Usiness Ctivities HE Ource of Ccounting Nformation

2-1
Chapter F2
B USINESS A
BUSINESS CTIVITIES –
ACTIVITIES –TTHE
HE
SSOURCE OF A
OURCE OF ACCOUNTING
CCOUNTING
IINFORMATION
NFORMATION
Electronic
ElectronicPresentation
Presentation
by Douglas
by Douglas Cloud
Cloud
Pepperdine
PepperdineUniversity
University
2-2
Objectives
Objectives
1. Identify financing activities and explain why they
Once you have
are important to a business.have
Once you
completed
completed this
2. Demonstrate how accountingthis chapter,
chapter,
measures and
you
you should
records business should be
be able
activities. able to:
to:
3. Identify investing activities and explain why they
are important to a business.
4. Identify operating activities and explain how they
create profits for a company.
Continued
Continued
2-3
Objectives
Objectives
5. Describe how financial reports summarize
business activities and provide information
for business decisions.
2-4
Objective
Objective
1
Identify financing
activities and explain
why they are
important to a
business.
2-5
Financing
Financing Activities
Activities
AA business
business isis anan
organization
organization that that exists
exists
for
for the
the purpose
purpose of of making
making
aa profit
profit for
for its
its owners.
owners.
2-6
Financing
Activities
AA contribution
contribution by by
owners
owners to to aa business,
business,
along
along with
with any
any profits
profits
that
that are
are kept
kept in
in the
the
business,
business, isis known
known asas
owners’
owners’ equity.
equity.
2-7
Financing
Activities
Business
Business activities
activities are
are
events
events that
that occur
occur when
when aa
business
business acquires,
acquires, uses,
uses, or
or
sells
sells resources
resources oror claims
claims toto
those
those resources.
resources.
2-8
Financing
Activities
Financing
Financing activities
activities occur
occur when
when
owners
owners or
or creditors
creditors provide
provide
resources
resources to
to aa company
company or or when
when aa
company
company transfers
transfers resources
resources to
to
owners
owners or or creditors.
creditors.
2-9
Exhibit
Exhibit11 Financing from Owners
and Creditors
2-10
Objective
Objective
2
Demonstrate how
accounting
measures and
records business
activities.
2-11
An
An account
account isis aa record
record of
of
increases
increases and
and decreases
decreases in in the
the
dollar
dollar amount
amount associated
associated with
with aa
specific
specific resource
resource or
or activity.
activity.
2-12
Accounting
Accounting transactions
transactions are
are
descriptions
descriptions of of business
business
activities
activities (or
(or events)
events) that
that are
are
measured
measured in in dollar
dollar values
values and
and
recorded
recorded in in accounts.
accounts.
2-13
The
The Accounting
Accounting Equation
Equation
Resources
Assets
Assets = controlled by
the business
2-14
The
The Accounting
Accounting Equation
Equation
Owners’
Owners’
Assets
Assets = Liabilities
Liabilities + Equity
Equity
The claims of Owners’ claims

creditors to a on the company’s
company’s assets
resources
2-15
Financing
Activities
On
On January
January 2,
2, 2004,
2004, Mom’s
Mom’s
Cookie
Cookie Company
Company received
received
$10,000
$10,000 from
from the
the company’s
company’s
owners.
owners. OnOn January
January 3,3, 2004,
2004,
the
the company
company received
received $8,000
$8,000
from
from the
the bank.
bank.
2-16
Exhibit
Exhibit33 Accounting Representation of
OWNERS’
ASSETS = LIABILITIES +
EQUITY
Date Accounts
Beginning Amounts 0 = 0 + 0
1/2 Cash 10,000
Contributed Capital 10,000
1/3 Cash 8,000
Notes payable 8,000
Cash
Cash
Ending
refers
refers to
Amounts
financial
to18,000
financial
=
resources
resources
8,000
in the10,000
+ in the
form
form of
of coins
coins and
and currency,
currency, bank
bank deposits,
deposits,
and
and short-term
short-term investments
investments that
that can
can be
be
converted
converted easily
easily into
into currency.
currency.
2-17
Exhibit
OWNERS’
EQUITY
Date Accounts
Beginning Amounts 0 = 0 + 0
1/2 Cash 10,000
1/3 Cash 8,000
Notes payable 8,000
Contributed
Contributed
Ending Amounts
capital
18,000 capital
=
isis an
8,000 an + 10,000
owners’
owners’ equity
equity account
account and
and
identifies
identifies amounts
amounts contributed
contributed
to
to aa company
company by
by its
its owners.
owners.
2-18
Exhibit
Notes
Notes payable isis aa liability
payableASSETS liability
=
account
account
LIABILITIES +
used
used
OWNERS’
EQUITY
Date Accounts
to identify amounts aa company owes to
to identify
Beginning Amounts
amounts 0 =
company 0
owes
+
to 0
creditors
creditors with
with whom
whom aa formal
formal
1/2 Cash 10,000
agreement,
Capital or
agreement,
Contributed or note,
note, has has been
been signed.
signed.10,000
1/3 Cash 8,000
Notes payable 8,000
Ending Amounts 18,000 = 8,000 + 10,000
2-19
Objective
Objective
3
Identify investing
activities and
explain why they
are important to a
business.
2-20
Investing
Investing Activities
Activities
Investing
Investing activities
activities involve
involve the
the
acquisition
acquisition and
and disposal
disposal ofof long-term
long-term
resources
resources used
used by
by aa business.
business.
2-21
Exhibit
Exhibit44 Business Activities: Investing
in Long-Term Resources
2-22
Investing
Activities
On
On January
January 5, 5, Mom’s
Mom’s Cookie
Cookie
Company
Company paid paid $6,000
$6,000 for
for
office
office equipment.
equipment. On On January
January
6,
6, the
the company
company bought
bought aa
delivery
delivery van
van for
for $25,000.
$25,000. ItIt
paid
paid $3,000
$3,000 in in cash
cash and
and
financed
financed thethe remaining
remaining
$22,000
$22,000 of of the
the purchase
purchase price
price
with
with aa note
note payable.
payable.
2-23
Exhibit
OWNERS’
EQUITY
Date Accounts
Beginning Amounts 18,000 = 8,000 + 10,000
1/5 Equipment 6,000
Cash –6,000
On
On January
January 5,5, one
one asset
asset increased
increased
(Equipment)
(Equipment) and
and another
another asset
asset decreased
decreased
(Cash)
(Cash) by
by the
the same
same amount,
amount, soso the
the
accounting
accounting equation
equation remained
remained unchanged.
unchanged.
Continued
Continued
2-24
Exhibit
Continued
Continued
OWNERS’
EQUITY
Date Accounts
1/5 Equipment 6,000
Cash –6,000
1/6 Equipment 25,000
Cash –3,000
Notes Payable 22,000
Ending Amounts 40,000 = 30,000 + 10,000
On
On January
January 6,6, the
the company
company acquired
acquired
aa delivery
delivery van
van for
for $25,000.
$25,000.
2-25
Exhibit
Continued
Continued
OWNERS’
EQUITY
Date Accounts
1/5 Equipment 6,000
Cash –6,000
Cash –3,000
Ending Amounts 40,000 = 30,000 + 10,000
The
The company
company paid
paid $3,000
$3,000 in
in cash.
cash.
2-26
Exhibit
OWNERS’
EQUITY
Date Accounts
1/5 Equipment 6,000
Cash –6,000
Cash –3,000
Ending Amounts 40,000 = 30,000 + 10,000
The
The balance
balance ofof $22,000
$22,000 was
was financed
financed
by
by issuing
issuing aa note
note payable.
payable.
2-27
Objective
Objective
4
Identify operating
activities and
explain how they
create profits for a
company.
2-28
Operating
Operating Activities
Activities
Operating
Operating activities
activities are
are those
those
activities
activities necessary
necessary toto acquire
acquire
goods
goods and
and services.
services.
2-29
Operating
Activities
Revenue
Revenue isis the
the amount
amount aa
company
company expects
expects to
to receive
receive when
when
itit sells
sells goods
goods or
or services.
services.
2-30
Operating
Activities
Expense
Expense isis the
the amount
amount of of
resources
resources consumed
consumed in in the
the
process
process of
of acquiring
acquiring and
and
selling
selling goods
goods and and services.
services.
2-31
Exhibit
Exhibit66 Purchase of Goods for Sale
2-32
Operating
Activities
Merchandise
Merchandise
inventory
inventory isis an
an
asset
asset account
account and
and
identifies
identifies the
the cost
cost
of
of goods
goods aa
company
company has has
purchased
purchased forfor sale.
sale.
2-33
Operating
Activities
On
On January
January 7,
7,
Mom’s
Mom’s Cookie
Cookie
Mom’s Cookie Co. Company
Company
purchased
purchased cookies
cookies
from
from the
the bakery
bakery at
at
aa cost
cost of
of $9,000.
$9,000.
2-34
Exhibit
Exhibit77 Accounting Representation
of Purchase of Merchandise
OWNERS’
EQUITY
Date Accounts
Beginning Amounts40,000 = 30,000 + 10,000
Jan. 7 Merchandise Inven. 9,000
Cash –9,000
Ending Amounts 40,000 = 30,000 + 10,000
The
The company
company now
now has
has
$9,000
$9,000 of
of goods
goods for
for sale.
sale.
Continued
Continued
2-35
Exhibit
OWNERS’
EQUITY
Date Accounts
Cash –9,000
Ending Amounts 40,000 = 30,000 + 10,000
The
The firm
firm spent
spent $9,000
$9,000 to
to
acquire
acquire the
the merchandise.
merchandise.
Continued
Continued
2-36
Exhibit
OWNERS’
EQUITY
Date Accounts
Cash –9,000
Ending Amounts 40,000 = 30,000 + 10,000
The
The ending
ending amount
amount ofof assets
assets
remains
remains the
the same.
same.
2-37
Exhibit
Exhibit88 Operating Activities: Selling
Goods to Customers
2-38
Operating
Activities
Mom’s
Mom’s Cookie
Cookie
Company
Company sellssells 380
380
boxes
boxes of of cookies
cookies (cost
(cost
to
to make
make == $7,600)
$7,600) toto
grocery
grocery stores
stores during
during
the
the month
month forfor
$11,400,
$11,400, receiving
receiving
cash.
cash.
2-39
Exhibit
of Operating Activities
Continued
Continued
ASSETS = LIABILITIES + OWNERS’ EQUITY
Other Contributed Retained

Cash
Date Accounts Assets Capital Earnings
Beginning Amounts 0 +40,000 30,000 10,000

1/31Cash 11,400
Sales Revenue 11,400
1/31Cost of Goods Sold -7,600
Sold
Merchan.Sold 380
380 boxes
Inventory of
of cookies
boxes-7,600cookies at
at $30
$30
Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800
each.
each. Cash
Cash increases
increases $11,400.
$11,400.
2-40
Exhibit
Continued
Continued

Cash
Beginning Amounts 0 +40,000 30,000 10,000

1/31Cash 11,400
Sales
Sales Revenue
Merchan. Inventory -7,600 increases
Revenue increases
Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800
Retained
Retained Earnings
Earnings by
by $11,400.
$11,400.
2-41
Exhibit
Continued
Continued

Cash
Beginning A
A second
second entry
Amounts 0entry isis required
+40,000 30,000
required to
10,000
to
1/31Cash record
record the
11,400
the cost
cost of
of $7,600…
$7,600…
Merchan. Inventory -7,600
Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800
2-42
Exhibit

Cash
…and
…and aa0reduction
Beginning Amounts in
in the
+40,000 30,000
reduction the10,000
1/31Cash amount
11,400 of inventory.
amount of inventory.
Merchan. Inventory -7,600
Ending Amounts 11,400 +32,400 = 30,000 + 10,000 + 3,800
2-43
Exhibit
Exhibit10
10 Accounting Representation
of Expenses
On
On January
January 6,
6, paid
paid $300
$300 for
for
supplies
supplies used
used during
during January.
January.

Cash
1/6 Supplies Expense -300

Cash -300
Continued
Continuedon
onSlide
Slide45
45
2-44
Operating
Activities
Did
Did you
you notice
notice that
that
revenues
revenues increase
increase
owners’
owners’ equity
equity and
and
expenses
expenses decrease
decrease
owners’
owners’ equity?
equity?
2-45
Exhibit
Exhibit10
of Expenses
On
On January
January 8,
8, paid
paid $600
$600 for
for
rent
rent for
for January.
January.

Cash
1/8 Rent Expense -600

Cash -600
Continued
Continued
2-46
Exhibit
Exhibit10
of Expenses
On
On January
January 31,
31, paid
paid $1,000
$1,000 for
for
wages
wages for
for January.
January.

Cash
1/31Wages Expense -1,000

Cash -1,000
Continued
Continued
2-47
Exhibit
Exhibit10
of Expenses
On
On January
January 31,31, paid
paid $200
$200 for
for
utilities
utilities for
for January.
January.

Cash
1/31Utilities Expense -200

Cash -200
Ending Amounts 9,300 +32,400 = 30,000 + 10,000 + 1,700
2-48
Objective
Objective
5
Describe how financial
reports summarize
business activities and
provide information for
business decisions.
2-49
Financial
Financial statements
statements are
are
reports
reports that
that summarize
summarize thethe
results
results of
of aa company’s
company’s
accounting
accounting transactions
transactions for
for aa
fiscal
fiscal period.
period.
2-50
Slide
Slide 51
51 isis aa summary
summary ofof
balances
balances for
for Mom’s
Mom’s Cookie
Cookie
Company
Company at at January
January 31
31
(Exhibit
(Exhibit 12).12).
2-51
January 31
Account Balance
Assets:
Cash 9,300
Merchandise inventory
$9,000
$9,000 –– $7,600
$7,600 1,400
Equipment $6,000
$6,000 ++ $25,000
$25,000 31,000
Liabilities:
Notes Payable$8,000
$8,000 ++ $22,000
$22,000 30,000
Owners’ Equity:
Cost of Goods Sold (7,600)
Wages Expense (1,000)
Rent Expense (600)
Supplies Expense (300)
Utilities Expense (200)
2-52
The
The income
income statement
statement reports
reports
revenues
revenues and
and expenses
expenses for
for aa
fiscal
fiscal period
period as
as aa means
means of
of
determining
determining how
how well
well aa
company
company hashas performed.
performed.
2-53
The
The income
income statement
statement for
for Mom’s
Mom’s
Cookie
Cookie Company
Company (Exhibit
(Exhibit 13)
13) isis
shown
shown on
on Slide
Slide 54.
54.
2-54
Mom’s Cookie Company Exhibit
Exhibit13
13
Income Statement
For the Month Ended January 31, 2004
Sales revenue $11,400
Cost of goods sold (7,600)
Wages expense (1,000)
Rent expense (600)
Supplies expense (300)
Utilities expense (200)
Net income $ 1,700
Account January 31
Balance
Owners’ Equity:
Cost of Goods Sold (7,600)
Wages Expense (1,000)
Rent Expense (600)
Supplies Expense (300)
Utilities Expense (200)
2-55
Mom’s Cookie Company
Income Statement
Sales revenue $11,400
Cost of goods sold (7,600)
Wages expense A fiscal period is (1,000)
Rent expense the time period (600)
Supplies expense for which a (300)
Utilities expense (200)
Net income company wants $ 1,700
to report its
financial
Netactivities.
income is the amount of
profit earned by a business
during a fiscal period.
2-56
AA balance
balance sheet
sheet identifies
identifies aa
company’s
company’s assets
assets and
and claims
claims toto
those
those assets
assets by
by creditors
creditors and
and
owners
owners at
at aa specific
specific date.
date.
2-57
Exhibit
Exhibit14
14 Balance Sheet
Balance Sheet
At January 31, 2004
Assets:
Cash $ 9,300
Merchandise inventory 1,400
Equipment 31,000
Total assets $41,700
Liabilities and Owners’ Equity
Notes payable $30,000 equal
Contributed capital 10,000
Retained earnings 1,700
Total liabilities and owners’ equity $41,700
2-58
The
The statement
statement of of cash
cash flows
flows
reports
reports events
events that
that affected
affected aa
company’s
company’s cashcash account
account
during
during aa fiscal
fiscal period.
period.
2-59
Exhibit
Exhibit15
15 Statement of Cash Flows
Statement of Cash Flows
Received from customers $11,400
Paid for merchandise (9,000)
Paid for wages (1,000)
Paid for rent (600)
Paid for supplies (300)
Paid for utilities (200)
Net cash flow from operating activities $ 300
Paid for equipment (31,000)
Continued
Continued
2-60
Carried forward $(30,700)

Received from creditors $30,000
Received from owners 10,000
Net cash flow from financing activities 40,000
Net cash flow in January 9,300
Cash balance, January 1 0
Cash balance, January 31 $ 9,300
The
The statement
statement of of cash
cash flows
flows isis useful
useful for
for
identifying
identifying how
how much
much cash
cash aa company
company has, has,
where
where that
that cash
cash came
came from,
from, and
and how
how the
the
company
company usedused its
its cash
cash during
during aa fiscal
fiscal period.
period.
2-61
What
What role
role does
does accounting
accounting play
play
in
in an
an organization’s
organization’s
transformation
transformation process?
process?
Accounting is an information system for the
measurement and reporting of the
transformation of resources into goods and
services and the sale or transfer of these goods
and services to customers.
2-62
Exhibit
Exhibit16
16 Reporting the
Transformation Process
Assets
$40,000 Profit
+11,400 Revenues $11,400
–9,700 Expenses –9,700
$41,700 Net Income $ 1,700
Liabilities $30,000
Owner Equity:
Retained Earnings 1,700
$41,700
2-63
Financial
Financial Analysis
Analysis
Return
Return on on assets
assets
(ROA)
(ROA) isis the
the ratio
ratio of
of
net
net income
income toto total
total
assets.
assets.
2-64
Financial
Financial Analysis
Analysis
For
For Mom’s
Mom’s Cookie
Cookie
Company
Company at
at January
January
31, 2004…ROA is
31, 2004…
4.1%.
Net$1,700
Income
= 4.1%
Total Assets
$41,700
2-65
Exhibit
Exhibit17
17 A Model of the
Accounting Process
Business
Business Accounting
Accounting
Activities
Activities Measuring
Measuring Business
Operating Recording Business
Operating Recording Decisions
Investing Reporting Decisions
Investing Reporting
Financing
Financing Analyzing
Analyzing
Actions Based on Business Decisions

2-66
CHAPTER F2
TTHE
HE E
END
ND
2-67

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2-1

The claims of Owners’ claims

Other Contributed Retained

Beginning Amounts 0 +40,000 30,000 10,000

Other Contributed Retained

Beginning Amounts 0 +40,000 30,000 10,000

Other Contributed Retained

Other Contributed Retained

ASSETS = LIABILITIES + OWNERS’ EQUITY

Other Contributed Retained

1/6 Supplies Expense -300

ASSETS = LIABILITIES + OWNERS’ EQUITY

Other Contributed Retained

1/8 Rent Expense -600

ASSETS = LIABILITIES + OWNERS’ EQUITY

Other Contributed Retained

1/31Wages Expense -1,000

ASSETS = LIABILITIES + OWNERS’ EQUITY

Other Contributed Retained

1/31Utilities Expense -200

Carried forward $(30,700)

Actions Based on Business Decisions

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