Fundamentals of Financial Accounting 3e by Phillips, Libby, and Libby.

Fundamentals of Financial Accounting 3e by Phillips, Libby, and Libby.
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Business Decisions and Financial Accounting
Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA Chapter 1: Business Decision and Financial Accounting

Describe various organizational forms and business decision makers.
Learning Objective 1 Describe various organizational forms and business decision makers. Learning objective 1 is to describe various organizational forms and business decision makers. 1-3

Organizational Forms Sole Proprietorship Partnership Corporation
Business organization owned by one person. The owner is personally liable for all debts of the business. Partnership Business organization owned by two or more people. Each partner is personally liable for all debts of the business. Corporation A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Part I There are three types of business organizations. A sole proprietorship is a business organization owned by one person. The owner is personally liable for all the debts of the business. Part II A partnership is a business organization owned by two or more people. Each partner is personally liable for all the debts of the business. Part III A corporation operates a business separate from its owners from both a legal and accounting perspective. Owners of corporations (often called stockholders) are not personally responsible for debts of the corporation. Corporations may be either public companies or private companies. Public companies have their stock bought and sold on stock exchanges. Private companies have their stock bought and sold privately. Most corporations start out as private companies and will become public companies if they need a lot of financing, which they obtain from selling new stock certificates to investors. Some big name corporations, like Cargill and Chick-Fil-A, haven’t gone public because they get enough financing from private sources. 1-4

Organizational Forms Source: BizStats.com
As this graphic shows, the majority (72%) of businesses are organized as sole proprietorships. Another 20% are organized as a corporation, followed by 5% as partnerships and 3% as limited liability companies. Limited liability companies (LLC) is a hybrid business entity that has certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through income taxation. An LLC is often more flexible than a corporation and is well-suited for companies with a single owner. 1-5 Source: BizStats.com

The Accounting System Business and Financing Activities Evaluate the company Run the company Accounting System Part I Most companies exist to earn profits for their stockholders. To know just how successful a company is the company will need to establish and maintain a good system of financial recordkeeping—an accounting system. Part II Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization. Part III The accounting system produces two kinds of reports. Part IV Managerial accounting reports include detailed financial plans and continuously updated reports about the financial performance of the company. These reports are made available only to employees of the company so that they can make business decisions such as whether to build, buy, or rent a building, whether to continue or discontinue making particular products, how much to pay employees, and how much to borrow. Part V Financial accounting reports are prepared periodically to provide information to people not employed by the business. These external financial statement users are not given access to the detailed internal records of the company, so they rely extensively on the financial statements. Financial statements are accounting reports that summarize the results of business activities. The two primary external users are creditors (such as banks and suppliers) and investors (such as stockholders). Other external users include customers and various local, state, and federal governments. Accounting Reports External users (creditors, investors, etc.) Internal users (managers, etc.) Financial Managerial Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-6

Learning Objective 2 Describe the purpose, structure, and content of the four basic financial statements. Learning objective 2 is to describe the purpose, structure, and content of the four basic financial statements. 1-7

The Basic Accounting Equation
Resources Owned . . . by the company Resources Owed . . . to creditors to stockholders Assets = Liabilities + Stockholders’ Equity Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. Part I One of the most central concepts to understanding financial reports is that what a company owns must equal what a company owes to its creditors and stockholders. In accounting, there are special names for what a company owns and what a company owes to creditors and stockholders. Resources owned by the company are called assets. Resources owed to creditors are called liabilities. Resources owed to stockholders are called stockholders’ equity. The relationship between assets, liabilities, and stockholders’ equity is known as the basic accounting equation. Part II The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business’s financial reports include only the activities of the business and not those of its stockholders. 1-8

Assets Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Assets are resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Assets include things like cash, supplies, furniture, and equipment. Cash Equipment Supplies Furniture 1-9

Amounts owed by the business to creditors.
Liabilities Amounts owed by the business to creditors. Liabilities are measurable amounts owed to creditors. If a company borrows from a bank, it would owe a liability called a note payable. The business can also owe payments to suppliers who deliver goods and services to the business. Amounts owed to suppliers are called accounts payable because purchases made using credit are said to be “on account.” As you may have noticed, anything with the word payable in its name is considered a liability. Notes Payable Accounts Payable 1-10

Owners’ claim to the business resources.
Stockholders’ Equity Owners’ claim to the business resources. Stockholders’ equity represents the owners’ claims on the business. These claims arise for two reasons. The owners have a claim on amounts they contributed to the business by purchasing the company’s stock (Contributed Capital). A stock certificate is evidence of ownership in a corporation. The owners have a claim on amounts the company has earned through profitable business operations (Retained Earnings). Contributed Capital Retained Earnings Stock Certificate 1-11

Revenues, Expenses and Net Income
Revenues – Expenses = Net Income Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. Expenses The costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Part I Revenues are the sales of goods or services to customers. They are measured at the amount the business charges the customer. Part II Expenses are the costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Net income is equal to revenues minus expenses. By generating net income, a company increases its stockholders’ equity. Net income can either be left in the company to accumulate (called retained earnings) or paid out to the company’s stockholders for their own personal use (called dividends). If revenues are less than expenses, the business would have a “net loss.” 1-12

Dividends are not an expense.
Distributions of a company’s earnings to its stockholders as a return on their investment. Part I A company’s profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders. Part II Distributions to stockholders are called dividends. The simplest type of dividend, and the most common, is a dividend paid in cash. Dividends are not an expense of the company. Rather, dividends are a distribution of earnings. They are determined at the discretion of the company’s stockholders. Dividends are not an expense. 1-13

Financial Statements Financial statements are typically prepared in this order. Income Statement Statement of Retained Earnings Balance Sheet Assets, liabilities, stockholders’ equity, revenues, expenses, and dividends appear in different reports in the financial statements. The term financial statements refers to four accounting reports, typically prepared in the following order: Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Financial statements can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports). Companies are allowed to choose any date for the end of their accounting (or fiscal) year. Statement of Cash Flows 1-14

Reports the amount of revenues less expenses for a period of time.
The Income Statement The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. Reports the amount of revenues less expenses for a period of time. Part I The purpose of the income statement is to report the amount of revenues less expenses for a period of time. For Pizza Aroma, revenues are earned from the sale of pizza to customers. Expenses are the costs incurred during the period to earn the revenue. Part II The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit, which in the United States is the U.S. dollar. The heading of every financial statement answers three questions: who (name of the business), what (title of the statement), and when (accounting period). 1-15

The Statement of Retained Earnings
The Statement of Retained Earnings reports the way that net income and the distribution of dividends affected the financial position of the company during the period. A more comprehensive statement of stockholders’ equity that explains changes in all stockholders’ equity accounts is provided by large corporations. For Pizza Aroma, most changes in stockholders’ equity relate to generating and distributing earnings, so a statement of retained earnings is just as informative as a detailed statement of stockholders’ equity. Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. 1-16

Reports at a point in time:
The Balance Sheet Reports at a point in time: What a business owns (assets). What it owes to creditors (liabilities). What is left over for the owners of the company’s stock (stockholders’ equity). BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity Part I The balance sheet reports a company’s financial position at a point in time. You can think of the balance sheet kind of like a picture or a snapshot of what a business owns (called assets), what it owes to creditors (called liabilities), and what is leftover for the owners of the company’s stock (called stockholders’ equity). Assets are listed in order of liquidity, that is, how quickly they are used up or converted into cash. Notes payable are like accounts payable except that they: (1) are not interest free; (2) will not be paid as soon; and (3) are formal written debt contracts. Part II The balance sheet “balances” because the resources (assets) equal the claims to the resources (liabilities and stockholders’ equity). 1-17

The Statement of Cash Flows
Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. The fourth financial statement is the Statement of Cash Flows. It includes only those activities that result in cash changing hands. The statement is divided into three categories of business activities. The operating section reports cash transactions directly related to running the business to earn profit. This section includes cash transactions such as cash received from customers and cash paid for supplies, wages, repairs, advertising, and utilities. The investing section reports cash transactions involving buying and selling productive resources with long lives, such as buildings, land, equipment, and tools. The financing section reports cash transactions related to borrowing from or repaying creditors and receiving cash from or paying cash to stockholders. Pizza Aroma’s income statement showed positive net income of $2,000, but net income is not necessarily equal to cash because revenues are reported when earned and expenses when incurred regardless of when cash is received or paid. 1-18

Notes to the Financial Statements
Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions. The four basic financial statements are not complete without notes to help financial statement users understand how the amounts were derived and what other information may affect their decisions. We will talk more about notes in a later chapter. 1-19

Relationships Among the Financial Statements
Net income flows from the Income Statement to the Statement of Retained Earnings. 1 The goal of the next few slides is to show how the four statements fit together. First, the income statement reports the results of business operations for the accounting period. The net income from the income statement flows to the statement of retained earnings. 1-20

Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2 The ending retained earnings balance for the period is also reported on the balance sheet. If we did not report the ending retained earnings balance on the balance sheet, our balance sheet would not balance. So the statement of retained earnings must be prepared before the balance sheet may be completed. 1-21

Cash on the balance sheet and Cash at End of Year on the statement of cash flows agree. Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3 1-22

Explain how financial statements are used by decision makers.
Learning Objective 3 Explain how financial statements are used by decision makers. Learning objective 3 is to explain how financial statements are used by decision makers. 1-23

Using Financial Statements
Creditors Investors Is the company generating enough cash to make payments on its loans? Does the company have enough assets to cover its liabilities? What immediate return (through dividends) on my contributions? What is the long-term return (through stock price increases resulting from the company’s profits)? … SRE … SCF Part I Here is how creditors and investors use financial statements. Creditors are mainly interested in assessing two things: Is the company generating enough cash to make payments on its loans? Creditors will find this information on the statement of cash flows. Part II 2. Does the company have enough assets to cover its liabilities? Creditors will find this information on the balance sheet Part III Investors expect a return on their contributions to a company. The return may be immediate (through dividends) or long-term (through selling stock certificates at a price higher than their original cost). Dividends and higher stock prices are more likely if a company is profitable. As a result, investors look closely at the statement of retained earnings for information about the company’s ability to distribute dividends. Part IV Investors look closely at the income statement for information about the company’s ability to generate a profit. … B/S .. I/S 1-24

Describe factors that contribute to useful financial information.
Learning Objective 4 Describe factors that contribute to useful financial information. Learning objective 4 is to describe factors that contribute to useful financial information. 1-25

External Financial Reporting
Main Goal: Provide useful financial information to external users for decision making. Useful Relevant Relevant Faithful Representation Faithful Representation Part I The main goal of external financial reporting is to ensure companies produce financial information that is useful to present and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers. Part II For financial information to be judged useful, it must be relevant and a faithful representation. Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities. Part III The usefulness of financial information is enhanced when it is comparable (to prior periods and other companies), verifiable, timely, and understandable. Comparable Verifiable Timely Understandable 1-26

Accounting Standards World United States Where? FASB Who? IASB GAAP
The system of financial statement reporting in use today has a long history—all the way back to a publication in 1494 by an Italian monk and mathematician, Luca Pacioli. Currently, in the United States, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rule of accounting. As a group, these rules are called Generally Accepted Accounting Principles, or GAAP for short (pronounced like the name of the clothing store). The accounting rules in the United States are similar, for the most part, to those used elsewhere in the world, but some important differences exist. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences. The accounting rules developed by the IASB are called International Financial Reporting Standards, or IFRS for short. GAAP What? IFRS 1-27

Ethical Conduct When faced with an ethical dilemma:
Identify who will benefit from the situation and how others will be harmed. Identify the alternative courses of action. Ethics refers to the standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair. Intentional financial misreporting is both unethical and illegal. As you will see throughout this course, some accounting and business issues have clear answers that are either right or wrong. However, many situations require accountants, auditors, and managers to weigh the pros and cons of alternatives before making final decisions. To help ensure these decisions are made in a professional and ethical manner, the American Institute of Certified Public Accountants (AICPA) requires all its members to adhere to a Code of Professional Conduct. Not all ethical dilemmas are clear-cut. Some situations will require you to weigh one moral principle (e.g., honesty) against another (e.g., loyalty). Advise your employees that, when faced with an ethical dilemma, they should follow a three-step process: Identify who will benefit from the situation (often the manager or employee) and how others will be harmed (other employees, the company’s reputation, owners, creditors, and the public in general). Identify the alternative courses of action. Choose the alternative that is the most ethical —and that you would be proud to have reported in the news. Often, there is no one right answer to ethical dilemmas and hard choices will need to be made. In the end, however, following strong ethical practices is a key factor in business success and in ensuring good financial reporting. Choose the alternative that is the most ethical. 1-28

Chapter 1 Supplement Accounting Careers

According to the government’s Labor Department, accounting is one of the fastest growing fields, with over 20,000 new accounting jobs expected to be added each year through This graphic summarizes the career opportunities available in private and public accounting. Accountants employed by a single organization are in private accounting. Accountants who charge fees for services to a variety of organizations are in public accounting. Accounting graduates often start their careers in public accounting firms and then at some point move into private accounting within business, governmental organizations such as the Internal Revenue Service (IRS) and Federal Bureau of Investigation (FBI), or not-for-profit organizations (NPOs). Many become top managers of large companies. Some even enter academia after earning a graduate degree to teach and conduct research. 1-30 *Source: 2008 Robert Half Salary Guide.

Chapter 1 Solved Exercises
M1-13, E1-3, E1-6, E1-8, S1-6 (Req. 1) Chapter 1 Solved Exercises: M1-13, E1-3, E1-6, E1-8

M1-13 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, For its first two years of operations, it reported the following: On the basis of the data given, prepare a statement of retained earnings for 2009 (its first year of operations) and Show computations. Net Income for 2009 $ 36,000 Net Income for 2010 45,000 Dividends for 2009 15,000 Dividends for 2010 20,000 Total assets at the end of 2009 125,000 Total assets at the end of 2010 242,000 M1-13 Preparing a Statement of Retained Earnings Stone Culture Corporation was organized on January 1, For its first two years of operations, it reported the following: Net Income for 2009, $36,000; Net Income for 2010, $45,000; Dividends for 2009, $15,000; Dividends for 2010, $20,000; Total assets at the end of 2009, $125,000; and Total assets at the end of 2010, $242,000. On the basis of the data given, prepare a statement of retained earnings for 2009 (its first year of operations) and Show computations. 1-32

M1-13 Preparing a Statement of Retained Earnings
Part I Stone Culture Corporation began 2009 with zero retained earnings. During 2009, net income was $36,000 and dividends were $15,000. This resulted in ending retained earnings at December 31, 2009 of $21,000. Part II In 2010, Stone Culture Corporation began the year with $21,000 in retained earnings. During 2010, net income was $45,000 and dividends were $20,000. This resulted in ending retained earnings at December 31, 2010 of $46,000. 1-33

E1-3 Preparing a Balance Sheet
DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at November 1, 2008, contained the following items (in thousands). Required: Prepare the balance sheet as of November 1, solving for the missing amount. As of November 1, did most of the financing for assets come from creditors or stockholders? E1-3 Preparing a Balance Sheet DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at November 1, 2008, contained the following items (in thousands). 1-34

E1-3 Preparing a Balance Sheet
DSW, Inc. Balance Sheet At November 1, 2008 (in thousands) Most of the financing as of November 1 came from stockholders. The stockholders have financed $470,786 of the total assets and creditors have financed only $314,597 of the total assets of the company. Assets Cash $45,570 Accounts Receivable 11,888 Property, Plant, and Equipment 233,631 Other Assets 494,294 Total Assets $785,383 Liabilities Accounts Payable $136,405 Notes Payable 99,044 Other Liabilities 79,148 Total Liabilities 314,597 Stockholders’ Equity Contributed Capital 291,248 Retained Earnings 179,538 Total Stockholders’ Equity 470,786 Total Liabilities and Stockholders’ Equity Part I First, we prepare the heading for the balance sheet which includes the company name, the financial statement title, and the date. Next, we prepare the assets section, which consists of cash, accounts receivable, property, plant, and equipment, and other assets. Part II The liabilities section includes accounts payable, notes payable, and other liabilities. The stockholders’ equity section includes contributed capital and retained earnings. Notice that the balance sheet is in balance where total assets equal total liabilities and stockholders’ equity. Part III Most of the financing as of November 1 came from stockholders. The stockholders have financed $470,786 of the total assets and creditors have financed only $314,597 of the total assets of the company. 1-35

E1-6 Preparing an Income Statement and Inferring Missing Values
Regal Entertainment Group operates movie theaters and food concession counters throughout the United States. Its income statement for the quarter ended June 26, 2008, reported the following amounts (in thousands): Required: 1. Solve for the missing amounts and prepare an Income Statement for the quarter ended June 26, TIP: First put the items in the order they would appear on the Income Statement and then solve for the missing values. 2. What is Regal’s main source of revenue and biggest expense? E1-6 Preparing an Income Statement and Inferring Missing Values Regal Entertainment Group operates movie theaters and food concession counters throughout the United States. Its income statement for the quarter ended June 26, 2008, reported the following amounts (in thousands): Required: 1. Solve for the missing amounts and prepare an Income Statement for the quarter ended June 26, TIP: First put the items in the order they would appear on the Income Statement and then solve for the missing values. 2. What is Regal’s main source of revenue and biggest expense? 1-36

Part I The first part of Regal’s income statement includes the three revenue accounts: admissions revenues, concessions revenues, and other revenues. Total revenues is $675,800. Part II The second part of Regal’s income statement includes all the expense accounts. One of the missing values in this problem was the total expenses. What did you get for total expenses? Part III Did you get the correct answer of $662,000 for total expenses? If not, go back and make sure you included all the expenses in the income statement. Another missing value in this problem was net income. Net income is calculated as revenues minus expenses. Part IV Regal’s net income for this period is $13,800? ? ? 1-37

Regal’s main source of revenue is from admissions and the main expense is the film rental expense. 1-38

E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations
Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company. TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts. E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company. TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts. 1-39

R – E = NI A = L + SE Part I The numerical relationship for the first three columns is that revenues minus expenses equals net income. The numerical relationship of the last three columns is that total assets equal total liabilities plus stockholders’ equity. For Case A, calculate the net income amount and the stockholders’ equity amount. Part II Net income of $18,000 is calculated as revenues of $100,000 minus expenses of $82,000. To calculate stockholders’ equity we must use a little algebra with the basic accounting equation and solve for stockholders’ equity. If total assets equals total liabilities plus stockholders’ equity, and if we know the amounts for two of the three numbers, we can solve for the missing value. In this case, total assets of $150,000 minus total liabilities of $70,000 equals stockholders’ equity of $80,000. Now, let’s solve the missing values in Case B. To solve for total revenues, we add together total expenses of $80,000 and net income of $12,000 to get total revenues of $92,000. Total liabilities is calculated by taking total assets of $112,000 and subtracting stockholders’ equity of $60,000. This results in total liabilities of $52,000. Let’s solve the missing values in Case C. 1-40

R – E = NI A = L + SE Part I Net loss of $6,000 is calculated as revenues of $80,000 minus expenses of $86,000. To calculate stockholders’ equity take total assets of $104,000 minus total liabilities of $26,000 which equals stockholders’ equity of $78,000. Now, let’s solve the missing values in Case D. Part II To solve for total expenses, we take total revenues of $50,000 and subtract net income of $13,000 to get total expenses of $37,000. Total assets is calculated by adding total liabilities of $22,000 and stockholders’ equity of $77,000. This results in total assets of $99,000. Let’s solve the missing values in Case E. Part III To solve for total revenues, we add total expenses of $81,000 and net loss of $6,000 to get total revenues of $75,000. Total assets is calculated by adding total liabilities of $73,000 and stockholders’ equity of $28,000. This results in total assets of $101,000. 1-41

S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $350. He figures that, if needed, he could sell it to a friend for $280. Ashley argued that she was better off because she had $1,000 cash in her bank account and a vintage car that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term. Required: 1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report. S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $300. He figures that, if needed, he could sell it to a friend for $280. Ashley argued that she was better off because she had $1,000 cash in her bank account and a vintage car that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term. Required: 1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report. 1-42

Balance Sheet Ashley Jason What is owned ASSETS Cash $1,000 $6,000
S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet Balance Sheet Ashley Jason What is owned ASSETS Cash $1,000 $6,000 Console -0- 350 Car 800 -0- TOTAL $1,800 $6,350 LIABILITIES What is owed Car loan $ 250 $ -0- A balance sheet lists items owned (assets) and owed (liabilities) at a particular point in time, producing a “net worth” that represents the excess of assets over liabilities. Let’s prepare a balance sheet based on historical cost, which is consistent with generally accepted accounting principles. First, we will identify what is owned. Then, we will identify what is owed. Continue to click through the solution to see what Ashley owns and owes and what Jason owns and owes. At the end, we will show you how the items on this slide relate to what we have learned about assets, liabilities, and equity in this chapter. If we used market values instead of historical cost, Ashley’s car would be valued at $1,400 and her equity would increase to $2,150. For Jason, his console would be $280 and his equity would decrease to $680. Tuition Payable -0- 800 Student Loan -0- 4,800 TOTAL 250 5,600 EQUITY “Net worth” 1,550 750 TOTAL $1,800 $6,350 1-43

End of Chapter 1 End of chapter 1.

Fundamentals of Financial Accounting 3e by Phillips, Libby, and Libby.

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