Financial Accounting Review McGraw-Hill/Irwin © 2009 The McGraw-Hill Companies, Inc.

Accounting – The Language of Business  Accounting is the art of recording, classifying and summarizing transactions, in terms of money, and interpreting the results.

McGraw-Hill/Irwin Slide 3 The Accounting Cycle During the Period Analyze transactions Record journal entries in the general journal Post amounts to the general ledger During the Period Analyze transactions Record journal entries in the general journal Post amounts to the general ledger Start of new period At the End of the Period Prepare a trial balance to determine if debits equal credits Adjust revenues and expenses and related balance sheet accounts (record in journal and post to ledger) Prepare a complete set of financial statements and disseminate it to users Close revenues, gains, expenses, and losses to Retained Earnings (record in journal and post to ledger) At the End of the Period Prepare a trial balance to determine if debits equal credits Adjust revenues and expenses and related balance sheet accounts (record in journal and post to ledger) Prepare a complete set of financial statements and disseminate it to users Close revenues, gains, expenses, and losses to Retained Earnings (record in journal and post to ledger)

Accounting Cycle-Another View l Prepare financial statements. l Disseminate statements to users. l Prepare financial statements. l Disseminate statements to users. l Close revenues, gains, expenses, and losses to Retained Earnings. During the period: l Analyze transactions. l Record journal entries. l Post amounts to general ledger. During the period: l Analyze transactions. l Record journal entries. l Post amounts to general ledger. At the end of the period: l Adjust revenues and expenses. At the end of the period: l Adjust revenues and expenses. Start of Period

McGraw-Hill/Irwin Slide 5 Information Reported on the Financial Statements 1. How well did the company perform (or operate) during the period? Revenues – Expenses Net income (Net loss) Income statement QuestionAnswer Financial Statement 2. Why did the company’s retained earnings change during the period? Beg. retained earnings + Net income (or – Net loss) Ending retained earnings Statement of retained earnings

McGraw-Hill/Irwin Slide 6 Information Reported on the Financial Statements 3. What is the company’s financial position at the end of the period? Assets = Liabilities + Owners’ equity Balance sheet QuestionAnswer Financial Statement 4. How much cash did the company generate and spend during the period? Operating cash flows ± Investing cash flows ± Financing cash flows Increase or decrease in cash Statement of cash flows

McGraw-Hill/Irwin Slide 7 Relationships Among the Statements 1.Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings. Income Statement Revenues $ 15,500 Statement of Retained Earnings Expenses (8,500) Beginning retained earnings $ 59,000 Net income $ 7,000 Net income 7,000 Dividends (2,500) Ending retained earnings $ 63,500

McGraw-Hill/Irwin Slide 8 Relationships Among the Statements 2.Ending retained earnings from the statement of retained earnings is one of the two components of stockholders’ equity on the balance sheet. Statement of Retained Earnings Balance Sheet Beginning retained earnings $ 59,000 Cash $ 14,000 Net income 7,000 Other assets 171,500 Dividends (2,500) Total assets $ 185,500 Ending retained earnings $ 63,500 Liabilities $ 42,000 Stockholders' Equity Common stock 80,000 Retained earnings 63,500 Total liabilities and equity $ 185,500

McGraw-Hill/Irwin Slide 9 Relationships Among the Statements 3.The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the balance sheet. Statement of Cash Flows Balance Sheet Cash flows from operating activities $ 21,000 Cash $ 14,000 Cash flows from investing activities (16,000) Other assets 171,500 Cash flows from financing activities 3,500 Total assets $ 185,500 Increase in cash $ 8,500 Liabilities $ 42,000 Beginning cash balance 5,500 Stockholders' Equity Ending cash balance $ 14,000 Common stock 80,000 Retained earnings 63,500 Total liabilities and equity $ 185,500

McGraw-Hill/Irwin Slide 10 Notes to Financial Statements Descriptions of the key accounting rules that apply to the company’s statements. Additional detail supporting reported numbers. Relevant financial information not disclosed on the statements.