M2 International Accounting Course Syllabus

IAE Clermont Auvergne – School of Management
Masters 2 INTERNATIONAL ACCOUNTING

2021-2022 COURSE MATERIALS
Instructor: Mme. M. MATHOT
M2CCA 2021-22 International Accounting Materials Mme. M. Mathot 1

International Accounting Course Syllabus

I. Course Objective:
To aid in successful mastery of fundamental accounting principles.
II. Course Description:

International Financial Accounting focuses on the rules by which firms (and individuals) report the results of
their operations to outsiders such as stockholders, potential investors, creditors, suppliers and regulatory
agencies. Course objectives are to understand: 1) the important role accounting plays in allowing individuals to
make informed decisions 2) review the comprehensive accounting system including the construction of
financial statements such as balance sheets, income statements, and cash flow statements from the underlying
transactions.
III. Instructor: Mericia Mathot, Director, International Bachelor Program, UCA

Chartered Professional Accountant (CPA) Canada
Certified Fraud Examiner (CFE), USA
Certified General Accountant (CGA), Canada
Bachelor of Arts (Economics Major), University of Waterloo, Canada
IV. Program:
1. International Accounting Principles Overview:
1. Understand and apply the accounting concepts and principles.
2. Describe the organizations and rules that govern accounting
3. Evaluate business operations using the accounting equation
4. Prepare the Financial Statements
5. Use financial statements and return on assets (R O A) to evaluate business performance
2. Measuring Business Income: The Adjustment Process
1. Analyze the Impact of Business Transactions on Accounts
2. Accrual versus Cash-Basis Accounting and Categories of Adjusting Entries.
3. Construct financial statements and evaluate a company’s debt-paying ability.
3. Stockholders’ Equity
The Corporate Structure, Paid-in Capital, Classes of Stocks
Understand Stock Issuance,
Account for the purchase and sale of treasury stock
Account for Dividend Distribution
4. Understanding and constructing the Cash Flows Statement:
1. Identify the purpose of the statement and distinguish among operating, investing, and
financing cash flows
2. Prepare the statement of cash flows by the indirect method
V. Assessment:
Midterm Exam 50%
Comprehensive Exam 50%
V. Bibliography
Miller-Nobles, Mattison, Horngren’s Accounting, 13th edition, Pearson 2021
Harrison, Horngren, Thomas, Tietz, Financial Accounting, 11th/12e, Prentice Hall, 2019
Choi, Meek, International Accounting, 7e, Prentice Hall, 2014

1.1 Introduction to Accounting

Accounting plays a vital role in society. As a branch of economics, it provides information about a firm and its
transactions to facilitate resource allocation decision by users of that information. If the information reported is
reliable and useful, scarce resources are allocated in an optimal fashion, and conversely, resource allocations
are less than optimal when information is less reliable and useful. International accounting, the subject of this
text, is no different in its intended role. What makes its study distinctive is that the entity being reported on is
either a multinational company (MNC) with operations and transactions that cross national boundaries, or an
entity with reporting obligations to users who are located in a country other than that of the reporting entity.
An understanding of the international dimensions of the accounting processes is important to those engaged in
importing or exporting activities, as well as those seeking to manage a business, or obtain or supply financing
across national borders. Even a company operating solely within the confines of a single country is no
longer insulated from the international aspects of accounting as reliance on international vendors to contain
production costs and remain globally competitive is a common feature of contemporary business. Accounting
amounts may vary significantly according to the principles that govern them. Differences in culture, business
practices, political and regulatory structures, legal systems, currency values, local inflation rates, business risks,
Despite this international heritage, in most countries accounting remained a nationalistic affair, with national
standards and practices deeply anchored into national laws and professional regulations. There was little
understanding of parallel requirements in other countries. Yet, accounting increasingly served people and
organizations whose decisions were increasingly international in scope.
Domestic accounting: an information specialty providing information about a firm to users of that information
as a basis for economic decisions.
International accounting (defined): same as above except that the firm being reported on is a multinational
company with operations and transactions that cross-national boundaries or an entity with reporting obligations
to non-domestic readers. The paradox of international accounting is that in many countries, accounting
remains a nationalistic affair. Accounting serves people and institutions whose decisions are international in
scope. Accounting diversity creates a demand for harmonization.
A country’s accounting standards and practices reflect the influence of legal, cultural, political, and economic
factors. Because these factors vary by country, the underlying goals and philosophy of national accounting
systems also vary dramatically.
Growth and spread of multinational operations international business has traditionally been associated with
foreign trade. This activity, rooted in antiquity, continues unabated.
The rapid growth in global capital markets and cross-border investment activity means that the international
dimensions of accounting are more important than ever for professionals who have to deal in one way or
another with these areas. Accounting plays a critical role in the efficient functioning of capital markets.

Lenders, investors, financial analysts, regulators, and stock exchanges require information about the financial
performance, position, and the future prospects of companies seeking financing. In turn, the needs of capital
market participants have strongly shaped the development of accounting practice. Demands of market
participants strongly influence companies’ accounting and disclosure choices and national and international
efforts to harmonize accounting measurement, disclosure, and auditing practices around the world.
How does, for example, a British or American investor make sense of Japanese accounts or Brazilian accounts
where measurement and transparency rules are very different from what they are typically accustomed to? Until
Japan and Brazil formally implement international financial reporting standards, should investors attempt to
as U.S. or IASB measurement rules prior to analysis? Or should they put themselves in the shoes of a Japanese
or Brazilian shareholder and conduct their analysis from a local perspective? On the other side of the coin, a
major factor motivating many corporations to raise monies abroad is to increase their access to funds and lower
their capital costs. The challenge here is trying to ensure that the foreign reader receives the same intended
message as the domestic reader. This challenge is significant in a world where firms compete for funds.
1.1a What is Accounting? Accounting is the information system that measures business activity, processes
the data into reports, and communicates the results to decision makers. Accounting is “the language of
business.” Individuals, investors and creditors, regulatory bodies, and non-profit organizations are all identified
as users of accounting information. Internal and external users of accounting information exist.
Decision Makers: The Users of Accounting Information
Financial accounting provides information to those outside of the entity and must faithfully give an accurate
picture of the entity’s economic activities, while management accounting provides information to those within
the organization. Examples of management accounting information include budgets, forecasts, and projections
that are used in making strategic decisions of the entity.
Individuals use accounting information to make decisions such as how much money to save for college or to
purchase a new computer. Business owners use accounting information to set goals, measure progress toward
those goals, and make adjustments when needed. Outside investors have an ownership interest in the business
and often provide money to get a business started. A creditor is any person or business to whom the business
owes money. Taxing authorities collect taxes levied on a business’s income or assets.
Certified Public Accountants (CPA s) are licensed professional accountants who serve the general public. To
become a CPA, you must meet educational and/or experience requirements and pass a qualifying exam.
Accountants can also obtain a Chartered Global Management Accountant (CGMA) designation. This
distinguishes accountants who have advanced knowledge in finance, operations, strategy, and management.
Visit the American Institute of Certified Public Accountants (AICPA) Web site for more information:
http://www.thiswaytocpa.com.
Chartered Global Management Accountants (C G M A s) have advanced knowledge in finance, operations,
strategy, and management.
Certified Management Accountants (C M A s) specialize in accounting and financial management knowledge
and often work for a single company.
Certified Financial Planners (C F P s) work with individuals to help them budget, plan for retirement, save for
education, and manage their finances. Individuals who want to obtain their C F P must have the four E’s:
education, examination, experience, and ethics. You can find out more about becoming a C F P on the following
Web site: https://www.cfp.net/home.
Accounting positions: Accountants generally work either in corporate or industry accounting, public
accounting, financial services, or governmental accounting. Corporate or industry accounting professionals are
in demand in every sector of the business community, including manufacturing, construction, and healthcare.
Public accounting involves services such as auditing, tax preparation, and consulting. Accountants also work in
financial services organizations such as banks. Other accountants work for federal, state, or local governments.
Today’s accountants need to know more than just accounting knowledge. They also need to understand how
technology is used to process financial information. Accounting and finance individuals actively work with
information technology teams to develop accounting systems. Artificial intelligence, cloud-based systems, and
robotic process automation are all changing the way companies handle financial information. Ideal accounting
employees have knowledge in both accounting and technology.
1.2 ACCOUNTING PRINCIPLES, ASSUMPTIONS, AND CONCEPTS In the USA, the Securities and
Exchange Commission (SEC) was created in the early 1930s by the US Congress to oversee Accounting
regulation and enforcement
Securities and Exchange Commission Has jurisdiction over listed companies
-Relies on private sector (FASB) to set accounting standards
-Pressures FASB on the direction of accounting standards
Financial Accounting Standards Board
-Conceptual Framework is a significant feature of accounting standard setting
-Standard setting in the U.S. is both political and technical
-Generally accepted accounting principles (GAAP) are voluminous and detailed
-Committed to converging U.S. GAAP with IFRS
Sarbanes-Oxley Act (2002) has expanded requirements on corporate governance, disclosure and reporting,
and the regulation of the audit profession
-Established PCAOB
-Sets standards for auditors
-Oversees and inspects audit firms
-Sanctions auditors for defective work
-CEO and CFO must certify financial statements
-Management must assess internal controls
-Auditors express an opinion on internal controls
1.2a Accountants follow professional guidelines for measurement and disclosure of financial information. In the
U.S.A, these are called Generally Accepted Accounting Principles (GAAP). The Financial Accounting
Standards Board (FASB) formulates GAAP. The International Accounting Standards Board (IASB) sets
global—or international—financial reporting standards (IFRS).
Below is an overview of the joint conceptual framework of accounting developed by the Financial
Accounting Standards Board and the International Accounting Standards Board (IASB).
-The overall objective of accounting is to provide financial information about the reporting entity that is useful to existing
and potential investors, lenders, and other creditors in making decisions about providing resources to the entity.
-To be useful, information must have relevance and be faithfully represented.

Accounting must also have the enhancing qualities of:
- Comparability - capable of being compared with information from other companies in the same period
- Verifiability- capable of being checked for accuracy, completeness, and reliability
- Timeliness Information made available to users early enough to help them make decisions
- and understandability - Information sufficiently transparent
- The costs of disclosure should not exceed the benefits to users.
Entity assumption. The most basic accounting assumption is the entity, which is any organization that stands
apart as a separate economic unit. Sharp boundaries are drawn around each entity so as not to confuse its
affairs with those of others.
Continuity (going- concern) assumption. In measuring and reporting accounting information, we assume that
the entity will continue to operate long enough to use existing assets—land, buildings, equipment, and
supplies—for its intended purposes. This is called the continuity (going concern) assumption.
Historical cost principle. The historical cost principle states that assets should be recorded at their actual cost,
measured on the date of purchase as the amount of cash paid plus the dollar value of all non-cash
consideration (other assets, privileges, or rights) also given in exchange. The historical cost principle is not used
as pervasively in the United States as it once was. Accounting is moving in the direction of reporting more and
more assets and liabilities at their fair values. Fair value is the amount that the business could sell the asset for,
or the amount that the business could pay to settle the liability.
Stable monetary unit assumption. Under the stable monetary unit assumption, accountants assume that the
dollar’s purchasing power is stable over time.
1.2b International Financial Reporting Standards Until recently, one of the major challenges of conducting
global business has been the fact that different countries have adopted different accounting standards for
business transactions. Historically, the major developed countries in the world (United States, United Kingdom,
Japan, Germany, etc.) have all had their own versions of GAAP. As investors seek to compare financial results
across entities from different countries, they have had to restate and convert accounting data from one country
to the next in order to make them comparable. This takes time and can be expensive. The solution to this
problem lies with the IASB, which has developed International Financial Reporting Standards (IFRS).
These standards are now being used by most countries around the world. For years, accountants in the United
States did not pay much attention to IFRS because our GAAP was considered to be the strongest single set of
accounting standards in the world. In addition, the application of GAAP for public companies in the United
States is overseen carefully by the U.S. Securities and Exchange Commission (SEC), a body that at present has
no global counterpart.
Nevertheless, in order to promote consistency in global financial reporting, the SEC is studying whether and
how to require all U.S. public companies to adopt some version of IFRS within the next decade. The advantage
to adopting a uniform set of high-quality global accounting standards is that financial statements from a U.S.
company (say, Hershey Corporation in Pennsylvania) will be comparable to those of a foreign company (say,
Nestlé in Switzerland). Using these standards, it will be easier for investors and businesspeople to evaluate
information of various companies in the same industries from across the globe, and companies will have to
prepare only one set of financial statements instead of multiple versions. Thus, in the long run, a uniform set of
high-quality global accounting standards should significantly reduce costs of doing business globally.
IFRS in France and European Union Since 2005 all EU-listed companies follow IFRS in their consolidated
financial statements. Generally, IFRS consolidated statements are permitted for non-listed companies. Listed
French companies follow IFRS in their consolidated financial statements, and non-listed companies also have
this option. However, all French companies must follow the fixed regulations of the plan at the individual
company level. Accounting for individual companies is the legal basis for distributing dividends and for
calculating taxable income. With a few exceptions, French rules regarding consolidated financial statements
follow the fair presentation approach of reporting substance over form. Two exceptions are that liabilities for
post-employment benefits do not have to be recognized and finance leases do not have to be capitalized.
Unusual features of French financial reporting is that they ust report results of environmental activities. The
reports aimed at preventing bankruptcies and the requirement of a social report.
• IFRS are based on fair presentation principles

• IFRS may be overridden in rare circumstances to achieve fair presentation
• Accounting measurements
- Business combinations – purchase accounting
- Goodwill – annual impairments test
- Investments in associates – equity method
- Translation of financial statements of foreign operations – functional currency concept
- Assets valued at historical cost or fair value
- Research costs – expensed; development costs – capitalized
- LIFO not allowed
- Finance leases – capitalized; operating leases – expensed
- Provisions – recognized when probable and estimable
- Deferred taxes – recognized in full, using the liability method, for temporary differences between the
carrying amount and tax base
France Overview France is the world’s leading advocate of national uniform accounting. The Ministry of
National Economy approved the first formal Plan Comptable Général (national accounting code) in
September 1947. The Plan Comptable Général provides:
• Objectives and principles of financial reporting

• Definitions of elements
• Recognition and valuation rules
• Standardized chart of accounts
• Model financial statements
The mandatory use of the national uniform chart of accounts does not burden French businesses because the
plan is widely accepted in practice. French accounting is so closely linked to the plan that it is possible to
overlook the fact that commercial legislation (i.e., the Code de Commerce) and tax laws dictate many of
France’s actual financial accounting and reporting practices. Both of these predate the plan.

1.2c THE ECONOMIC ENTITIES: An economic entity is an organization that stands apart as a separate
economic unit. An entity is a separate economic unit when it is separate from its owners. There are various
types of business entities, including sole proprietorships, partnerships, corporations, and limited-liability
companies (LLCs).
1) Sole Proprietorship
2) Partnership
3) Corporation
4) Limited-liability company (LLC)
1. A proprietorship has a single owner, called the proprietor. Proprietorships tend to be small retail stores or
solo providers of professional services—physicians, attorneys, or accountants. Legally, the business is the
proprietor, and the proprietor is personally liable for all the debts. But for accounting purposes, a proprietorship
is a distinct entity, separate from its proprietor. Thus, the business records should not include the proprietor’s
personal finances.
2. A partnership has two or more parties as co-owners, and each owner is a partner. Individuals, corporations,
partnerships, or other types of entities can be partners. Income and loss of the partnership “flows through” to the
partners, and they recognize it based on their agreed upon percentage interest in the business. The partnership is
not a taxpaying entity. Instead, each partner takes a proportionate share of the entity’s taxable income and pays
tax according to that partner’s individual or corporate rate. Partnerships are governed by agreement, usually
spelled out in writing in the form of a contract between the partners. General partnerships have mutual agency
and unlimited liability, meaning that each partner may conduct business in the name of the entity and can make
agreements that legally bind all partners without limit for the partnership’s debts. Partnerships are therefore
quite risky, because an irresponsible partner can create large debts for the other general partners without their
knowledge or permission. This feature of general partnerships has spawned the creation of limited-liability
partnerships (LLPs). A limited-liability partnership is one in which a wayward partner cannot create a large
liability for the other partners. In LLPs, each partner is liable for partnership debts only up to the extent of his or
her investment in the partnership, plus his or her proportionate share of the liabilities. Each LLP, however, must
have one general partner with unlimited liability for all partnership debts.
3. A corporation is a business owned by the stockholders, or shareholders, who own stock representing shares
of ownership in the corporation. One of the major advantages of doing business in the corporate form is the
ability to raise large sums of capital from issuance of stock to the public. All types of entities (individuals,
partnerships, corporations, or other types) may be shareholders in a corporation. Even though proprietorships
and partnerships are more numerous, corporations transact much more business and are larger in terms of assets,
income, and number of employees.
A corporation is formed under state law. Unlike proprietorships and partnerships, a corporation is legally
distinct from its owners. The corporation is like an artificial person and possesses many of the same rights that a
person has.
Corporations pay business income tax and then shareholders are taxed on dividend distributions. Essentially,
corporations are subject to double taxation.
Ultimate control of a corporation rests with the stockholders, who generally get one vote for each share of stock
they own. Stockholders elect the board of directors, which sets policy and appoints officers. The board elects a
chairperson, who holds the most power in the corporation, often called the chief executive officer CEO. The
board also appoints the president as chief operating officer (COO).
4 A limited-liability company is one in which the business (and not the owner) is liable for the company’s debts.
An LLC may have one owner or many owners, called members or partners. Unlike a proprietorship or a general
partnership, the members of an LLC do not have unlimited liability for the LLC’s debts. An LLC pays no
business income tax. Instead, the LLC's income “flows through” to the members, and they pay income tax at
their own tax rates, just as they would if they were partners. Today, many multiple-owner businesses are
organized as LLC’s, because members of an LLC effectively enjoy limited liability while still being taxed like
members of a partnership.
1.3. Applying the Accounting Equation to Business Organizations The financial statements are based on the
accounting equation. The equation presents the resources of the company (assets) and the claims to those
resources (liabilities and owners’ equity).
• Assets: economic resources that are expected to produce a future benefit.
• Liabilities: “outsider claims.” Include debts, payables, and loans.
• Owners’ equity: “insider claims.” Equity means ownership. For example, it is the stockholders’ interest
in the assets of a corporation.
The accounting equation can be rewritten as Assets – Liabilities = Owners’ Equity.

Corporation’s equity is referred to as Stockholders’ Equity. It has 2 parts.
1. Paid-in capital: the amount the stockholders have invested in the corporation
2. Retained earnings: the amount earned by income-producing activities and kept for use in the business
Components of Retained Earnings

• Revenues are inflows of resources that increase retained earnings by delivering goods or services to
customers.
• Expenses are outflows of resources that decrease retained earnings due to operations. Expenses
represent the cost of doing business.
• Dividends are distributions to the stockholders and decrease retained earnings. Dividends are not
expenses and do not affect net income.
Ethics in Accounting and Business Ethical considerations affect accounting. Investors and creditors need
relevant and faithfully representative information about a company that they are investing in or lending money
to. Companies want to be profitable and financially strong to attract investors and attempt to present their
financial statements in a manner that portrays the business in the best possible way. Sometimes these two
opposing viewpoints can cause conflicts of interest. To handle these conflicts of interest and to provide reliable
information, the S E C requires publicly held companies to have their financial statements audited by
independent accountants. An audit is an examination of a company’s financial statements and records. The
independent accountants then issue an opinion that states whether the financial statements give a fair picture of
the company’s financial situation.

In response to the Enron and WorldCom reporting scandals, the U.S. government took swift action. It
passed the Sarbanes-Oxley Act (SOX), intended to curb financial scandals. S O X requires management to
review internal control and take responsibility for the accuracy and completeness of their financial reports. In
addition, S O X made it a criminal offense to falsify financial statements. The Sarbanes-Oxley Act also created
a new watchdog agency, the Public Company Accounting Oversight Board (PCAOB), to monitor the work
of independent accountants who audit public companies.
1.4. EVALUATE BUSINESS OPERATIONS USING THE FINANCIAL STATEMENTS

The objective of general purpose financial statements is to provide information about the financial position,
performance and cash flows of an enterprise that is useful to a wide range of users in making economic
decisions. They provide information about and enterprise's:
• Assets - Cash and cash equivalents, Inventories, Property, plant, and equipment
• Liabilities - Accounts payable, Income taxes payable, Long-term debt
• Equity
• Income and expenses
• Cash flows.
The principal financial statements of a corporation are the income statement, the Statement of Retained
Earnings, the balance sheet, and statement of cash flows. Footnotes (notes) accompany these financial
statements. To evaluate the financial condition, the profitability, and cash flows of an entity, the user needs to
understand the statements and related notes.
Income Statement (Statement of Earnings) measures Operating Performance The income statement
summarizes revenues and expenses and gains and losses, ending with net income. It summarizes the results of
operations for a particular period of time. Net income is included in retained earnings in the stockholders’
equity section of the balance sheet. (This is necessary for the balance sheet to balance.) Net income is the
bottom line of the Income Statement. It is equal to revenues minus expenses. It is regarded as the single most
important item on the financial statements.

The Statement of Owner’s Equity and/or Statement of Retained Earnings

The statement of owner’s equity shows the changes in the owner’s capital account for a specific period. In the
Exhibit below, notice that the net income for the month is the net income that was calculated on the income
statement.
In corporations, Retained earnings is the portion of net income that the company has kept over the years and
reinvested into the business. Net income increases retained earnings, while net losses and dividends decrease
retained earnings. A positive retained earnings indicates that the business has been able to accumulate earnings
and expand overtime.
Walt Disney Company Consolidated Statements of Retained Earnings for the two-year period ending October 1,
2016. This statement was excerpted from the company’s Consolidated Statements of Stockholders’ Equity,
which analyse all of the increases and decreases in every account in the stockholders’ equity section of the
balance sheet.
Balance Sheet (Statement of Financial Position) A balance sheet shows the financial condition of an
accounting entity as of a particular date. The balance sheet consists of three major sections: assets, the
resources of the firm; liabilities, the debts of the firm; and stockholders’ equity, the owners’ interest in the firm.
At any point in time, the total assets amount must equal the total amount of the contributions of the creditors
and owners. There are two types of assets: current and long-term. Current assets are expected to be used,
converted to cash, or sold within one business cycles. Examples: cash and cash equivalents, receivables,
inventories, and prepaid expenses. Long-term assets are tangible assets that are expected to benefit the
company beyond the next business cycle. Examples: property, plant, and equipment, long-term investments, and
intangible assets.

There are two types of liabilities: current and long-term. Current liabilities are due within one year. Examples:
accounts payable, salaries payable, short-term notes payable, accrued liabilities. Long-term liabilities are
payable after the year. Examples: long-term notes payable, long-term bonds payable.
The equity section represents the stockholders’ ownership of the business’s assets. Examples: common stock,
additional paid-in capital, retained earnings, treasury stock, accumulated other comprehensive income (loss)
A simple, account-style balance sheet is presented below:
Statement of Cash Flows (Statement of Inflows and Outflows of Cash) The Statement of Cash Flows is the
fourth and final financial statement. It measures cash receipts and cash payments. Companies engage in three
basic types of activities.
Operating activities. Companies operate by selling goods and services to customers. Operating activities result
in net income or net loss, and they either increase or decrease cash. The income statement tells whether the
company is profitable. The statement of cash flows reports whether operations increased the company's cash
balances. Operating activities are most important, and they should be the company’s main source of cash.
Continuing negative cash flow from operations can lead to bankruptcy.
Investing activities. Companies invest in long-term assets. A company buys fixtures and equipment, and when
these assets wear out, the company sells them. Both purchases and sales of long-term assets are investing cash
flows. Investing cash flows are the next most important after operations.
Financing activities. Companies need money for financing. Financing includes issuing stock, paying dividends,
borrowing, and repayments of borrowed funds. The company may also pay loans and repurchase its own stock.

1.5 How Do You Use Financial Statements to Evaluate Business Performance? Return on assets is one of
many tools users of financial statements use to determine how well a company is performing. Return on assets
measures how well a company uses its assets to generate net income. The formula to calculate return on assets
is Net income / Average total assets.
N e t in c o m e
R e tu rn o n a s s e ts 
A v e ra g e to ta l a s s e ts
(B e g in n in g to ta l a s s e ts  E n d in g to ta l a s s e ts )
A v e ra g e to t a l a s s e ts 
2
On its 2018 income statement, Kohl’s reported net income of $801 million. The corporation reported beginning
total assets (found on the balance sheet) of $13,389 million and ending total assets of $12,469 million. Kohl’s
return on assets for 2018 is (all amounts in millions):
Exercise 1
On its 2018 income statement, Kohl’s reported net income of $801 million. The corporation reported beginning
total assets of $13,389 million and ending total assets of $12,469 million. Kohl’s return on assets for 2018 is
(all amounts in millions):

1. HOMEWORK AND ASSIGNMENTS
Question 1-1 (Learning Objective: Using the accounting equation to analyse business transactions
Ashley Stamper opened a medical practice. During July, the first month of operation, the business, titled Ashley
Stamper, MD, experienced the following events:
Jul. 6 Stamper contributed $68,000 in the business by opening a bank account in the name of A. Stamper, MD.
The business gave capital to Stamper.
9 Paid $56,000 cash for land.
12 Purchased medical supplies for $1,500 on account.
15 Officially opened for business.
20 Paid cash expenses: employees’ salaries, $1,300; office rent, $1,500; utilities, $100.
31 Earned service revenue for the month, $13,000, receiving cash.
31 Paid $1,050 on account.
Analyse the effects of these events on the accounting equation of the medical practice of Ashley Stamper, MD,
using the following format:

Q 1-2 (Learning Objective: Evaluate business activity)
For each of the following questions, indicate which financial statement would most likely be used to provide the
information. Use the following abbreviations: Income statement (I), Statement of retained earnings (R), Balance
sheet (B), and Statement of cash flows (C).
a. How well did the company perform during the year?
b. Why did the company’s retained earnings change during the year?
c. Did the company declare a dividend during the year?
d. How much in total debt does the company have?
e. How much cash did the company generate and spend during the year?
f. What assets does the company have?
g. How much cash was generated by operating activities?
h. What were the company’s net sales for the year?
i. What is the company’s financial position at the end of the year?
Q1-3 (Learning Objective: Apply the accounting equation; evaluate business operations)
Blackwell Services, Inc., has current assets of $240 million; property, plant, and equipment of $350 million; and
other assets totaling $170 million. Current liabilities are $150 million, and long-term liabilities total $360
million.
Requirements
1. Use these data to write Blackwell Services, Inc.’s, accounting equation.
2. How much in resources does Blackwell Services have to work with?
3. How much does Blackwell Services owe creditors?
4. How much of the company’s assets do the Blackwell Services stockholders actually own?

Q1-4 (Learning Objective: Evaluate business operations; construct and analyze an income statement, a
statement of retained earnings, and a balance sheet)
The assets and liabilities of Beckwith Garden Supply, Inc., as of December 31, 2016, and revenues and
expenses for the year ended on that date follow:
Equipment.......................... $ 119,000 Interest expense................... 10,200
Interest payable ................... 2,500 Accounts payable ................ 24,000
Salary expense..................... 108,500 Building............................... 401,000
Cash.................................... 41,000 Common stock.................... 12,700
Land................................... $ 27,000 Note payable...................... 99,500
Property tax expense .......... 7,300 Rent expense...................... 40,600
Accounts receivable............ 84,600 Service revenue................... 457,600
Supplies.............................. 6,800 Utilities expense ................. 8,500
Beginning retained earnings was $364,200, and dividends declared totaled $106,000 for the year.
Requirements:
1. Prepare the income statement of Beckwith Garden Supply, Inc., for the year ended December 31, 2016.
2. Prepare the company’s statement of retained earnings for the year.
3. Prepare the company’s balance sheet at December 31, 2016.
4. Analyze Beckwith Garden Supply, Inc., by answering these questions:
a. Was Beckwith Garden Supply profitable during 2016? By how much?
b. Did retained earnings increase or decrease? By how much?
c. Which is greater, total liabilities or total stockholders’ equity? Who has a greater claim to Beckwith
Garden Supply’s assets, creditors of the company or the Beckwith Garden Supply stockholders?
Q1-5 (Learning Objective: Analyse the impact of business transactions on accounts)

1. Set up the following T-accounts: Cash, Accounts Receivable, Office Supplies, Office Furniture, Accounts
Payable, Common Stock, Dividends, Service Revenue, Salary Expense, and Rent Expense.
2. Record the following transactions directly in the T-accounts without using a journal. Use the letters to
identify the transactions.
a. Leigh Hampton opened a law firm by investing $22,500 cash and office furniture with a fair value of $9,000.
Organized as a professional corporation, the business issued common stock to Hampton.
b. Paid monthly rent of $1,600.
c. Purchased office supplies on account, $1,400.
d. Paid employees’ salaries of $3,300.
e. Paid $850 of the account payable created in transaction c.
f. Performed legal service on account, $10,100.
g. Declared and paid dividends of $2,300.
3. After recording the transactions, and assuming they all occurred in the month of January 2016, prepare the
trial balance of Leigh Hampton, Attorney, at January 31, 2016. Use the T-accounts that have been prepared for
the business.
4. How well did the business perform during its first month? Compute net income (or net loss) for the month.

2. Accrual Accounting and Income

Accrual accounting records the impact of a business transaction as it occurs. When the business performs a
service, makes a sale, or incurs an expense, the accountant records the transaction even if the business receives
or pays no cash.
Records:
- Income when earned
- Expenses when incurred
Cash-basis accounting records only cash transactions—cash receipts and cash payments. Cash receipts are
treated as revenues, and cash payments are handled as expenses. Fails to capture the underlying economic
phenomenon; Results in incomplete financial statements; Only used by businesses that do not follow accounting
standards
2.1. Explain How Accrual Accounting Differs from Cash-Basis Accounting

Accrual accounting is more complex—and, in terms of the Conceptual Foundations of Accounting
(see Exhibit 1-3), is a more faithful representation of economic reality—than cash-basis accounting.
To be sure, accrual accounting records cash transactions, such as the following:
■ Collecting cash from customers
■ Receiving cash from interest earned
■ Paying salaries, rent, and other expenses
■ Borrowing money
■ Paying off loans
■ Issuing shares
But accrual accounting also records noncash transactions, such as the following:
■ Sales on account
■ Purchases of inventory on account
■ Accrual of expenses incurred but not yet paid
■ Depreciation expense
■ Usage of prepaid rent, insurance, and supplies
■ Earning of revenue when cash was collected in advance
Accrual accounting is based on a framework of concepts and principles additional to those we

discussed in the last section. These include the time-period concept, the revenue principle, and the
expense recognition principle.
The time-period concept ensures that accounting information is reported at regular intervals.
The basic accounting period is one year, and virtually all businesses prepare annual financial statements.
Around 60% of large companies—including Amazon.com, eBay, and YUM! Brands—use the calendar year
from January 1 through December 31. A fiscal year may end on a date other than December 31. Most retailers,
including Amazon.com, eBay, and Under Armour, Inc., use a fiscal year that ends on or near January 31 because
the low point in their business activity falls in January, after Christmas. Companies also prepare financial
statements for interim periods of less than a year, such as a month, a quarter (three months), or a semiannual
period (six months).
2.2 Revenue (Expense) Recognition Principles Revenue is recognized when the business transfers
promised goods or services to a customer in an amount that reflects the cash (or fair market value of other
consideration) that the entity expects to receive in exchange for those goods or services.
Revenue is to be recorded when earned – never before. In most cases, this means when goods are services are
delivered to the customer. Revenue is recorded for the amount of cash or fair market value that the entities
expects to receive in exchange.
Revenue is recognized when:
- risks and rewards of ownership of the goods has transferred to the buyer
- the entity retains neither continuing managerial involvement usually associated with ownership nor
effective control over goods sold
The expense recognition principle is the basis for recording expenses. Expenses are the costs of assets used up
and of liabilities created in earning revenue. Expenses have no future benefit to the company. The expense
recognition principle includes two steps:
1. Identify all the expenses incurred during the accounting period.
2. Measure the expenses and recognize them in the same period in which any related
revenues are earned.
To recognize expenses along with related revenues means to subtract expenses from related
revenues to compute net income or net loss.
The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) have
reached agreement on a new standard, to be implemented in 2017, that will bring the revenue recognition
standards of the two bodies into much closer harmony and consistency than existed under previous standards
2.3. Adjust the accounts

At the end of the period, the business reports its financial statements. This process begins with the trial balance.
We refer to this trial balance as unadjusted because the accounts are not yet ready for the financial statements.
In most cases, the simple label “Trial Balance” means “unadjusted.” Below is the unadjusted trial balance of
Alladin Travel, Inc. as of June 30, 2018.
Accounting adjustments fall into three basic categories: deferrals, depreciation, and accruals.
• Deferrals. A deferral is an adjustment for payment of an item or receipt of cash in advance. Prepaid
Rent, Prepaid Insurance, and all other prepaid expenses require deferral adjustments. There are also
deferral adjustments for liabilities called Unearned Sales Revenue.
• Depreciation allocates the cost of a plant asset to expense over the asset’s useful life. Depreciation is the
most common long-term deferral. The accounting adjustment records Depreciation Expense and
decreases the asset’s book value over its life. The process is identical to a deferral-type adjustment; the
only difference is the type of asset involved.
• An accrual is the opposite of a deferral. For an accrued expense, the company records the expense
before paying cash. For an accrued revenue, the company records the revenue before collecting cash.
Salary Expense can create an accrual adjustment. As employees work, the company’s salary expense
accrues with the passage of time. At year end, the company may owe employees some salaries to be paid
after year-end. Other examples of expense accruals include interest expense and income tax expense. An
accrued revenue is a revenue that the business has earned and will collect next year.
Prepaid Expenses An expense paid in advance. Prepaid expenses are recorded as assets because they provide a
future benefit for the owner. Adjusting entries at the end of the period records the amounts as an expense.
These include: Rent, Insurance, Supplies.
Prepaid Rent: Suppose Aladdin’s Travel Inc., prepays three months’ store rent ($3,000) on June 1.
Throughout June, Prepaid Rent carries the balance of $3,000. On June 30, an adjusting entry is required to
transfer $1,000 ($3,000 ÷ 3) from Prepaid Rent to Rent Expense.
Supplies: On June 2, Alladin Travel paid cash of $700 for cleaning supplies. The cost of supplies used is
Supplies Expense. A count at June 30 indicates that $400 of supplies remain on hand, meaning that Alladin used
$300 of supplies throughout June. Therefore, an adjusting entry is necessary to record the supplies used. At July
1, Supplies has a balance of $400.

Depreciation of Plant Assets: Plant assets are long-lived tangible assets, such as land, buildings, furniture, and
equipment. All plant assets except land decline in usefulness, and this decline is an expense. Depreciation is the
process of allocating cost to expense for a long-term plant asset.
Equipment. Suppose that on June 3 Alladin Travel purchased equipment on account for $24,000
Using the Straight-line depreciation method:

• Divide cost of the asset by its useful life
• Alladin Travel Inc. Equipment:
Cost: $24,000
Useful life: 5 years
Annual depreciation = 24,000/5 years = 4,800 per year
Monthly depreciation = 4,800/12 months = 400 per month
Depreciation expense for June is recorded as follows:
Note that the Accumulated Depreciation—Equipment account (not Equipment) is credited to preserve the
original cost of the asset in the Equipment account. Managers can then refer to the Equipment account if they
ever need to know how much the asset cost.

The Accumulated Depreciation account shows the sum of all depreciation expense from using the asset.
Therefore, the balance in the Accumulated Depreciation account increases over the asset’s life.
It is a contra asset account, meaning it has a normal credit balance. A contra account has two distinguishing
characteristics:
1. It always has a companion account.
2. Its normal is opposite that of the companion account.
Book Value: Cost of the plant asset minus accumulated depreciation.
Accrued Expenses Businesses may incur expenses before they pay cash. The term accrued expense refers to a
liability that arises from an expense that has been incurred but has not yet been paid. As explained, salary
expense accrues as employees work before they are paid. Another example is interest expense on a note
payable. Interest accrues as the clock ticks before the payment date.
Accrued Revenues When businesses earn revenue before they receive the cash, an accrued revenue is
recorded. Therefore, it is a revenue that has been earned but not yet collected.
Assume that on June 15 a hotel agrees to pay Alladin a commission of $600 for booking 100 clients into its
hotel over the next 30 days. Alladin books 50 clients in June and 50 in July. Alladin will earn half a month’s,
fee, $300, for work done June 15 through June 30.
Unearned Service Revenue - some businesses collect cash from customers before earning the revenue. This
creates a liability called unearned revenue. Only when the job is completed does the business earn the revenue.
Assume Disney World Resort pays Alladin Travel $400 monthly, beginning immediately, if it books up to eight
clients into the resort within a 30-day period. If Alladin Travel collects the first amount on June 15, then it
records this transaction as follows:

During the last 15 days of the month, Alladin Travel books four clients into Disneyworld Resort to earn ½ of
the $400.
This adjusting entry shifts $200 of the total amount received ($400) from liability to revenue. After posting,
Unearned Service Revenue is reduced to $200, and Service Revenue is increased by $200 (adjustment
highlighted).

Summary of the Adjusting Process
The adjusting process measures income and updates the balance sheet. Every adjusting entry affects both
revenue or expense, to measure income, and asset or liability, to update the balance sheet.
2.3. The Adjusted Trial Balance Summarizes all accounts and their final balances after all adjusting entries
have been journalized and posted. The adjusted trial balance is often used when preparing the financial
statements. This document lists all the accounts and their final balances in a single place.
The worksheet for preparing the adjusted trial balance of Alladin Travel, Inc is presented below. The Account
Title and the Trial Balance data come from the unadjusted trial balance. The two Adjustments columns
summarize the adjusting entries. The Adjusted Trial Balance columns then give the final account balances. Each
adjusted amount below is the unadjusted balance plus or minus the adjustments.

2.4. CONSTRUCT THE FINANCIAL STATEMENTS
The June financial statements of Alladin Travel, Inc. can be prepared from the adjusted trial balance.
Close the Books Closing the books prepare the accounts for the next period’s transactions. Closing entries set
the temporary accounts back to zero. Temporary accounts are those that relate to a limited time period. These
are revenues, expenses, and dividends, therefore, these accounts are closed at the end of the period and
transferred to retained earnings. Permanent accounts are not closed at the end of the period but rather carry over
to the next period. Assets, liabilities, and stockholders’ equity are permanent accounts. Their ending balances
become the next period’s beginning balance.

Steps to close the books:
1. Debit each revenue for the amount of its credit balance. Credit Retained Earnings for the sum of all
revenues.
2. Credit each expense account for the amount of its debit balance. Debit Retained Earnings for the sum of
all expenses.
3. Credit the Dividends account for the amount of its debit balance. Debit Retained Earnings for the same
amount.
The chart below shows the closing journal entries that Aladdin Travel Inc. would make. It follows the steps
discussed on the previous slide.
Journalizing and Posting the Closing Entries

Close the Books
Above is the Retained Earnings account of Aladdin Travel, Inc. after closing the books. Revenues were credited
to Retained Earnings, while expenses and dividends were debited.
2.5 Classifying Assets and Liabilities Based on Their Liquidity On the balance sheet, assets and liabilities
are classified as current or long term to indicate their relative liquidity. Liquidity measures how quickly an item
can be converted to cash.
-Cash is the most liquid asset.
-Accounts receivable are relatively liquid because cash collections usually follow quickly.
-Inventory is less liquid than accounts receivable because the company must first sell the goods.
-Equipment and buildings are even less liquid because these assets are held for use and not for sale.
Current assets are the most liquid assets. They are converted to cash, sold, or consumed within one year or
before the end of the business‘s operating cycle. Examples include Cash, Short-term Investments, Accounts
Receivable, and Prepaid Expenses
Long-Term Investments, Intangible Assets, and Other Assets (a catch-all category for assets that are not
classified more precisely) are also long term. Examples include Land, Buildings, Furniture and Fixtures, and
Equipment.
Current liabilities are always listed first. Bankers and other lenders are interested in the due dates of a
company’s liabilities. The sooner a liability must be paid, the more pressure it creates. Therefore, the balance
sheet lists liabilities in the order in which they must be paid.
Long-Term Liabilities Some notes payable are paid in installments, with the first installment due within one
year, the second installment due the second year, and so on. The first installment is a current liability and the
remainder is long term.
Below is a classified balance sheet for The Walt Disney Company. It separates current assets from long-term
assets and current liabilities from long-term liabilities.

Balance Sheet Formats: The report format lists the assets at the top, followed by the liabilities and
stockholders’ equity below. The report format is more popular, with approximately 60% of large companies
using it. The account format lists the assets on the left and the liabilities and stockholders’ equity on the right in
the same way that a T-account appears, with assets (debits) on the left and liabilities and equity (credits) on the
right. Either format is acceptable.

Exercise 2-1 Understanding The Classified Balance Sheet
STARBUCKS (SBUX) 10/02/2011 BALANCE SHEET ($ in millions)

ASSETS LIABILITIES
Cash and cash
equivalents $ 1,148.1 Accounts payable $ 540.0
Short-term investments 902.6 Short-term debt 0.0
Accounts receivable 385.6 Other current liabilities 1,535.8
Inventories 965.8 Long-term debt 549.5
Other current assets 392.8 Other noncurrent liabilities 350.2
STOCKHOLDERS’
PPE, net 2,355.0 EQUITY
Goodwill and intangibles 433.5 Contributed capital 41.2
Long-term investments 479.3 Retained earnings 4,297.4
Other noncurrent assets 297.7 Other stockholders’ equity 46.3
TOTAL ASSETS $7,360.4 TOTAL L & SE $7,360.4
To answer the following questions, refer to the balance sheet presented above.
Q1 How many accounts listed are Current Assets? (1 / 3 / 5) Property, Plant, and Equipment? (1 / 3 / 5)
Goodwill and Intangibles? (1 / 3 / 5) Other Assets? (1 / 2 / 5)
Q2 What is the total amount reported for Current Liabilities? _____________million
Noncurrent Liabilities? _________million Total Stockholders’ Equity? ___________million
Use Starbucks’ balance sheet dated 10/02/2011 (on the opposite page) to answer the following questions.
a. How much do customers owe this company? _____________million
b. For inventories, $965.8 million is the (acquisition cost / current market value / can’t tell).
c. For property, plant, and equipment, net, $2,355.0 million is the (acquisition cost / current market value /
book value / can’t tell).
d. What amount of investments does this company intend to hold for more than a year?
________________million
e. (PPE / Goodwill / Long-term investments) is created when a company is acquired.
f. How much does this company owe to suppliers? ______________million
g. Current assets total _________million and current liabilities total __________million. Current assets are
used to pay off (current / noncurrent) liabilities. This company has (sufficient / insufficient) current
assets to pay off its current liabilities.
h. Noncurrent assets total _________million and noncurrent liabilities total ________million. Noncurrent
liabilities are used to finance (current / noncurrent) assets.

i. Contributed capital represents (amounts borrowed / amounts paid-in by shareholders / net income
earned by the company).
j. This company is relying primarily on (long-term debt / contributed capital / retained earnings) to
finance assets, which is an (external / internal) source of financing.
k. The balance sheet reports a company’s financial position (as of a certain date / over a period of time).
l. Assets and liabilities are recorded on the balance sheet in order of (magnitude / alphabetically / liquidity),
which means that (PPE / cash) will always be reported before (PPE / cash).
m. U.S. GAAP and IFRS treat (cash / PPE) essentially the same. However, for (cash / PPE), IFRS allows
valuation at fair value, whereas U.S. GAAP requires (historical cost / fair value
Income Statement Formats: A single-step income statement (statement of earnings) lists all the revenues
together under a heading such as Revenues. The expenses are listed together in a single category titled
Expenses. There is only one step, the subtraction of the sum of expenses from revenues. A multi-step income
statement reports a number of subtotals to highlight important relationships between revenues and expenses.
Gross profit, various levels of operating income, income before taxes, and net income are highlighted for
emphasis. A multi-step income statement is shown below.
2.6 Analyze and Evaluate a Company’s Debt-Paying Ability To analyze a company’s financial position,
decision makers use ratios computed from various items in the financial statements.
Net working capital is a computed dollar amount that represents operating liquidity. Its computation is simple:
Net working capital = Total current assets - Total current liabilities.
Generally, to be considered liquid, a company should have a sufficient excess of current assets over current
liabilities. The amount considered “sufficient” varies with the industry.

Another way of expressing operating liquidity is with the current ratio, which divides total current assets by
total current liabilities. Like net working capital, the current ratio measures a company’s ability to pay its
current liabilities with its current assets. A company prefers a high current ratio, which means that the business
has plenty of current assets to pay its current liabilities. An increasing current ratio from period to period
indicates improvement in the company’s liquidity. As a rule of thumb, a strong current ratio is 1.50, which
indicates that the company has $1.50 in current assets for every $1.00 in current liabilities. A company with a
current ratio of 1.50 would probably have little trouble paying its current liabilities. Many successful businesses
operate with current ratios between 1.20 and 1.50. A current ratio of less than 1.00 is considered low. That
would mean that current liabilities exceed current assets.
Still another measure of a company’s debt-paying ability is its debt ratio, which is the ratio of its total liabilities
to its total assets. The debt ratio indicates the proportion of a company’s assets that is financed with debt. This
ratio measures a business’s ability to pay both its current and long-term debts (total liabilities).
A low debt ratio is safer than a high debt ratio. A company with few liabilities has low required debt payments
and is unlikely to get into financial difficulty. By contrast, a business with a high debt ratio may have trouble
paying its liabilities, especially when its sales are low and its cash is scarce. Most bankruptcies result in part
from high debt ratios.

2. HOMEWORK AND ASSIGNMENTS

Question 2-1 (Learning Objective: Explain how accrual accounting differs from cash-basis accounting; adjust
the accounts)
An accountant made the following adjustments at December 31, the end of the accounting period:
a. Prepaid insurance, beginning, $600. Payments for insurance during the period, $2,000.
Prepaid insurance, ending, $1,200.
b. Interest revenue accrued, $2,100.
c. Unearned service revenue, beginning, $1,800. Unearned service revenue, ending, $400.
d. Depreciation, $5,200.
e. Employees’ salaries owed for two days of a five-day workweek: weekly payroll, $18,000.
f. Income before income tax, $25,000. Income tax rate is 35%.
Requirements
1. Journalize the adjusting entries (use the journal format provided below)
2. Suppose the adjustments were not made. Compute the overall overstatement or understatement
of net income as a result of the omission of these adjustments.
Adjusting Entries
DATE ACCOUNT TITLES DEBIT CREDIT

Question 2-2 The worksheet of Best Jobs Employment Service follows but is incomplete.
The following data at April 30, 2018, are given for Best Jobs Employment Service:
a.Service revenue accrued, $700.
b. Office supplies used, $300.
c.Depreciation on equipment, $1,300.
d. Salaries owed to employees, $1,400.
Requirements
1. Calculate the adjustment amounts in the Adjustments columns and complete the Adjusted Trial Balance.
2. Prepare each adjusting journal entry calculated in Requirement 1
Date Accounts and Explanation Debit Credit

Question 2-3 (Learning Objective: Adjust the accounts; close the books) The unadjusted trial balance and
income statement amounts from the December 31 adjusted trial balance of Winwood Production Company
follow.
Requirement
1. Journalize the adjusting and closing entries of Winwood Production Company at December 31. There was
only one adjustment to Service Revenue.
Question 2-4 (Learning Objective: Construct the financial statements; analyse and evaluate liquidity and
debt-paying ability) Refer to Question 2-3..
Requirements
1. Use the data in the partial worksheet to prepare Winwood Production Company’s classified balance sheet at
December 31 of the current year. Use the report format. First you must compute the adjusted balance for several
of the balance-sheet accounts.
2. Compute Winwood Production Company’s net working capital, current ratio, and debt ratio at December 31.
A year ago, net working capital was $3,900, the current ratio was 1.40, and the debt ratio was 0.64. Indicate
whether the company’s ability to pay its debts—both current and total—improved or deteriorated during the
current year.

3. STOCKHOLDERS’ EQUITY
3.1 Characteristics of a Corporation A corporation is a business organized under state law that is a separate
legal entity. Corporations dominate business activity in the United States. Most well-known companies are
corporations and tend to be large multinational businesses.
A corporation has many unique characteristics:
- Separate legal entity—A corporation is a separate legal entity. It is organized independently of its owners.
- Number of owners—Corporations have one or more owners (called stockholders). A public corporation is
a corporation whose stock can be purchased on an organized stock exchange, such as the New York
Stock Exchange or the NASDAQ Stock Market. Some corporations are privately held, which means the
stock cannot be purchased on a stock exchange. These corporations often have only a few stockholders.
- No personal liability of the owner(s) for business’s debts—Stockholders are not personally liable for the
debts of the corporation.
- Lack of mutual agency—Stockholders cannot bind the business to a contract.
- Indefinite life—Corporations have an indefinite life.
- Taxation—Corporations are separate taxable entities.
- Double taxation—Double taxation occurs when corporations make cash payments (called dividends) to
stockholders. These payments are taxed once as earnings of the corporation and then again when the
stockholder receives the dividend.
- Capital accumulation—Corporations can raise more money than sole proprietorships and partnerships. This
is completed through an initial public offering (IPO) and represents the initial offering of corporate
shares of stock to the public.
A corporation is created by filing a certificate of formation with a state. The state authorizes the business to be
organized as a corporation and grants the entity a charter or articles of incorporation. The corporation then
prepares a set of bylaws, which provide the rules and procedures that the corporation will follow.
The corporate charter of a corporation identifies the maximum number of shares of stock the corporation may
issue. Authorized stock is the maximum number of shares of stock that the corporate charter allows the
corporation to issue. Authorized stock can be issued or unissued. Issued stock is stock that has been issued but
may or may not be held by stockholders. A corporation issues stock certificates to the stockholders when they
buy stock. A stock certificate is paper evidence of ownership in a corporation. The stock certificate represents
the individual’s ownership of the corporation’s capital, so it is called capital stock. Outstanding stock is issued
stock in the hands of stockholders.
Stockholders’ Rights A stockholder has four basic rights, unless a right is withheld by contract:
1. Vote—Stockholders participate in management indirectly by voting on corporate matters at stockholders’
meetings. This is the only way in which a stockholder can help to manage the corporation. Normally,
each share of basic ownership in the corporation carries one vote.
2. Dividends—Stockholders receive a proportionate part of any dividend that is declared and paid. A
dividend is a distribution of a corporation’s earnings to stockholders.
3. Liquidation—Stockholders receive their proportionate share of any assets remaining after the corporation
pays its debts and liquidates (goes out of business).
4. Preemptive right—Stockholders have a preemptive right to maintain their proportionate ownership in the
corporation. This right, however, is usually withheld by contract for most corporations.
DIFFERENT TYPES OF CAPITAL STOCK Corporations can issue different classes of stock. The stock of
a corporation may be either common or preferred. Every corporation issues common stock. Common stock
represents the basic ownership of a corporation.
Preferred stock gives its owners certain advantages over common stockholders, such as the right to receive
dividends before the common stockholders and the right to receive assets before the common stockholders if the
corporation liquidates.
Stock may carry a par value, or it may be no-par stock. Par value is an amount assigned by a company to a
share of its stock. Most companies set par value low to avoid issuing their stock below par. The par value of a
stock has no relation to the market value, which is the price at which the stock is bought and sold.
Some states allow the issuance of no-par stock. No-par stock is stock that has no amount (par) assigned to it.
Stated value stock is no-par stock that has been assigned an amount similar to par value.
A corporation’s equity is called stockholders’ equity. State laws require corporation to report their sources of
owners’ capital because some of the capital must be maintained by the company. There are two basic sources of
stockholders’ equity:
Paid-in capital (also called contributed capital) represents amounts received from the stockholders in exchange
for stock. Common stock is the main source of paid-in capital. Paid-in capital is externally generated capital and
results from transactions with outsiders.
Retained earnings is equity earned by profitable operations that is not distributed to stockholders. Retained
earnings is internally generated equity because it results from corporate decisions to retain net income to use in
future operations or for expansion. Retained earnings is equity earned by profitable operations of a corporation
that is not distributed to stockholders.

3.2 How Is the Issuance of Stock Accounted For? Large corporations need huge quantities of money. They
cannot finance all of their operations through borrowings, so they raise capital by issuing stock. A company can
sell its stock directly to stockholders, or it can use the services of an underwriter. An underwriter is a firm that
handles the issuance of a company’s stock to the public, usually assuming some of the risk by agreeing to buy
the stock if the firm cannot sell all of the stock to its clients.
The amount that the corporation receives from issuing stock is called the issue price. The issue price is the price
the stock initially sells for the first time it is sold.
Issuing Common Stock at Par Value
Smart Touch Learning’s common stock carries a par value of $1 per share, and the charter authorizes
20,000,000 shares of common stock. The stock issuance of 15,000 shares of stock at par value is recorded as:
Issuing Common Stock at a Premium

Smart Touch Learning issues an additional 3,000 shares for $5 per share. The $4 difference between the issue
price ($5) and the par value ($1) is a premium, recorded in Paid-in Capital in Excess of Par.
Exhibit shows how Smart Touch Learning would report stockholders’ equity on its balance sheet after the stock
issuances, assuming that the balance of Retained Earnings is $3,550.
Issuing No-Par Common Stock When a company issues no-par stock, it debits the asset received and credits the
stock account. For no-par stock, there can be no Paid-In Capital in Excess of Par because there is no par to be in
excess of.
Smart Touch Learning’s common stock is no-par. Assume that the company issues 15,000 shares for $1 and
3,000 shares for $5.

Issuing Stated Value Common Stock Accounting for stated value common stock is almost identical to
accounting for par value stock. The only difference is that stated value stock uses an account titled Paid-In
Capital in Excess of Stated to record amounts received above the stated value.
Smart Touch Learning issues 3,000 shares of $1 stated value stock for $5 per share. Accounting for stated value
stock is similar to accounting for par value stock.
Issuing Common Stock for Assets Other Than Cash A corporation may issue stock for assets other than cash. It
records the transaction at the market value of the stock issued or the market value of the assets received,
whichever is more clearly determinable. Smart Touch Learning receives an additional contribution of furniture
with a market value of $18,000 in exchange for 5,000 shares of its $1 par common stock.
Issuing Preferred Stock Accounting for preferred stock follows the pattern illustrated for issuing common stock.
Assume that Smart Touch Learning has authorization from the state to issue 2,000 shares of preferred stock.
Smart Touch Learning decides to issue 1,000 shares of its $50 par, 6% preferred stock on January 3, 2025, at
$55 per share. The 6% in the description of the preferred stock refers to the stated dividend associated with the
stock.
Preferred Stock is included in the stockholders’ equity section of the balance sheet and is often listed first. Any
Paid-In Capital in Excess of Par—Preferred is listed next, followed by Common Stock and Paid-in Capital in
Excess of Par—Common. Exhibit 6 shows the stockholders’ equity section of Smart Touch Learning’s balance
sheet, assuming that both stocks were par value stocks.
3.3 Account for the purchase and sale of treasury stock A company’s own stock that it has previously issued
and later reacquired is called treasury stock. In effect, the corporation holds the stock in its treasury. A
corporation, such as Smart Touch Learning, may purchase treasury stock for several reasons:
Management wants to increase net assets by buying low and selling high.
Management wants to support the company’s stock price.
Management wants to avoid a takeover by an outside party by reducing the number of outstanding shares that
have voting rights.
Management wants to reward valued employees with stock.
Here are the basics of accounting for treasury stock:
The Treasury Stock account has a normal debit balance, which is the opposite of the other stockholders’ equity
accounts. Therefore, Treasury Stock is a contra equity account.
Treasury stock is recorded at cost (what the company paid to reacquire the shares), without reference to par
value.
The Treasury Stock account is reported beneath Retained Earnings on the balance sheet as a reduction to total
stockholders’ equity.
Treasury stock decreases the company’s stock that is outstanding—that is, held by outsiders (the stockholders).
Therefore, outstanding stock is issued stock less treasury stock.

Purchase of Treasury Stock Assume that on March 31, Smart Touch Learning purchases 1,000 shares of
previously issued common stock, paying $5 per share. To record the purchase, the company debits Treasury
Stock—Common and credits Cash.
Sale at Cost Companies buy their treasury stock and eventually resell or retire it. A company may resell
treasury stock at, above, or below its cost (what the company paid for the shares).
If treasury stock is sold for cost—the same price the corporation paid for it—there is no difference between the
cost per share and the sale price per share to journalize.
Assume that Smart Touch Learning resells 100 of the treasury shares on April 1 for $5 each. The journal entry
includes a debit to Cash for $500 (100 shares × $5) and a credit to Treasury Stock—Common.
Sale Above Cost Smart Touch Learning resells 200 of its treasury shares for $6 per share on April 2 (recall that
the cost was $5 per share).
Sale Below Cost The resale price of treasury stock can be less than cost. The shortfall is debited first to Paid-In
Capital from Treasury Stock Transactions. However, this account can only be debited for an amount that brings
it to zero; it cannot have a debit balance. If this account’s balance is too small, Retained Earnings is debited for
the remaining amount.
On April 3, Smart Touch Learning resells 200 treasury shares for $4.30 each.

Stockholders’ Equity After Treasury Stock Transactions
How many common shares are outstanding on April 4? The 23,000 common shares previously issued minus
300 treasury shares equals 22,700 outstanding common shares.

Retirement of Stock Retirements of preferred stock are common as companies seek to avoid paying the
preferred dividends. A corporation may retire its stock by canceling the stock certificates.
Retired stock cannot be reissued.
To repurchase previously issued stock for retirement, we debit the stock accounts and credit Cash.
This removes the retired stock from the company’s books and it also reduces total assets and total stockholders’
equity.
3.4 Account for cash dividends, stock dividends A profitable corporation may make distributions to
stockholders in the form of dividends. Dividends can be paid in the form of cash, stock, or other property.
Cash dividends cause a decrease in both assets (Cash) and equity (Retained Earnings). Most states prohibit
using paid-in capital for dividends. Accountants, therefore, use the term legal capital to refer to the portion of
stockholders’ equity that cannot be used for dividends.
Cash Dividends A corporation declares a dividend before paying it. Three dividend dates are relevant:
Declaration date―On the declaration date—say, May 1—the board of directors announces the intention to pay
the dividend. The declaration of a cash dividend creates an obligation (liability) for the corporation.
Date of record (or record date)―Stockholders holding the stock at the end of business on the date of record—a
week or two after declaration, say, May 15—will receive the dividend check. Date of record is the date the
corporation records the stockholders that receive dividend checks.
Payment date―Payment of the dividend usually follows the record date by a week or two—say, May 30.
Declaring and Paying Dividends― Common Stock
On May 1, Smart Touch Learning declares a $0.05 per share cash dividend on 22,700 outstanding shares of
common stock.
On May 15, the date of record, no journal entry is recorded. This is simply the cutoff point to determine who
owns the stock and will, therefore, receive the cash payment. To pay the dividend on the payment date, May 30,
Smart Touch Learning debits Dividends Payable—Common and credits Cash.
Declaring and Paying Dividends― Preferred Stock The cash dividend rate on preferred stock is often
expressed as a percentage of the preferred stock par value, such as 6%. Sometimes, however, cash dividends on
preferred stock are expressed as a flat dollar amount per share, such as $3 per share.
Greg’s Games, Inc. has 1,000 outstanding shares of 6%, $50 par value preferred stock.
Preferred dividend = Outstanding shares × Par value × Preferred dividend rate
Preferred dividend = 1,000 shares × $50 par value per share × 6% = $3,000
A preferred stock dividend in arrears is a dividend that has not been paid for the year.
Preferred stock can be:
Cumulative preferred stock―Preferred stock whose owners must receive all dividends in arrears plus the
current year dividends before the corporation pays dividends to the common stockholders
Noncumulative preferred stock―Preferred stock whose owners do not receive passed dividends
Greg’s Games, Inc. has 1,000 outstanding shares of 6%, $50 par value cumulative preferred stock. In 2024 the
business did not pay any cash dividends. On September 6, 2025, Greg’s Games declares a $50,000 total
dividend.
Greg’s Games’ entry to record the declaration of this dividend on September 6, 2025:
If the preferred stock is noncumulative, Greg’s Games would have to pay only the 2025 preferred dividend of
$3,000, which would leave $47,000 for the common stockholders.
A stock dividend is a distribution of a corporation’s own stock to its stockholders. Unlike cash dividends, stock
dividends do not give any of the corporation’s assets, like cash, to the stockholders. Stock dividends have the
following characteristics:
They affect only stockholders’ equity accounts.
They have no effect on total stockholders’ equity.
They have no effect on assets or liabilities.
The corporation distributes stock dividends to stockholders in proportion to the number of shares the
stockholders already own.
A company issues stock dividends for several reasons:
To continue dividends but conserve cash―A company may wish to continue the distribution of dividends to
keep stockholders happy but may need to keep its cash for operations. Issuing a stock dividend is a way to do so
without using corporate cash.
To reduce the market price per share of its stock―Depending on its size, a stock dividend may cause the
company’s market price per share to fall because of the increased supply of the stock. One objective of issuing a
stock dividend might be to make the stock less expensive and, therefore, more available and attractive to
investors.
To reward investors―Investors often feel like they have received something of value when they get a stock
dividend.
3. ASSIGNMENT AND HOMEWORK

Question 3-1 (Learning Objective: Divide cash dividends between preferred and common stock)
Baxter, Inc., has 25,000 shares of $1.35 preferred stock outstanding in addition to its common stock. The $1.35
designation means that the preferred stockholders receive an annual cash dividend of $1.35 per share. In 2016,
Baxter declares an annual dividend of $500,000. The allocation to preferred and common stockholders is
Preferred dividend (25,000 shares * $1.35 per share) ................ $ 33,750
Common dividend (remainder: $500,000 - $33,750) ............... 466,250
Total dividend........................................................................... $500,000
Answer these questions about Baxter’s cash dividends.
1. How much in dividends must Baxter declare each year before the common stockholders receive any cash
dividends for the year?
2. Suppose Baxter, Inc., declares cash dividends of $400,000 for 2016. How much of the dividends goes to
preferred? How much goes to common?
3. Is Baxter’s preferred stock cumulative or noncumulative? How can you tell?
4. Baxter, Inc., passed the preferred dividend in 2015 and 2016. Then in 2017, Baxter declares cash dividends of
$1,300,000. How much of the dividends goes to preferred? How much goes to common?

Question 3-2 (Learning Objective: Compute book value per share) Fresco Ambulatory, Inc., has the following
stockholders’ equity:
The company has passed its preferred dividends for three years, including the current year.
Required: Compute the book value per share of the company’s common stock.
Question 3-3 (Learning Objective: Analyse a basic statement of stockholders’ equity)

Use the following statement of stockholders’ equity to answer the following questions about Beckett
Corporation:
1. How much cash did the issuance of common stock bring in during 2016? 12800+580000
2. How much in dividends did Beckett declare during 2016? 25000
3. What was the effect of the dividends on Beckett’s retained earnings? On total paid-in capital? On total
stockholders’ equity? On total assets?
4. What was the cost of the treasury stock that Beckett purchased during 2016?
5. What was the cost of the treasury stock that Beckett sold during the year? For how much did Beckett sell the
treasury stock during 2016?
6. How much was Beckett’s net income?
7. What is Beckett’s total stockholders’ equity as of December 31, 2016?

Question 3-4 Use the following accounts and related balances to prepare the classified balance sheet of
Whitehall, Inc., at September 30, 2017. Use the account format of the balance sheet.

4. Statement of Cash Flows

The statement of cash flows is required for both IFRS and GAAP. Cash is “king” and is used to pay outstanding
liabilities. The Cash Flow Statement indicates the sources and uses of the company’s cash flow. It reports on a
business’s cash receipts and cash payments for a specific period.
This statement reports:
• on the cash flows of a business—where cash came from (receipts) and how cash was spent (payments)
• why cash increased or decreased during the period
• Covers a span of time and is stated the same as the income statement—“Year Ended December 31,
2016,” or “Month Ended June 30, 2016.”
The statement of cash flows serves four purposes:
- Predicts future cash flows
- Evaluates managements decisions
- Determines ability to pay dividends and interest
- Shows the relationship of net income to cash flows
On a statement of cash flows, cash means more than just cash in the bank. It includes cash equivalents, which
are highly liquid short-term investments that can be converted into cash immediately. Examples include money-
market accounts and investments in US securities.
Classification of Cash Flows:
There are three basic types of cash flows, and the statement of cash flows has a section for each:
 Operating activities
 Investing activities
 Financing activities
1. Operating activities is the first section on the statement of cash flows and is often the most important
category. The operating activities section reports on activities that create revenue or expense in the entity’s
business. It reflects the day-to-day operations of the business, such as cash receipts (cash inflows) from
customers for the sales of merchandise inventory and services and the cash outflow for purchases of
merchandise inventory or payment of operating expenses. The operating activities section also includes cash
receipts (cash inflows) for interest and dividend income and cash payments (cash outflows) for interest expense
and income tax expense.
2. Investing activities is the second category listed on the statement of cash flows. This section reports cash
receipts and cash payments that increase or decrease long-term assets, such as property, plant, equipment, notes
receivable, and investments. It includes the cash inflow from selling and the cash outflow from purchasing these
long-term assets. In addition, it includes the loaning (cash outflow) and collecting (cash inflow) of long-term
notes receivable.
3. Financing activities include cash inflows and outflows involved in long-term liabilities and equity. This
includes issuing stock, paying dividends, and buying and selling treasury stock. It also includes borrowing
money and paying off long-term liabilities such as notes payable, bonds payable, and mortgages payable.
Each section of the statement of cash flows affects a different part of the balance sheet. The operating activities
section reports on how cash flows affect the current accounts—current assets and current liabilities. Investing

activities affect the long-term assets. And financing activities affect long-term liabilities and equity.
Non-cash Investing and Financing Activities The three sections of the statement of cash flows report only
activities that involve cash. Companies also make investments that do not require cash. They also obtain
financing other than cash. Such transactions are called non-cash investing and financing activities. Non-cash
investing and financing activities are investing and financing activities that do not involve cash. Examples of
these activities include the purchase of equipment financed by a long-term note payable or the contribution of
equipment by a stockholder in exchange for common stock. These activities are not included in the statement of
cash flows. Instead, they appear as a separate schedule at the bottom of the statement of cash flows or in the
notes to the financial statements.
There are two ways to format the operating activities section of the statement of cash flows:
1. The indirect method starts with net income and adjusts it to net cash provided by operating activities.
2. The direct method restates the income statement in terms of cash. The direct method shows all the cash
receipts and all the cash payments from operating activities.
The indirect method and direct method use different computations but produce the same amount of net cash
flow from operating activities. Both methods present investing activities and financing activities in exactly the
same format. Only the operating activities section is presented differently between the two methods. IFRS
permits the use of either the direct or indirect method.
Cash flow statement using the indirect method To prepare the statement of cash flows, you need the income
statement for the current year, as well as the balance sheets from the current and prior years. Let’s prepare the
cashflow statement for ShopMart, Inc. Items needed:
- Income statement for the current year
- Balance sheet from the current year
- Balance sheet from the prior year
- Additional information based on review of transactions


Cash Flows from Operating Activities:

Transactions that make up net income
From the income statement
-Net income
-Depreciation, depletion, amortization expense
-Gains and losses on sale of long-term assets
From the comparative balance sheets
-Increase or decrease in each current asset
-Increase or decrease in each current liability
Let’s show the operating activities of ShopMart: Start with the Net Income amount from the Income Statement
– this is accrual basis net income or loss, which must be adjusted to a cash number. (For example, sales on
account generate revenues that increase net income, but the company has not yet collected cash from those
sales. Accrued expenses decrease net income, but the company has not yet paid cash if the expenses are
accrued.)
+ Add back all non-cash expenses to the net income. Expenses such as Depreciation Expense, Amortization
Expense, and Depletion Expense represent expenses that are not related to current cash flows as depreciation
does not affect cash.
- Subtract accounting gains from net income.
Disposals of long-term assets such as land and buildings are investing activities, and these disposals usually
create a gain or a loss. The gain or loss is included in net income, which is already in the operating activities
section of the statement of cash flows. The gain or loss must be removed from net income on the statement of
cash flows so the total cash receipts from the sale of the assets can be shown in the investing section.
+Add accounting losses back to net income. These losses (such as Loss on Sale of Equipment) are not cash
flows that are related to operating activities, so their effect should be eliminated from net income.
-When current assets(other than cash) increase, we treat that as a “use” of cash and subtract it from net income.
+When current assets (other than cash) decrease, we treat that as a “source” of cash and add it to net income.
+When current liabilities increase, we treat that as a “source” of cash and add the increase to net income.
-When current liabilities decrease, we treat that as a “use” of cash and subtract the decrease from net income.
When all of the adjustments have been made to net income, you can compute net cash flow from operating
activities.
Cash Flows from Investing Activities

Investing activities affect long-term assets, such as Plant Assets, Investments, and Notes Receivable. When
computing investing cash flows, it is helpful to evaluate the T-accounts for each long-term asset. A T-account
will show if an acquisition or a disposal happened during the year.
The beginning and ending balances for each account are taken directly from the comparative balance sheet.
Depreciation expense has been included in the Accumulated Depreciation account, and this was taken from the
income statement. The acquisition and disposal information came from the additional information provided
when we introduced the example:
-Purchased $310,000 in plant assets by paying cash.
-Sold plant assets with a cost of $55,000 and accumulated depreciation of $15,000, yielding a gain of $10,000.

We need to determine the amount of cash received for the disposal of plant assets. Using the information
provided, we can re-create the journal entry for the disposal and solve for the missing cash amount.
Cash Flows from Financing Activities

Financing activities affect the long-term liability and equity accounts, such as Long-term Notes Payable, Bonds
Payable, Common Stock, and Retained Earnings. To determine the cash flows from financing activities, we
need to review each of these accounts.
- Most data from balance sheet
- Increases are offset by increases in cash
- Decreases are offset by decreases in cash
The beginning and ending balances of Notes Payable are taken from the comparative balance sheet.
The T-account for ShopMart’s Notes Payable is shown below.

Additional information:
- Received $90,000 cash from issuance of notes payable.
- Paid $10,000 cash to retire notes payable.
-A new issuance of notes payable is known to be a $90,000 cash receipt.
-In addition, ShopMart paid $10,000 cash to retire notes payable.
The cash inflow and cash outflow associated with these notes payable are listed first in the cash flows from
financing activities section.
Common Stock and Treasury Stock

The amount of new issuances of stock is determined by analyzing the stock accounts and reviewing additional
information:
- Received $120,000 cash from issuing shares of common stock.
- Paid $20,000 cash for purchase of shares of treasury stock.
The common stock account shows a new stock issuance of $120,000. The entry to record this debits Cash for
$120,000 and credits Common Stock for $120,000.

The entry to record the acquisition of treasury stock debits Treasury Stock and credits cash for the $20,000 cost
of the stock.
The $20,000 payment for treasury stock is shown as a cash outflow in the financing section of the statement of
cash flows.
Computing Dividend Payments

The amount of dividend payments can be computed by analyzing the Retained Earnings account.
ShopMart earned net income of $40,000.
Only cash dividends paid are reported on the statement of cash flows. We know the cash dividends are paid
because there are no dividends payable reported on ShopMart’s balance sheet. Companies can also distribute
stock dividends. A stock dividend has no effect on Cash and is not reported in the financing activities section of
the statement of cash flows. ShopMart had no stock dividends, only cash dividends, which are shown as an
outflow in the financing activities section of the statement of cash flows.

Net Change in Cash and Cash Balances
To complete the statement of cash flows, the net change in cash and its effect on the beginning cash balance
must be shown. This represents the total change in cash for the period and reconciles the statement of cash
flows. First, the net increase or decrease in cash is computed by combining the cash provided by or used for
operating, investing, and financing activities.
Non-cash Investing and Financing Activities

The last step in preparing the statement of cash flows is to prepare the non-cash investing and financing
activities section. This section appears as a separate schedule of the statement of cash flows or in the notes to
the financial statements.
Let’s consider three non-cash transactions for The Outdoors, Inc.:
1. Acquired $300,000 building by issuing common stock.
2. Acquired $70,000 land by issuing notes payable.
3. Retired $100,000 notes payable by issuing common stock.
The Outdoors issues common stock of $300,000 to acquire a building. The journal entry to record the purchase
is as follows:
This transaction would not be reported on the statement of cash flows because no cash was paid or received. But
the building and the common stock are important. The purchase of the building is an investing activity. The
issuance of common stock is a financing activity. Taken together, this transaction is a non-cash investing and
financing activity.
The purchase of the land is an investing activity. The issuance of the note is a financing activity. Taken
together, this transaction is a non-cash investing and financing activity.
The retirement of the note and the issuance of the common stock are both financing activities. Taken together,
this transaction, even though it is two financing transactions, is reported in the non-cash investing and financing
activities.
Non-cash investing and financing activities are reported in a separate part of the statement of cash flows. This
information is either reported as a separate schedule following the statement of cash flows or can be disclosed in
a note.
4. Assignments and Questions

Question 4-1 Destiny Corporation is preparing its statement of cash flows by the indirect method. Destiny has
the following items for you to consider in preparing the statement: Identify each item as a(n):
• Operating activity—addition to net income   or subtraction from net income  
O O
• Investing activity—cash inflow   or cash outflow  

I I
• Financing activity—cash inflow   or cash outflow  

F F
• Activity that is not used to prepare the indirect statement of cash flows (N)
a. Increase in accounts payable b. Payment of dividends
c. Decrease in accrued liabilities d. Issuance of common stock
e. Gain on sale of building f. Loss on sale of land
g. Depreciation expense h. Increase in merchandise inventory
i. Decrease in accounts receivable j. Purchase of equipment

P4-2 – Understanding the Statement of Cash Flows
PEPSICO (PEP) 2010 STATEMENT OF CASH FLOWS ($ in millions)

Net cash received from operating activities (NCOA) $ 8,448
Net cash paid for investing activities (NCIA) (7,668)
Net cash received from financing activities (NCFA) 1,386
Effect of exchange rate changes (166)
Change in cash 2,000
+ Cash, beginning of the period
3,943
= Cash, end of the period $ 5,943
Q1 Use PepsiCo’s 2010 statement of cash flows above to answer the following questions:
a. PepsiCo’s operating activities generated cash inflows of ____________million.
8448
b. PepsiCo purchased property, plant, and equipment, which resulted in a cash (inflow / outflow) of
____________million
7668 from (operating / investing / financing) activities.
c. PepsiCo borrowed money, which resulted in a cash (inflow / outflow) of __________million

1386 from
(operating / investing / financing) activities.
d. At the beginning of 2010, cash ___________million.
3943 During the year, cash (increased / decreased)
by __________million,
20000 resulting in an ending cash balance of _____________million.
5943
e. Cash at the end of 2010 is the (same as / different than) cash at the beginning of 2011.
Q2 Circle whether the account is reported on the Income Statement (IS), the Balance Sheet (BS), or the
Statement of Cash Flows (CF).
a. Retained earnings (IS / BS / CF) e. Cash from issuing common stock (IS / BS / CF)
b. Rent expense (IS / BS / CF) f. Sales revenue (IS / BS / CF)
c. Rent payable (IS / BS / CF) g. Accounts receivable (IS / BS / CF)
d. Cash paid for rent (IS / BS / CF) h. Cash received from customers (IS / BS / CF)
Problem 4-3
For each of the following cash transactions, identify whether it is better described as an operating,
financing, or investing activity.
a. An entrepreneur contributes his own money to start a new business. F
b. The business buys a building. I
c. The business purchases inventory. O
d. The business sells inventory to customers. O
e. The business pays a loan. F , IF LONG TERM ----> INVEST

Question 4-4 (Learning Objective: Classifying the category of the transactions on the statement of cash flows
(Operating /Investing /Financing / Non-cash investing and financing – indirect method)
F
F
IN
F
NON
IN
FIN
NO
OP
Question 4-5 (Learning Objective: Computing cash flows from operating activities—indirect method)
Winding Road Cellular accountants have assembled the following data for the year ended April 30, 2018:
I+ Cash receipt from sale of land $ 27,000 Net income $ 55,000 +
O+Depreciation expense 2,000 Cash purchase of equipment 44,000 -I
F-Cash payment of dividends 5,800 Decrease in current liabilities 20,000 -O
F+Cash receipt from issuance of common stock17,000Increase in current assets other than cash 27,000 -O
FIN
Prepare the operating activities section using the indirect method for Winding Road Cellular’s statement of cash
flows for the year ended April 30, 2018.
Question 4-6 (Learning Objective: Computing cash flows from investing and financing activities)
Use the data in Question 4-3 to complete this exercise. Prepare Winding Road Cellular’s statement of cash
flows using the indirect method for the year ended April 30, 2018.
Assume beginning and ending Cash are $48,000 and $52,200, respectively.

M2 International Accounting Course Syllabus

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IAE Clermont Auvergne – School of Management

Masters 2 INTERNATIONAL ACCOUNTING

Instructor: Mme. M. MATHOT

M2CCA 2021-22 International Accounting Materials Mme. M. Mathot 1

International Accounting Course Syllabus

II. Course Description:

III. Instructor: Mericia Mathot, Director, International Bachelor Program, UCA

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1.1 Introduction to Accounting

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• IFRS are based on fair presentation principles

• Objectives and principles of financial reporting

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Components of Retained Earnings

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1.4. EVALUATE BUSINESS OPERATIONS USING THE FINANCIAL STATEMENTS

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The Statement of Owner’s Equity and/or Statement of Retained Earnings

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A simple, account-style balance sheet is presented below:

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a. How well did the company perform during the year?

c. Did the company declare a dividend during the year?

d. How much in total debt does the company have?

f. What assets does the company have?

g. How much cash was generated by operating activities?

h. What were the company’s net sales for the year?

i. What is the company’s financial position at the end of the year?

1. Use these data to write Blackwell Services, Inc.’s, accounting equation.

2. How much in resources does Blackwell Services have to work with?

3. How much does Blackwell Services owe creditors?

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Q1-5 (Learning Objective: Analyse the impact of business transactions on accounts)

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2. Accrual Accounting and Income

2.1. Explain How Accrual Accounting Differs from Cash-Basis Accounting

Accrual accounting is based on a framework of concepts and principles additional to those we

2.3. Adjust the accounts

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Using the Straight-line depreciation method:

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Journalizing and Posting the Closing Entries

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STARBUCKS (SBUX) 10/02/2011 BALANCE SHEET ($ in millions)

a. How much do customers owe this company? _____________million

e. (PPE / Goodwill / Long-term investments) is created when a company is acquired.

f. How much does this company owe to suppliers? ______________million

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2. HOMEWORK AND ASSIGNMENTS

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