Presentation on theme: "Discussion Section #1 Financial Accounting"— Presentation transcript:
1 Discussion Section #1 Financial Accounting Agenda:Fill out Information SheetChapter 1 SummaryHomework ProblemsQuiz to Review Concepts
2 Accounting Terminology Define key accounting terms:Four Basis Accounting Statements:AssetsLiabilitiesStockholders’ EquityRevenueExpensesBalance SheetIncome StatementStatement of Retained EarningsStatement of Cash Flows
3 Accounting Terminology Assets - Economic benefits that a firm expects to receive at some point in the futureLiabilities - Economic obligations that a firm expects to pay at some point in the futureStockholders Equity – The financing provided by the owners and the operations of the business.Two Sources: Contributed Capital2. Retained EarningsRevenues - Economic resources generated by the firm as a result of services provided or goods sold by the firmExpenses - Economic resources consumed by the firm in the process of providing services or selling goods
4 Assets = Liabilities + Shareholders’ Equity Balance SheetSnapshot of the investing and financing activities at a moment in time.The Basic Accounting Equation:Assets = Liabilities + Shareholders’ Equitywhich is the same ideas asInvesting = FinancingCopyright ã 2000 by Harcourt, Inc. All rights reserved.
5 Double – Entry System OR Assets = Liabilities + Shareholders’ Equity Every transaction will . . .have a self-canceling effect on one side of the equation.have an equal effect on the other side of the equation.OREvery economic event has two sides, a give and a take.Accountants record both sides of some economic events as a transaction.Furthermore, accountants require that the two sides of a transaction balance so that the basic accounting equation remains in balance.2.1. Dual Effect of a TransactionRecall the basic accounting equationAssets = Liabilities + Owners’ EquityAny transaction will effect one or more on the three classes of accounts.Remember that the transaction must balance, andThat the basic equation must balance.
6 Classifications of Accounts ASSETSLIABILITIESOWNERS’EQUITY=+CashAccounts ReceivableNotes ReceivablePrepaid ExpensesLandBuildingAccounts PayableNotes PayableAdvances from CustomersMortgage PayableIncome Taxes PayableCommon StockPreferred StockAdditional Paid-in CapitalRetained EarningsEconomicResourcesCreditors’ClaimsOwners’Claims
7 Net Income = Revenues - Expenses Income StatementReports the accountant's primary measure of performance of the business over the accounting periodIncome Statement Equation:Net Income = Revenues - ExpensesNote: Income Statement = Statement of Income, Statement of Earnings, Statement of OperationsNet Income = Net EarningsCopyright ã 2000 by Harcourt, Inc. All rights reserved.
8 - Measurement of Performance Revenues Expenses Income = Earned from the sale of goods or services to customers.Inflow of Net AssetsThe dollar amt of resources the entity used up to earn revenues during a period of time.Outflow of Net Assets. Increase in Owner’s Equity for the period covered*. Increase in Net Assets from Operations and Other Income*Excludes dividends and capital transactionsThe Life of a Business Enterprise is ContinuousSo accountants divides its life into artificial accounting periods
9 Accrual Basis Vs. Cash Basis Revenues are recognized when earned and expenses are recognized when incurred.Cash BasisRevenues are recognized when cash is received and expenses recorded when cash is paid.Intuitive and easy.Provides information on the liquiditySubject to manipulation, for example, the firm can delay having to recognize an expense by postponing cash payment.More difficult conceptually.Provides information on long-term profitability.Subject to manipulation by the choice of recognition rules99
10 Cash Flow StatementReports inflows and outflows of cash during the accounting period in the categories of operating, investing and financing.The Cash Flow Statement Equation:Cash = CF from Operating Acts+ CF from Investing Acts+ CF from Financing ActsCopyright ã 2000 by Harcourt, Inc. All rights reserved.
11 Statement Format Three categories of cash flows: Operating Activities Investing ActivitiesFinancing Activities
12 Statement Format The Statement of Cash Flows Explains the reasons for a change in cash.Classifies the reasons for the change as an operating, investing or financing activity.Reconciles net income with cash flow from operations.II. Classification of Cash FlowsOperations - cash flows related to selling goods and services; that is, the principle business of the firm.Investing - cash flows related to the acquisition or sale of noncurrent assets.Financing - long term and short-term cash flows related to liabilities and owners’ equity; dividends are a financing cash outflow.
13 Statement of Retained Earnings Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.Retained Earnings Equation:REEND = REEND + Net Income - DividendsCopyright ã 2000 by Harcourt, Inc. All rights reserved.