Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Basic Accounting Concepts: The Balance Sheet © The McGraw-Hill Companies, Inc., Part One: Financial Accounting

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Accounting period Conservatism Realization Matching Consistency Materiality Basic Concepts Money measurement Entity Going concern Cost Dual aspect Slide 2-1

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999  Owner The Entity Concept The owner of a clothing store removes $100 from the store’s cash register for personal use. Should the store’s accounting records show that the owner took this cash? Slide 2-2

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Entity Concept Yes, because of the entity concept. This concept requires that the accounting records of the clothing store show that the business has less cash than it had previously. Slide 2-3

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Going -Concern Concept A thriving blue jeans manufacturing firm has jeans in various stages of production. If the firm had to cease operations and liquidate today, the jeans would have little, if any, value. If today is the last day of the accounting period, should the jeans be shown at liquidation value? Slide 2-4

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Going -Concern Concept Because of the going-concern concept, the firm would not value the jeans at what they are currently worth--the liquidation value. Slide 2-5

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Cost Concept--Nonmonetary Assets Land purchased last year for $250,000 has a current market value of $270,000. What amount should be shown in the accounting records to reflect ownership of this land? Slide 2-6

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Cost Concept--Nonmonetary Assets The land should be shown at the original purchase price of $250,000 because of the cost concept. Slide 2-7

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Cost Concept--Monetary Assets A company invested surplus cash in 100,000 shares of the common stock of General Electric. The cost of per share was $60; therefore, the firm spent $6,000,000. By the end of the fiscal period, the stock had a fair market value of $65 per share. What amount should be shown on the balance sheet? Slide 2-8

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Cost Concept--Monetary Assets The fair value of the stocks is $6,500,000. This is the amount that should be shown for this monetary asset. Slide 2-9

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Dual-Aspect Concept Slide 2-10 Ms. Jones opens a bank account for the business by depositing $40,000. Assets = Liabilities + Owners’ equity Assets = Equities + $40,000 =

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 The Dual-Aspect Concept Slide 2-11 The business borrows $15,000 from the bank. + $40,000 = $40,000 Assets = Liabilities + Owners’ equity + 15,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Assets = Liabilities + Owners’ equity The Dual-Aspect Concept Slide 2-12 Assets = Equities + $40,000 = $40, ,000 $55,000 $15,000 $40,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999  Name of entity  Name of statement  Moment of time GARSDEN CORPORATION Balance Sheet As of December 31, 1998 The Balance Sheet--The Heading Slide 2-13

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Current assets: Cash$ 3,448,891 Marketable securities246,221 Accounts receivable5,954,588 Inventories12,623,412 Prepaid expenses 377,960 Total current assets$22,651,072 Property, plant, and equipment: Land642,367 Building and equipment, at cost26,303,481 Less: accumulated depreciation13,534,06912,769,412 Other assets: Investments110,000 Intangible assets 63, ,214 Total assets$36,236,065 The Balance Sheet--Assets Slide 2-14

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Slide 2-15 The Balance Sheet--Liabilities and Shareholders’ Equity Current liabilities: Accounts payable$ 6,301,442 Taxes payable1,672,000 Accrued expenses640,407 Deferred revenues205,240 Current portion of long-term debt 300,000 Total current liabilities$ 9,119,089 Long-term debt 3,000,000 Total liabilities12,119,089 Shareholders’ equity: Paid-in capital5,000,000 Retained earnings19,116,976 Total shareholders’ equity24,116,976 Total liabilities and shareholders’ equity$36,236,065

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Cash Funds that are readily available for distribution Marketable securities Investments that are both readily marketable and expected to be converted into cash withinone year Accounts receivable Amounts owed to the entity by its customers Cash Funds that are readily available for distribution Marketable securities Investments that are both readily marketable and expected to be converted into cash withinone year Accounts receivable Amounts owed to the entity by its customers Account Categories--Current Assets Slide 2-16

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Inventories Aggregate of items either held for sale in the ordinary course of the business, in process of production for such sale, or soon to be consumed in production Prepaid expenses Assets, usually of an intangible nature, whose usefulness will expire in the near future Inventories Aggregate of items either held for sale in the ordinary course of the business, in process of production for such sale, or soon to be consumed in production Prepaid expenses Assets, usually of an intangible nature, whose usefulness will expire in the near future Slide 2-17 Account Categories--Current Assets

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Accounts payable Claims of suppliers arising from their furnishing goods or services to the entity for which they have not been paid Taxes payable Amount the entity owes governmental agencies Accounts payable Claims of suppliers arising from their furnishing goods or services to the entity for which they have not been paid Taxes payable Amount the entity owes governmental agencies Account Categories--Current Liabilities Slide 2-18

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Accrued expenses Amounts earned by outside parties but have not been paid by the entity Deferred revenues Liabilities that arise because the entity receives advanced payments for services the entity has agreed to render in the future Current portion of long-term debt Accrued expenses Amounts earned by outside parties but have not been paid by the entity Deferred revenues Liabilities that arise because the entity receives advanced payments for services the entity has agreed to render in the future Current portion of long-term debt Account Categories--Current Liabilities Slide 2-19

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Music Mart Slide 2-20 On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates.

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Music Mart Slide 2-21 On January 1, John Smith starts an incorporated CD and tape store called Music Mart, Inc. He deposits $25,000 of his own funds in a bank account that he opened in the name of the entity. In return, he takes $25,000 of stock certificates. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash$25,000Paid-in capital$25,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Music Mart Slide 2-22 On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity Cash$25,000Paid-in capital$25,000

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Cash$37,500Notes payable$12,500 Paid-in capital25,000 Total$37,500Total$37,500 Music Mart Slide 2-23 On January 2, Music Mart borrows $12,500 from a bank; the loan is evidence by a legal document called a note. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Cash$32,500Notes payable$12,500 Inventory5,000Paid-in capital25,000 Total$37,500Total$37,500 Music Mart Slide 2-24 On January 3, the business buys inventory in the amount of $5,000, paying cash. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Cash$33,250Notes payable$12,500 Inventory4,500Paid-in capital25,000 Retained earnings250 Total$37,750Total$37,750 Music Mart Slide 2-25 On January 4, the business sells merchandise that cost $500 for $750. Cash was received. MUSIC MART Balance Sheet As of January 1 Assets Liabilities and Owners’ Equity

Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 Chapter 2 The End