Accounting Information and

Decision Making

Chapter 1

1
Chapter 1 - Participation Questions
1. What is the only way to access the Connect
Website?
2. When an investor provides money ($) to a
corporation for ownership, what does the
corporation issue to the investor/owner in return?
3. A ‘Payable’ is always a liability. T/F
4. Which financial statement is always completed first?
5. Which financial statement is more like a movie over
a period of time versus a camera picture?

2
 Announcements
 Connect Enrollment Date closes on 9/6/15 – USE KNIGHTS E-MAIL ADDRESS ONLY

 21Day free access includes e-book

◦ “Connect” - $85.00 includes no e-book – purchase through Connect Website
◦ “Connect Plus” - $125.00 includes e-book – purchase through Connect Website

 Assignments
◦ September 1st (as soon as possible if receiving federal student aid)
 Syllabus Quiz #1 – used for attendance for Federal Student Aid (Webcourses) – 2
attempts

◦ September 13th
 Participation Questions for Chapter #1 questions (Webcourses) – 1 attempt
 Connect Homework Assignment #1 (Connect) – unlimited attempts
 Materia Homework Assignment #1 (Webcourses) – unlimited attempts

◦ September 20th
 Participation Questions for Chapter #2 questions (Webcourses) – 1 attempt
 Connect Homework Assignment #2 (Connect) – unlimited attempts
 Materia Homework Assignment #2 (Webcourses) – unlimited attempts
 Definitions Quiz (Webcourses) – 2 attempts

◦ The Accounting Game: Basic Accounting Fresh from the Lemonade Stand. Darrell Mullis & Judith
Orloff, ISBN 978-1-4022-1186-7 3
 Block 1
Chapter 1: Overview of Accounting and Financial Reporting

Measure Aggregate Communicate

Chapter 2 – 3: Accounting Cycle – Measure/analyze

business transactions to aggregate data and construct
financial statements for communication with decision
makers
5
 Com
Aggregate mun
su re 1+1+1+1=4 icat
a e
Me 6
Aggregating data to communicate to decision-makers…

Final Score –
Yankees 10
Buccaneers 18

e –
rad
a lG
Fin ”
“A
7
Overall Question to be answered this
semester:

What is financial
reporting’s role in
today’s American
society?
8
 Is Accounting Relevant???
 Bank Deposit at Bank United

 Suppliers - Edgar Securities and Exchange

Website
 https://www.sec.gov/cgi-bin/viewer?action=view&cik=1166126&accession_number=0001166126-14-000017&xbrl_type=v #
 https://www.sec.gov/cgi-bin/viewer?action=view&cik=1378950&accession_number=0001193125-14-094601&xbrl_type=v #

 Budgets - Sales Manager – EBITDA

◦ Sales; Travel & Expense; Marketing Budgets
◦ http://www2.massgeneral.org/facultydevelopment/cfd/pdf/20111006BudgetingBasics.pdf

9
 Legal Forms of Business Organization
 Sole Proprietorship
◦ Owned by a single person
 Partnership
◦ Owned by more than one person
 Corporation
◦ Owned by multiple shareholders
◦ Pros – limited liability: stockholders are not personally
responsible for financial obligations of corporation.
◦ Cons –
 Double taxation
 Corporate income is taxed
 Shareholders taxed on distributions of earnings
(dividends)
10
 Stock Ownership
A type of security that signifies ownership in a corporation and
represents a claim on part of the corporation's assets and earnings.

A holder of stock (a shareholder) has a claim to a part of the

corporation's assets and earnings. In other words, a shareholder is an
owner of a company. Ownership is determined by the number of shares
a person owns relative to the number of outstanding shares. For
example, if a company has 1,000 shares of stock outstanding and one
person owns 100 shares, that person would own and have claim to 10%
of the company's assets.

11
How a corporation begins…

12
Learning Objective #1

Accounting as a
Measurement/Communication
Process

13
 Two Functions of Financial Accounting

To measure business activities of a

company and to communicate those
measurements to external parties for
decision-making purposes.
Walmart Company Statistics Website: http://www.statisticbrain.com/wal-mart-company-statistics/

14
 Types of Accounting
Managerial
Managerial Accounting
Accounting Financial
FinancialAccounting
Accounting
Deals with
with the
the methods
methods Measures
Measuresbusiness
business
accountants
accountants useuse to to provide
provide activities
activitiesofofaacompany
companyand
and
information
information toto an
an communicates
communicatesthose those
organization’s
organization’s internal
internal measurements
measurementstotoexternal
external
users;
users; that
that is,
is, its
its own
own parties
partiesfor
fordecision-making
decision-making
managers
managers.. purposes.
purposes.
Focus of the Course
15
Accounting Information - The Language of
Business

Make Decisions About

People Companies

Communicate Activities
information to: Measured by:
Accountants

1
 (WHO) Users of Accounting Information
The two primary users of accounting information for decision-making:

 Investors - for present & potential capital providers

 Creditors - Bonds and Banks for Investment & lending decisions

Other users include:

 Customers
 Suppliers
 Managers
 Employees
 Competitors
 Regulators
 Tax authorities

17 17
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
 WHAT is Measured?
BUSINESS ACTIVITIES

These transaction are from the COMPANY PERSPECTIVE

 Operating Activities
◦ Involves transactions in primary operations of business
 Purchase inventory (lemonade) to sell $1,000
 Selling Lemonade to 1,000 customers for $2.00 per cup.
 Financing Activities
◦ Involves funding from external sources
 Individual invests $1,000 in a business in return for company stock.
 Bank loan of $1,000.
 Investing Activities
◦ Involves purchase and sale of long-term resources
 Purchased lemonade stand to operate business - $100
18 18
 HOW to Measure Business Activities
(Transactions)
The Accounting Equation
Assets = Liabilities + Stockholders’ Equity

Check-
In Company’s
resources
Claims to those resources

#1

19
Accounting Equation
Elements
Assets • Resources owned by company

Liabilities • Amounts owed to creditors

Stockholders’ • Owners claim to resources

Equity (stockholders of the corporations)

20
 Claims on Assets
ASSETS
• Cash
• Inventory
• Equipment
• Building

OWNER’S CLAIMS –
AMOUNTS OWED –
OWNER’S (STOCKHOLDER)
LIABILITIES
EQUITY
• Bank
• Supplier
• Stockholders – common
• Government
and preferred
• Employees
21
Company Profits – Operating Cycle
• Amounts earned from selling
Revenue products and services to customers

• Cost of providing products and

Expenses services

• Difference between revenue and

Net Profit expense

22
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Net Income (aka “the bottom line)
If
expense
Revenues s exceed
revenue
Minus Expenses s

Net Income A net loss

results

23
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Net Income and (Net Loss) Examples

2011 2010

Revenues 1,000,000 1,000,000

Expenses 850,000 1,075,000

Net Income/(Net Loss) 150,000 (75,000)

2
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
25
26
 Accounts - Revenues and Expense of Apple Computers

What is an Account – a place to record and aggregate similar transactions

(Chart of Accounts)

What Constitutes Revenue?

Check-
• List one or two items
In
What constitutes Expenses? #2
• List one or two items

27
 Revenues and Expenses of Apple

What Constitutes Revenue?

• Products
• Repairs
• Itunes
• Iphone contracts
• Iwatch???

What constitutes Expenses?

• Rent
• Employee wages
• Insurance
• Furniture and fixtures
• Utilities
• Supplies
• Marketing

28
Misconceptions about Accounting
 It is not an exact science – differing treatments can yield differing
results.
◦ Receivables Allowances
◦ Inventory valuation
◦ Depreciation methods
LIFO FIFO
Revenue 100,000 100,000
Cost of goods sold 33,000 30,000
Gross Profit 67,000 70,000

Less: Expenses 60,000 60,000

Operating Income 7,000 7.0% 10,000 10.0%

1-29
 Reality Check…
____ Assets A. Costs of selling products and
services
____ Liabilities
B. Amounts received from sales of
products or services
____ Owner’s Equity C. Amounts owed to creditors
____ Revenues D. Owner’s claims to company resources
____ Expenses E. Resources owned

30 30
 Learning Objective #3

Communicating through the Basic Financial Statements

3
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
 The Basic Financial Statements
Fiscal or Calendar Year

2.) Statement of
1.) Income 3.) Balance 4.) Cash Flow
Stockholder’s
Statement Sheet Statement
Equity

Data flows from one financial

statement to the other based on the
order above.
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Income Statement
 Revenues – Expenses = Net Income

 Reports how the company performed operationally

based on the company’s revenues and expenses over
a period of time.
◦ “MOVIE”

 Income Statement flows to Statement of Stockholders’

Equity Flows
Check-In #3
Balance Sheet
 Shows resources and obligations (account
balances) at ONE point in time.
◦ “SNAPSHOT”

 Summarized using the basic ACCOUNTING

EQUATION
◦ Assets = Liabilities + Stockholders’ Equity

 Statement of Stockholders’ Equity Flows to

Balance Sheet
 ASSETS – Sample of Accounts
 Cash – liquid assets
 Accounts Receivable – amounts the company expects to
collect from customers.
 Notes Receivable – amounts company expects to collect
from a party who has a signed promissory note with company
 Inventory – items for sale by company
 Supplies – items that will be consumed by the company
during the operation of the business such as office supplies.
 Prepaid expenses – prepayments for advertisements, rent,
insurance, and supplies.
 Property, plant, and equipment – land, buildings,
computers, store fixtures, manufacturing equipment.
LIABILITIES – Sample of Accounts
 Accounts Payable – amounts owed to vendors
for the purchase of materials or services.
 Salaries Payable – amounts due employees
 Interest Payable - amounts owed to lenders
based on loans
 Utilities Payable – amounts owed to utility
companies
 Notes payable – amounts due to another party
for loaning money to the company
Receivable versus Payable
 Receivable – the firm will receive dollars, so it is a
resource to the firm that can be utilized in the
future. ALWAYS AN ASSET

 Payable – the firm owes money to creditors, such

as suppliers or the bank. ALWAYS AN LIABILITY
 STOCKHOLDERS’ EQUITY – Two Primary
Accounts
 Paid-in-Capital
◦ Stock – external source
 Amount shareholders have invested in
the business
 Retained Earnings – internal source
◦ Cumulative amount of net income earned
and kept in business less dividends paid
out.
Check-In #4
 Financial Statements
Income Statement Balance Sheet

• Activity over a period of time • Resources and obligations at

(performance) a point in time
• One Month • As of a certain date
• One Quarter such as December 31,
• One Year 20XX
 ACCOUNTING EQUATION

Assets = Liabilities + Stockholders’ Equity

Paid in Capital (Stock) Retained Earnings

Revenue Expenses Dividends

 Statement of Stockholders’
Equity
 Summarizes the changes to Stockholders’ Equity
over an interval of time.
◦ Common Stock Account
◦ Retained Earnings Account
 Net income
 Dividends

 Net income (or net loss) flows from the Income

Statement to Stockholders’ Equity
Components of Common Stock (CS)
Beginning
Balance of
CS

Issuance of
Plus Stock ($
received)

Ending
Equals Balance of
CS

4
 Retained Earnings (RE)
Two Components of Retained Earnings:

1. Net Income (Net Loss) - Inflows (outflows) to retained earnings based

on the profits retained by the company.

2. Dividends - Outflow of cash from retained earnings.

45
 Net Loss
decrease
Net
Dividends
Income
decrease
Increase

Retaine
d
earnings

Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

Components of Retained Earnings (Example Apple for 2014)

http://www.sec.gov/cgi-bin/viewer?action=view&cik=32019
Beginning 3&accession_number=0001193125-13-416534&xbrl_type=
v

Balance of RE #

Net Income (or

Plus or Net Loss) for
Minus
the Period

Minus Dividends for

the Period

Equals Ending
Balance of RE

4
Components of RE – Example 1 Net Income
Beginning of
100,000 Period RE

Net Income
Plus 150,000
Check-In #5
Dividends
Minus
50,000

End of Period
Equals 200,000 RE

4
Components of RE – Example 2 Net Loss
100,000 Beginning of
Period RE

Net Loss
Minus (250,000)

Dividends
Minus
0

End of Period
Equals (150,000) RE

4
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
The Statement of Cash
Flows
 Measures cash receipts and cash payments

 Investors & creditors like this statement

 Categorizes into three types of activities:

◦ Operating
◦ Investing
◦ Financing

Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

 Cash Flow Categories

Operating
• Cash receipts and payments from selling goods and
services
Investing
• Purchasing & selling long-term assets

Financing
• Issuing stock and borrowing

Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

How Do You Use Financial Statements to Evaluate Performance?

Copyright ©2014 Pearson Education, 1-

Inc. publishing as Prentice Hall 53
 The Basic Financial Statements
Fiscal or Calendar Year

2.) Statement of
1.) Income 3.) Balance 4.) Cash Flow
Stockholder’s
Statement Sheet Statement
Equity

Data flows from one financial

statement to the other based on the
order above.
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Relationships between Financial Statements
Relationships between Financial Statements
 Balance Sheet
December 31, 2010 Cash from
Assets $$$,$$$ the Asset
Liabilities $$$,$$$
Stockholders’ equity:
section of
Common stock $$$,$$$ the Balance
Retained earnings $$$,$$$ Sheet
Total liabilities and equity $$$,$$$ equals
Statement of Cash Flows
For the year ended December 31, 2010 ending
Cash flows from operating activities $$$,$$$ Cash on
Cash flows from investing activities $$,$$$ the
Cash flows from financing activities $$,$$$
Statement
Net cash flows $$,$$$
Cash balance, December 31, 2009 $$,$$$
of Cash
Cash balance, December 31, 2010 $$,$$$ Flows
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
 Practice – HOW: Analyzing a Transaction?

Smart Touch performs computer training. Check-In #6

1. Smart Touch Learning starts a new business. The company issues
$30,000 of Common Stock for Cash.
2. Next, Smart Touch purchases land for $20,000 cash.
3. In Transaction #3, Smart Touch buys $500 of office supplies,
offering to pay in 30 days.
4. In Transaction #4, Smart Touch provides training services to
customers for $5,500 cash.
5. In Transaction #5, Smart Touch performs $3,000 of services for a
customer who will pay in one month.
1-58
Assets = Liabilities + Equity
Paid-in-Capital + Retained
Earnings

59
 Next four slides show Apple’s

1. Income Statement (Statement of Operations)

2. Statement of Stockholder’s Equity
3. Balance Sheet
4. Statement of Cash Flows

60
 Consolidated Statements of 12 Months Ended
Operations (USD $)
In Millions, except Share data in
Thousands, unless otherwise
specified
Sep. 28, 2013 Sep. 29, 2012 Sep. 24, 2011

Net sales $ 170,910 $ 156,508 $ 108,249

Cost of sales 106,606 87,846 64,431
Gross margin 64,304 68,662 43,818
Operating expenses:
Research and development 4,475 3,381 2,429
Selling, general and administrative 10,830 10,040 7,599
Total operating expenses 15,305 13,421 10,028
Operating income 48,999 55,241 33,790
Other income/(expense), net 1,156 522 415
Income before provision for income taxes 50,155 55,763 34,205
Provision for income taxes 13,118 14,030 8,283
Net income $ 37,037 $ 41,733 $ 25,922

61
 Consolidated Statements of
Shareholders' Equity (USD $) Common Retained Accumulated Other
Total
In Millions, except Share data in Stock Earnings Comprehensive Income/(Loss)
Thousands

Ending Balance at Sep. 29, 2012 118,210 16,422 101,289 499

Ending Balance (in shares) at Sep. 29, 939,208 939,208

2012
Net income 37,037 0 37,037 0

Other comprehensive income/(loss) (970) 0 0 (970)

Dividends and dividend equivalent rights (10,676) 0 (10,676) 0

declared
Repurchase of common stock (in shares) (46,976)

Repurchase of common stock (22,950) 0 (22,950) 0

Share-based compensation 2,253 2,253 0 0

Common stock issued under stock plans, 6,981

net of shares withheld for employee
taxes (in shares)
Common stock issued under stock plans, (587) (143) (444) 0
net of shares withheld for employee
taxes
Tax benefit from equity awards, including 1,232 1,232 0 0
transfer pricing adjustments
Ending Balance at Sep. 28, 2013 $ 123,549 $ 19,764 $ 104,256 $ (471)

Ending Balance (in shares) at Sep. 28, 899,213 899,213

2013

62
Consolidated Balance Sheets (USD $)
Sep. 28, 2013 Sep. 29, 2012
In Millions, unless otherwise specified

Current assets:
Cash and Cash Equivalents $ 14,259 $ 10,746
Short-term marketable securities 26,287 18,383
Accounts receivable, less allowances of 13,102 10,930
$99 and $98, respectively
Inventories 1,764 791
Deferred tax assets 3,453 2,583
Vendor non-trade receivables 7,539 7,762
Other current assets 6,882 6,458
Total current assets 73,286 57,653
Long-term marketable securities 106,215 92,122
Property, plant and equipment, net 16,597 15,452
Goodwill 1,577 1,135
Acquired intangible assets, net 4,179 4,224
Other assets 5,146 5,478
Total assets 207,000 176,064
Current liabilities:
Accounts payable 22,367 21,175
Accrued expenses 13,856 11,414
Deferred revenue 7,435 5,953
Total current liabilities 43,658 38,542
Deferred revenue - non-current 2,625 2,648
Long-term debt 16,960 0
Other non-current liabilities 20,208 16,664
Total liabilities 83,451 57,854
Commitments and contingencies
Shareholders' equity:
Common stock, no par value; 1,800,000 19,764 16,422
shares authorized;
Retained earnings 899,213 and 939,208 104,256 101,289
shares issued and outstanding,
Accumulated
respectively other comprehensive (471) 499
income/(loss)
Total shareholders' equity 123,549 118,210
Total liabilities and shareholders' equity $ 207,000 $ 176,064

63
 Consolidated Statements of Cash 12 Months Ended
Flows (USD $)
In Millions, unless otherwise specified
Sep. 28, 2013 Sep. 29, 2012 Sep. 24, 2011

Cash and cash equivalents, beginning of $ 10,746 $ 9,815 $ 11,261

the year
Operating activities:
Net income 37,037 41,733 25,922
Adjustments to reconcile net income
to cash generated
Depreciation by operating
and amortization 6,757 3,277 1,814
activities:
Share-based compensation expense 2,253 1,740 1,168
Deferred income tax expense 1,141 4,405 2,868
Changes in operating assets and
liabilities:
Accounts receivable, net (2,172) (5,551) 143
Inventories (973) (15) 275
Vendor non-trade receivables 223 (1,414) (1,934)
Other current and non-current assets 1,080 (3,162) (1,391)
Accounts payable 2,340 4,467 2,515
Deferred revenue 1,459 2,824 1,654
Other current and non-current liabilities 4,521 2,552 4,495
Cash generated by operating activities 53,666 50,856 37,529
Investing activities:
Purchases of marketable securities (148,489) (151,232) (102,317)
Proceeds from maturities of marketable 20,317 13,035 20,437
securities
Proceeds from sales of marketable 104,130 99,770 49,416
securities
Payments made in connection with (496) (350) (244)
business acquisitions,
Payments netof property,
for acquisition (8,165) (8,295) (4,260)
plant and equipment
Payments for acquisition of intangible (911) (1,107) (3,192)
assets
Other (160) (48) (259)
Cash used in investing activities (33,774) (48,227) (40,419)
Financing activities:
Proceeds from issuance of common 530 665 831
stock
Excess tax benefits from equity awards 701 1,351 1,133
Taxes paid related to net share (1,082) (1,226) (520)
settlement of equity
Dividends and awards
dividend equivalent rights (10,564) (2,488) 0
paid
Repurchase of common stock (22,860) 0 0
Proceeds from issuance of long-term 16,896 0 0
debt,
Cash net
generated by/(used in) financing (16,379) (1,698) 1,444
activities
Increase/(decrease) in cash and cash 3,513 931 (1,446)
equivalents
Cash and cash equivalents, end of the 14,259 10,746 9,815
year
64
 Learning Objective #5

Generally Accepted Accounting

Principles

1-65
 The Organizations That Govern Accounting

SEC FASB
• Securities and • Financial Accounting
Exchange Standards Board
Commission (SEC) (FASB)
 Securities Act of 1934 • Privately funded
• Oversees the US • Creates the rules and
financial markets standards that govern
• Oversees FASB financial accounting
66
 Generally Accepted Accounting
Principles (GAAP)
Relevant = The info
• Issued by the FASB. allows users to make
• Establishes the rules for a decision.
recording transactions and
preparing financial
statements. Faithfully
• Published online as part of the Representative =
Accounting Standards The info is complete,
Codification.
• Requires that information be neutral, and free
useful. from material error.
1-67
 Auditors
 Certified Public Accountants – CPA’s are
licensed professional accountants that
serve the general public.

 Certified Management Accountants – CMA’s

are certified professionals who specialize in
accounting and financial management,
usually for private industry.
68
Role of Auditors
Auditors are
are trained
trained individuals
individualshired
hiredby
byaacompany
company
as an independent
independent party
party to
to express
express aaprofessional
professional
opinion of the
the accuracy
accuracy of
of that
that company’s
company’sfinancial
financial
statements.
statements.
Role of auditors

Help ensure that Help investors and

management has in fact creditors in their decisions
appropriately applied GAAP by adding credibility to the
in preparing the company’s financial statements.
financial statements
69
1-69
 Statement
Flowofof Accounting
Income Retained Balance Statement of
Statement Earnings Sheet Cash Flows

Accounting Equation: Assets =

Liabilities + Owners Equity

GAAP (Rules) formulated by FASB

7 70
 Part C

Careers in Accounting

1-71
Accounting Profession
 http://fortune.com/2014/08/06/15-most-profi
table-business-sectors
/

 Kramer at work
 http://www.youtube.com/watch?v=bU6m5U
qLx9M&list=RDXEL65gywwHQ&index=2

72
Careers in Accounting
Public Accounting Private Accounting
(Big
(Big 44 and
and Non
Non-Big
-Big 4)
Clients:
Clients: Corporations Your employer
Governments
Governments
Nonprofit organizations
Individuals
Nonprofit organizations
Individuals
Traditional Auditors
Auditors Financial accountants
Financial accountants
Traditional
roles: Tax preparers/planners Managerial
roles: Tax preparers/planners
Business consultants Managerial accountants
accountants
Business consultants Budget analysts
Internal auditors
Tax preparers
Tax preparers
Payroll managers
73
1-73
Careers in Accounting (cont.)
Expanding
Expanding Financial planners Information managers
roles:
roles: Info. tech. developers Management advisors
Financial analysts Tax planners
Forensic accountants Acquisition specialists
Information risk FBI agents
managers Sports agents
Investment bankers
Environmental
accountants
Financial advisors
Tax lawyers

Other career options : Governmental accounting, sole proprietorship,

and education.
74
1-74
 The Audit - Monty Python's The Flying
Circus

 https://
www.youtube.com/watch?v=cFW7yTOmRM
8

 $1.00 = 1.50 British pound currency

 1 shilling = $0.08 today

75
Chapter 1 Practice Set from Connect
Descriptions Account Classifications
Amounts received from sale of products or services
Owners’ claims to resources
Distributions to shareholders
Amounts owed to creditors

Costs of selling products or services

Resources owned

1. Assets
2. Revenues
3. Dividends
4. Liabilities
5. Expenses
6. Stockholders’ Equity
76
 Financial Statements
Descriptions Financial
Statements

Change to Owners’ claim to resources

Profitability of the company
Change in cash as a result of operating, investing, and
financing activities

Resources equal creditors’ and owners’ claims to the

resources

1. Balance Sheet
2. Statement of Cash Flows
3. Income Statement
4. Statement of Stockholders’ Equity

77
Accounts Balances
Cowboy Law Firm

Cash $4,370 Income Statement

Salaries expense 1,590
Accounts payable 2,390
Retained earnings 3,610
Service Revenue
Utilities expense 970
Supplies 12,250 Expenses:
Service revenue 8,560
Common stock 4,620

Total expense

Net income (loss)

78
Accounts Balances
Cowboy Law Firm

Cash $4,370 Income Statement

Salaries expense 1,590
Accounts payable 2,390
Retained earnings 3,610
Service Revenue $8,560
Utilities expense 970
Supplies 12,250 Expenses:
Service revenue 8,560
Salaries expense $1,590
Common stock 4,620
Utilities expense 970

Total expense 2,560

Net income (loss) $6,000

79
Eagle Corp. operates Magnetic Resonance Imaging (MRI) clinics throughout the
Northeast. At the end of the current period, the company reports the following
amounts:

Assets = $41,900
Liabilities = $21,100
Dividends = $2,100
Revenues = $11,100
Expenses = $8,200.

Net Income = ?

80
 At the beginning of the year (January 1), Buffalo Drilling has $9,400 of common stock outstanding and
retained earnings of $7,100. During the year, Buffalo reports net income of $7,400 and pays dividends of
$2,340. In addition, Buffalo issues additional common stock for $6,800.

Buffalo Drilling
Statement of Stockholders’ Equity

Retained Total Stockholders’

Common Stock Earnings Equity
Beginning Balance
Issuance of Common Stock
Add: Net Income
Less: Dividends
Ending Balance

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At the beginning of the year (January 1), Buffalo Drilling has $9,400 of common stock outstanding and
retained earnings of $7,100. During the year, Buffalo reports net income of $7,400 and pays dividends of
$2,340. In addition, Buffalo issues additional common stock for $6,800.

Buffalo Drilling
Statement of Stockholders’ Equity

Retained Total Stockholders’

Common Stock Earnings Equity
Beginning Balance $9,400 $7,100 $16,500
Issuance of Common Stock 6,800 6,800
Add: Net Income 7,400 7,400
Less: Dividends (2,340) (2,340)
Ending Balance $16,200 $12,160 $28,360

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 Accounts and Balances at Year End
Equipment $21,300 Service revenue 30,800
Accounts payable (A/P) 2,060 Cash 10,920
Salaries expense 26,300 Retained earnings ?
Common stock 16,200
Land 14,150
Notes payable (N/P) 15,950

Buffalo Drilling
Balance Sheet
Assets Liabilities

Total Liabilities
Stockholders’ Equity

Total Stockholders’ Equity

Total Assets Total Liabilities and Stockholders’ Equity
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 Accounts and Balances at Year End
Equipment $21,300 Service revenue 30,800
Accounts payable (A/P) 2,060 Cash 10,920
Salaries expense 26,300 Retained earnings ?
Common stock 16,200
Land 14,150
Notes payable (N/P) 15,950

Wolfpack Construction
Balance Sheet
Assets Liabilities
Cash $10,920 Accounts Payable $2,060
Land 14,150 Notes Payable 15,950
Equipment 21,300 Total Liabilities 18,010
Stockholders’ Equity
Common Stock 16,200
Retained Earnings 12,160
Total Stockholders’ Equity 28,360
Total Assets $46,370 Total Liabilities and Stockholders’ Equity $46,370
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During its first five years of operations, Red Raider Consulting reports net income and pays dividends as follows.

Calculate the balance of retained earnings at the end of each year of Red Raider Consulting. Note that retained earnings
will always equal $0 at the beginning of year 1.
Year Net Income Dividends Retained Earnings

1 $1,100 $500
2 1,900 400
3 2,150 1,050
4 3,450 1,100
5 4,150 850

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