1. Revision of double-entry
FINANCIAL ACCOUNTING
Revision of double-entry

2. Revision of double-entry
Today we want to:
Revise double-entry
Understand the cash flow statement
Practice with examples
Revision of double-entry

3. Example: Marvin Company
Marvin Company balance sheet at the 1st of January was as follows
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4. Revision of double-entry
Transaction 1a
Goods were sold for 12,000€. The client pays cash.
Analysis
The asset Cash increases
The revenue Sales Revenue increases
Journal entry
Cash……………………….12,000
Sales revenue…………………..12,000
Posting
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5. Revision of double-entry
Transaction 1b
The inventory value of the goods sold is 7,000€. Analysis
The asset Inventory decreases
The expense Cost of Sales increases
Journal entry
Cost of sales……………………….7,000
Inventory……..…………………..7,000
Posting
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6. Revision of double-entry
Transaction 2
Marvin places an order to Star Company merchandise for 7,000€ and receives the goods.
Analysis
The asset Inventory increases
The liability Trade payables increases
Journal entry
Inventory……………………….7,000
Trade payables…………………..7,000
Posting
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7. Revision of double-entry
Transaction 3a
Goods sold for 2,500€ and paid in cash
Analysis
The asset Cash increases
The revenue Sales revenue increases
Journal entry
Cash……………………….2,500
Sales revenue…………………..2,500
Posting
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8. Revision of double-entry
Transaction 3b
The inventory value of the goods sold is 1,500€. Analysis
The expense Cost of Sales increases
The asset Inventory decreases
Journal entry
Cost of sales……………………….1,500
Inventory……..…………………..1,500
Posting
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9. Revision of double-entry
Transaction 4a
Goods sold for 3,400€ on credit
Analysis
The asset Trade receivables increases
The revenue Sales revenue increases
Journal entry
Trade receivables……………….3,400
Sales revenue…………………..3,400
Posting
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10. Revision of double-entry
Transaction 4b
The inventory value of the goods sold is 2,000€. Analysis
The expense Cost of Sales increases
The asset Inventory decreases
Journal entry
Cost of sales……………………….2,000
Inventory……..…………………..2,000
Posting
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11. Revision of double-entry
Transaction 5
Marvin pays the employees for January 4,200€ in cash
Analysis
The expense Wages increases
The asset Cash decreases
Journal entry
Wages………………………….4,200
Cash………..…………………..4,200
Posting
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12. Revision of double-entry
Transaction 6
Marvin purchases land for 20,000€ and pays in cash
Analysis
The asset PPE increases
The asset Cash decreases
Journal entry
PPE(Land)…………………….20,000
Cash………..…………………..20,000
Posting
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13. Revision of double-entry
Transaction 7
Marvin purchases a two year insurance policy for 2,800€ and pays in cash
Analysis
The asset Prepaid expenses increases
The expense Insurance increases
The asset Cash decreases
Journal entry
Prepaid expenses…………….2,683
Insurance…………………………117
Cash………..…………………..2,800
Posting
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14. General journal for Marvin
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15. Revision of double-entry

16. Trial balance for Marvin at the 9 of January
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17. Trial balance, income statement and balance sheet
Balance sheet for Marvin co. asat the 9 of January - €
Income statement for Marvin co.
for the period ending 9 of January - €
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18. Statement of Cash Flows
The Statement of Cash Flow can help answer the following questions:
How did cash increase when there was a net loss for the period?
Is cash flow greater or less than net income?
How was the expansion in the plant and equipment financed?
How was the the debt retired?
How much money was borrowed during the year?
What amount was paid in dividends?
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19. Sources of Information for the Statement of Cash Flows
The cash flow statement is a created statement that relies on information from the income statement and balance sheet. Therefore, to prepare the cash flow statement, you need:
Current income statement (only current year)
Comparative balance sheet (2 years)
Additional information
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20. Format of the Statement of Cash Flows
Cash Flow Statement has four sections:
operating
investing
financing
significant non-cash investing and financing activities
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21. Revision of double-entry
Operating Activities
Income Statement Information Needed:
Net income
Depreciation and amortization (noncash expenditures)
Gain(loss) on sale of assets or investments
Balance Sheet Information Needed:
Change in Current Assets
Change in Current Liabilities
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22. Revision of double-entry
Investing Activities
Income Statement Information Needed :
Gain(Loss) on Assets
Balance Sheet Information Needed :
Change in Long-Term Assets
Property Plant and Equipment
Long-Term Investments
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23. Revision of double-entry
Financing Activities
Income Statement Information Needed:
None
Balance Sheet Information Needed:
Change in Long-Term Liabilities
Change in Stockholders’ Equity
Retained Earnings Stmt Information:
Dividends Paid
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24. Significant Non-Cash Activities
Transactions that do not affect cash are NOT reported in the body of the statement of cash flows. However, these items are reported:
In a separate schedule at the bottom of the statement of cash flows or
In a separate note or supplementary schedule to the financial statements.
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25. Examples of Significant Non-Cash Activities
Issuance of common stock to purchase assets.
Conversion of bonds into common stock.
Issuance of debt to purchase assets.
Exchanges of plant assets.
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26. Converting Net Income to Cash Flow From Operations
Accrual Method
Cash Method
Revenue earned
Non cash expenses
(e.g. depreciation) +
- Expense incurred
Decreases in current assets
Increases in current liabilities +
NET INCOME
Increases in current assets
Decreases in current liabilities -
CASH FLOW FROM OPERATIONS
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27. Steps in Preparing Cash Flow Statement
Determine the net Increase (decrease) in cash. Note: This will serve as the check figure.
Determine the cash provided (used) by operations.
Determine the cash provided (used) by investing.
Determine the cash provided (used) by financing.
Determine any significant noncash transactions that should be disclosed.
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28. Revision of double-entry
Cash Flow statement (1)
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29. Revision of double-entry
Cash Flow statement (2)
Indirect method
Direct method
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30. Using The Accounting Framework: America Online Inc.
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31. Accounting Tools That Will Be Used
The accounting equation
Relationships (Articulation) among the financial statements
Information disclosed in footnotes to the financial statements
Debits, credits and T-accounts
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32. Revision of double-entry
Total Assets $ 959 million
Total Assets $ 847 million
Change in Total Assets $(112 million)
WHY?
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33. The accounting equation
Equity
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34. Revision of double-entry
Total Liabilities 1996 $446 million
Total Liabilities 1997 $719 million
Change in Liabilities $273 million
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35. Revision of double-entry
Total Equity $ 513 million
Total Equity $ 128 million
Change in Equity $(385 million)
HERE IS THE KEY!
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36. Explanation for Changes In Shareholders’ Equity
Retained earnings: decreased by $499 million
Common stock and additional-paid-in capital: increased by $98 million
AOL issued additional shares of stock
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37. The role of the income statement
Equity
Income Statement
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38. Revision of double-entry

39. Analysis of the expenses
Cost of revenues $1,041 million
Marketing $ million
General & administrative $ million
Write-off of deferred
subscriber acquisition cost $ million
What is the last entry?
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40. Subscriber Acquisition Costs - Footnote #2
Costs attributable to marketing programs that result in subscriber registrations
These expenditures are recorded as an asset
What?
Amortized (as opposed to depreciated) monthly over a period less than 24 months
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41. Subscriber Acquisition Costs - Footnote #3
Due to change in business model, AOL changed to a flat-rate pricing and reduced reliance on online subscriber revenues.
This change in the future stream of revenue created uncertainty as to whether these expenditures created an asset (i.e., produced a future benefit)
After 10/1/96 these costs were expensed as incurred - no longer recorded as assets. Thus, the asset must be written off.
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42. How Does A Company Write Off An Asset ?
AOL must remove the asset from its books and debit the expense, deferred subscriber acquisition expense and credit the asset, deferred subscriber acquisition cost. Footnote 3 indicates that AOL wrote off $385 million for the year.
Deferred subscriber acquisition expense 385,221,000
Deferred subscriber acquisition cost ,221,000
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43. How Does A Company Write Off An Asset ?
Remove (credit) the asset from the books
Add (Debit) the corresponding expense
Footnote 3 indicates that AOL wrote off $385 million for the year.
Journal entry
Deferred subscriber acquisition expense 385,221,000
Deferred subscriber acquisition cost ,221,000
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44. T-accounts (1) Accumulated Deficit (Retained Earnings) Balance 6/30/96
From balance sheet
7,767
1997 loss from
income statement
499,347
Balance 6/30/97
From balance sheet
507,114

45. T-accounts (2) Deferred Subscriber Acquisition Costs Balance 6/30/96
(Asset account)
Balance 6/30/96
314,181
130,229
The Statement of Cash Flows indicates that an additional
$130,229 cash was spent on these costs between 7/1/96
and 9/30/96.
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46. T-accounts (3) Deferred Subscriber Acquisition Costs 314,181 56,189
(Asset account)
314,181
130,229
56,189
The Statement of Cash Flows indicates that amortization of these costs between 7/1/96 and 9/30/96 was $56,189. AOL estimated that $56,189 of the asset expired over this time period.
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47. Writing-off the asset (1)
Deferred Subscriber Acquisition Costs
(Asset account)
314,181
130,229
385,221
56,189
Balance 9/30/96
385,221
Write-off
on 10/1/96
It was this 385,221 that was “written off” as an expense on
10/1/96
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48. Writing-off the asset (2)
Deferred Subscriber Acquisition Costs
(Expense account)
385,221
This expense will enter the income statement and will affect
The Balance sheet through the profit and/or loss for the year
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49. Income statement and cash flow

50. Information from the Cash Flow Statement
AOL’s cash flow statement shows that:
Cash flow from operations was a positive $123 million.
Cash flow from financing activities provided cash of $79 million. Note this is consistent with our earlier analysis of stockholders’ equity.
Investing activities used cash of $197 million. This is to be expected from a growing company.
Overall increase in cash, $6 million.
How could AOL’s income statement show such a large loss, yet have a positive cash flow?
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51. Information from the Cash Flow Statement
Operating cash flows, positive $123 million
Investing activities used cash of $197 million - this is to be expected from a growing company
Financing activities provided cash of $79 million - from issuance of new stock
Overall increase in cash, $6 million.
How could a large loss have caused no cash
flow problem?
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52. Explanation of Increase in Cash Flow
The write-off (expense) of the $385 million in deferred subscriber acquisition costs, current subscriber acquisition costs of $59 million, $22 noncash restructuring charges, and $64 million of depreciation and amortization are all non- cash expenses that are added back to net income. It is a noncash expense. Therefore, the income statement reported $530 million dollars in expenses that did not require the outlay of cash!
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53. Revision of double-entry
Summing up
Accounting is far from being an exact picture of the situation of the company
Crucial importance of the balance sheet equation
The relationship between the income statement at the balance sheet equation
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