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Chapter 1: Accounting is the Langua

1 Useaccounting vocabulary

2 Learnaccounting concepts and

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3 Applythe accounting equation to

organizations

4 Evaluatebusiness operations

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5 Usefinancial statements

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e of Business

Page 2

rinciples

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business

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1 Useaccounting vocabulary

Each chapter begins with an actual

statement

For Chapter 1 we used the i ncome

or" Consol idated Statement of Op

For J Crew Group Inc.

Company managers make lots of deci

for J Crew

Which is selling faster-pants,

or shoes?

Are jeans bringing in more pr

blazers?

Should J Crew expand into Eu

Asia?

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Accounting is

.. an information system

.. the "language of business"the better you understand the

the better you can manage yo

Accounting produces .

f inanc ial statements

. Which report informatio

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the business entity

The f inanc ial statemen tsmeasure

performance and tell where a bus

stands in financial terms

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Flow of Accounting Information

People make decisions

Business transactions occur

Companies report results

Who uses Accounting information?

.. individuals

investors and creditors

.. regulatory bodies

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.. non profit organizations

Two kinds of Accounting

FinancialAccounting

ManagerialAccounting

Financial Accounting --

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provides information to people u

the firm

investors

bankers

government agencies

general publ ic

Financial Accounting --

must meet standards ofrelevanc

rel iabil i ty

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Managerial Accounting --

generates "inside information" fo

provides information for manager

Managerial Accounting --

examples

budgets, forecasts, and projec

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must still be accurate and relevan

decision needs of managers

Forms a business can take

1 proprietorship

2 partnership

limited-liability companies (LL3 corporations

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proprietorship

has a single owner

legally the proprietor is the busin

proprietor is personally responsi

for accounting the proprietorshipfrom the proprietor

partnership

two or more partners

each partner is liable

jointly and severally liable

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Limited Liability Company

one or many ownersowners have no personal liability

owners are called members

Corporation

one or many owners

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owners have no personal liability

owners "own" stock

owners are called stockholders o

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page 3

language

r finances

page 3

about

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page 3

iness

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page 4

page 4

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page 4

page 4

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ersoutside

page 4

and

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page 4

managers

s

page 4

tion

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t for the

page 5

)

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page 6

ss

le

is separate

page 6

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page 7

page 7

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shareholders

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J. Crew Group, Inc. page 2

Consolidated Statement of Operations

Year ended

(In millions) Feb. 3, 2007

Revenue1 Net sales 1,117$

2 Other revenue 35

3 Total revenue 1,152

4 Cost of goods sold 652

5 Gross Profit 500

6 Selling and adm. expenses 375

7 Income from operations 125

8 Interest expense 44

9 Lose on debt refinancing 10

10 Income before inc. taxes 71

11 Income taxes (7)

12 Net income 78$

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Year ended

Feb. 2, 2008

1,292$

43

1,335

746

589

416

173

11

-

162

65

97$

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Learnaccounting concepts and

GenerallyA ccepted A ccounting

professional guidelines for

and disclosure of fina

Two importance sources of acco

1. Financial A ccounting Standa

sets rules in the Unite

2. International A ccounting Sta

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sets rules globally

Conceptual Foundation of Accou

The overall objective of accouis to provide usefu lfin


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Accounting's Objectives-

fundamental qual i tat ive chara

relevance

faithful represe


relevance -able to in f luence decis

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Conceptual Foundation of Accoufaithful representation orrel ia

. complete

.. neutral (f ree f rom bias

w ithout mater ial error

accounting information focuseconom ic substance


Accounting's Objectives-

enhancing qual i tat ive charact

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. comparab il i ty

.. ver if iab i li t y

t imel iness

. understandabi l i ty


Two aspects ofcomparabi l i ty

1. able to compare dif ferent com

2. able to compare a company frperiod to the next -cons is

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verifiability- must be able to check for accuracy

completeness

reliabili

process of verifying information'soften involves internaland ex


t imel iness-

information must be available

enough to help them

understandabi l i ty-

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must make sense to the reaso


Constraints

. mater ial i ty

.. cos t


material i ty

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. information must be important

.. if omitted or in error it would

in the users decision

only "mater ial informat ion"must

disc losed


cos t

cost should not exceed the exto the user

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Entity Concept

- an organization stands apart

separate economic uni

-sharp boundaries are draw ar

so as not to confuse its aff

Continuity Assumption

Going concern concept

assumes an entity will remain

enough to use existing asse

purpose

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Cost principle

assets and services should be

actual "historical cost"

Stable monetary unit

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- assume that the dollars purch

- ignore inflation

- add and subtract dollar amou

dollar has the same purchasin

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rinciples

page 7

Principles (GAAP)

measurement

cial information

nting guidelines

page 7

ds Board (FASB)

States

dards Board (ISAB)

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ting page 7

tingancial information

ting page 7

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ter ist ics

ntation

ting page 7

ons

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ting page 7-8i l i ty -

n thef a transaction

ting page 8

r is t ics

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ting page 8

anies-compare

m oneen t

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ting page 8

ty

ernal audito rs

ting page 8

o the user early

ake decisions

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able informed user

ting page 8

ting page 8

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ake a difference

be separately

ting page 8

ected benefit

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page 8

as a

t

und an "entity"

irs with others

page 9

in operations long

ts for their intended

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page 9

recorded at their

page10

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sing power is stable

ts as though each

power

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App lythe accounting equation to bu

organizations

Assets = Liabilities +

Asset

economic resources that are exp

a future benefit

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Claims on assets

-- Liabilities are "outsiders claims"-- debts payableto outsiders (or

-- Equity are "insider claims"Equity means ownersh ip

Equity has two parts

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-- paid in capital -(also called contr

-- retain earn ing - the amount ear

producing activities kept for u

Expanded balance sheet equation


Assets = Liabi l i t ies+ Contrib uted Capit

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Paid-in capital

. the amount investors have "inves

.. basic component is common s toc

1 common s tockis issued by a

as evidence of ownership2 all corporations have common

Retained Earnings

the amount earned from income-

and kept for use in the busine

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Revenues

Expenses

Revenues

an increase in retained earnings

of goods and services

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Expenses

a decrease in retained earnings b

Dividend

a decrease in retained earnings b

distribution to shareholders

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Components of Retained Earnings

Beginning balance star t of th

+ Net Income/ - Net Loss revenues -

- Dividends payments

= Ending balance end of the

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iness

Page 13

Equities

Page 13

cted to produce

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Page 13

creditors)

Page 13

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buted capital)

ned from income

e in the business

Page 14

Equities

l + Retained Earn ings

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Page 14

ed" in the corporationk

orporation

stock

Page 14

roducing activities

s

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Page 14

y delivery

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Page 14

operations

Page 15

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Page 15

per iod

expenses

o shareholders

eriod

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Evaluatebusiness operations

Four financial statements

income statement

statement of retained earn ing

balance sheet

statement o f cash f low

Income statement

How well did the company perfor

What did sell?

What did spend? -

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=

Statement of retained earnings

Why did the company's retained e

Beginning retained earnings

+ net income- dividends

Ending retained earnings

Balance sheet

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What is the company's financial pDec. 31. the end o f the year

Assets = Liabilities + Equity

Statement of cash flow

Increases / decreases in cash

+/ - Operating activities

+/ - Investing activities

+/ - Financing activities

= total Increases / (decreases) i

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+ Beginning bal

= Ending balance

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page 16

s

page 16

?

Revenues

Expense

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income or loss

page 16

rnings change?

page 16

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sition at?

page 16

n cash

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Exh ib it 1-11 page 27

Relationship among the financial state

Revenues 700,000$ Beg. Ret. Ear

Expenses 670,000 Net income

Net Income 30,000$ Cash dividen

End. Ret. Ear

Assets Operating cas

Cash 35,000$ investing cash

Other Assets 265,000 Financing cas

Total Assets 300,000$ Net increase in

Liabilities Beginning cas

Total Liabilities 120,000$ Ending cash

Stockholders Equity

Common stock 40,000

Retained earnings 200,000

Other equity (60,000)

Total Stkhdrs Equity 180,000

ABC Company

Balance Sheet

December 31, 2010

AB

Statem

Year E

ABC CompanyIncome Statement

Year Ended Dec. 31, 2010

ABStatement

Year E

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Total Liab + Equity 300,000$

page 16

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ents

nings 180,000$

30,000$

d (10,000)$

nings 200,000$

90,000$

(100,000)

40,000

cash 30,000

5,000

35,000$

Company

nt of Cash Flow

ded Dec. 31, 2010

Companyf Retained Earnings

ded Dec. 31, 2010

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S1 - 1 PAGE 36


a = 130,000$ +b 250,000$ = 70,000$ +

c 190,000$ = +

S1 - 8 PAGE 37

1 Assets Liabilities

A acct payable x

B common stock

C supplies x

D retained earningsE Land x

F Prepaid expense x

G Acct receivable x

H Long term debt x

I Mech inventory x

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J Note payable x

K expenses payable x

L Equipment x

S1- 9 Page 37

1 Revenues , expenses

2 net income / net loss

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S1- 10 Page 37

Call Anywhere Wireless Inc.

Income Statement

for the year ending 12/31/10

(millions)

Revenues 94

Expenses 23

Net Income 71

S1- 11 Page 37

Roam Corp.

Statement Retained Earning

for the year ending 12/31/10

(millions)

Beginning Retained earnings 210

Net Income 130

Dividend (43)

Ending Retained earnings 297

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S1- 12 Page 32

Tommer Products

Balance Sheet

At 12/31/10

Assets

Cash 12,000

Receivables 5,000

Inventory 42,000

Equipment 82,000

Total Assets 141,000

Liabilities

Acct Pay 17,000

Long term Note Pay 78,000

Total Liabilities 95,000

Equity

Common Stock 14,800

Retained earning 31,200

Total Equity 46,000

Total Equity & Liabilities 141,000

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S1- 13 Page 38

Yidas Medical SuppliesStatement of Cash Flows

For the year ending 12/31/10

Cash from

Operating

Net income 90,000

Cash adjustments (16,000)

Cash from Operating Activities: 74,000

Investing

Purchase of equipment (40,000)

Cash Used in Investing Activities: (40,000)

Finances

Dividends paid (60,000)

Cash Used in Financing Activities: (60,000)

Net decrease in cash (26,000)

Beginning balance 40,000

Ending balance 14,000

S1- 13 Page 38

a SCF,SRE dividends

b IS Salary expense

c BS Inventory

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d IS Sales revenue

e BS, SRE Retained earnings

f SCF Net cash provided by operating activitie

g SCF,IS,SRE Net income

h BS,SCF Cashi SCF Net cash used in financing activities

j BS Accounts payable

k BS Common stock

l IS Interest revenues

m BS Long term debt

n SCF Increase or decrease in cash

E1-16A Page 38

Assets =

Corner Grocery =

Hudson Bank 29$ =

DJ Video Rental 21$ =

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Equity

21,000$

80,000$

Equity

x

x

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Rev 380

exp 250

net inc 130

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BS = Balance Sheet

IS = Income Statement

SCF = Statement of Cash Flow

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SRE = Statement of Retained Earnings

Stockholders'

Liabilities + Equity

9$ + 7$

+ 15$

10$ +

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