1. Accounting as a Form of Communication
Chapter 1
Accounting as a Form of Communication
Financial Accounting 4e by Porter and Norton 1 1

2. Decisions Made with Financial Information
Add new
product line??
Invest??
Build new plant??
Borrow $$??
Loan $$??
Extend credit $$??
Start new business??
Sell stocks or bonds?? 2 2

3. What is Accounting? Identifying Economic to Information Measuring
various
users
Measuring
Communicating

4. Internal and External Users of Accounting Information
Creditors
Current
and
Potential
Owners
Government
Agencies
Suppliers
Trade
Organizations
Financial
Analysts
Banks
Internal
Users -
Management 12 12

5. The Accounting Equation
Assets = Liabilities + Owners’ Equity
(or Stockholders' Equity)
Creditors'
Claims
to Assets
Owners'
Economic
Resources = +
Accounts payable
Notes payable
Capital stock
Retained earnings
Examples:
Cash
Accounts receivable
Inventory 14 14

6. = + Balance Sheet - snapshot of financial position Liabilities Assets
Owners’ Equity
(or Stockholders' Equity)
Stock
Certificate 15 15

7. Winnebago Industries, Inc. Consolidated Balance Sheets
A = L + SE
Winnebago Industries, Inc. Consolidated Balance Sheets
Assets August 25, August 26,2000 A
Current assets:
Cash and cash equivalents $ 93,779 $ 51,443
Receivables, less allow. for doubtful accts.
($244 and $1,168, respectively) , ,045
Dealer financing receivables, less allow. for
doubtful accts ($117 and $27, respectively) , ,696
Inventories , ,707
Prepaid expenses , ,952
Deferred income taxes , ,675
Total current assets , ,518
Property, plant and equipment, net , ,455
Investment in life insurance , ,028
Deferred income taxes , ,044
Other assets , ,050
$342, $307,095

8. Winnebago Industries, Inc. Consolidated Balance Sheets
A = L + SE
Winnebago Industries, Inc. Consolidated Balance Sheets
Liabilities and Stockholders' Equity
August 25, August 26, 2000
= L
Current liabilities:
Accounts payable, trade $ 30,789 $ 26,212
Income taxes payable 4, ,790
Accrued expenses 34, ,242
Total current liabilities 70, ,244
Postretirement health care and deferred
compensation benefits 64, ,942
+ SE
Stockholders' equity:
Capital stock common 12, ,939
Additional paid-in capital 22, ,994
Reinvested earnings , ,556
269, ,489
Less treasury stock, at cost (61,879) (55,580)
Total stockholders' equity , ,909 8
$ 342, $307,095

9. Income Statement
Revenues $$$
Less: Expenses ($$)
Net income $$ 16 16

10. Winnebago Industries, Inc. Consolidated Statements of Operations
August 25, August 26, 2000
Revenues - Expenses = Net Income
Revenues
Net revenues $ 681,834 $ 753,382
Cost of manf. products , ,488
Gross profit 94, ,894
Selling, general and administrative
expenses 39, ,240
Operating income 55, ,654
Financial income , ,338
Income before income taxes 59, ,992
Provision for taxes 15, ,593
Change in acctg. principle, net (1,050)
Net Income $ 42,704 $ 48,399
Expenses
Expenses
Revenues
Expenses

11. Statement of Retained Earnings
Beginning retained earnings $$$
Add: Net income for the period $$
Deduct: Dividends for the period ($$)
= Ending retained earnings $$$ 11 17 17

12. Winnebago Industries, Inc. Statement of Retained Earnings for 2001
Beginning balance, retained earnings $ 195,556
Add: Net income 42,704
Deduct: Cash dividends (4,121)
Ending balance, retained earnings $ 234,139

13. Relationships among Financial Statements – Winnebago Industries Example
Income Statement for 2001
Revenues $ xxx
Less: Expenses xxx
Net income $ 42,704
Statement of Retained Earnings for 2001
Beginning balance, retained earnings $195,556
Add: Net income 42,704
Deduct: Cash dividends (4,121)
Ending balance, retained earnings $ 234,139
Balance Sheets
Total assets $ xxx $ xxx
Liabilities xxx xxx
Capital stock xxx xxx
Retained earnings , ,556
Total liabilities & stockholders' equity $ xxx $ xxx

14. Financial Statement Assumptions
Economic
Entity
Cost
Principle
Time
Period
Going
Concern
Monetary
Unit 20 20

15. Economic Entity Concept
Each entity has its own books, records and financial statements that are separate from owners
No intermingling of personal and business assets and liabilities or income and expenses
Business
Books &
Records
Owners’
Books &
Records 21 21

16. Cost Principle Record assets at cost paid to acquire them
Continue to value assets at historical cost until sold
More objective than market value 22 22

17. Going Concern
Assume business will continue indefinitely into the foreseeable future
Justifies use of historical cost 23 23

18. Monetary Unit
How we measure (e.g. U.S. dollar, Japanese yen, Mexican peso, etc.)
Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

19. Time Period Assumption
Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year)
Necessary to provide users with financial results on a timely basis
Requires use of estimates 25 25

20. The Rules of the Game The rules GAAP The rule makers FASB
The rule enforcers
The CPA regulators
GAAP
FASB
SEC
AICPA 26 26

21. Where Accountants Work
Private Business
Nonbusiness Organizations
Public Accounting
audit
tax
management consulting
Educational Institutions 27 27

22. End of Chapter 1