Chapter One An Introduction to Accounting © 2015 McGraw-Hill Education.

Role of Accounting in Society Accounting provides information that is useful in answering questions about resource allocation. Should I invest money in IBM or General Motors? 1-2

1-3

1-4

Elements of Financial Statements 1.Assets—Cash, Equipment, Buildings, Land 2.Liabilities 3.Equity 4.Contributed Capital 5.Revenue 6.Expenses 7.Distributions 8.Net Income 9.Gains 10.Losses Subclassifications of the elements are frequently called accounts. Accounts are reported in the financial statements. 1-5

Accounting Equation Claims on the assets are from two sources: 1.Creditors (liabilities) 2.Investors or owners (equity). 1-6

Event 1: RCS (formed on Jan. 1, 2014) acquired cash through $120,000 common stock issue. 1.Increase assets (cash). 2.Increase equity (common stock). Asset Source Transaction Event 2: RCS acquired $400,000 cash by borrowing from a creditor. 1.Increase assets (cash). 2. Increase liabilities (notes payable). Asset Source Transaction 1-7

Event 3: RCS paid $500,000 cash to purchase land. 1.Decrease assets (cash). 2.Decrease equity (selling expenses). Asset Exchange Transaction Event 4: RCS obtained $85,000 cash by leasing camp sites to customers. 1. Increase assets (cash) 2. Increase stockholders’ equity (revenue). Asset Source Transaction 1-8

Event 5: RCS paid $50,000 cash for operating expenses. 1.Decrease assets (cash). 2.Decrease equity (operating expenses). Asset Use Transaction 1. Decrease assets (cash). 2. Decrease stockholders’ equity (retained earnings). Asset Use Transaction Event 6: RCS paid $4,000 in cash dividends to its owners. 1-9

Event 7: The land that RCS purchased for $500,000 cash had an appraised value of $525,000 on Dec. 31, Not Recognized due to Historical Cost concept Non-Transaction Historical Cost Concept 1-10

Summary of Accounting Events 1-11

Two Views of the The Right Side of the Accounting Equation Sources of the company’s assets. Stewardship means to protect and use assets for the benefit of the owners. Obligations of the company to return creditor assets. Commitments of the company to investor- provided assets. View Two View One 1-12

Distributions in Business Liquidations Creditors have Priority. If there are any assets left over, they are distributed to investors Going Concern Assumes that a business is able to continue operations into the foreseeable future. 1-13

Recap: Types of Transactions The described transactions have been classified into one of three categories: Asset Source Asset Exchange Asset Use Increase total assets, increase total claims Increase one asset, decrease another asset Decrease total assets, decrease total claims 1-14

Preparing Financial Statements Net Loss Accounting Period Matching Concept results when expenses exceed revenues. Revenues exceeded expenses. Income is measured for a span of time called the { Revenues are matched to expenses. 1-15

Preparing Financial Statements 1-16

Preparing Financial Statements equal Assets are displayed in order of liquidity. 1-17

Operating Investing Financing Preparing Financial Statements 1-18

The Closing Process Transfers net income (or loss) and dividends to Retained Earnings. Establishes zero balances in all revenue, expense, and dividend accounts. 1-19

Horizontal Financial Statements Model 1-20

Annual Reports (1)Financial Statements (2)Notes (3)Auditor’s Report –Chapter 6 (4)Management’s Discussion and Analysis (MD&A) Traditionally, large companies have distributed expensive annual reports with many color photographs. Increasingly, however, companies are issuing more modest annual reports or are simply distributing their 10-K reports. 1-21

End of Chapter One 1-22