Buad 280

Entity -> System -> Financial Accountant -> Audit -> End User (investor)
Financial info is conveyed through 4 financial statements

- Income statement
- Statement of retained earnings/Stockholders Equity
- Balance sheet
- Statement of cash flows
Income Statement
Revenues - Expenses = Net income
Revenue - inflows from selling
- Goods and services
Expenses - outflows related to conducting business operations, DOESNT include dividends
Net Income - whether we receive more than we expended from business operations
What Income Statement Looks Like
- Header (Entity name, Period of time, Income Statement, Units)
- Revenues
- Cost of sales
- Revenues - Cost of Sales = Gross Profit
- Operating expenses
- Gross Profit - Operating Expenses = Pre-Tax Income
- Tax Expense
- Pre-Tax Income - Tax Expense = Net Income
Statement of Retained Earnings (RE)
BEG RE + Net Income (NI) - Dividends = End RE
- Tells us if company is paying their dividends
Dividend - payment from the company to the shareholders, NOT expense
- More NI leads to more RE so company can pay dividends
- Represents a return of profits to shareholders
- Companies pay them to increase cash flows to shareholders
- If they dont pay them they reinvest in business operations
Balance Sheet
Assets = Liabilities + Stockholders Equity
Assets - what you have (property, cash inflows?, you want to eventually turn it into cash)
Liabilities - what you owe (debt, payable, future cash outflows)
Stockholders Equity - how much we received from shareholders and generated through
business operations
- Common stock - cash received from shareholders from the sale of stock
- End RE
Statement of Cash Flows

Cash From Operations + Cash From Investing Activities + Cash From Financing Activities =
Total Change in Cash
Historical Cost Principle - assets are recorded at the actual purchase price
Entity Assumption/Principle
Asset must be:

- acquired at a measurable cost
- Acquired or controlled by the entity (because then you cant turn it into cash)
- Expected to produce verifiable future economic benefits
- Arise from a past transaction or event
Ex: Cash from a sale (as an asset)
- Yes, acquired at a measurable cost (measured on balance sheet)
- Yes, controlled by us entirely
- Yes, cash is verified as a cash flow which will provide future economic benefit
- Yes, acquired from a sale which is a past transaction
- ASSET
Ex: Spent cash on advertising
- Yes, spent cash on it so we know how much it is
- Yes, we control what the commercial will be
- NO, NOT verifiable because future sales are NOT verifiable, they just MIGHT be
future sales
- Yes, spent money for the ad which is a past transaction
- ***EXPENSE since it isnt an asset
Ex: Purchase inventory with cash
- Yes, bought with cash which is measurable cost
- Yes, now owned by us
- Yes, we will sell the inventory
- Yes, we paid for the inventory in a past transaction
- ASSET
*****why can we assume inventory will lead to future sales but advertising wont lead to future
sales? If they both have a history of working
Ex: Prepaid insurance
- Yes, we paid for it
- Yes, it is now ours
- Yes, there is a contracted payout if what we insured against happens
- Yes, we paid for it so it is a past transaction
- ASSET because it is prepaid
Liability must:
- Involve probable future sacrifice of economic resources by the entity
- The economic resource transfer is to another entity
- The future sacrifice is a present obligation arising from a past event
Ex: Hire an employee with a weekly wage of $600, and the employee starts work next week
- Yes, will lose economic resources ($600 per week)
- Yes, the money is going to the employee who is their own entity
- NO, we dont have to pay them yet because they arent working yet, so it is NOT
a present obligation
- NOT a liability
Ex: Receive $10,000 in cash for work to be performed next month
- Yes, we will have to work

- Yes, we are performing the work for the customer
- Yes, we are obligated to do the work since we were paid
- LIABILITY (called either deferred revenue or unearned revenue)
Ex: Signed contract to perform $10,000 worth of work next month
- Yes, we will have to work
- Yes, we are performing the work for the customer
- NO, we are not obligated to do the work since we have not been paid yet
- NOT a liability, contracts do not count as past event
- Would be an asset (receivable) if we performed the work and didnt get paid yet
***ALL of this is just what you record things as AT THE TIME of making the sheet, which is why
contracts dont count
Stockholders Equity
Common Stock/Contributed Capital
- Amount of cash or other assets received from the owners
End RE
- Beg RE +/- NI - DIV = Rev - Exp
Property, Plant, and Equipment
- Accumulated Depreciation - reflects the accumulated use of PP+E
- PP+E - Accumulated Depreciation = Net PP+E
Trademark
- Gives exclusive use to a particular brand name
Patent
- Gives exclusive right to a production process
Current
Non-Current
-
Asset - use it within a year

Liability - make economic sacrifice within a year
Asset - use it in longer than a year
Liability - make sacrifices after a year
Revenue - expenses - dividends = RE (all falls under stockholders equity)

Accounts payable is a liability
On account means it hasnt been paid for yet, it is owed
Expense - like rent, or things we have used and now have to pay for (not prepaid)
Transaction
- any event that has an immediate financial impact on the company
- Ex: hiring an employee is not a transaction until they start working
Transaction -> account -> financial statements
- Account: Summary of related transactions
- Net result from all similar transactions will give us our account
balance
Transaction Analysis
1. Identify the accounts affected - there have to be at least two
Dual effects
What did we get? Or what did we give?
2. Classify the accounts by type - asset, liability, or stockholders equity
3. Determine the direction of the effect on each account
4. Verify the accounting identity is in balance
Assets = Liabilities + Stockholders Equity
Ex: Purchase a truck for $40,000, but only $10,000 in cash was paid at the time of purchase.
The remainder was financed with a note payable.
1. Accounts: Truck, cash, note payable
2. Type:
Truck (asset)
Cash (asset)
Note payable (liability)
3. Direction:
Truck - increase by $40,000
Cash - decrease by $10,000
Note payable - increase by $30,000 (the amount you OWE increased)
4. Assets = Liabilities + Stockholders Equity
$40,000 (truck) - $10,000 (cash) = $30,000 (note payable) + 0
$30,000 = $30,000
Accounting identity is in balance
Ex: Issued shares of common stock to investors in exchange for $100,000 cash
1. Accounts: cash, common stock
2. Type:
Cash (asset)
Common stock (stockholders equity)
3. Direction:
Cash - increase by $100,000
Common stock - increase by $100,000 (theyre issuing stock so its the initial giving of
stock, increasing it)
4. $100,000 (cash) = 0 (liabilities) + $100,000 (common stock)
$100,000 = $100,000
Balanced
Ex: Borrowed $45,000 by issuing bonds
1. Accounts: cash, bonds
2. Type:
Cash - asset
Bond - liability
3. Direction:
Cash - increase by $45,000
Bonds - increase by $45,000
4. $45,000 (cash) = $45,000 (bonds) + 0
$45,000 = $45,000
Balanced
Journal Entry
- A record of the accounts that were changed by a single transaction
- Use a T account (T-chart) for each account
Reference
Dr.
Cr.
Account Titles
(Description)
Assets
Dr. +
Cr. Liabilities
Dr. Cr. +
SE
Dr. Cr. +
Assets
Dr.
Truck
Cash
Notes Payable
(Purchase of Trucks)
Cr.
$40,000
$10,000
$30,000
Cash
20,000 (beginning balance)
-10,000
Truck
10,000
40,000
40,000
NID
30,000
30,000
Example: Issued shares of common stock to investors in exchange for $100,000 cash and
borrowed $45,000 by issuing bonds
Journal Entry 1
Cash
Common Stock
(Issued common stock)
Dr.
100,000
Cr.
100,000
Journal Entry 2
Cash
Bonds
(Issued bonds)
Dr.
45,000
Cr.
45,000
T- accounts
Cash (asset)
Dr. (+)
100,000
45,000
Cr. (-)
Common Stock
Dr. (-)
Cr. (+)
100,000
Bonds
Dr. (-)
Cr. (+)
45,000
Steps:
1.
2.
3.
4.
5.
Journal Entries
T-Accounts
Update general ledger
Trial Balance
Financial statements
Excel:
Black - formulas
Blue - inputs (company specific numbers or assumptions)
Note: prof likes to make assumptions red
To reference a cell on a different worksheet, use = then CONTROL FN PAGE UP (or DOWN)
Email to [email protected]
SUbject Line: Excel Lab 1/Eric Allen/14516

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Entity -> System -> Financial Accountant -> Audit -> End User (investor)

Financial info is conveyed through 4 financial statements

Statement of Cash Flows

Asset must be:

- Yes, we will have to work

Asset - use it within a year

Revenue - expenses - dividends = RE (all falls under stockholders equity)

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