Professional Documents
Culture Documents
Ch2 ACCT1101 S1 2223 MOODLE
Ch2 ACCT1101 S1 2223 MOODLE
ACCT1101
Dr. Olivia Leung
chapter Investing and Financing
Decisions and the Accounting
System
Financial Accounting
9e
10e
Libby • Libby • Hodge
2-1
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
After studying this chapter, you should be able to:
2-1 Define the objective of financial reporting, the elements of the balance
sheet, and the related key accounting assumptions and principles.
2-5 Prepare a trial balance and simple classified balance sheet and analyze
the company using the current ratio.
2-2
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Accounting Conceptual Framework,
Key Accounting Assumptions and Principles
2-3
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.1
Financial Accounting and Reporting Conceptual Framework
2-4
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-5
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Common Balance Sheet Account Titles
2-6
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Elements of the Balance Sheet
A = L + SE
Stockholders’
Assets Liabilities Equity
Economic Debts or obligations The financing
resources with (claims to a provided by the
probable future company’s resources) owners and the
benefits owned that result from a operations of the
or controlled by company’s past business.
the entity. transactions and will
be paid with assets or
services. Entities that
a company owes
money to are called
creditors.
2-7
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
• An account is a record of increases and
decreases in a specific asset, liability,
equity, revenue, or expense item.
2-8
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.3
Typical Account Titles
Title expense accounts by what was
incurred or used followed by the
Accounts with “payable” in the title are word “expense,” except for
always liabilities and represent amounts inventory sold, which is titled Cost
owed by the company to be paid to of Goods Sold.
Accounts with others in the future.
“receivable” in
the title are
always assets; Assets Liabilities Stockholder’s Revenues Expenses
they represent Equity
amounts owed
by (receivable Cash Accounts Payable Common Stock Sales Revenue Cost of Goods
from) customers Short-Term Accrued Expenses Additional Paid-in Fee Revenue Sold
and others to the Investments Payable Capital Interest Revenue Wages Expense
business. Accounts Notes Payable Retained Earnings Rent Revenue Rent Expense
Receivable Taxes Payable Service Revenue Interest Expense
Notes Receivable Unearned Depreciation
Inventory (to be Revenue Expense
sold) Bonds Payable Advertising
Supplies Expense
Prepaid Expenses Accounts with “unearned” in the
Prepaid Expenses Insurance
is always an asset; it title are always liabilities
Long-Term Expense
represents amounts representing amounts paid in the
paid in advance by Investments Repair Expense
past to the company by others who
the company to Equipment expect future goods or services Income Tax
others for future Buildings from the company. Expense
benefits, such as Land
future insurance Title revenue accounts by
coverage, rental of Intangibles their source followed by
property, or the word “revenue.”
advertising.
2-9
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Common Stock &
Additional Paid-In Capital
Common Stock :
The par (face) value of the stocks
x no. of stocks issued and outstanding
2-10
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyze Business Transactions
in terms of
The Accounting Model:
Assets = Liabilities + Stockholders' Equity.
2-11
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Principles of Transaction Analysis
Every transaction has at least two effects (dual effects) on the
basic accounting equation.
A = L + SE
Assets Liabilities Stockholders’
Equity
2-12
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Balancing the Accounting Equation
Step 1: Ask -
§ Which accounts are being affected ?
(e.g., Cash and Notes Payable). Make sure at least two accounts
change.
§ What category (A/L/SE or else) the affected accounts belong to ?
(e.g. Cash is an asset and Notes Payable is a liability).
§ Which direction (+/-) the accounts are affected by ?
The account increased (+) or decreased (−)
(e.g. Cash increased and Notes Payable increased).
2-13
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (1 of 7)
Assume that Chipotle engages in the following events during the first
quarter of 2018, the first three months following the balance sheet in
Exhibit 2.2.
Account titles are from that balance sheet. All amounts are in millions,
except per share data.
2-14
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (2 of 7)
票⾯價值
(a) Chipotle issued (sold) 100 additional shares of common stock with a
par value of $0.01 per share at a market value of $3.00 per share,
receiving $300 in cash from investors.
普通股 股本溢價
2-15
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (3 of 7)
(b) Chipotle borrowed $2 from its local bank, signing a note to be paid in
three years (a noncurrent liability).
2-16
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (4 of 7)
2-17
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (5 of 7)
(d) Chipotle paid $1 on the short-term note payable in (c) above (ignore any
interest on the loan in this chapter).
2-18
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (6 of 7)
2-19
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions (7 of 7)
(f) Chipotle does not pay dividends but instead reinvests profits into growing
the business. However, for illustration purposes, assume Chipotle’s board of
directors declared that the Company will pay $2 in cash as dividends to
shareholders next quarter.
Step 1: What was received and what was given?
(account name, type of account, amount, and direction of effect)
2-21
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
ASSETS LIABILITIES STOCKHOLDERS’
EQUITY
Cash ST Invest N/R Land Buildings Equip’t = ST N/P LT N/P + CS Add’l R/E
Paid-in
Capital
Beg
Bal
a
b
c
d
e
f
End
Bal
ST= Short term; LT= Long term; N/R = Notes Receivable; N/P = Notes Payable; CS = Common Stock; R/E = Retained Earnings
2-22
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Record Business Transactions
on the Balance Sheet
using Journal Entries and T-accounts.
2-23
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.4
The Accounting Cycle
2-24
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
How Do Companies Keep Track of Account Balances?
General Journal
(chronological list of transactions)
POST
General Ledger
or T-accounts
(a record of effects to
and balances of each
account)
2-25
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
P1
JOURNALIZING &
POSTING TRANSACTIONS
Step 1: Analyze
Step 2: Apply double-
transactions and source
entry accounting
documents.
記載balance sheet資產負債表的值
2-27
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debits and Credits
Account Title
(Left side) (Right side)
Debit Credit
2-28
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
C4
Double-Entry Accounting
An account balance is the difference between the increases and
decreases in an account. Notice the T-Account.
2-29
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.5
Basic Transaction Analysis Model
STOCKHOLDERS’ EQUITY
ASSETS LIABILITIES Contributed Capital Earned Capital
(many accounts) = (many accounts) + (2 accounts) (1 account)
2-30
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Debits and Credits
In Summary:
2-31
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Lecture Exercise: P2-1
2-32
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Journal Entry
(a) Chipotle issued (sold) 100 additional shares of common stock with a
par value of $0.01 per share at a market value of $3.00 per share,
receiving $300 in cash from investors.
Account Titles:
Debited accounts on top. Amounts:
Credited accounts on bottom, usually indented. Debited amounts on left.
Credited amounts on right.
Debit Credit
(a) Cash (+A) 300
Common stock (+SE) 1
Additional paid-in capital (+SE) 299
Reference:
Letter,
number, or
date.
2-33
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.6
Posting Transaction Effects from the Journal to the Ledger
2-34
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.7
T-Accounts Illustrated
2-35
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Inferring Business Activities from T-Accounts
FINANCIAL ANALYSIS
Solution:
Beginning Purchases Cash Payments Ending
Balance + on Account - to Suppliers = Balance
$600 + $1,500 - ? = $ 300
$2,100 - ? = $ 300
? = $1,800
2-36
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction Analysis Illustrated
(a) Chipotle issued (sold) 100 additional shares of common stock with a
par value of $0.01 per share at a market value of $3.00 per share,
receiving $300 in cash from investors.
Debit Credit
(a) Cash (+A) 300
Common stock (+SE) 1
Additional paid-in capital (+SE) 299
Additional Paid-in
+ Cash (A) – – Common Stock (SE) + – Capital (SE) +
1/1/18 186 1 1/1/18 1,305 1/1/18
(a) 300 1 (a) 299 (a)
2-37
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction Analysis Illustrated
(b) Chipotle borrowed $2 from its local bank, signing a note to be paid in
three years (a noncurrent liability).
Debit Credit
(b) Cash (+A) 2
Notes payable (+L) 2
2-38
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions
(c) Chipotle purchased $8 in additional land, $34 in new buildings, $10 in
new equipment, and $3 in additional intangible assets; paid $54 in cash and
signed a $1 short-term note payable for the remainder amount owed.
2-39
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions
(d) Chipotle paid $1 on the short-term note payable in (c) above (ignore any
interest on the loan in this chapter).
2-40
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions
(e) Chipotle purchased the stock of other companies as investments, paying
$44 cash; of this, $9 was in short-term investments and $35 was in long-
term investments.
2-41
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Analyzing Chipotle’s Transactions
(f) Chipotle does not pay dividends but instead reinvests profits into growing
the business. However, for illustration purposes, assume Chipotle’s board of
directors declared that the Company will pay $2 in cash as dividends to
shareholders next quarter.
2-42
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Transaction Analysis Illustrated (3 of 3)
After analyzing all transactions from (a)–(f), the balance in our T-accounts will
appear as follows:
2-43
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Lecture Exercise : E2-15
2-44
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Revisit: 3 questions when preparing journal entries
Step 1: Ask -
§ Which accounts are being affected ?
(e.g., Cash and Notes Payable). Make sure at least two accounts
change.
§ What category (A/L/SE or else) the affected accounts belong to ?
(e.g. Cash is an asset and Notes Payable is a liability).
§ Which direction (+/-) the accounts are affected by ?
The account increased (+) or decreased (−)
(e.g. Cash increased and Notes Payable increased).
2-45
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.5
Revisit: Debits and Credits
STOCKHOLDERS’ EQUITY
ASSETS LIABILITIES Contributed Capital Earned Capital
(many accounts) = (many accounts) + (2 accounts) (1 account)
2-46
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Lecture Exercise : E2-15
2-47
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Lecture Exercise : E2-15
2-48
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
E2-15
2-49
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Trial balance
2-50
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Trial Balance
• The trial balance is a
listing of the ending
balance in each
account in the
general ledger.
• List accounts in
financial statement
order (assets,
liabilities,
stockholders’ equity,
revenues and
expenses).
• The purpose of the
trial balance is to
make sure the debits
and credits are
equal.
2-51
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Classified Balance Sheet
2-52
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Classified Balance Sheet
Assets and
liabilities are
classified into two
categories:
current and
noncurrent.
Current assets are those to be used or
turned into cash within the upcoming
year, whereas noncurrent assets are
those that will last longer than one year.
2-53
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.8 (1 of 3)
Chipotle Mexican
Grill’s First
Quarter 2018
Balance Sheet
(based on investing and
financing activities only)
2-54
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Exhibit 2.2
Chipotle Mexican Grill, Inc., Balance Sheet
*The information
has been adapted
from actual
statements and
simplified for this
chapter.
2-55
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chipotle Mexican Grill’s First Quarter 2018
Exhibit 2.8 (2 of 3) Balance Sheet
(based on investing and financing activities only)
2-56
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chipotle Mexican Grill’s First Quarter 2018
Exhibit 2.8 (3 of 3) Balance Sheet
(based on investing and financing activities only)
2-57
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Current Ratio
2-58
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Current Ratio
KEY RATIO ANALYSIS
$$$
Current Ratio = Current Assets
Current Liabilities
2-59
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Accounting Cycle
2-60
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
The Accounting Cycle
Steps:
(1+2) Journalize daily business transactions in
general journal using journal entries.
(3) Post journal entries to Ledger (or T-
Accounts).
(4) Prepare Trial Balance based on Ledger
balances (or T-Account balances).
(5) To be continued in Chapter 3…
2-61
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Assignment 2 : P2-5
(Due Sept 26 @ 9:30am)
2-62
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-63
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
2-64
Copyright ©2020 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.