Presentation on theme: "The Mechanics of Financial Accounting Presentations for Chapter 4 by Glenn Owen."— Presentation transcript:
The Mechanics of Financial Accounting Presentations for Chapter 4 by Glenn Owen
Key Points Two criteria necessary for economic events to be reflected in the financial statements. The accounting equation and how it relates to the balance sheet, income statement, statement of retained earnings, and statement of cash flows. Journal entries (and T-accounts) and how they express the effect of economic events on the basic accounting equation and the financial statements. Why managers need to understand how economic events affect the financial statements. Why the financial statements are adjusted periodically to reflect certain economic events.
Economic Events Relevant events have economic significance to a company and include any occurrence that affects its financial condition. The dollar values assigned to these events must be determined in an objective manner.
The Fundamental Accounting Equation Assets = Liabilities + Stockholders’ Equity =+
The Journal Entry Box 2. What is the direction of the effect? Increase Decrease 3. What is the dollar value of the transaction? Asset Accounts $Debit (left) Asset Accounts $Credit (right) 1. What accounts are affected? Assets Liabilities and Stockholders’ Equity = Liab/Stock Eq. Accounts $Credit (right) Liab/Stock Eq. Accounts $Debit (left)
Recognizing Gains and Losses Often investments and noncurrent assets are sold for more or less than the amounts at which they are carried on the balance sheet. In such cases a gain or loss must be recognized.
Periodic Adjustments Accruals Deferrals and cost expirations Revaluation adjustments
Accruals The term accrue means to build up gradually. Accruals refer to amounts in asset and liability accounts that build up over time. Adjustments to record accruals are made at the end of an accounting period. Examples include – accrued wages. – accrued interest revenue.
Deferrals and Cost Expirations Deferrals are recorded to achieve an appropriate matching of revenues and expenses and do not reflect cash exchanges. Expense or capitalize? – Current expenses – Supplies inventory – Merchandise inventory – Prepaid expenses – Unearned revenue – Property, plant, and equipment – Intangible assets
Expense or Capitalize Incur cost in current period Decide what period revenue is generated If current then expense, if future, capitalize Cost Expiration SalariesCurrent period (expense) Salary Exp XX Salary Pay XX None required InterestCurrent period (expense) Interest Exp XX Interest Pay XX None required Receive Utility Bill Current period (expense) Utilities Exp XX Accounts Pay XX None required Purchase Supplies Future period (asset) Supplies XX Cash XX Supplies Exp XX Supplies XX Purchase Inventory Future period (asset) Inventory XX Accounts Pay XX COGS XX Inventory XX
Expense or Capitalize Incur cost in current period Decide what period revenue is generated If current then expense, if future, capitalize Cost Expiration Prepaid RentFuture period (asset) Prepaid Rent XX Cash XX Rent Exp XX Prepaid Rent XX Advance Payments Future period (liability) Cash XX Unearned Rev XX Revenue XX Purchase Equipment Future period (asset) Equipment XX Note Pay XX Depreciation XX Acc. Dep. XX Purchase Patent Future period (asset) Patent XX Cash XX Amort. Exp XX Acc. Amort. XX
Revaluation Adjustments These are adjustments that do not fall into the categories of accruals or cost expirations. They serve to restate certain accounts to keep their reported values in line with existing facts. Examples include the revaluation of: – short-term investments – accounts receivable – inventories
Review Problem Kelly Supply Beginning Balance Sheet as of December 31, 2002 Daily journal entries and T-accounts Adjusting journal entries and T-accounts Income Statement for the year ended December 31, 2003 Statement of Retained Earnings for the year ended December 31, 2003 Ending Balance Sheet as of December 31, 2003 Statement of Cash Flows for the year ended December 31, 2003
Kelly Supply Balance Sheet December 31, 2002 Assets: Cash$12,000 Accounts receivable15,000 Merchandise inventory12,000 Prepaid rent3,000 Machinery$25,000 Less: Accumulated depreciation. 5,000 20,000 Patent. 5,000 Total assets$67,000
Kelly Supply Balance Sheet December 31, 2002 Liabilities and Stockholders’ Equity: Accounts payable$ 8,000 Wages payable3,000 Interest payable1,000 Dividends payable2,000 Unearned revenue3,000 Short-term notes payable5,000 Long-term notes payable10,000 Common stock30,000 Retained earnings. 5,000 Total liabilities and stockholders’ equity$67,000
(1)Cash (+A) 10,000 Accounts Receivable (+A)15,000 Sales (R, +SE)25,000 Sold merchandise for cash and on account. Cash 12, ,00 0 Accounts Receivable 15,00 0 Sales 25,00 0 Daily Journal Entries and T-accounts
(2)Cash (+A) 8,000 Accounts Receivable (-A)8,000 Received cash on account. Cash 12, ,00 0 8,000 Accounts Receivable 15,00 0 8,000 Daily Journal Entries and T-accounts
(3)Merchandise Inventory (+A) 10,000 Cash (-A)3,000 Accounts Payable (+L)7,000 Purchased merchandise inventory for cash and on account. Merchandise Inv. 12, ,00 0 Cash 12, ,00 0 8,000 3,000 Accounts Payable 8,000 7,000 Daily Journal Entries and T-accounts
(12)Cost of Goods Sold (E, -SE) 9,000 Merchandise Inventory (-A)9,000 Recognized $13,000 of inventory on hand. Cost of Goods Sold 9,000 Merchandise Inventory 12, , ,00 0 9,000 Adjusting Journal Entries and T-accounts
(19)Rent Expense (E, -SE) 1,000 Prepaid Rent (-A)1,000 Recognized 1/3 of rent period expired. Rent Expense 1,000 Prepaid Rent 3,000 2,000 1,000 Adjusting Journal Entries and T-accounts
Kelly Supply Income Statement For the Year Ended December 31, 2003 Revenues: Sales$27,000 Interest revenue50 Total revenues$27,050 Expenses: Cost of goods sold$ 9,000 Wages expense8,000 Rent expense1,000 Interest expense3,000 Depreciation expense3,000 Amortization expense500 Total expenses. 24,500 Net income$ 2,550
Kelly Supply Statement of Retained Earnings For the Year Ended December 31, 2003 Beginning balance$5,000 Plus: Net income2,550 Less: Dividends(1,000) Ending balance$6,550
Kelly Supply Balance Sheet December 31, 2003 Assets: Cash$ 9,500 Accounts receivable22,000 Interest receivable50 Merchandise inventory13,000 Prepaid rent2,000 Machinery$26,000 Less: Accumulated depreciation8,000 18,000 Patent4,500 Total assets$69,050
Kelly Supply Balance Sheet December 31, 2003 Liabilities and stockholders’ equity: Accounts payable$ 5,000 Wages payable1,000 Interest payable2,000 Dividends payable1,000 Unearned revenue1,000 Short-term notes payable2,500 Long-term notes payable20,000 Common stock30,000 Retained earnings6,550 Total liabilities and stockholders’ equity$69,050
Kelly Supply Statement of Cash Flows For the Year Ended December 31, 2003 Operating activities: Collections from sales$10,000 Collections of accounts receivable8,000 Payment for inventory purchases(3,000) Payments on accounts payable(10,000) Payments for wages(10,000) Payments for interest. (2,000) Net cash increase (decrease)$(7,000) Investing activities: Purchase of machinery$(1,000) Net cash increase (decrease)(1,000) Financing activities: Issuance of long-term notes payable$10,000 Payment of dividend(2,000) Payment of short-term notes payable. (2,500) Net cash increase (decrease). 5,500 Net cash increase (decrease) during 2003$(2,500) Beginning cash balance. 12,000 Ending cash balance$ 9,500