Financial Accounting 2023

Tutorial 1
Balance Sheet and Income Statement

September 12, 2023

Ying Huang
Contact: ying.huang@insead.edu
Goal: get familiar with basic concepts and do more exercises!

Timeline
4 Sep Session1 Introduction
6 Sep Session2 Balance Sheet
8 Sep Session3 Income Statement
11 Sep Session4 Income Statement + Common size analysis
12 Sep Tutorial1 Balance Sheet + Income Statement
13 Sep Session5 Statement of Cashflow
14 Sep Session6 Statement of Cashflow + Financial Statement Analysis
16 Sep Tutorial2 Statement of Cashflow
18 Sep Session7 Financial Statement Analysis
20 Sep Session8 Revenue Recognition
25 Sep Session9 Receivables + Inventory
26 Sep Session10 Long-live asset
26 Sep Tutorial3 Revenue Recognition + Receivables
28 Sep Session11 Long-term Debt + Bonds
30 Sep Tutorial4 Inventories + Long-lived Assets
2 Oct Session12 Leases + Off B/S Liability
3 Oct Session13 Investments
4 Oct Session14 Shareholder Equity
7 Oct Tutorial5 Past final exams
Recap: Assets

• Asset recognition criteria:

• 1. The firm owns or controls the right to use the item
• 2. The right to use the item arises as a result of a past transaction or
exchange
• 3. The future benefit has a relevant measurement attribute that can be
quantified with sufficient reliability
Assets and Liabilities
Indicate whether or not each transaction immediately gives rise to an
asset of a company.
1. A firm signs a three-year employment agreement with its president for
$3,000,000 per year. The contract period begins next month.

2. A firm spends $2,500,000 to research ingredients for a new ready-meal

dinner.

3. A airline services provider places an order for 10 airplanes, costing $80

million each.

4. The same firm writes a check for a total of $5 million as a deposit on the
aircraft it ordered.

4
Recap: Liabilities

• Liability recognition criteria:

• 1. The item represents a present obligation, not a potential future
commitment or intent
• 2. The obligation must exist as a result of a past transaction or exchange
(the obligating event)
• 3. The obligation must require a probable future economic resource that
the firm has little or no discretion to avoid
• 4. The obligation must have a relevant measurement base that the firm
can quantify with sufficient reliability
Assets and Liabilities
Indicate whether or not each transaction immediately gives rise to a
liability of a company.
1. A magazine publisher receives a check for $72 for a 1-year subscription to
a magazine. The subscription period begins next month.

2. A firm signs a contract to purchase at least $600,0000 of the merchandise

from a particular supplier during the next year.

3. A firm receives a bill for utility services received during the month totaling
$3,400.

4. A baseball team owner receives notice that a former player has filed suit
against it, alleging nonperformance of contractual terms. The player claims
$10,000,000 in damages.

6
Let’s start a company 1
Electronics Appliance Corporation began operations on July 1.
Record the following transactions occurring during the month of July
using the BSE.
1. Issues 15,000 shares of $10 par value common stock at par value for
cash.
2. Pays $2,880 cash for a one-year insurance premium on July 1, with
coverage beginning on that date.
3. Pays $12,000 as three months’ rent in advance on July 1.
4. Purchases $50,000 of equipment; pays $10,000 cash, with the balance
due in 60 days.
5. Purchases $20,000 of merchandise inventory on account from various
suppliers.
6. Receives an advance of $15,000 cash from a customer for
merchandise scheduled for delivery in August.
Electronic Appliance Corp
Other Other Non- Non-
Current
Cash + Current + PPE + current = + current + Equity
Liabilities
Assets Assets Liabilities

End

8
 Let’s start a company (again)
Preparing a balance sheet

Cirklon3, a data-compression technology company in Silicon Valley, opens up shop in August 2016 and engages in the
following transactions during this month:

1. Aug. 1: Issues 2,000 shares for $20 per share

2. Aug. 2: Issues 600 shares to acquire a patent from another firm
3. Aug. 6: Pays $10,000 as two months’ rent in advance on a factory building that is leased for the three years beginning
Sept. 1. Monthly rental payments are $5,000
4. Aug. 11: Purchases raw materials on account for $6,000
5. Aug. 16: Receives a check for $9,000 from a customer as a deposit on a special order for equipment (a data-
compression box) that Cirklon3 plans to manufacture. The contract price is $28,000
6. Aug. 20: Acquires office equipment with a list price of $9,500. After deducting a discount of $250 in return for prompt
payment, it issues a check in full payment.
7. Aug. 28: Issues a cash advance totalling $2,000 to three new employees who will begin work on Sept. 1.
8. Aug. 31: Purchases IT equipment costing $27,500. Cirklon3 pays $5,000 in cash and assumes long-term financing (i.e.,
a loan) for the balance
9. Aug 31: Pays $450 for the labor costs of installing the new IT equipment in (8)

Required:

- Record the nine transactions using the balance sheet equation

- Prepare a balance sheet for Cirklon3 as of Aug. 31

9
 Cirklon3

Adv. To Accounts Adv. From Contributed

Cash Prepaid Rent Inventory Patent Equipment Loan
Employees Payable Customer Capital

End

10
Recap: Income Statement
• Accrual accounting reports inflows of net assets when they are earned, and
matches them against outflows of net assets used to generate them (Revenue
Recognition and Matching)

• Balance Sheet Equation always maintains

• During the accounting period, the accounting process records transactions as
they occur
• At the end of the accounting period, the accounting process records
adjusting and closing entries to prepare the financial statements
Cash vs. Accruals

Indicate whether or not the following transactions or events immediately

give rise to the recognition of revenue under the accrual/cash-basis of
accounting.

Recognize Revenue?
Accrual-Basis Cash-Basis
May 2017 Company receives cash from customers for NO YES
services to be provided in June
June 2017 Company provides services to customers who YES NO
prepaid in May

12
Cash vs. Accruals

Indicate whether or not the following transactions or events immediately

give rise to the recognition of expense under the accrual/cash-basis of
accounting.

Recognize Expense?
Accrual-Basis Cash-Basis
May 2013 Employees earn salaries but will not be paid YES NO
until next month
June 2013 Company pays cash to employees for salaries NO YES
earned last month

13
Cash vs. Accruals
Occam’s Razor Consultants, Inc. opens a consulting business on August 1, Year
2. Preparing income statement for five months ended December 31, Year 2, using
cash and accrual basis.

1. Dick Gray contributes $100,000 cash for shares of the firm’s common stock.
2. The corporation borrows $60,000 from a local bank on August 1, Year 2. The loan is
repayable on July 31, year 3, with interest at the rate of 8 percent per year.
3. The firm renders consulting services for clients between August 1 and December 31,
Year 2, totaling of $135,000. It collects $109,000 of this amount by year-end.
4. The firm rents office space on August 1. It pays the remaining monthly rental fees of
$1,500 at the first of each month.
5. The firm purchases office equipment with a five-year life and zero-salvage for cash on
August 1 for $24,000.
6. It incurs and pays other costs by the end of the year as follows: utilities, $3,460;
salaries, $98,500. It has unpaid bills at year-end as follows: utilities, $580; salaries,
$11,300.
 Occam’s Razor

Acount Insterest Wage Utility Contributed Retained

Cash PPE Loan
Receivables Payable Payable Payable Capital Earninges

1
2
3
4
5
6
6
6
6
ADJ1
ADJ2
Occam’s Razor
Extra Question