1. 2-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. F13 2 Business Activities— The Source of Accounting Information Financial Accounting A Bridge to Decision Making Ingram and Albright 6 th edition

2. 2-2 Once you have completed this chapter, you should be able to— ObjectivesObjectives

3. 2-3 2.Demonstrate how accounting measures and records business activities. 3.Identify investing activities and explain why they are important to a business. 4.Identify operating activities and explain how they create profits for a company. ObjectivesObjectives ContinuedContinued 1.Identify financing activities and explain why they are important to a business.

4. 2-4 5.Describe how financial reports summarize business activities and provide information for business decisions. ObjectivesObjectives

5. 2-51 ObjectiveObjective Identify financing activities and explain why they are important to a business.

6. 2-6 Financing Activities A business is an organization that exists for the purpose of making a profit for its owners.

7. 2-7 A contribution by owners to a business, along with any profits that are kept in the business, is known as owners’ equity. Financing Activities

8. 2-8 Financing Activities The amount a company borrows is the principal of a loan. Interest is the cost of borrowing and is paid to creditors in addition to the repayment of principal.

9. 2-9 Financing from Owners and Creditors Exhibit 1 Favorite

10. 2-10 2 2 Demonstrate how accounting measures and records business activities. ObjectiveObjective

11. 2-11 An account is a record of the increases and decreases in the dollar amount associated with a specific resource or activity. Accounting for Business Activities

12. 2-12 Accounting transactions are descriptions of business activities (or events) that are measured in dollar values and recorded in accounts. Accounting for Business Activities

13. 2-13 Assets = Resources controlled by the business The Accounting Equation

14. 2-14 Assets = Liabilities Owners’ Equity + The claims of creditors to a company’s resources Owners’ claims on the company’s assets The Accounting Equation

15. 2-15 Financing Activities On January 2, 2007, Favorite Cookie Company received $10,000 from the company’s owners. On January 3, 2007, the company received $8,000 from the bank.

16. 2-16ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts0=0+0 1/2Cash10,000 Contributed Capital10,000 1/3Cash8,000 Notes payable8,000 Ending Amounts 18,000=8,000+10,000 Financing Activities Exhibit 3

17. 2-17 Cash refers to financial resources in the form of coins and currency, bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and obligations of a company. Financing Activities

18. 2-18 Contributed capital is an owners’ equity account and identifies amounts contributed to a company by its owners. Financing Activities

19. 2-19 Notes payable is a liability account used to identify amounts a company owes to creditors with whom a formal agreement, or note, has been signed. Financing Activities

20. 2-20 3 3 Identify investing activities and explain why they are important to a business. ObjectiveObjective

21. 2-21 Investing Activities Investing activities involve the acquisition or disposal of long-term resources used by a business.

22. 2-22 Investing in Long-Term Resources Exhibit 4 Favorite

23. 2-23 On January 5, Favorite Cookie Company paid $6,000 for office equipment. On January 6, the company bought a delivery van for $25,000. It paid $3,000 in cash and financed the remaining $22,000 of the purchase price with a note payable. Investing Activities

24. 2-24ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts18,000 =8,000+10,000 1/5Equipment6,000 Cash–6,000 1/6Equipment25,000 Cash–3,000 Notes Payable22,000 Ending Amounts40,000=30,000+10,000 Investing Activities On January 5, one asset increased (Equipment) and another asset decreased (Cash) by the same amount, so the accounting equation remained unchanged. Exhibit 3

25. 2-25ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts18,000 =8,000+10,000 1/5Equipment6,000 Cash–6,000 1/6Equipment25,000 Cash–3,000 Notes Payable22,000 Ending Amounts40,000=30,000+10,000 Investing Activities On January 6, the company acquired a delivery van for $25,000. Exhibit 3

26. 2-26ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts18,000 =8,000+10,000 1/5Equipment6,000 Cash–6,000 1/6Equipment25,000 Cash–3,000 Notes Payable22,000 Ending Amounts40,000=30,000+10,000 Investing Activities The company paid $3,000 in cash. Exhibit 3

27. 2-27ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts18,000 =8,000+10,000 1/5Equipment6,000 Cash–6,000 1/6Equipment25,000 Cash–3,000 Notes Payable22,000 Ending Amounts40,000=30,000+10,000 Investing Activities The balance of $22,000 was financed by issuing a note payable. Exhibit 3

28. 2-28ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts18,000 =8,000+10,000 1/5Equipment6,000 Cash–6,000 1/6Equipment25,000 Cash–3,000 Notes Payable22,000 Ending Amounts40,000=30,000+10,000 Investing Activities Exhibit 3

29. 2-29 4 4 Identify operating activities and explain how they create profits for a company. ObjectiveObjective

30. 2-30 Operating activities are those activities necessary to acquire and sell goods and services. Operating Activities

31. 2-31 Revenue is the amount a company expects to receive when it sells goods or services. Operating Activities

32. 2-32 Expense is the amount of resources consumed in the process of acquiring and selling goods and services. Operating Activities

33. 2-33 Purchase of Goods for Sale Exhibit 6 Favorite Fragile

34. 2-34 Merchandise inventory is an asset account and identifies the cost of goods a company has purchased that are available for sale to customers. Operating Activities

35. 2-35 On January 7, Favorite Cookie Company purchased cookies from the bakery at a cost of $7,200. Favorite Cookie Co. Operating Activities

36. 2-36 Operating Activities ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts40,000 =30,000+10,000 Jan. 7Merchandise Inven.7,200 Cash–7,200 Ending Amounts40,000=30,000+10,000 The company now has goods costing $7,200 for sale. Exhibit 6

37. 2-37 Operating Activities ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts40,000 =30,000+10,000 Jan. 7Merchandise Inven.7,200 Cash–7,200 Ending Amounts40,000=30,000+10,000 The firm spent cash to acquire the merchandise. Exhibit 6

38. 2-38 Operating Activities ASSETS=LIABILITIES+ OWNERS’ EQUITY Date Accounts Beginning Amounts40,000 =30,000+10,000 Jan. 7Merchandise Inven.7,200 Cash–7,200 Ending Amounts40,000=30,000+10,000 The ending amount of assets remains the same. Exhibit 6

39. 2-39 Selling Goods to Customers Exhibit 8 Favorite Fragile

40. 2-40 Favorite Cookie Company sells 380 boxes of cookies (cost to purchase = $6,080) to the store January for $11,400, receiving cash. Operating Activities

41. 2-41 Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts 1/31Cash11,400 Sales Revenue11,400 1/31Cost of Goods Sold–6,080 Merchan. Inventory–6,080 Ending Amounts13,200+31,120= 30,000+ 10,000+ 5,320 Cash Other Assets Contributed Capital Retained Earnings Sold 380 boxes of cookies at $30 each. Cash increases $11,400. Exhibit 9 Beginning Amounts1,800+38,20030,00010,000

42. 2-42 Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts 1/31Cash11,400 Sales Revenue11,400 1/31Cost of Goods Sold–6,080 Merchan. Inventory–6,080 Ending Amounts13,200 +32,120= 30,000+ 10,000+ 3,220 Cash Other Assets Contributed Capital Retained Earnings Beginning Amounts1,800+38,20030,00010,000 Revenue from sales increases Retained Earnings by $11,400. Exhibit 9

43. 2-43 Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts 1/31Cash11,400 Sales Revenue11,400 1/31Cost of Goods Sold–6,080 Merchan. Inventory–6,080 Ending Amounts13,200+32,120= 30,000+ 10,000+ 5,320 Cash Other Assets Contributed Capital Retained Earnings Beginning Amounts1,800+38,20030,00010,000 A second entry is required to record the cost of $6,080… Exhibit 9

44. 2-44 Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts 1/31Cash11,400 Sales Revenue11,400 1/31Cost of Goods Sold–6,080 Merchan. Inventory–6,080 Ending Amounts13,200+32,120 = 30,000 + 10,000+ 5,320 Cash Other Assets Contributed Capital Retained Earnings Beginning Amounts1,800+38,20030,00010,000 …and a reduction in the amount of inventory. Exhibit 9

45. 2-45 Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts 1/31Cash11,400 Sales Revenue11,400 1/31Cost of Goods Sold–6,080 Merchan. Inventory–6,080 Ending Amounts13,200+32,120 = 30,000 + 10,000+ 5,320 Cash Other Assets Contributed Capital Retained Earnings Beginning Amounts1,800+38,20030,00010,000 Exhibit 9

46. 2-46 Operating Activities Cost of Goods Sold identifies the cost to the company of goods transferred to customers.

47. 2-47 On January 6, paid $300 for supplies used during January. Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts Cash Other Assets Contributed Capital Retained Earnings 1/6Supplies Expense–300 Cash–300 Exhibit 10

48. 2-48 Operating Activities NOTICE Revenues increase owners’ equity. Expenses decrease owners’ equity. NOTICE Revenues increase owners’ equity. Expenses decrease owners’ equity. NOTICE

49. 2-49 On January 8, paid $600 for rent for January. Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts Cash Other Assets Contributed Capital Retained Earnings Exhibit 10 1/8Rent Expense–600 Cash–600

50. 2-50 On January 31, paid $1,000 for wages for January. Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts Cash Other Assets Contributed Capital Retained Earnings Exhibit 10 1/31Wages Expense–1,000 Cash –1,000

51. 2-51 On January 31, paid $200 for utilities for January. Operating Activities ASSETS = LIABILITIES + OWNERS’ EQUITY + OWNERS’ EQUITY Date Accounts Cash Other Assets Contributed Capital Retained Earnings 1/31Utilities Expense–200 Cash–200 Exhibit 10 Ending Amounts11,100+32,120= 30,000 + 10,000+ 3,220

52. 2-52 Exercise 2-4 Click the button to skip this exercise. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. June 1 $15,000 of merchandise inventory was purchased for cash. If you experience trouble making the button work, type 66 and press “Enter.” ContinuedContinued

53. 2-53 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 1 Press “Enter” or click left mouse key for solution. Merchandise Inventory15,000 Cash–15,000

54. 2-54 Exercise 2-4 June 15 Sold merchandise for $60,000 cash. The merchandise had cost Popovich $28,000. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

55. 2-55 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 15 Cash60,000 Sales Revenue60,000 Cost of Goods Sold-28,000 Merchandise Inventory-28,000 Press “Enter” or click left mouse key for solution.

56. 2-56 Exercise 2-4 June 23 Borrowed $250,000 from the bank. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

57. 2-57 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 23 Cash250,000 Bank Loan250,000 Press “Enter” or click left mouse key for solution.

58. 2-58 Exercise 2-4 June 25 Paid $2,000 for supplies used in June. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

59. 2-59 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 25 Supplies Expense-2,000 Cash-2,000 Press “Enter” or click left mouse key for solution.

60. 2-60 Exercise 2-4 June 28 June wages of $5,000 were paid. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

61. 2-61 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 25 Wages Expense–5,000 Cash–5,000 Press “Enter” or click left mouse key for solution.

62. 2-62 Exercise 2-4 June 30$100,000 of equipment was purchased for cash. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

63. 2-63 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 30 Equipment100,000 Cash–100,000 Press “Enter” or click left mouse key for solution.

64. 2-64 Exercise 2-4 June 30Paid $6,000 for utilities consumed in June. Popovich Company had the following transaction during June. Indicate the amount of cash, other assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide. ContinuedContinued

65. 2-65 Exercise 2-4 ASSETS = LIAB. + OWNERS EQ. Date Accounts Cash OA Cont. Cap. RE Beg. Amts.40,00060,00030,00050,00020,000 June 30 Utilities Expense–6,000 Cash–6,000 Press “Enter” or click left mouse key for solution. End. Amts.222,000147,000280,00050,00039,000

66. 2-66 5 5 Describe how financial reports summarize business activities and provide information for business decisions. ObjectiveObjective

67. 2-67 Financial statements are reports that summarize the results of a company’s accounting transactions for a fiscal period.

68. 2-68 The income statement reports revenues and expenses for a fiscal period as a means of determining how well a company has performed in creating profit for its owners.

69. 2-69Account January 31 Balance Assets: Cash11,100 Merchandise inventory1,120 Equipment31,000 Liabilities: Notes Payable30,000 Owners’ Equity: Contributed Capital10,000 Sales Revenue11,400 Cost of Goods Sold(6,080) Wages Expense(1,000) Rent Expense(600) Supplies Expense(300) Utilities Expense(200) $7,200 – $6,080 Exhibit 12

70. 2-70Account January 31 Balance Assets: Cash11,100 Merchandise inventory1,120 Equipment31,000 Liabilities: Notes Payable30,000 Owners’ Equity: Contributed Capital10,000 Sales Revenue11,400 Cost of Goods Sold(6,080) Wages Expense(1,000) Rent Expense(600) Supplies Expense(300) Utilities Expense(200) $6,000 + $25,000 Exhibit 12

71. 2-71Account January 31 Balance Assets: Cash11,100 Merchandise inventory1,120 Equipment31,000 Liabilities: Notes Payable30,000 Owners’ Equity: Contributed Capital10,000 Sales Revenue11,400 Cost of Goods Sold(6,080) Wages Expense(1,000) Rent Expense(600) Supplies Expense(300) Utilities Expense(200) $8,000 + $22,000 Exhibit 12

72. 2-72 Favorite Cookie Company Income Statement For the Month Ended January 31, 2007 Sales revenue$11,400 Cost of goods sold(6,080) Wages expense(1,000) Rent expense(600) Supplies expense(300) Utilities expense (200) Net income$ 3,220 Account January 31 Balance Owners’ Equity: Contributed Capital10,000 Sales Revenue11,400 Cost of Goods Sold(6,080) Wages Expense(1,000) Rent Expense(600) Supplies Expense(300) Utilities Expense(200) Exhibit 13

73. 2-73 A fiscal period is the time period for which a company reports its financial activities. Favorite Cookie Company Income Statement For the Month Ended January 31, 2007 Sales revenue$11,400 Cost of goods sold(6,080) Wages expense(1,000) Rent expense(600) Supplies expense(300) Utilities expense (200) Net income$ 3,220

74. 2-74 Net income is the amount of profit earned by a business during a fiscal period. Favorite Cookie Company Income Statement For the Month Ended January 31, 2007 Sales revenue$11,400 Cost of goods sold(6,080) Wages expense(1,000) Rent expense(600) Supplies expense(300) Utilities expense (200) Net income$ 3,220

75. 2-75 A balance sheet identifies a company’s assets and claims to those assets by creditors and owners at a specific date.

76. 2-76 Favorite Cookie Company Balance Sheet At January 31, 2007 Assets: Cash$11,100 Merchandise inventory1,120 Equipment 31,000 Total assets$43,220 Liabilities and Owners’ Equity Notes payable$30,000 Contributed capital10,000 Retained earnings 3,220 Total liabilities and owners’ equity$43,220 equal Exhibit 14

77. 2-77 The statement of cash flows reports events that affected a company’s cash account during a fiscal period.

78. 2-78 Favorite Cookie Company Statement of Cash Flows For the Month Ended January 31, 2007 Operating Activities Received from customers$11,400 Paid for merchandise(7,200) Paid for wages(1,000) Paid for rent(600) Paid for supplies(300) Paid for utilities (200) Net cash flow from operating activities$ 2,100 Investing Activities Paid for equipment(31,000) ContinuedContinued Exhibit 15

79. 2-79 Carried forward $(28,900) Financing Activities Received from creditors$30,000 Received from owners 10,000 Net cash flow from financing activities 40,000 Net cash flow for January11,100 Cash balance, January 1 0 Cash balance, January 31$ 11,100 The statement of cash flows is useful for identifying how much cash a company has, where that cash came from, and how the company used its cash during a fiscal period.

80. 2-80 Exercise 2-17 Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears. Wages expense Cost of goods sold Sales revenue Merchandise inventory Net income Retained earnings Income statement Balance sheet Income statement Balance sheet Press “Enter” or click left mouse button for solutions. ContinuedContinued Click the button to skip this exercise. If you experience trouble making the button work, type 82 and press “Enter.”

81. 2-81 Exercise 2-17 Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears. Contributed capital Rent expense Cash Notes payable Balance sheet Income statement Bal. sheet & SCFlows Balance sheet Press “Enter” or click left mouse button for solutions.

82. 2-82 What role does accounting play in an organization’s transformation process? Accounting is an information system for the measurement and reporting of the transformation of resources into goods and services and the sale or transfer of these goods and services to customers.

83. 2-83 Assets $40,000 +11,400 -8,180 $43,220 Profit Revenues$11,400 Expenses -8,180 Net Income$ 3,220 Liabilities$30,000 Owners’ Equity: Contributed Capital10,000 Retained Earnings 3,220 $43,220 Exhibit 16 Reporting the Transformation Process 1 2 3 4 5

84. 2-84 Financial Analysis Return on assets (ROA) is the ratio of net income to total assets. Net Income Total Assets ROA =

85. 2-85 Financial Analysis Net Income Total Assets ROA = For Favorite Cookie Company at January 31, 2007, ROA is 7.5 percent.

86. 2-86 Financial Analysis Net Income Total Assets $3,220 $43,220 = 7.5% For Favorite Cookie Company at January 31, 2007, ROA is 7.5 percent. ROA =

87. 2-87 Business Activities Operating Investing Financing Business Activities Operating Investing Financing Accounting Measuring Recording Reporting Analyzing Accounting Measuring Recording Reporting Analyzing Business Decisions Business Decisions Actions Based on Business Decisions A Model of the Accounting Process Exhibit 17

88. 2-88 T HE E ND C HAPTER 2

89. 2-89