owns (assets), owes (liabilities) and the owners’ residual interest in the assets (equity).
May 31, 2012 Financial Statement Articulation
Balance Sheet Income Statement Statement of Cash Flows Financial Statement Disclosure Notesto the financial statements often provide facts necessary for the proper interpretation of the statements. Apple’s Notes:
End of Chapter 2 Have you seen this site? Khan Academy