1 6

Define and use the accounting equation
Assets = Liabilities + Stockholders’ equity
Economic Claims to
Resources Economic
Resources
Copyright (c) 2009 Prentice Hall. All rights reserved. 2

 Economic resources that have a future benefit
 Examples:
◦ Cash
◦ Accounts receivable
◦ Merchandise inventory
◦ Furniture
◦ Land

 Liabilities  Owners’ equity
◦ Debts payable to ◦ Owners’ claims to the
outsiders assets of the business
◦ Examples: ◦ In a corporation,
 Accounts payable stockholders’ equity
 Bank loans

Assets = Liabilities + Stockholders’ equity
Paid-in Retained
capital earnings

Stockholders’ equity
Paid-in capital Retained earnings
Common stock + Net income
- Dividends

Retained earnings Revenues
+ Net income
- Expenses
- Dividends

 Amounts earned by delivering goods or services
to customers
◦ Sales revenue
◦ Service revenue
◦ Interest revenue
◦ Dividend revenue

 Outflows of assets or increasing liabilities in the
course of delivering goods or services to
customers
◦ Salary expense
◦ Rent expense
◦ Utilities expense
◦ Interest expense

Assets Liabilities Owner’s
equity
Nice Cuts $?? $25,000 $43,000
Love Dry
85,000 ?? 54,000
Cleaners
Hudson Gift
102,000 49,000 ??
and Cards
10
Assets Liabilities Stockholders’
equity
Nice Cuts $?
$68,000 $25,000 $43,000
Love Dry 31,000

85,000 ? 54,000
Cleaners
Hudson Gift
102,000 49,000 53,000
?
and Cards
11
Depict accounting for business transactions
 An event that affects the financial position of a
particular entity
 Can be recorded reliably
 Every transaction impacts at least two items
 The accounting equation balances before and
after each transaction

Assets Liabilities Stockholders' Equity
Accounts Accounts Common Retained
Date Cash receivable Supplies Land payable stock earnings
Bal 2,500 1,500 0 13,000 4,000 5,000 8,000
Liabilities & Equity =

Assets = $17,000
$17,000

Bal 2,500 1,500 - 13,000 4,000 5,000 8,000

(a) 10,000 10,000
Bal 12,500 1,500 - 13,000 4,000 15,000 8,000

Assets = $27,000
$27,000

Bal 12,500 1,500 - 13,000 4,000 15,000 8,000
(b) 1,100 1,100
Bal 13,600 1,500 - 13,000 4,000 15,000 9,100

Assets = $28,100
$28,100

Bal 13,600 1,500 - 13,000 4,000 15,000 9,100
(c) (4,000) (4,000)
Bal 9,600 1,500 - 13,000 0 15,000 9,100

Assets = $24,100
$24,100

Bal 9,600 1,500 - 13,000 15,000 9,100
(d) 700 700
Bal 9,600 1,500 700 13,000 700 15,000 9,100

Assets = $24,800
$24,800

Bal 9,600 1,500 700 13,000 700 15,000 9,100

(e) 600 (600)
Bal 10,200 900 700 13,000 700 15,000 9,100

Assets = $24,800
$24,800

Bal 10,200 900 700 13,000 700 15,000 9,100
(f) 1,700 1,700
Bal 11,900 900 700 13,000 700 16,700 9,100

Assets = $26,500
$26,500

Bal 11,900 900 700 13,000 700 16,700 9,100
(g) 4,300 4,300
Bal 11,900 5,200 700 13,000 700 16,700 13,400

Assets = $30,800
$30,800

Bal 11,900 5,200 700 13,000 700 16,700 13,400
(h) (1,000) (1,000)
(300) (300)
Bal 10,600 5,200 700 13,000 700 16,700 12,100

Assets = $29,500
$29,500

Bal 10,600 5,200 700 13,000 700 16,700 12,100
(i) 100 (100)
Bal 10,700 5,200 600 13,000 700 16,700 12,100

Assets = $29,500
$29,500

Bal 10,700 5,200 600 13,000 700 16,700 12,100
(j) (2,200) (2,200)
Bal 8,500 5,200 600 13,000 700 16,700 9,900

Assets = $27,300
$27,300

Explain and prepare financial statements
Income Balance
Statement Sheet
Retained
Cash Flow
Earnings
Statement
Statement
 Reports on profitability of business
Revenues minus Expenses
equals
If expenses >
revenue = net
Net income loss

 Summary of changes in an entity’s retained
earnings during a specific period
Beginning Retained earnings

Plus: Net income (or minus net loss)
Less: Dividends
Equals: Ending Retained earnings

 Reports the entity’s assets, liabilities, and
stockholders’ equity as of a specific date
Balance Sheet
Liabilities
Assets
Equity

 Reports cash receipts and cash payments during
a period

Goth Inc.
Income Statement
Month ended September 30, 2011
Revenue:
Service revenue $5,400
Expenses:
Rent expense $1,000
Advertising expense 300
Total expenses 1,300
Net income $4,100

Goth Inc.
Statement of Retained Earnings
Month ended September 30, 2011
Retained earnings, September 1, 2011 $ 8,000
Add: Net Income 4,100
$ 12,100
Less: Dividends (2,200)
Retained earnings, September 30, 2011 $ 9,900

Goth Inc.
Balance Sheet
September 30, 2011
Assets Liabilities
Cash $8,500 Accounts payable $ 700
Accounts receivable 5,200 Stockholders' Equity
Supplies 600 Common stock 16,700
Land 13,000 Retained earnings 9,900
Total stockholders' equity 26,600
Total liabilities & stockholders'
Total assets 27,300 equity 27,300

Use financial statements to evaluate business
performance
Income Statement
Revenues - Expenses = Net Income

Increased by Net Income Decreased by Dividends
Balance Sheet
Assets = Liabilities + Equity

Statement of
Income
Retained Balance Sheet
Statement
Earnings
Shows
Displays
Demonstrates changes in
financial
profitability Retained
position
earnings

Chapter 3
Differentiate between accrual and cash-basis
accounting

Accrual Basis Cash Basis
Revenues are Revenues are
recognized when recognized when
earned and expenses cash is received and
are recognized when expenses recorded
incurred. when cash is paid.
Not GAAP

Accrual – Revenue recognized
when services provided
Cash – Revenue recognized

when cash is received

Accrual – Expense recognized
when incurred
Cash – Expense recognized

when cash is paid

Define and apply the accounting period concept,
revenue, and matching principles

 Businesses prepare financial statements for
specific periods to evaluate performance
 Basic accounting period = one year
◦ Calendar year
◦ Fiscal year
 Interim periods
◦ Financial statements of less than one year
 Monthly
 Quarterly
 Semiannually

 When to record revenue?
◦ When it is earned
 When service is provided or product delivered
 This is not necessarily the time when cash is received
 What amount of revenue should be recorded?
◦ Value of item or service transferred to customer

 Measure all expenses incurred during the
accounting period
 Match the expenses against the revenues earned
during the same period

 Requires that accounting information be reported
at regular intervals
 Accounts are updated at the end of each
accounting period

Explain why adjusting entries are needed

 Prepared at end of an accounting period
 Assign:
◦ Revenues to the period when earned
◦ Expenses to the period when incurred
 Update asset and liability accounts
 Need to properly measure:
◦ Net Income
◦ Assets & Liabilities

Either increase
Never involve revenue or
cash increase an
expense
“Accrued”
means amount
must be
recorded

Journalize and post adjusting entries

Prepaid
Depreciation
expenses
Accrued Accrued
expenses revenues
Unearned
revenues

 Advance payments of expenses
 Examples:
◦ Rent
◦ Insurance
◦ Supplies
 Recorded as an asset
 Adjusting entry records amount used as an
expense

GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Apr 1 Prepaid Rent 4,800

Cash 4,800
Prepaid rent for 6 months
Prepaid rent
4/1 4,800

GENERAL JOURNAL
Apr 30 Rent expense 800

Prepaid rent 800
To record rent expired in April
Prepaid rent Rent expense

4/1 4,800 4/30 800 4/30 800
Bal 4,000

 Plant assets
◦ Long-lived tangible assets used in business operations
 Examples:
◦ Land, buildings, equipment, and furniture
 Depreciation
◦ Allocation of a plant asset’s cost to expense over its
useful life
◦ Land is not depreciated

GENERAL JOURNAL
12 31 Depreciation expense $$$$

Accumulated depreciation $$$$
Amount
Contra-asset
calculated based
account
on depreciation
method

 Contra asset
◦ Normal credit balance
◦ Always paired with related account
 Holds sum of all depreciation recorded on a plant
asset
 Book value:
◦ Cost minus accumulated depreciation

 Expenses incurred before payment is made
◦ Results in a liability
 Opposite of a prepaid expense
 Examples:
◦ Salaries
◦ Interest

GENERAL JOURNAL
Dec 31 Interest expense $$$$

Interest payable $$$$$
To record accrued interest
GENERAL JOURNAL
Dec 31 Salaries expense $$$$

Salaries payable $$$$
To record accrued salaries
 Revenue earned before cash is received
 Results in a receivable
GENERAL JOURNAL
Dec 31 Accounts receivable $$$$

Service revenue $$$$
To record accrued revenues

 Cash is collected before revenue is earned
◦ Results in a liability as the company owes a product or
service or they will have to give the money back
 Also called deferred revenue
BEFORE

GENERAL JOURNAL
Dec 1 Cash $$$$

Unearned revenue $$$$
To record cash received before service is provided
GENERAL JOURNAL
Dec 31 Unearned revenue $$$$

Service revenue $$$$
To record earned portion of
unearned revenue
 To properly measure net income on the income
statement
◦ Each adjusting entry affects a revenue or an expense
 To update the balance sheet
◦ Each adjusting entry affects an asset or a liability

Category of Adjusting Entry Debit Credit
Prepaid expense Expense Asset
Depreciation Expense Contra asset
Accrued expense Expense Liability
Accrued revenue Asset Revenue
Unearned revenue Liability Revenue

Explain the purpose of and prepare an adjusted
trial balance
 Prepared after adjusting entries are posted
 Useful step in preparing financial statements
 Often appears on a work sheet
◦ Tool accountants use at end of period

Any Company
Worksheet
December 31, 2010
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 5,400
Supplies 700 a. 500 200
Equipment 17,000
Accum. depr. - Equip. 1,000 b. 1,000 2,000
Accounts payable 200
Interest payable c. 100 100
Note payable 9,000 9,000
Josie Smith, Capital 6,000 6,000
Josie Smith, W/D 1,000 1,000
Service revenue 12,000 12,000
Rent expense 4,000 4,000
Supplies expense a. 500 500
Depreciation expense b. 1,000 1,000
Interest expense 100 c. 100 200
Totals 27,200 27,200 1,600 1,600 28,300 28,300
Copyright (c) 2009 Prentice Hall. All rights reserved.

31
Prepare the financial statements from the adjusted
trial balance
Income • Reports revenue and expenses
statement • Determines net income
Statement of • Shows why Retained earnings

changed during the period
retained • Computes ending Retained
earnings earnings
• Reports assets, liabilities and

stockholders’ equity
Balance sheet • Needs ending Retained earnings to
balance

Any Company
Worksheet
December 31, 2010
Adjusted
Trial Balance
Account Title Dr. Cr.
Cash 5,400
Supplies 200
Equipment 17,000
Accum. depr. - Equip. 2,000 Balance sheet
Interest payable 100
Note payable 3,000
Common stock 6,000
Retained earnings 5,000
Service revenue 12,000
Rent expense 4,000
Supplies expense 500 Income statement
Depreciation expense 1,000
Interest expense 200
Totals 28,300 28,300
34
Any Company
Income Statement
Year ended December 31, 2010
Revenue:
Service revenue $ 12,000
Expenses:
Rent expense $ 4,000
Depreciation expense 1,000
Supplies expense 500
Interest expense 200
Total expenses 5,700
Net income $ 6,300

Any Company
Retained earnings, January 1, 2010 $ 5,000
Add: Net income 6,300
Retained earnings, December 31, 2010 $11,300

Any Company
Balance Sheet
December 31, 2010
Assets
Cash $5,400
Supplies 200
Equipment 17,000
Less: Accumulated depreciation (2,000) 15,000
Total assets 20,600
Liabilities
Interest payable 100
Notes payable 3,000
Total liabilities 3,300
Stockholders' Equity
Common stock 6,000
Retained earnings 11,300
Total stockholders' equity 17,300
Total liabilities & stockholders' equity 20,600

Chapter 6
Define accounting principles related to inventory
Consistency Disclosure
Materiality Conservatism

 Consistency
◦ Businesses should use the same accounting methods
from period to period
 Disclosure
◦ Companies should report enough information for
outsiders to make decisions about the company
 Materiality
◦ Companies must follow accounting rules for significant
items
 Significant – cause a user to change decision
 Conservatism
◦ Exercise caution in financial reporting

Define inventory costing methods
Specific-unit First-in,
cost First-out
Last-in, Average-
First-out cost

 Each inventory item is identified by its specific cost
 Used by business that sell unique, easily identified
items
◦ Examples: Cars, fine jewelry, real estate

Assumes oldest items are sold first
Oldest Cost of Goods

Costs Sold
Therefore, newest items are on hand
Recent Ending
Costs Inventory

Assumes newest items are sold first
Recent Cost of Goods

Costs Sold
Therefore, oldest items are on hand
Oldest Ending
Costs Inventory

The average cost of each unit in inventory is
assigned to cost of goods sold
Cost of Inventory Number of Units

on Hand ÷ on Hand = Average Cost

Account for perpetual inventory by the three most
common costing methods
Beginning Inventory
Purchase 5 shirts

Then we sell 4 shirts for $20 each.
Beginning Inventory What costs should be assigned to
Cost of goods sold?
First-In, First-Out
Purchase 5 shirts

Cost of goods sold?
First-In, First-Out
Purchase 5 shirts

What costs should be assigned to
Cost of goods sold?
First-In, First-Out
Inventory = $48 Cost of good sold = $42

GENERAL JOURNAL
Accounts receivable ($20 x 4) 80

Sales revenue 80
To record sales on account
Cost of goods sold 42

Inventory 42
To record cost of sales

Sales $80
Gross profit $38

Cost of goods sold?
Last-In, First-Out
Purchase 5 shirts
Inventory = $42 Cost of good sold = $48

GENERAL JOURNAL

Sales revenue 80

Inventory 48

Sales $80
Gross profit $32

Cost of goods sold?
Compute the Average Cost

Units Cost
Beginning inventory 3 $30
Purchases 5 60
Total 8 $90
Average = $90/8 = $11.25
Purchase 5 shirts
Inventory = $11.25 x 4 = $45 Cost of good sold = $11.25 x 4 = $45

GENERAL JOURNAL

Sales revenue 80

Inventory 45

Sales $80
Gross profit $35

Compare the effects of the three most common
costing methods
FIFO
LIFO 46%
31%
Avg
20% Other
3%

FIFO LIFO Average
Sales $80 $80 $80
Cost of goods sold $42 $48 $45
Gross profit $38 $32 $35
Highest Lowest
If inventory gross gross
prices are profit; profit;
increasing highest lowest
net net
income income
Copyright (c) 2009 Prentice Hall. All rights reserved .
First-In, Last-In, Average
First-Out First-Out Cost
High income Lower income = “Middle ground”

attracts Less taxes
investors

Apply the lower-of-cost-or market rule to inventory
 Example of Accounting Conservatism
 Inventory is reported at lower of:
◦ Historical cost or
◦ Market value (current replacement cost)
 If market is lower than cost, write down inventory
value:
GENERAL JOURNAL
Post
Date Accounts Ref Debit Credit
Cost of goods sold
Inventory

GENERAL JOURNAL
Post
#1 Date Accounts Ref Debit Credit
Cost of goods sold $25,000
Inventory $25,000
L and M Electronics
Balance Sheet
December 30, 2012
#2 Current assets:
Inventory, (at lower-of-cost-or-market) $80,000
$105,000 - $25,000

L and M Electronics
Income Statement
#3
Cost of goods sold $430,000
$405,000 + $25,000
#4 Conservatism

Measure the effects of inventory errors
Ending inventory
overstated
Cost of goods sold

understated
Gross profit and net income

overstated
Next period beginning inventory

overstated

Ending inventory
understated
Cost of goods sold

overstated
Gross profit and net income

understated
Next period beginning inventory

understated

Estimate ending inventory by the gross profit
method
 Method to estimate ending inventory using the
gross profit percent
Beginning inventory $15,000

Net purchases 70,000
Cost of goods available 85,000
Estimated cost of goods sold:
Sales revenue $100,000
Less: Estimated gross profit of 35% (35,000)
Estimated cost of goods sold (65,000)
Estimated cost of ending inventory $20,000

Beginning inventory $47,000
Net purchases 30,300
Cost of goods available 77,300
Estimated cost of goods sold:
Sales revenue $63,000
Less: Estimated gross profit of 35% (22,050)
Estimated cost of goods sold (40,950)
Estimated cost of ending inventory $36,350

Chapter 5
 Businesses that sell a product to customers
 Inventory
◦ Merchandise held for sale
◦ Asset account

Describe and illustrate merchandising operations
and the two types of inventory systems

Balance Sheet Income Statement
 Inventory  Sales revenue

◦ Asset  Cost of goods sold
◦ Expense

Cash
Purchase
inventory
Collect
cash from
customers
Accounts Sell
receivable inventory Inventory

PERIODIC PERPETUAL
 Goods counted  Record of quantity of

periodically to determine goods is constantly
quantity updated
 Used by small  Better control of inventory
businesses  Popular now due to bar
 Less popular now codes and computer
because of computerized scanning
inventory systems

Account for the purchase of inventory using a
perpetual system

 The inventory account is increased each time
merchandise is purchased
 The vendor provides an invoice showing the
quantity and cost of the items
 Inventory cost is also impacted by:
◦ Shipping costs
◦ Return of purchased items
◦ Discounts for early payment

GENERAL JOURNAL
Inventory $$$$
Accounts payable $$$$
Purchased inventory on account
Copyright (c) 2009. Prentice Hall. All rights reserved.

 Discount for early payment
 Expressed as follows:
2/10 , n/30
2% discount if paid Full amount due

within 10 days within 30 days
Other terms:
No discount, full
n/30 amount due in 30 days eom Full amount due by
the end of month

GENERAL JOURNAL

Cash $$$$
Inventory $$$
Paid within discount period

 Purchase return
◦ Merchandise returned by the purchaser to the supplier
 Purchase allowance
◦ Seller reduces amount owed
◦ Incentive for purchaser to keep goods

GENERAL JOURNAL

Inventory $$$$
Returned damaged goods
Reverse of purchase entry
Decreases both accounts

payable and inventory

Account for the sale of inventory using a perpetual
system

 Sales revenue
◦ Amount earned from selling inventory
◦ Revenue account
 Cost of goods sold
◦ Cost of inventory that has been sold to customers
◦ Expense account

GENERAL JOURNAL
Accounts receivable (or Cash) $$$$$

Sales revenue $$$$$
Cost of goods sold $$$$$

Inventory $$$$$

 Sales returns & allowances
◦ When customer returns goods or the seller grants a
reduction in price to customer
◦ Contra-revenue account (debit balance)
 Sales discounts
◦ If customer pays within the discount period allowed by
the seller
◦ Contra-revenue account (debit balance)
 Freight-out
◦ Delivery expense
◦ If terms are FOB shipping point

GENERAL JOURNAL
Sales returns and allowances $$$$

Accounts receivable $$$$
Inventory $$$$
Cost of goods sold $$$$
Customer returned merchandise

GENERAL JOURNAL
Cash $$$$$
Sales discounts $$$$
Accounts receivable $$$$$
Collected on account within discount period

Sales
minus
Sales Returns &
Allowances
minus
Sales Discounts
equals
Net Sales

Net Sales
minus
Cost of Goods Sold
equals
Gross Profit

Chapter 9
Plant Natural Intangible
Assets Resources Assets
Depreciation Depletion Amortization

 Held for use in business
 Full cost includes several expenditures
 Last several years
 Can be sold or traded in

Measure the cost of a plant asset
The Cost Principle

Land
Land Buildings
improvements
Machinery & Furniture &

equipment fixtures

 NOT depreciated
 Costs included in Land
◦ Purchase price
◦ Brokerage fees
◦ Survey and legal fees
◦ Property taxes in arrears
◦ Title transfer
◦ Costs of clearing and removing unwanted buildings

 Subject to depreciation
 Examples:
◦ Fencing
◦ Paving
◦ Sprinkler systems
◦ Lighting
◦ Signs

 Cost includes:
◦ Purchase price
◦ Architectural fees
◦ Contractor charges
◦ Materials, labor, and overhead
 If self-constructed, interest on loans may be
included
 If existing structure is purchased, repairs and
renovations are included

 Cost includes:
◦ Purchase price (less any discounts)
◦ Transportation charges
◦ Insurance while in transit
◦ Sales tax
◦ Installation costs
◦ Cost of testing before asset is used

 Purchase price (less any discounts)
 Shipping charges
 Costs to assemble

 Company purchases a group of plant assets for a
single price
◦ Also called basket purchase
 Assign cost to individual assets based on relative
sales values

Fair value Percent Allocated
cost Multiply
Land $75,000 50% $70,000 percent by
total cost
Building $60,000 40% $56,000
of
Equipment $15,000 10% $14,000 $140,000
Total $150,000 100% $140,000
Divide fair value of

each asset by the total
fair value of $150,000

Capital expenditures Expenses
 Debited to an asset  Debited to an expense

account account
 Increase asset’s capacity  Maintain asset in working
of efficiency OR order
 Extend useful life

 If a capital expenditure is incorrectly recorded as
an expense:
Overstates expenses
Understates net income
Understates Capital
Understates assets (equipment)

Account for depreciation
 Allocation of a plant asset’s cost to expense over
its useful life
 Matches expense against revenue generated
using the asset
$40,000 cost
10-year life

 Wear and tear from use
 Physical factors
 Obsolescence
◦ Computers and other technology

 Cost
 Estimated useful life
◦ Expressed in years, units, miles, or output
 Estimated residual value
◦ Also called salvage value
◦ Expected cash value at end of useful life
Residual
Cost Useful Life
Value

Straight- Units-of
line production
Declining-
balance

1 #
(Cost – residual value)
Life 12
Depreciation expense

Increases over
time
Accumulated
Cost
depreciation
Book value
Decreases over
time

Depreciation per unit =
1
(Cost – Residual value) x
Life in units
Depreciation expense =
Depreciation per unit x activity during the period

 Accelerated method
◦ Writes off more depreciation near the start of an asset’s
life
 Residual value is not in formula
◦ Ignored until last year

(Cost – Accumulated 2 #
depreciation) Life 12
Book Twice the straight-

value line rate
Depreciation expense
Decreases over the

asset’s life
Cost = $50,000 Residual value Life = 5 years or
= $5,000 100,000 units

Units-of- Double-declining-
Straight-line
production balance
• For assets that • For assets that • For assets that
generate depreciate due produce more
revenue over to wear and revenue in their
time tear early years

Straight-line – 1st year
1 12
(65,000,000 – 5,000,000) 4 12
$15,000,000 depreciation, 1st year

Units-of-Production
1 = $10
(65,000,000 – 5,000,000) x 6,000,000 miles
per mile
1.3 million miles

x $10 per mile
= $13,000,000
depreciation expense, 1st year

Double-declining-balance – 1st year
2 12
($65,000,000 - 0)
4 12
$32,500,000 depreciation
expense, 1st year

Cost $65,000,000
Less: Accumulated depreciation 15,000,000
Book value, using straight-line $50,000,000
32
 Considered a change in estimate
 Businesses must report on the reason and effect
of the change
 Remaining asset book value is depreciated over
the remaining life

 Asset has reached the end of its estimated life
 If still useful, a company will continue to use it
 Report book value on balance sheet
 Record no more depreciation
 Asset never reported below residual value

Record the disposal of an asset by sale or trade
 Asset wears out or becomes obsolete.
 Company can:
◦ Sell the asset for cash
◦ Scrap the asset for no cash Result in a
◦ Trade the asset for another asset gain or loss
 Non-like property exchange
 Like-kind exchange
No gain or
loss

 Bring depreciation up to date
 Remove old asset from books
◦ Zero out asset by crediting for original cost
◦ Zero out accumulated depreciation of asset by debiting
for all depreciation taken
 Record the value of any cash paid or received
◦ If money is borrowed, credit Notes payable
 Determine difference between total debits and
total credits

 If asset was traded for a like-kind asset
◦ Difference will be recorded as a debit to the new asset
account
 If the asset was sold or exchanged for a dissimilar
asset
◦ Gain or loss will be recorded
If debits > credits If debits < credits If debits = credits
GAIN LOSS NO GAIN

OR LOSS

GENERAL JOURNAL
8 31 Depreciation expense 2,560

Accumulated depreciation 2,560
Year Depreciation Accumulated Book value

expense depreciation
$16,000
2011 $6,400 6,400 9,600
2012 2,560 8,960 7,040

GENERAL JOURNAL
8 31 Cash 7,600
Accumulated depreciation 8,960
Fixtures 16,000
Gain on sale of plant assets 560
Year Depreciation Accumulated Book value

expense depreciation
$16,000
2011 $6,400 6,400 9,600
2012 2,560 8,960 7,040
40
Account for natural resources
 Plant assets extracted from the natural
environment
◦ Iron ore, oil, coal
 Expensed through depletion using the units-of-
production method
 Accumulated depletion is a contra-asset account
to the natural resource

Depletion per unit =
1
Estimated total units of natural
(Cost – Residual value) x
resource
Depletion expense =
Depletion per unit x number of units removed

Account for intangible assets
 Non-current assets with no physical form
 Provide exclusive rights or privileges
 Expensed through amortization using the straight-
line method
◦ Credit to the asset directly
◦ If intangible has indefinite life, it is not amortized

Trademarks and
Patent Copyright
brand names
• Exclusive 20- • Exclusive right • Represent
year right to to sell a book, distinctive
produce & sell musical work, products or
an invention film, art, services
software, or
intellectual
property
Issued by the federal government

Franchises &
Goodwill
licenses
• Allows • Excess of the
purchaser to sell cost to purchase
goods or another
services under company over
specific the market value
conditions of its net assets

 Only recorded when a company purchases
another business
 Not amortized
◦ Current value measured each year
 If value increases, no entry
 If value decreases, a loss is recorded

 Important to several industries, such as
pharmaceutical companies
 Not an intangible
◦ Expensed as incurred

Describe ethical issues related to plant assets
Capitalize Expense
 Results in higher  Results in lower net
asset value and income
larger net income ◦ Less taxes
◦ Looks better to  If cost does not
investors provide a future
 If cost provides a benefit, then expense
future benefit, then
capitalize

Chapter 13
Identify the purposes of the Statement
of Cash Flows
 Shows where cash came from and how it was
spent
 Reports why cash increased or decreased during
the period
◦ Covers a span of time
 Communicating link between the Income
Statement and cash reported on the Balance
Sheet

Predict ability
Evaluate
Predict future to pay debts
management
cash flows and
decisions
dividends

 Highly liquid investments
 Can convert into cash quickly
 Examples:
◦ Money-market accounts
◦ Investments in U.S. government securities

Distinguish among operating, investing, and
financing cash flows
Operating Investing
Financing

 Most important category
◦ Reflects day-to-day transactions
 Create revenues, expenses, gains, and losses
 Transactions that make up net income
 Also affect current assets and current liabilities on
the Balance Sheet

 Transactions that increase and decrease long-
term assets
◦ Purchase and sales of plant assets including:
 Computers, land, buildings, and equipment
 Includes loans receivable

 Increases and decreases in long-term liabilities
and owner’s equity
◦ Issuing stock and paying dividends
◦ Buying and selling treasury stock
◦ Borrowing money and paying off loans

Operating
Current Current
Operating
cash flows assets liabilities cash flows
Long-term Long-term
assets liabilities Financing
Investing
cash flows Owners’ cash flows
equity

(a) O + (i) I +
(b) NIF (j) F +
(c) F - (k) O +
(d) NIF (l) F -
(e) N (m) F +
(f) O + (n) O +
(g) O - (o) O +
(h) O - (p) F -

 Current Asset  Current Liability
 Cash  Cash
 Current Asset  Current Liability

 Cash  Cash

 Sales and acquisitions of long-term assets
◦ Plant assets and Investments
 Analyze accounts to determine activity
◦ Use of T-account is helpful
 If gain or loss appears on the Income Statement, a
long-term asset has been sold

 Issuance of and payments on long-term notes
payable
 Issuances of stock and purchases of treasury
stock
 Analyze accounts to determine activity
◦ Use of T-accounts helpful

Statement of Cash Flows (partial)
Cash flows from operating activities

Receipts:
Collections from customers
Interest received
Dividends received on investments
Total cash receipts
Payments:
To suppliers
To employees
For interest and income taxes
Total cash payments
Net cash provided by operating activities

Cash receipts:
Collection from = Sales + Decrease in accounts receivable
customers or
- Increase in accounts receivable
Cash payments:
To suppliers = Cost of + Increase in + Decrease in
goods sold inventory accounts
A payable
or N or
- Decrease D - Increase in
in inventory accounts
payable

Cash payments:
For other = Operating + Increase + Decrease in
operating expenses in prepaid accrued
expenses expenses A liabilities
or N Or
- Decrease D - Increase in
in prepaid accrued
expenses liabilities
For interest = Interest + Decrease in interest payable
expense or
- Increase in interest payable
For income taxes = Income tax + Decrease in income tax payable
expense or
- Increase in income tax payable
18

1 6

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

1 6

Uploaded by

Copyright:

Available Formats

Define and use the accounting equation

Assets = Liabilities + Stockholders’ equity

Copyright (c) 2009 Prentice Hall. All rights reserved. 2

Copyright (c) 2009 Prentice Hall. All rights reserved. 3

Copyright (c) 2009 Prentice Hall. All rights reserved. 4

Copyright (c) 2009 Prentice Hall. All rights reserved. 5

Paid-in capital Retained earnings

Common stock + Net income

Copyright (c) 2009 Prentice Hall. All rights reserved. 6

Copyright (c) 2009 Prentice Hall. All rights reserved. 7

Copyright (c) 2009 Prentice Hall. All rights reserved. 8

Copyright (c) 2009 Prentice Hall. All rights reserved. 9

Nice Cuts $?? $25,000 $43,000

Love Dry 31,000

Copyright (c) 2009 Prentice Hall. All rights reserved. 13

Bal 2,500 1,500 0 13,000 4,000 5,000 8,000

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 14

Bal 2,500 1,500 - 13,000 4,000 5,000 8,000

Bal 12,500 1,500 - 13,000 4,000 15,000 8,000

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 15

Bal 12,500 1,500 - 13,000 4,000 15,000 8,000

(b) 1,100 1,100

Bal 13,600 1,500 - 13,000 4,000 15,000 9,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 16

Bal 13,600 1,500 - 13,000 4,000 15,000 9,100

(c) (4,000) (4,000)

Bal 9,600 1,500 - 13,000 0 15,000 9,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 17

Bal 9,600 1,500 - 13,000 15,000 9,100

(d) 700 700

Bal 9,600 1,500 700 13,000 700 15,000 9,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 18

Bal 9,600 1,500 700 13,000 700 15,000 9,100

Bal 10,200 900 700 13,000 700 15,000 9,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 19

Bal 10,200 900 700 13,000 700 15,000 9,100

(f) 1,700 1,700

Bal 11,900 900 700 13,000 700 16,700 9,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 20

Bal 11,900 900 700 13,000 700 16,700 9,100

(g) 4,300 4,300

Bal 11,900 5,200 700 13,000 700 16,700 13,400

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 21

Bal 11,900 5,200 700 13,000 700 16,700 13,400

(h) (1,000) (1,000)

Bal 10,600 5,200 700 13,000 700 16,700 12,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 22

Bal 10,600 5,200 700 13,000 700 16,700 12,100

(i) 100 (100)

Bal 10,700 5,200 600 13,000 700 16,700 12,100

Liabilities & Equity =

Copyright (c) 2009 Prentice Hall. All rights reserved. 23

Bal 10,700 5,200 600 13,000 700 16,700 12,100

(j) (2,200) (2,200)