1. Discussion Section #1 Financial Accounting
Agenda:
Fill out Information Sheet
Chapter 1 Summary
Homework Problems
Quiz to Review Concepts

2. Accounting Terminology
Define key accounting terms:
Four Basis Accounting Statements:
Assets
Liabilities
Stockholders’ Equity
Revenue
Expenses
Balance Sheet
Income Statement
Statement of Retained Earnings
Statement of Cash Flows

3. Accounting Terminology
Assets - Economic benefits that a firm expects to receive at some point in the future
Liabilities - Economic obligations that a firm expects to pay at some point in the future
Stockholders Equity – The financing provided by the owners and the operations of the business.
Two Sources: Contributed Capital
2. Retained Earnings
Revenues - Economic resources generated by the firm as a result of services provided or goods sold by the firm
Expenses - Economic resources consumed by the firm in the process of providing services or selling goods

4. Assets = Liabilities + Shareholders’ Equity
Balance Sheet
Snapshot of the investing and financing activities at a moment in time.
The Basic Accounting Equation:
Assets = Liabilities + Shareholders’ Equity
which is the same ideas as
Investing = Financing
Copyright ã 2000 by Harcourt, Inc. All rights reserved.

5. Double – Entry System OR Assets = Liabilities + Shareholders’ Equity
Every transaction will . . .
have a self-canceling effect on one side of the equation.
have an equal effect on the other side of the equation. OR
Every economic event has two sides, a give and a take.
Accountants record both sides of some economic events as a transaction.
Furthermore, accountants require that the two sides of a transaction balance so that the basic accounting equation remains in balance.
2.1. Dual Effect of a Transaction
Recall the basic accounting equation
Assets = Liabilities + Owners’ Equity
Any transaction will effect one or more on the three classes of accounts.
Remember that the transaction must balance, and
That the basic equation must balance.

6. Classifications of Accounts
ASSETS
LIABILITIES
OWNERS’
EQUITY = +
Cash
Accounts Receivable
Notes Receivable
Prepaid Expenses
Land
Building
Accounts Payable
Notes Payable
Advances from Customers
Mortgage Payable
Income Taxes Payable
Common Stock
Preferred Stock
Additional Paid-in Capital
Retained Earnings
Economic
Resources
Creditors’
Claims
Owners’
Claims

7. Net Income = Revenues - Expenses
Income Statement
Reports the accountant's primary measure of performance of the business over the accounting period
Income Statement Equation:
Net Income = Revenues - Expenses
Note: Income Statement = Statement of Income, Statement of Earnings, Statement of Operations
Net Income = Net Earnings
Copyright ã 2000 by Harcourt, Inc. All rights reserved.

8. - Measurement of Performance Revenues Expenses Income =
Earned from the sale of goods or services to customers.
Inflow of Net Assets
The dollar amt of resources the entity used up to earn revenues during a period of time.
Outflow of Net Assets
. Increase in Owner’s Equity for the period covered*
. Increase in Net Assets from Operations and Other Income
*Excludes dividends and capital transactions
The Life of a Business Enterprise is Continuous
So accountants divides its life into artificial accounting periods

9. Accrual Basis Vs. Cash Basis
Revenues are recognized when earned and expenses are recognized when incurred.
Cash Basis
Revenues are recognized when cash is received and expenses recorded when cash is paid.
Intuitive and easy.
Provides information on the liquidity
Subject to manipulation, for example, the firm can delay having to recognize an expense by postponing cash payment.
More difficult conceptually.
Provides information on long-term profitability.
Subject to manipulation by the choice of recognition rules 9 9

10. Cash Flow Statement
Reports inflows and outflows of cash during the accounting period in the categories of operating, investing and financing.
The Cash Flow Statement Equation:
Cash =  CF from Operating Acts
+  CF from Investing Acts
+  CF from Financing Acts
Copyright ã 2000 by Harcourt, Inc. All rights reserved.

11. Statement Format Three categories of cash flows: Operating Activities
Investing Activities
Financing Activities

12. Statement Format The Statement of Cash Flows
Explains the reasons for a change in cash.
Classifies the reasons for the change as an operating, investing or financing activity.
Reconciles net income with cash flow from operations.
II. Classification of Cash Flows
Operations - cash flows related to selling goods and services; that is, the principle business of the firm.
Investing - cash flows related to the acquisition or sale of noncurrent assets.
Financing - long term and short-term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.

13. Statement of Retained Earnings
Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.
Retained Earnings Equation:
REEND = REEND + Net Income - Dividends
Copyright ã 2000 by Harcourt, Inc. All rights reserved.

14. 1-32