Copyright © 2015 by McGraw-Hill Education (Asia).

All rights reserved.

Chapter 1&2

1-2
 The
Accounting
Process

Accounting links
decision makers
Economic with economic Accounting
Activities
activities  and Information
with the results of
Actions their decisions. Reported
Results of
(decisions)
Actions
(decisions)
Decision
Makers
1-3
 Information
Information System
System

Information
Information Financial
Financial Decisions
Decisions
Users
Users(External
(External Information
Information Supported
Supported
and
andInternal)
Internal) Provided
Provided Performance
Performance

Investors  evaluations
Investors Profitability
Profitability evaluations

Creditors  Equity
Creditors Financial
Financial Equity

Managers
Managers position investments
investments
position

Owners  Tax
Taxstrategies
Owners Cash
Cashflows
flows strategies

Customers
Customers Labor
Laborrelations
relations

Employees
Employees Resource
Resource

Regulators
Regulators allocations
allocations
Lending
Lending
decisions
decisions
Borrowing
Borrowing
1-4
 Interpret and  Classify similar
record business transactions into
transactions. useful reports.

 Summarize and
communicate
information to
decision makers.
1-5
 Financial Accounting provides
information about the financial
resources, obligations, and activities
of an enterprise that is intended for
use primarily by external decision
makers – investors and creditors.

1-6
The primary financial statements.
Statement of
Income
Financial
Statement
Position

Statement of
Cash Flows

1-7
To
Tohelp
helpachieve
achieve
goals
goalsand
and
missions
missions

To
Tohelp
helpevaluate
evaluate
and
andreward
reward
decision
decisionmakers
makers

1-8
The competent accountants have to prepare and
present the accounting information properly by
using their professional judgment and applying
strong ethical standards.

The professional accountants have to consider

different issues that are often complex, and the
specific circumstances unique.

1-9
Accounting is the language of business,
and trying to run a business without
understanding accounting information is
similar to trying to play sports without
understanding the rules.

1-10
Statement of Financial Three primary
Position
financial
statements.
Income Statement

Statement of Cash Flows

We will use a
corporation to
describe
these
statements.
1-11
Statement of Financial Describes
Position where the
Income Statement enterprise
stands at a
Statement of Cash Flows specific date.

1-12
Statement of Financial
Position

Income Statement
Depicts the
revenue and
Statement of Cash Flows expenses for a
designated
period of time.

1-13
Statement of Financial
Position

Income Statement

Statement of Cash Flows

Depicts the
ways cash has
changed during
a designated
period of time.

1-14
 Statement of Financial Position
31 December 2013
Assets Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

1-15
 A business
entity or legal
Vagabond entity is
Travel separate from
Agency
the personal
affairs of its
owner.
1-16
 Fortune Travel Agency
Statement of Financial Position
31 December 2013
Assets Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

Assets are resources that are controlled the business and are expected
to have future economic benefits flowed to the business.
1-17
 These accounting principles support
cost as the basis for asset valuation.
• Assets should be recorded in the balance
COST
sheet at historical cost, i.e. amount paid to
PRINCIPLE acquire the assets
• It is different from cost to purchase the
same asset today or market value of the
asset

Going-Concern • Business is a continuing enterprise

• Assets are required for use for production
Assumption
of goods/service and NOT for resale
• Market value is less important

1-18
These accounting principles support
cost as the basis for asset valuation.
• Assets valuations should be objective and
Objectivity
can be verified by independent experts
Principle • Cost is more objective than market value

Stable-Dollar • Value of monetary unit or dollar is always

Assumption stable

1-19
 Fortune Travel Agency
Statement of Financial Position
31 December 2013
Assets Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

Liabilities are debts that represent negative future cash flows

for the enterprise.
1-20
 Fortune Travel Agency
Statement of Financial Position
31 December 2013
Assets Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

Equity represents
the owners’ claims on the assets of the business.
1-21
 Assets
Assets == Liabilities
Liabilities
Fortune ++ Equity
Travel Agency Equity
Balance Sheet
$300,000 = 31 December 2013
$80,000 ++ $220,000
$300,000 =
Assets
$80,000 $220,000
Liabilities & Equity
Land $ 100,000 Liabilities:
Building 90,000 Notes payable $ 41,000
Office equipment 15,000 Accounts payable 36,000
Supplies 2,000 Salaries payable 3,000
Notes receivable 10,000 Total liabilities $ 80,000
Accounts receivable 60,500 Equity:
Cash 22,500 Share capital 150,000
Retained earnings 70,000
Total $ 300,000 Total $ 300,000

1-22
Let’s analyze
transactions
for JJ’s Lawn
Care Service.

1-23
 On 1 May, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service
and received 800 shares of the company.
JJ's Lawn Care Service
Statement of Financial Position
1 May 2013
Assets Equity
Cash $ 8,000 Share capital $ 8,000

Total $ 8,000 Total $ 8,000

2-24
 On 2 May, JJ’s purchased a riding lawn
mower for $2,500 cash.
JJ's Lawn Care Service
Statement of Financial Position
2 May 2013
Assets Equity
Tools & Equipment $ 2,500 Share capital $ 8,000
Cash 5,500

Total $ 8,000 Total $ 8,000

2-25
 On 8 May, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a
note payable for the remaining $13,000.
JJ's Lawn Care Service
Statement of Financial Position
8 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,500 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Cash 3,500 Equity:
Share capital 8,000

Total $ 21,000 Total $ 21,000

2-26
 On 11 May, JJ’s purchased some repair
parts for $300 on account.
JJ's Lawn Care Service
Statement of Financial Position
11 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,800 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Cash 3,500 Accounts Payable 300
Total Liabilities $ 13,300
Equity:
Share capital 8,000

Total $ 21,300 Total $ 21,300

2-27
 Jill realized she had purchased more repair parts
than needed. On 18 May, JJ’s was able to sell half
of the repair parts to ABC Lawns for $150, a price
equal to JJ’s cost. JJ’s will receive the cash
within 30 days.
JJ's Lawn Care Service
Statement of Financial Position
18 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,650 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Accounts Receivable 150 Accounts Payable 300
Cash 3,500 Total Liabilities $ 13,300
Equity:
Share capital 8,000

Total $ 21,300 Total $ 21,300

2-28
 On 25 May, ABC Lawns pays JJ’s $75 as a
partial settlement of its accounts
receivable.
JJ's Lawn Care Service
Statement of Financial Position
25 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,650 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Accounts Receivable 75 Accounts Payable 300
Cash 3,575 Total Liabilities $ 13,300
Equity:
Share capital 8,000

Total $ 21,300 Total $ 21,300

2-29
 On 28 May, JJ’s pays $150 of its accounts
payable.

JJ's Lawn Care Service

Statement of Financial Position
28 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,650 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Accounts Receivable 75 Accounts Payable 150
Cash 3,425 Total Liabilities 13,150
Equity:
Share capital 8,000

Total $ 21,150 Total $ 21,150

2-30
 On 29 May, JJ’s recorded lawn care
services provided during May of $750. All
clients were paid in cash.
JJ's Lawn Care Service
Statement of Financial Position
29 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,650 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Accounts Receivable 75 Accounts Payable 150
Cash 4,175 Total Liabilities 13,150
Equity:
Share capital 8,000
Retained Earnings 750
Total $ 21,900 Total $ 21,900

2-31
 On 31 May, JJ’s purchased gasoline for the
lawn mower and the truck for $50 cash.
JJ's Lawn Care Service
Statement of Financial Position
31 May 2013
Assets Liabilities and Equity
Tools & Equipment $ 2,650 Liabilities:
Truck 15,000 Notes Payable $ 13,000
Accounts Receivable 75 Accounts Payable 150
Cash 4,125 Total Liabilities 13,150
Equity:
Share capital 8,000
Retained Earnings 700
Total $ 21,850 Total $ 21,850

Now, let’s review how JJ’s transactions

affected the accounting equation.
2-32
 Assets = Liabilities + Equity
Accts. Tools & Notes Accts. Share Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Capital + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) $ 2,500
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) $ 15,000 $ 13,000
Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 $ 8,000
May 11 300 $ 300
Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 25 75 (75)
Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000
May 29 750 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700

2-33
 Let’s prepare the Income Statement and
Statement Assets of Cash Flows
= for JJ’s+ Lawn
Liabilities Care
Equity

Cash
Service
Accts.
for
Tools &
the month ending
Notes
31
Accts.
May
Share
2013.
Retained
+ Rec. + Equip. + Truck = Payable + Pay. + Capital + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) These
$ 2,500These transactions
transactions
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) impact
impact
$ 15,000 the
the
$ 13,000
Balances $ 3,500 $ 2,500Statement
$ 15,000 of Cash
$ 13,000 $ 8,000
May 11 300 Statement of Cash
$ 300
Balances $ 3,500 $ 2,800 Flows.
Flows.
$ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Balances $ 3,500 $ 150 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 25 75 (75)
Balances $ 3,575 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000
May 29 750 These
These transactions
transactions 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) impact
impact the the Income
Income (50)
Balances $ 4,125 $ 75 $ 2,650
Statement.
$ 15,000 $ 13,000
Statement.
$ 150 $ 8,000 $ 700

2-34
 JJ's Lawn Care Service
Income Statement
For the Month Ended 31 May 2013

Sales Revenue $ 750

Operating Expense:
Gasoline Expense 50
Profit $ 700

Investments
Investments by by and
and payments
payments to to the
the owners
owners
are
are not
not included
included on
on the
the Income
Income Statement.
Statement.
1-35
 JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended 31 May 2013
Cash flows from operating activities:
Cash received from revenue transactions $ 750
Cash paid for expenses (50)
Net cash from operating activities $ 700
Cash flows from investing activities:
Purchase of lawn mower $ (2,500)
Purchase of truck (2,000)
Collection for sale of repair parts 75
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125
Cash balance, 1 May 2009 -
Cash balance, 31 May 2009 $ 4,125
1-36
 Now, let’s prepare the Statement of Financial
Position for JJ’s Lawn Care Service for May 31, 2013
Assets = Liabilities + Equity
Accts. Tools & Notes Accts. Share Retained
Cash + Rec. + Equip. + Truck = Payable + Pay. + Capital + Earnings
May 1 $ 8,000 $ 8,000
Balances $ 8,000 $ 8,000
May 2 (2,500) $ 2,500
Balances $ 5,500 $ 2,500 $ 8,000
May 8 (2,000) $ 15,000 $ 13,000
Balances $ 3,500 $ 2,500 $ 15,000 $ 13,000 $ 8,000
May 11 300 $ 300
Balances $ 3,500 $ 2,800 $ 15,000 $ 13,000 $ 300 $ 8,000
May 18 $ 150 (150)
Balances
May 25
$ 3,500
75
$ 150
(75)
These
These balances
$ 2,650
balances will
$ 15,000
will appear
$ 13,000 $ 300
appear
$ 8,000

Balances $ 3,575 $ 75 on
on the
$ 2,650
the Statement
Statement
$ 15,000 $ 13,000 $of
of300 $ 8,000
May 28 (150) (150)
Balances $ 3,425 $ 75 Financial
Financial
$ 2,650 $ 15,000 Position.
Position.
$ 13,000 $ 150 $ 8,000
May 29 750 750
Balances $ 4,175 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 750
May 31 (50) (50)
Balances $ 4,125 $ 75 $ 2,650 $ 15,000 $ 13,000 $ 150 $ 8,000 $ 700

2-37
 JJ's Lawn Care Service
Statement of Financial Position
31 May 2013
Assets Liabilities
Tools & equipment $ 2,650 Notes payable $ 13,000
Truch 15,000 Accounts payable 150
Account receivable 75 Equity
Cash 4,125 Share capital 8,000
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850

Assets
Assets == Liabilities
Liabilities ++ Equity
Equity

$21,850
$21,850 == $13,150
$13,150 ++ $8,700
$8,700

1-38
 Date at Date at
beginning of end of
period period
Time

Statement of Statement of
Financial Position Financial Position

Income Statement
Statement of Cash Flows

1-39
 Financial Statement Articulation
JJ's Lawn Care Service
Statement of Cash Flows
JJ's Lawn Care Service
For the Month Ended 31 May 2013
Cash flows from operating activities: Income Statement
Cash received from revenue transactions $ 750 For the Month Ended 31 May 2013
Cash paid for expenses (50)
Net cash from operating activities $ 700
Cash flows from investing activities:
Sales Revenue $ 750
Purchase of lawn mower $ (2,500) Operating Expense:
Purchase of truck (2,000) Gasoline Expense 50
Collection for sale of repair parts 75
Profit $ 700
Payment for repair parts (150)
Net cash used by investing activities (4,575)
Cash flows from financing activities:
Investment by owners 8,000
Increase in cash for month $ 4,125 JJ's Lawn Care Service
Cash balance, 1 May 2009 -
Statement of Financial Position
Cash balance, 31 May 2009 $ 4,125
31 May 2013
Assets Liabilities
Tools & equipment $ 2,650 Notes payable $ 13,000
Truch 15,000 Accounts payable 150
Account receivable 75 Equity
Cash 4,125 Share capital 8,000
Retained earnings 700
Total assets $ 21,850 Total liabilities & equity $ 21,850

2-40
Financial statements are
just one source of
financial accounting Income
Statement
information. Statement
of
Financial
Statement
Position
of Cash
Flows

Other Information:
• Industry
• Competitors
• National economy
1-41
 Sole
Sole
Proprietorships
Proprietorships Partnerships
Partnerships Corporations
Corporations

1-42
 Ow ner's equity:
Sole
Sole
Proprietorships
Proprietorships Jill Jones, capital $ 8,000

Partners' equity
Jill Jones, capital $ 4,000
Partnerships
Partnerships Bill Jones, capital 4,000
Total partners' equity $ 8,000

Equity
Share capital $ 7,000
Corporations
Corporations Retained earnings 1,000
Total shareholders' equity $ 8,000
1-43
Adequate
Adequate Disclosure
Disclosure is is an
an important
important
generally
generally accepted
accepted accounting
accounting principle.
principle.
ItIt means
means that
that users
users of of financial
financial statements
statements
are
are informed
informed ofof all
all information
information necessary
necessary
for
for the
the proper
proper interpretation
interpretation of of the
the
statements.
statements.

1-44
Statement of Financial
Position Notes
Notes toto the
the
financial
financial
Income Statement
statements
statements
Statement of Cash Flows often
often provide
provide
facts
facts necessary
necessary
for
for the
the proper
proper
interpretation
interpretation of of
the
the statements.
statements.

1-45
1-46