Presentation is loading. Please wait.

Presentation is loading. Please wait.

1 of 81Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/eChapter 3, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University.

Similar presentations


Presentation on theme: "1 of 81Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/eChapter 3, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University."— Presentation transcript:

1 1 of 81Visit UMT online at South-Western 2004 Survey of Accounting, 2/eChapter 3, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA Voice: (703) Fax: (703) Website:

2 2 of 81Visit UMT online at Chapter 3, ACCT125 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3 3 of 81Visit UMT online at South-Western 2004 Survey of Accounting, 2/eChapter 3, ACCT125 Chapter 3 The Accrual Basis of Accounting

4 4 of 81Visit UMT online at Chapter 3, ACCT125 After studying this chapter, you should be able to: ContinuedContinued Learning Objectives 1.Describe the accrual basis of accounting. 2.Use the accrual basis of accounting to analyze, record, and summarize transactions. 3.Describe and illustrate the end-of-the-period adjustment process. 4.Prepare accrual-basis financial statements, including a classified balance sheet.

5 5 of 81Visit UMT online at Chapter 3, ACCT125 Learning Objectives 5.Describe how the accrual basis of accounting enhances the interpretation of financial statements. 6.Describe the accounting cycle for the accrual basis of accounting. 7.Describe and illustrate how common-sized financial statements can be used to analyze and evaluate a companys performance.

6 6 of 81Visit UMT online at Chapter 3, ACCT125 1 Describe the accrual basis of accounting. Learning Objective

7 7 of 81Visit UMT online at Chapter 3, ACCT125 Under the cash basis, the matching concept is not emphasized. Under the cash basis, the receipt or payment of cash governs the recording process. The cash basis does not work well for large businesses. Under the accrual accounting basis, transactions are recorded even though cash is not received or paid unit a later point. Under accrual accounting, revenue is normally recognized when it is earned.

8 8 of 81Visit UMT online at Chapter 3, ACCT125 Use the accrual basis of accounting to analyze, record, and summarize transactions. 2 Learning Objective

9 9 of 81Visit UMT online at Chapter 3, ACCT125 a. On November 1, received $1,800 from H.S. Company as rent for the use of Family Health Cares land as a temporary parking lot from November 2003 through March 2004.

10 10 of 81Visit UMT online at Chapter 3, ACCT125 Cash + Land Assets a.1,800 Bal.7,32012,000 Bal.9,12012,000 Left Side of the Accounting Equation

11 11 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable a.1,800 Bal. 10,0006,0003,320 Retained Earnings Bal.10,0001,8006,0003,320 + Unearned Revenue + Right Side of the Accounting Equation

12 12 of 81Visit UMT online at Chapter 3, ACCT125 b. On November 1, paid $2,400 for an insurance premium on a two-year, general business policy.

13 13 of 81Visit UMT online at Chapter 3, ACCT125 Prepaid Cash + Insurance + Land Assets b.–2,4002,400 Bal.9,12012,000 Bal.6,7202,40012,000 No effect on right side Prepaid Insurance Left Side of the Accounting Equation

14 14 of 81Visit UMT online at Chapter 3, ACCT125 c. On November 1, paid $6,000 for an insurance premium on a six-month medical malpractice insurance policy.

15 15 of 81Visit UMT online at Chapter 3, ACCT125 Prepaid Cash + Insurance + Land Assets c.–6,0006,000 Bal.6,7202,40012,000 Bal.7208,40012,000 No effect on right side Left Side of the Accounting Equation

16 16 of 81Visit UMT online at Chapter 3, ACCT125 d. Dr. Landry invested an additional $5,000 in the business in exchange for capital stock.

17 17 of 81Visit UMT online at Chapter 3, ACCT125 Prepaid Cash + Insurance + Land Assets d.5,000 Bal.7208,40012,000 Bal.5,7208,40012,000 Left Side of the Accounting Equation

18 18 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable d.5,000 Bal. 10,0001,8006,0003,320 Retained Earnings Bal.10,0001,80011,0003,320 + Unearn. Rev. ++ Right Side of the Accounting Equation

19 19 of 81Visit UMT online at Chapter 3, ACCT125 e. Purchased supplies for $240 on account.

20 20 of 81Visit UMT online at Chapter 3, ACCT125 Prepaid Cash + Insurance + + Land Assets e.240 Bal.5,7208,40012,000 Bal.5,7208, ,000 Supplies Left Side of the Accounting Equation

21 21 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable e.240 Bal. 10,0001,80011,0003,320 Retained Earnings Bal.10, ,80011,0003,320 + Unearn. Rev. +++ Accts. Pay. Right Side of the Accounting Equation

22 22 of 81Visit UMT online at Chapter 3, ACCT125 f. Purchased $8,500 of office equipment. Paid $1,700 cash as a down payment with the remainder due in five monthly installments of $1,360 beginning December 1.

23 23 of 81Visit UMT online at Chapter 3, ACCT125 Prepaid Cash + Insurance + + Land Assets f.-1,7008,500 Bal.5,7208, ,000 Bal.4,0208, ,50012,000 Supplies + Office Equip. Left Side of the Accounting Equation

24 24 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable f.6,800 Bal. 10, ,80011,0003,320 Retained Earnings Bal.16, ,80011,0003,320 + Unearn. Rev Accts. Pay. Right Side of the Accounting Equation

25 25 of 81Visit UMT online at Chapter 3, ACCT125 g. Provided services of $6,100 to patients on account.

26 26 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets g.6,100 Bal.4,0208, ,50012,000 Bal.4,0206,1008, ,50012,000 Ac. Rec. Left Side of the Accounting Equation

27 27 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable g.6,100 Bal. 16, ,80011,0003,320 Retained Earnings Bal.16, ,80011,0009,420 + Unearn. Rev. +++ Accts. Pay. Fees Earned Right Side of the Accounting Equation

28 28 of 81Visit UMT online at Chapter 3, ACCT125 h. Received $5,500 for services provided to patients who paid cash.

29 29 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets h.5,500 Bal.4,0206,1008, ,50012,000 Bal.9,5206,1008, ,50012,000 Ac. Rec. Left Side of the Accounting Equation

30 30 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable h.5,500 Bal. 16, ,80011,0009,420 Retained Earnings Bal.16, ,80011,00014,920 + Unearn. Rev Accts. Pay. Fees Earned Right Side of the Accounting Equation

31 31 of 81Visit UMT online at Chapter 3, ACCT125 i. Received $4,200 from insurance companies, which paid on patients accounts for services that have been rendered.

32 32 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets i.4,200–4,200 Bal.9,5206,1008, ,50012,000 Bal.13,7201,9008, ,50012,000 Ac. Rec. No effect on right side Left Side of the Accounting Equation

33 33 of 81Visit UMT online at Chapter 3, ACCT125 j. Paid $100 on account for supplies that had been purchased.

34 34 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets j.–100 Bal.13,7201,9008, ,50012,000 Bal.13,6201,9008, ,50012,000 Ac. Rec. Left Side of the Accounting Equation

35 35 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable j.–100 Bal. 16, ,80011,00014,920 Retained Earnings Bal.16, ,80011,00014,920 + Unearn. Rev Accts. Pay. Right Side of the Accounting Equation

36 36 of 81Visit UMT online at Chapter 3, ACCT125 k. Expenses paid during November were as follows: wages, $2,790; rent, $800; utilities, $580; interest, $100; miscellaneous, $420.

37 37 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets k.–4,690 Bal.13,6201,9008, ,50012,000 Bal.8,9301,9008, ,50012,000 Ac. Rec. Left Side of the Accounting Equation

38 38 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable k.–2,790 –800 –580 –100 –420 Bal. 16, ,80011,00014,920 Retained Earnings Bal.16, ,80011,00010,230 + Unearn. Rev Accts. Pay. Wages Exp. Rent Exp. Utilities Exp. Interest Exp. Miscellaneous Exp. Right Side of the Accounting Equation

39 39 of 81Visit UMT online at Chapter 3, ACCT125 l. Paid dividends of $1,200 to stockholder (Dr. Landry).

40 40 of 81Visit UMT online at Chapter 3, ACCT125 Prep. Office Cash + + Insur. + Supp. + Equip. + Land Assets l.–1,200 Bal.8,9301,9008, ,50012,000 Bal.7,7301,9008, ,50012,000 Ac. Rec. Left Side of the Accounting Equation

41 41 of 81Visit UMT online at Chapter 3, ACCT125 Capital Stock Stockholders Equity Liabilities + Notes Payable l.–1,200 Bal. 16, ,80011,00010,230 Retained Earnings Bal.16, ,80011,0009,030 + Unearn. Rev Accts. Pay. DividendsDividends Right Side of the Accounting Equation

42 42 of 81Visit UMT online at Chapter 3, ACCT125 Describe and illustrate the end- of-the-period adjustment process. 3 Learning Objective

43 43 of 81Visit UMT online at Chapter 3, ACCT125 The accrual basis of accounting requires the accounting records to be updated prior to preparing financial statements.

44 44 of 81Visit UMT online at Chapter 3, ACCT125 This updating process is called the adjustment process.

45 45 of 81Visit UMT online at Chapter 3, ACCT125 Deferrals are created by recording a transaction in a way that delays or defers the recognition of an expense or a revenue Accruals are created when a revenue or expense has not been recorded at the end of the accounting period. Deferrals and Accruals

46 46 of 81Visit UMT online at Chapter 3, ACCT125

47 47 of 81Visit UMT online at Chapter 3, ACCT125 a1.Earlier Family Health Care prepaid two policiesa general business policy for $2,400 and a malpractice policy for $6,000. The general business policy expires at a rate of $100 ($2,400 ÷ 24) per month and the malpractice policy expires at a rate of $1,000 ($6,000 ÷ 6) per month. Deferrals and Accruals

48 48 of 81Visit UMT online at Chapter 3, ACCT125 Assets Prepaid Insurance Stockholder Equity Retained Earnings Balance 8,400 9,030 a1–1,100 Balance 7,3007,930 Insurance Exp. Deferrals and Accruals

49 49 of 81Visit UMT online at Chapter 3, ACCT125 a2.For November, $150 of the supplies were used, leaving $90 of supplies for use during the coming months. Assets Supplies Stockholder Equity Retained Earnings Balance 2407,930 a2–150 Balance 907,780 Supplies Exp. Deferrals and Accruals

50 50 of 81Visit UMT online at Chapter 3, ACCT125 Fixed assets such as drilling equipment lose their ability to provide service over time. This reduction in ability is called depreciation. Deferrals and Accruals

51 51 of 81Visit UMT online at Chapter 3, ACCT125 The fixed asset account is not reduced directly by depreciation. Instead, an offsetting account, called Accumulated Depreciation, is used. Deferrals and Accruals

52 52 of 81Visit UMT online at Chapter 3, ACCT125 a3.Assume that the amount of depreciation for November is $160. Assets Office Equipment Stockholder Equity Retained Earnings Balance 8,5007,930 a3160 –160 Balance 8, ,620 Accumulated – Depreciation Depreciation Exp. Deferrals and Accruals

53 53 of 81Visit UMT online at Chapter 3, ACCT125 a4.Of the $1,800 received for five-months rent, $360 ($1,800 ÷ 5) has been earned. Liabilities Unearned Rent Stockholder Equity Retained Earnings Balance 1,8007,620 a4– Balance 1,4407,980 Rental Rev. Deferrals and Accruals

54 54 of 81Visit UMT online at Chapter 3, ACCT125 a5.As of November 30, employees are owed $220 for accrued wages. Liabilities Wages Payable Stockholder Equity Retained Earnings Balance 7,980 a5220 –220 Balance 2207,760 Wages Exp. Deferrals and Accruals

55 55 of 81Visit UMT online at Chapter 3, ACCT125 a6.Family Health Care provided $750 in services to patients that have not yet been billed. Assets Accounts Receivable Stockholder Equity Retained Earnings Balance 1,9007,760 a6750 Balance 2,6508,510 Fees Earned Deferrals and Accruals

56 56 of 81Visit UMT online at Chapter 3, ACCT125 Prepare accrual-basis financial statements, including a classified balance sheet. 4 Learning Objective

57 Fees earned$12,350 Operating expenses: Wages expense$3,010 Insurance expense1,100 Rent expense800 Utilities expense580 Depreciation expense160 Supplies expense150 Interest expense100 Miscellaneous expense 420 Total operating expenses 6,320 Operating income:$ 6,030 Other income: Rent revenue 360 Net income$ 6,390 Family Health Care, P.C. Income Statement For the Month Ended November 30, 2003

58 58 of 81Visit UMT online at Chapter 3, ACCT125 Retained earnings, November 1, 2003$3,320 Net income for November$6,390 Less dividends 1,200 5,190 Retained earning, November 30, 2003$8,510 Family Health Care, P.C. Retained Earnings Statement For the Month Ended November 30, 2003 From the income statement (Slide 3-55) From the income statement (Slide 3-55)

59 Assets Current assets: Cash$ 7,730 Accounts receivable2,650 Prepaid insurance7,300 Supplies 90 Total current assets$17,770 Fixed assets: Office equipment$8,500 Less accumulated depreciation 160$ 8,340 Land 12,000 Total fixed assets 20,340 Total assets$38,110 Family Health Care, P.C. Balance Sheet November 30, 2003 ContinuedContinued

60 60 of 81Visit UMT online at Chapter 3, ACCT125 Liabilities Current liabilities: Accounts payable$ 140 Wages payable220 Notes payable6,800 Unearned revenue 1,440 Total current liabilities$ 8,600 Long-term liabilities: Notes payable 10,000 Total liabilities$18,600 Stockholders equity Capital stock$11,000 Retained earnings 8,510 19,510 Total liabilities and stockholders equity$38,110 From the retained earnings statement

61 61 of 81Visit UMT online at Chapter 3, ACCT125 Cash flows from operating activities: Cash received from patients$ 9,700 Cash received from rental of land 1,800$11,500 Deduct cash payments for expenses: Insurance premiums$(8,400) Supplies(100) Wages(2,790) Rent(800) Utilities(580) Interest(100) Miscellaneous expense (420) (13,190) Net cash flow used in operating activities$ (1,690) Family Health Care, P.C. Statement of Cash Flows For the Month Ended November 30, 2003 ContinuedContinued

62 62 of 81Visit UMT online at Chapter 3, ACCT125 Net cash flow used in operating activities$ (1,690) Cash flows from investing activities: Purchase of office equipment(1,700) Cash flows from financing activities: Additional issuance of capital stock$ 5,000 Deduct cash dividends (1,200) Net cash flow from financing activities 3,800 Net increase in cash$ 410 November 1, 2003 cash balance 7,320 November 30, 2003 cash balance$ 7,730

63 63 of 81Visit UMT online at Chapter 3, ACCT125 Assets are resources such as physical items or rights that are owned by the business. Assets

64 64 of 81Visit UMT online at Chapter 3, ACCT125 Physical assets of a long-term nature are referred to as fixed assets. Buildings Equipment Land Fixtures Assets

65 65 of 81Visit UMT online at Chapter 3, ACCT125 Rights that are long-term in nature are called intangible assets. Patents Copyrights Trademarks Leasehold improvements Assets

66 66 of 81Visit UMT online at Chapter 3, ACCT125 Cash and other assets that are expected to be converted to cash or sold or used up within one year or less, through the normal operations of the business, are called current assets. Accounts receivable Notes receivable Supplies Other prepaid expenses Assets

67 67 of 81Visit UMT online at Chapter 3, ACCT125 Liabilities are amounts owed to outsiders… normally referred to as creditors. Liabilities

68 68 of 81Visit UMT online at Chapter 3, ACCT125 Liabilities that will be due within a short time (usually one year or less) and that are paid out of current assets are called current liabilities. Accounts payable Wages payable Interest payable Taxes payable A sizable number of liabilities end in the word payable. Liabilities

69 69 of 81Visit UMT online at Chapter 3, ACCT125 Liabilities that will not be due within a short time (usually more than a year) or are not paid out of current assets are called long-term liabilities. Mortgage payable Bonds payable Liabilities

70 70 of 81Visit UMT online at Chapter 3, ACCT125 Stockholders equity is the stockholders right to the assets of the business. Capital stock Retained earnings Stockholders Equity

71 71 of 81Visit UMT online at Chapter 3, ACCT125 Describe how the accrual basis of accounting enhances the interpretation of financial statements. 5 Learning Goal

72 Family Health Care, P.C. Cash Basis Income Statement For the Month Ended November 30, 2003 Fee earned$ 9,700 Operating expenses: Wages expense$2,790 Insurance expense8,400 Rent expense800 Utilities expense580 Supplies expense100 Interest expense100 Miscellaneous expense 420 Total operating expenses 13,190 Operating loss$ 3,490 Rental revenue 1,800 Net loss$ 1,690 Note that this is a cash basis income statement

73 73 of 81Visit UMT online at Chapter 3, ACCT125 Using the accrual basis, net income for November was $6,390. However, if we followed the cash basis, the firm shows a loss of $1,690. Cash Accrual

74 74 of 81Visit UMT online at Chapter 3, ACCT125 Describe the accounting cycle for the accrual basis of accounting. 6 Learning Objective

75 75 of 81Visit UMT online at Chapter 3, ACCT125 1.Identifying, analyzing and recording the effects of transactions on the accounting equation. 2.Identifying, analyzing, and recording adjustment data. 3.Preparing financial statements. 4.Preparing the accounting records for the next accounting period. The Accounting Cycle

76 76 of 81Visit UMT online at Chapter 3, ACCT125 After the financial statements are prepared, the balances in the revenue, expense, and dividend accounts are closed by the closing process.

77 77 of 81Visit UMT online at Chapter 3, ACCT125 In this way, the revenue, expense, and dividend accounts begin each period with a zero balance, and the transactions of each period are kept separate from one another.

78 78 of 81Visit UMT online at Chapter 3, ACCT125 Describe and illustrate how common-size financial statements can be used to analyze and evaluate a companys performance. 7 Learning Objective

79 79 of 81Visit UMT online at Chapter 3, ACCT125 Income Statements for the Year Ending December 31, 2001 Revenues 100.0%100.0% Operating expenses 86.2% 81.8% Operating income13.8%18.2% Other expenses 0.9% 2.5% Income before taxes12.9%15.7% Income taxes 4.8% 4.7% Net income8.1%11.0% Wendys McDonalds Note Wendys higher proportion of operating expenses to revenue. Which is probably the reason for Wendys lesser percentage of net income. Common-Size Financial Statements

80 80 of 81Visit UMT online at Chapter 3, ACCT125 Balance Sheets as of December 31, 2001 Current assets: Cash5.4%1.9% Accounts receivable4.0%3.9% Inventories and other assets 3.4% 2.3% Total current assets12.8%8.1% Property, plant, and equipment79.0%76.7% Other long-term assets 8.2% 15.2% Total assets100.0%100.0% Wendys McDonalds ContinuedContinued Common-Size Financial Statements

81 81 of 81Visit UMT online at Chapter 3, ACCT125 Balance Sheets as of December 31, 2001 Current liabilities: Accounts payable5.4%3.1% Other liabilities 8.9% 6.9% Total current liabilities14.3%10.0% Long-term liabilities36.1%47.9% Stockholders equity 49.6% 42.1% Total assets100.0%100.0% Wendys McDonalds Common-Size Financial Statements


Download ppt "1 of 81Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/eChapter 3, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University."

Similar presentations


Ads by Google