Professional Documents
Culture Documents
Prepared by
Gregory K. Lowry
Mercer University
Marianne Bradford
The University of Tennessee
Statement of cash
Accounting and you Basic accounting
flows
equation
The accounting
profession
WHAT IS ACCOUNTING?
Accounting is a process of three activities:
1 Identifying
2 Recording
3 Communicating
ILLUSTRATION 1-1
ACCOUNTING PROCESS
Communication
Accounting
Reports
Identification Recording
Prepare accounting
reports
SOFTBYTE
Select economic events Record, classify Annual Report
Bookkeeping
1 Involves only the recording of economic events
2 Is just one part of accounting
THE BUILDING BLOCKS
OF ACCOUNTING
Ethics - standards of conduct by which one’s
actions are judged as right or wrong, honest or
dishonest.
Generally Accepted Accounting Principles -
primarily established by the Financial
Accounting Standards Board and the Securities and
Exchange Commission.
Assumptions:
1 Monetary unit - only transaction data that
can be expressed in terms of money is
included in the accounting records.
2 Economic entity - includes any
organization or unit in society.
ILLUSTRATION 1-4
STEPS IN ANALYZING ETHICS CASES
ALT #2
ALT #1
ILLUSTRATION 1-4
STEPS IN ANALYZING ETHICS CASES
ALT #2
ALT #1
ILLUSTRATION 1-4
STEPS IN ANALYZING ETHICS CASES
ALT #2
ALT #1
BUSINESS ENTERPRISES
A business owned by one person is generally a
proprietorship.
A business owned by two or more persons
associated as partners is a partnership.
A business organized as a separate legal entity
under state corporation law and having
ownership divided into transferable shares of
stock is called a corporation.
ILLUSTRATION 1-5
THE BASIC ACCOUNTING EQUATION
INCREASE DECREASE
Investments by Dividends to
Stockholders Stockholders
Stockholders’
Equity
Revenues Expenses
USING THE BUILDING BLOCKS
TRANSACTION ANALYSIS
Transactions are the economic events of the enterprise.
They may be identified as external or internal.
1 External transactions involve economic events
between the company and some outside enterprise
or party.
2 Internal transactions are economic events that
occur entirely within one company.
My division
We need ten
needs 2,500
cases by
pounds from
Friday
your division
TRANSACTION ANALYSIS
TRANSACTION 1
There
Thereisisan
anincrease
increasein
inthe
theasset
assetCash,
Cash,$15,000,
$15,000,
and
andan
anequal
equalincrease
increasein
inthe
thestockholders’
stockholders’
equity,
equity,Common
CommonStock,
Stock,$15,000.
$15,000.
TRANSACTION ANALYSIS
TRANSACTION 2
Stockholders’
Assets = Liabilities + Equity
Common
Cash + Equipment = Stock
Old Bal. $15,000 $15,000
(2) -7,000 +$7,000
New Bal. $ 8,000 + $7,000 = $15,000
$15,000
Cash
Cashisisdecreased
decreased$7,000
$7,000and
andthe
theasset
asset
Equipment
Equipmentisisincreased
increased$7,000.
$7,000.
TRANSACTION ANALYSIS
TRANSACTION 3
Softbyte, Inc.
TRANSACTION ANALYSIS
TRANSACTION 3 SOLUTION
Stockholders’
Assets = Liabilities + Equity
Accounts Common
Cash + Supplies + Equipment = Payable + Stock
Old Bal. $8,000 $7,000 $15,000
(3) +$1,600 +$1,600
New Bal. $8,000 + $1,600 + $7,000 = $1,600 + $15,000
$16,600 $16,600
The
Theasset
assetSupplies
Suppliesisisincreased
increased$1,600
$1,600and
andthe
theliability
liability
Accounts
AccountsPayable
Payableisisincreased
increasedby
bythe
thesame
sameamount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 4
Softbyte, Inc.
TRANSACTION ANALYSIS
TRANSACTION 4 SOLUTION
$17,800 $17,800
Cash
Cashisisincreased
increased$1,200
$1,200and
andRetained
Retained
Earnings
Earningsisisincreased
increased$1,200.
$1,200.
TRANSACTION ANALYSIS
TRANSACTION 5
Dail News
y
TRANSACTION ANALYSIS
TRANSACTION 5 SOLUTION
$17,800 $17,800
Accounts
AccountsPayable
Payableisisincreased
increased$250,
$250,and
and
Retained
RetainedEarnings
Earningsisisdecreased
decreased$250.
$250.
TRANSACTION ANALYSIS
TRANSACTION 6
Softbyte, Inc.
Bill
TRANSACTION ANALYSIS
TRANSACTION 6 SOLUTION
$21,300 $21,300
Cash
Cashisisincreased
increased$1,500;
$1,500;Accounts
AccountsReceivable
Receivableisisincreased
increased
$2,000;
$2,000;and
andRetained
RetainedEarnings
Earningsisisincreased
increased$3,500.
$3,500.
TRANSACTION ANALYSIS
TRANSACTION 7
$600
$900
Softbyte, Inc.
$200
TRANSACTION ANALYSIS
TRANSACTION 7 SOLUTION
$19,600 $19,600
Cash
Cashisisdecreased
decreased$1,700
$1,700and
andRetained
RetainedEarnings
Earnings
isisdecreased
decreasedby
by$1,700.
$1,700.
TRANSACTION ANALYSIS
TRANSACTION 8
Softbyte, Inc.
Daily News
TRANSACTION ANALYSIS
TRANSACTION 8 SOLUTION
$19,350 $19,350
Cash
Cashisisdecreased
decreased$250
$250and
andAccounts
AccountsPayable
Payableisisdecreased
decreased
by
by$250.
$250.
TRANSACTION ANALYSIS
TRANSACTION 9
Softbyte, Inc.
TRANSACTION ANALYSIS
TRANSACTION 9 SOLUTION
$19,350 $19,350
Cash
Cashisisincreased
increased$600
$600and
andAccounts
AccountsReceivable
Receivable
isisdecreased
decreasedbybythe
thesame
sameamount.
amount.
TRANSACTION ANALYSIS
TRANSACTION 10
$1,300
Softbyte, Inc.
TRANSACTION ANALYSIS
TRANSACTION 10 SOLUTION
$18,050 $18,050
Cash
Cashisisdecreased
decreased$1,300
$1,300and
andStockholders’
Stockholders’Equity
Equityisis
decreased
decreasedbybythe
thesame
sameamount.
amount.
FINANCIAL STATEMENTS
After transactions are identified, recorded, and summarized,
four financial statements are prepared from the
summarized accounting data:
1 An income statement presents the revenues and expenses
and resulting net income or net loss of a company for a
specific period of time.
2 A retained earnings statement summarizes the changes in
retained earnings for a specific period of time.
3 A balance sheet reports the assets, liabilities, and
stockholders’equity of a business enterprise at a
specific date.
4 A statement of cash flows summarizes information
concerning the cash inflows (receipts) and outflows
(payments) for a specific period of time.
ILLUSTRATION 1-9
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
statement.
ILLUSTRATION 1-9
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Retained Earnings Statement
For the Month Ended September 30, 2002
Retained earnings, September 1 $ –0–
Add: Net income 2,750
Retained 2,750 The retained
earnings of Less: Dividends 1,300
earnings of
Retained earnings, September 30 $ 1,450
$1,450 at the $1,450 at the
end of the SOFTBYTE, INC. end of the
reporting Balance Sheet reporting period
period September 30, 2002 is shown as the
Assets final total of the
shown in the Cash $ 8,050
retained Accounts receivable 1,400 retained
Supplies 1,600 earnings column
earnings Equipment 7,000 of the Summary
statement is Total assets $ 18,050
of Transactions
shown on Liabilities and Stockholders’ Equity
(Illustration
Liabilities
the balance Accounts payable $ 1,600 1-8).
sheet. Stockholders’ equity
Common stock $ 15,000
Retained earnings 1,450 16,450
Total liabilities and stockholders’ equity $ 18,050
ILLUSTRATION 1-9
FINANCIAL STATEMENTS AND THEIR INTERRELATIONSHIPS
SOFTBYTE, INC.
Balance Sheet
September 30, 2002
Assets
Cash $ 8,050
Accounts receivable 1,400
Supplies 1,600
Equipment 7,000
Total assets
Liabilities and Stockholders’ Equity
$ 18,050
Cash of $8,050
Liabilities on the balance
Accounts payable $ 1,600
Stockholders’ equity sheet and
Cash of $8,050 on Common stock $ 15,000
statement of cash
Retained earnings 1,450 16,450
the balance sheet Total liabilities and stockholders’ equity $ 18,050 flows is shown as
is reported on the SOFTBYTE, INC. the final total of
statement of cash Statement of Cash Flows the cash column
For the Month Ended September 30, 2002
flows. Cash flows from operating activities of the Summary
Cash receipts from revenues
Cash payments for expenses
$ 3,300
(1,950)
of Transactions
Net cash provided by operating activities 1,350 (Illustration 1-8).
Cash flows from investing activities
Purchase of equipment (7,000)
Cash flows from financing activities
Sale of common stock $ 15,000
Payment of cash dividends (1,300) 13,700
Net increase in cash 8,050
Cash at the beginning of the period –0–
Cash at the end of the period $8,050
APPENDIX A
THE ACCOUNTING PROFESSION
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CHAPTER 1
ACCOUNTING IN ACTION