Basic Accounting: Concepts, Techniques, and Conventions

Chapter 15
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 1

The Need for Accounting

Managers, investors, and other internal groups want the answers to two important questions: How well did the organization perform?

Where does the organization stand?

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

The Need for Accounting

Accountants answer these questions with three major financial statements: Income statement Statement of cash flows
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 3

Balance sheet

The Need for Accounting

A tr s ti fi i l i iti r ir y f r tt t ff t t r i ti r i .

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Balance Sheet
The balance heet (also called tatement of financial po ition or tatement of financial condition) condition) is a snapshot of the financial status of an organization at a point in time.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Balance Sheet
A et are economic resources that are expected to benefit future activities of the organization.

Liabilitie are the entit s economic obligations to nonowners. Owner equity is the excess of the assets over the liabilities.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 6

Balance Sheet
The owners equit of a corporation is called shareholders equity. shareholders equity. Shareholders equit

PaidPaid-in capital

Retained earnings
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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

King Hardware Transactions

Initial investment b owners: $100,000 cash Acquisition of inventor : $75,000 cash Acquisition of inventor on open account: $35,000 Merchandise costing $100,000 was sold on open account for $120,000.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 8

King Hardware Transactions

Stockholders Assets = Liabilities + equity

1) 2)

Cash Cash Inventor 3) Inventor 4a) Receivable 4b) Cost Subtotal

+100,000 75,000 + 75,000 + 35,000 + 35,000 +120,000 100,000 +155,000 + 35,000

+100,000

+120,000 100,000 +120,000

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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King Hardware Transactions

Cash collections of accounts receivable: $15,000 Cash pa ments of accounts pa able: $20,000 On March 1, paid $3,000 cash for store rent for March, April, and Ma . Rent is $1,000 per month.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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King Hardware Transactions

Stockholders Assets = Liabilities + equity

5) i ) ) ) r i ) E T t l T t l (1- ) (1l

5, 5, , , , , , 155, 134,000

, 5,

, , +120,000 120,000 134,000

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2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

Revenues and Expenses

Revenues are increases in re nershi clai s arising fr the elivery of goods or services. f x enses are decreases in ownershi claims arising from delivering goods clai s or services or using up assets.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Relationship Between Balance Sheet and Income Statement

The income statement measures the performance of an organization b matching its accomplishments (revenue from customers, which is sales) usuall called sales) and its efforts (cost of goods sold and other expenses.)

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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Relationship Between Balance Sheet and Income Statement

Balance sheet Feb. 28 20xx Balance sheet March 31 20xx Balance sheet April 30 20xx Balance sheet Ma 31 20xx

Time

Income statement for March

Income statement for April

Income statement for Ma

Time

Income statement for quarter ended Ma 31, 20xx

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 14

The Analytical Power of the Balance Sheet Equation

The balance sheet equation can highlight the link between the income statement and balance sheet. Assets (A) = Liabilities (L) + Stockholders equit (S ) A = L + Paid-in capital + Retained income PaidA = L + Paid-in capital + Revenue xpenses Paid2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 15

Accrual Basis and Cash Basis

The accrual basis of accounting recognizes revenues and expenses when the occur regardless of when cash is received or disbursed. The cash basis of accounting recognizes revenue and expense when cash is received and disbursed.
2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton 15 - 16

Accrual Basis and Cash Basis

The major deficienc of the cash basis of accounting is that it is incomplete.

It fails to match efforts and accomplishments in a manner that properl measures economic performance and financial position.

2005 Prentice Hall Business Publishing, Introduction to Management Accounting 13/e, Horngren/Sundem/Stratton

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