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1 of 50Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/eChapter 2, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University.

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Presentation on theme: "1 of 50Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/eChapter 2, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University."— Presentation transcript:

1 1 of 50Visit UMT online at South-Western 2004 Survey of Accounting, 2/eChapter 2, 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 50Visit UMT online at Chapter 2, 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 50Visit UMT online at South-Western 2004 Survey of Accounting, 2/eChapter 2, ACCT125 Chapter 2 The Cash Basis of Accounting

4 4 of 50Visit UMT online at Chapter 2, ACCT125 ContinuedContinued Learning Objectives 1.Describe the basic elements of a financial accounting information system. 2.Describe the cash and accrual bases of accounting. 3.Use the cash basis of accounting to analyze, record, and summarize transactions for a corporations first period of operations. 4.Use the cash basis of accounting to prepare financial statements for the first period of operations. After studying this chapter, you should be able to:

5 5 of 50Visit UMT online at Chapter 2, ACCT125 Learning Objectives 5.Use the cash basis of accounting for recording transactions and preparing financial statements for a second period of operations. 6.Describe the advantages and disadvantages of the cash basis of accounting. 7.Describe and illustrate how vertical analysis can be used to analyze and evaluate a companys performance.

6 6 of 50Visit UMT online at Chapter 2, ACCT125 1 Describe the basic elements of a financial accounting information system. Learning Objective

7 7 of 50Visit UMT online at Chapter 2, ACCT125 Assets = Liabilities Stock- holders Equity + The rights of creditors The rights of the stockholders The Accounting Equation Balance Sheet

8 8 of 50Visit UMT online at Chapter 2, ACCT125 Describe the cash and accrual bases of accounting. 2 Learning Objective

9 9 of 50Visit UMT online at Chapter 2, ACCT125 Under the cash basis of accounting, a business records only transactions involving increases or decreases in cash.

10 10 of 50Visit UMT online at Chapter 2, ACCT125 Under the accrual basis of accounting, revenue is recorded as it is earned and an expense is recorded when incurred.

11 11 of 50Visit UMT online at Chapter 2, ACCT125 Use the cash basis of accounting to analyze, record, and summarize transactions for a corporations first period of operations. 3 Learning Objective

12 12 of 50Visit UMT online at Chapter 2, ACCT125 On September 1, 2003, Dr. Lee Landry organized a professional corporation to practice general medicine.

13 13 of 50Visit UMT online at Chapter 2, ACCT125 a. Dr. Landry deposits $6,000 in a bank account in the name of Family Health Care, P.C. in return for shares of stock in the corporation. Capital Stock 6,000Investment by Dr. Landry Cash 6,000 a. Assets Stockholders Equity =

14 14 of 50Visit UMT online at Chapter 2, ACCT125 b. Family Health Care borrowed $10,000 from First National Bank. Capital Stock 6,000 Cash 6,000 a. Assets Stockholders Equity = Liabilities + b. 10,00010,000 Bal.16,00010,0006,000 Notes Payable + =

15 15 of 50Visit UMT online at Chapter 2, ACCT125 c. Family Health Care buys land for $12,000 cash. Capital Stock Cash Assets Stockholders Equity = Liabilities + Bal.16,000 10,0006,000 Notes Payable + = c.–12,00012,000 Bal. 4,00012,00010,0006,000 + Land

16 16 of 50Visit UMT online at Chapter 2, ACCT125 d. During the first month of operations, Family Health Care earns patient fees of $5,500, receiving the amount in cash. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = d.5,500Revenue 5,500 Bal.4,00012,00010,0006,000 Retained Earnings Bal.9,50012,00010,0006,0005,500

17 e. The expenses for the month were as follows: wages, $1,125; rent, $950; utilities, $450; interest, $100; miscellaneous, $275. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = e.–2,900Wages expense –1,125 Rent expense –950 Utilities expense –450 Interest expense –100 Misc. expense –275 Retained Earnings Bal.9,50012,00010,0006,0005,500 Bal.6,60012,00010,0006,0002,600

18 18 of 50Visit UMT online at Chapter 2, ACCT125 f. Family Health Care pays $1,500 to stockholder (Dr. Landry) as dividends. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = f.–1,500Dividends –1,500 Retained Earnings Bal.6,60012,00010,0006,0002,600 Bal.5,10012,00010,0006,0001,100

19 19 of 50Visit UMT online at Chapter 2, ACCT125 1.The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements. 2.The two sides of the accounting equation are always equal. 3.The stockholders equity is increased by amounts invested by stockholders and by revenues. It is decreased by expenses and dividends. Lets visualize this. The following apply to all types of businesses:

20 20 of 50Visit UMT online at Chapter 2, ACCT125 Capital StockRetained Earnings Stockholders Investments Revenues Expenses Expenses Dividends Dividends STOCKHOLDERS EQUITY

21 21 of 50Visit UMT online at Chapter 2, ACCT125 Use the cash basis of accounting to prepare financial statements for the first period of operations. 4 Learning Objective

22 Fees earned$5,500 Operating expenses: Wages expense$1,125 Rent expense950 Utilities expense450 Interest expense100 Miscellaneous expense 275 Total operating expenses 2,900 Net income$2,600 Family Health Care, P.C. Income Statement For the Month Ended September 30, 2003 Revenue and expense amounts taken from the Retained Earnings column in Exhibit 2 of the textbook.

23 Net income for September$2,600 Less dividends 1,500 Retained Earnings, September 30, 2003$1,100 Family Health Care, P.C. Retained Earnings Statement For the Month Ended September 30, 2003 The net income is taken from the income statement (previous slide) and the amount of dividends from the Retained Earnings column in Exhibit 2 of the textbook.

24 Assets Cash$ 5,100 Land 12,000 Total assets$17,100 Liabilities Notes payable$10,000 Stockholders Equity Capital stock$6,000 Retained earnings 1,100 7,100 Total liabilities and stockholders equity$17,100 Family Health Care, P.C. Balance Sheet September 30, 2003 All account balances were taken from the bottom row of Exhibit 2, except Retained Earnings. Retained Earnings balance is taken from the retained earnings statement.

25 Assets Cash$ 5,100 Land 12,000 Total assets$17,100 Liabilities Notes payable$10,000 Stockholders Equity Capital stock$6,000 Retained earnings 1,100 7,100 Total liabilities and stockholders equity$17,100 Family Health Care, P.C. Balance Sheet September 30, 2003 Total assets equal total liabilities plus stockholders equity.

26 Cash flows from operating activities: Cash received from customers$ 5,500 Deduct cash payments for expenses 2,900 Net cash flow from operating activities$ 2,600 Cash flows from investing activities: Cash payments for acquisition of land(12,000) Cash flows from financing activities: Cash from sale of cap. stock$ 6,000 Cash from notes payable 10,000$16,000 Deduct cash dividends 1,500 Net cash flow from financing activities 14,500 Net increase in cash$ 5,100 September 1, 2003 cash balance 0 September 30, 2003 cash balance$ 5,100 Family Health Care, P.C. Statement of Cash Flows For the Month Ended September 30, 2003

27 27 of 50Visit UMT online at Chapter 2, ACCT125 Use the cash basis of accounting for recording transactions and preparing financial statements for a second period of operations. 5 Learning Objective

28 28 of 50Visit UMT online at Chapter 2, ACCT125 a. Received fees of $6,400 in cash. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = a.6,400Revenue 6,400 Retained Earnings Bal.5,10012,00010,0006,0001,100 Bal.11,50012,00010,0006,0007,500

29 b. Paid expenses in cash as follows follows: wages, $1,370; rent, $950; utilities, $540; interest, $100; miscellaneous, $220. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = e.–3,180Wages expense –1,370 Rent expense –950 Utilities expense –540 Interest expense –100 Misc. expense –220 Retained Earnings Bal.11,50012,00010,0006,0007,500 Bal.8,32012,00010,0006,0004,320

30 30 of 50Visit UMT online at Chapter 2, ACCT125 c. Family Health Care pays $1,000 to stockholders (Dr. Landry) as dividends. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = c.–1,000Dividends –1,000 Retained Earnings Bal.8,32012,00010,0006,0004,320 Bal.7,32012,00010,0006,0003,320

31 Fees earned$6,400 Operating expenses: Wages expense$1,370 Rent expense950 Utilities expense540 Interest expense100 Miscellaneous expense 220 Total operating expenses 3,180 Net income$3,220 Family Health Care, P.C. Income Statement For the Month Ended October 31, 2003 To review the source of this amount, click the green button below. Revenue To review the source of expenses, click the orange button below. Expenses

32 32 of 50Visit UMT online at Chapter 2, ACCT125 Describe the advantages and disadvantages of the cash basis of accounting. 6 Learning Objective

33 33 of 50Visit UMT online at Chapter 2, ACCT125 The primary advantage of the cash basis of accounting is its simplicity.

34 34 of 50Visit UMT online at Chapter 2, ACCT125 The primary disadvantage of the cash basis is that revenues and expenses may not be properly matched on the income statement.

35 35 of 50Visit UMT online at Chapter 2, ACCT125 Describe and illustrate how vertical analysis can be used to analyze and evaluate a companys performance. 7 Learning Objective

36 36 of 50Visit UMT online at Chapter 2, ACCT125 Statements can be compared by computing a percentage of each item within a statement to a total within the statement.

37 37 of 50Visit UMT online at Chapter 2, ACCT125 This type of analysis is called vertical analysis.

38 38 of 50Visit UMT online at Chapter 2, ACCT125 Assets: Cash and cash equivalents$ 307,785 Short-term investments25,450 Accounts receivable239,885 Inventories278,981 Property, plant, and equipment684,379 Other assets 229,168 TOTAL ASSETS$1,765,648 $307,785 $1,765, % Vertical AnalysisBalance Sheet

39 39 of 50Visit UMT online at Chapter 2, ACCT125 Assets: Cash and cash equivalents$ 307,785 Short-term investments25,450 Accounts receivable239,885 Inventories278,981 Property, plant, and equipment684,379 Other assets 229,168 TOTAL ASSETS$1,765,648 $25,450 $1,765, % 1.4 Vertical AnalysisBalance Sheet

40 40 of 50Visit UMT online at Chapter 2, ACCT125 Assets: Cash and cash equivalents$ 307,785 Short-term investments25,450 Accounts receivable239,885 Inventories278,981 Property, plant, and equipment684,379 Other assets 229,168 TOTAL ASSETS$1,765, % % Vertical AnalysisBalance Sheet

41 41 of 50Visit UMT online at Chapter 2, ACCT125 Liabilities: Accounts payable$ 91,225 Dividends payable42,741 Income and other taxes payable68,467 Long-term liabilities157,127 Other liabilities 129,891 Total liabilities$ 489,451 Stockholders equity: Total stockholders equity 1,276,197 TOTAL LIAB. & S.E.$1,765,648 $91,225 $1,765, % Vertical AnalysisBalance Sheet

42 42 of 50Visit UMT online at Chapter 2, ACCT % % % Liabilities: Accounts payable$ 91,225 Dividends payable42,741 Income and other taxes payable68,467 Long-term liabilities157,127 Other liabilities 129,891 Total liabilities$ 489,451 Stockholders equity: Total stockholders equity 1,276,197 TOTAL LIAB. & S.E.$1,765,648 Vertical AnalysisBalance Sheet

43 43 of 50Visit UMT online at Chapter 2, ACCT125 Assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Property, plant, and equipment Other assets TOTAL ASSETS 17.4% % % % 2000 Vertical AnalysisComparative Balance Sheets

44 44 of 50Visit UMT online at Chapter 2, ACCT % % % Liabilities: Accounts payable Dividends payable Income and other taxes payable Long-term liabilities Other liabilities Total liabilities Stockholders equity: Total stockholders equity TOTAL LIAB. & S.E % % % 2000 Vertical AnalysisComparative Balance Sheets

45 45 of 50Visit UMT online at Chapter 2, ACCT125 Net sales$2,429,646 Cost of sales 997,054 Gross profit$1,432,592 Selling and administrative exp. 919,236 Operating income$ 513,356 Other income (expense) 14,010 Income before income taxes$ 527,366 Income taxes 164,380 Net income$ 362, % $997,054 $2,429, Vertical AnalysisIncome Statement

46 46 of 50Visit UMT online at Chapter 2, ACCT125 Net sales$2,429,646 Cost of sales 997,054 Gross profit$1,432,592 Selling and administrative exp. 919,236 Operating income$ 513,356 Other income (expense) 14,010 Income before income taxes$ 527,366 Income taxes 164,380 Net income$ 362, % $1,432,592 $2,429, % Vertical AnalysisIncome Statement

47 47 of 50Visit UMT online at Chapter 2, ACCT125 Net sales$2,429,646 Cost of sales 997,054 Gross profit$1,432,592 Selling and administrative exp. 919,236 Operating income$ 513,356 Other income (expense) 14,010 Income before income taxes$ 527,366 Income taxes 164,380 Net income$ 362, % % % % % Vertical AnalysisIncome Statement

48 48 of 50Visit UMT online at Chapter 2, ACCT125 Net sales Cost of sales Gross profit Selling and administrative exp. Operating income Other income (expense) Income before income taxes Income taxes Net income 100.0% % % % % % % % % % 2000 Vertical AnalysisIncome Statement

49 a. Received fees of $6,400 in cash. Capital Stock Cash + Land Assets Stockholders Equity = Liabilities + Notes Payable + = a.6,400Revenue 6,400 Retained Earnings Bal.5,10012,00010,0006,0001,100 Bal.11,50012,00010,0006,0007,500 Return to income statement

50 b. Paid expenses in cash as follows follows: wages, $1,370; rent, $950; utilities, $540; interest, $100; miscellaneous, $220. Cash + Land Assets e.–2,900Wages expense –1,370 Rent expense –950 Utilities expense –540 Interest expense –100 Misc. expense –220 Capital Stock Stockholders Equity = Liabilities + Notes Payable + = Retained Earnings Bal.11,50012,00010,0006,0007,500 Bal.8,32012,00010,0006,0004,320 Return to income statement


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