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Harrison Fa11 STPPT 01
Harrison Fa11 STPPT 01
2020 SUMMER
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Course Syllabus
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Financial Accounting
Eleventh Edition
Chapter 1
The Financial
Statements
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The Walt Disney Company
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Explain Why Accounting Is the
Language of Business
• Accounting is an information system that:
– Measures business activities
– Processes data into reports
– Communicates results to decision makers
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Exhibit 1-1 The Flow of Accounting
Information
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Who Uses Accounting Information?
• Individuals
• Investors and creditors
• Regulatory bodies
• Nonprofit organizations
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Two Kinds of Accounting (1 of 2)
Financial Accounting
• For decision makers outside the entity
– Investors
– Creditors
– Government agencies
– The public
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Two Kinds of Accounting (2 of 2)
Managerial Accounting
• For managers inside the entity
– Budgets
– Forecasts
– Projections
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Exhibit 1-2 The Various Forms of
Business Organization
blank Proprietorship Partnership LLC Corporation
1. Owner(s) Proprietor – Partners – Members Stockholders
one owner two or more – generally
owners many owners
2. Personal Proprietor is General Members are Stockholders
liability of personally partners are not personally are not
owner(s) for liable personally liable personally
business liable; limited liable
debts partners are
not
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Organizing a Business (1 of 5)
• Proprietorship
– Single owner
– Tend to be small retail stores or solo providers of
professional services
– Personally labile for all business’s debts
– Distinct entity for accounting purposes
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Organizing a Business (2 of 5)
• Partnership
– Two or more parties as co-owners
– Income and losses “flow through” to partners
– Many are small or medium-sized companies
– General partnerships have mutual agency and
unlimited liability
– In limited-liability partnerships, only liable up to the
investment put in
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Organizing a Business (3 of 5)
• Limited-Liability Company
– Business (not owners) is liable for debts
– May have one owner or many, called members
– Members have limited liability
– Income “flows through” to members
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Organizing a Business (4 of 5)
Corporation
• Owned by stockholders (shareholders)
• Able to raise large sums of capital by issuing stock
• Formed under state law
• Legally distinct from its owners
• Stockholders have no personal obligation for the
corporation’s debts, limited liability
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Organizing a Business (5 of 5)
Corporation
• Double taxation
– Corporation pays income tax
– Shareholders taxed on dividends
• Stockholders elect board of directors, which
– Sets policy
– Appoints officers
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Learning Objective 1.2
Explain and apply underlying accounting concepts,
assumptions, and principles.
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Professional Frameworks
• Generally Accepted Accounting Principles (GAAP)
– Formulated by the Financial Accounting Standards
Board (FASB)
• International Financial Reporting Standards (IFRS)
– Formulated by the International Accounting
Standards Board (IASB)
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Exhibit 1-3 Conceptual Foundation of
Accounting
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Assumptions and Principles
• Entity Assumption
– An organization stands apart from other organizations
and individuals as a separate economic unit
• Continuity (Going-Concern) Assumption
– Entity will continue to operate for the foreseeable future
• Historical Cost Principle
– Assets should be recorded at their actual cost on the
date of purchase
• Stable-Monetary-Unit Assumption
– Assume the dollar’s purchasing power is stable over
time
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Learning Objective 1.3
Apply the accounting equation to business
organizations.
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Exhibit 1-4 The Accounting Equation
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Apply the Accounting Equation to
Business Organizations (1 of 4)
The financial statements are based on the accounting
equation.
• Assets
– Resources expected to produce future benefit
• Liabilities
– Outsider claims – debts payable to outsiders
• Owner’s Equity
– Insider claims, stockholders’ interest in the assets
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Apply the Accounting Equation to
Business Organizations (2 of 4)
• Assets
– Cash and cash equivalents
– Inventories
– Property, plant, and equipment
• Liabilities
– Accounts payable
– Income taxes payable
– Long-term debt
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Apply the Accounting Equation to
Business Organizations (3 of 4)
Owner’s Equity
• The accounting equation can be rewritten as:
– Assets – Liabilities = Owners’ Equity
• Corporation’s equity is called stockholders’ equity and
it has two parts:
– Paid-in capital
– Retained earning
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Apply the Accounting Equation to
Business Organizations (4 of 4)
Owner’s Equity
• Paid-in capital
– The amount stockholders have invested in the
business.
• Retained Earnings
– The amount of earned income kept for use in the
business.
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Exhibit 1-5 The Components of
Retained Earnings
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Components of Retained Earnings
• Revenues
– Inflow of resources from delivering goods or
services
– Increase retained earnings
• Expenses
– Outflow of resources due to the cost of operations
– Decrease retained earnings
• Dividends
– Distribution of assets to stockholders
– Decrease retained earnings
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Learning Objective 1.4
Evaluate business operations through the financial
statements.
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Exhibit 1-6 Information Reported in
the Financial Statements
Question Financial statement Answer
Revenues
How well did the company
Income statement − Expense
perform during the year?
Net income or (net loss)
Beginning retained earnings
Why did the company’s
Statement of + Net Income (-Net Loss)
retained earning change
retained earnings − Dividends declared
during the year?
Ending retained earnings
What Is the company’s
Assets = Liabilities + Owners’
financial position at year- Balance sheet
equity
end?
Operating cash flows
How much cash did the
Statement of cash ± Investing cash flows
company generate and
flows ± Financial cash flows
spend during the year?
Increase (decrease) in cash.
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Order of the Financial Statements
• Income statement
• Statement of retained earnings
• Balance sheet
• Statement of cash flows
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The Income Statement Measures
Operating Performance
• The income statement reports revenues and
expenses for the period.
– The bottom line net income (loss) for the period
Net income = Total Revenues and Gains − Total
Expenses and Losses
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Exhibit 1-7 The Walt Disney Company,
Consolidated Statements of Income
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The Statement of Retained
Earnings (1 of 2)
• Retained Earnings
– Portion of net income reinvested into the business
– Net income increases retained earnings
– Net losses and dividends decrease retained
earnings
– Net income (net loss) flows from the income
statement to the statement of retained earnings
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The Statement of Retained
Earnings (2 of 2)
Beginning retained earnings 1000
Add: Net income (loss) 300
Less: Dividends declared 200
Ending retained earnings 1100
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Exhibit 1-8 The Walt Disney Company,
Consolidated Statements of Retained Earnings
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The Balance Sheet
Balance Sheet
• Also called the statement of financial position
• Reports three items:
– Assets
– Liabilities
– Stockholders’ equity
• Reflects the company’s position at a specific moment
in time
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The Balance Sheet – Assets (1 of 2)
Assets
• Current assets – expected to be used or converted to
cash within one business cycle
– Examples: cash and cash equivalents, short-term
investments, accounts receivable, prepaid
expenses
• Long-term assets – expected to benefit the company
beyond just the next fiscal year
– Examples: property, plant, and equipment, long-
term investments, intangible assets
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The Balance Sheet – Assets (2 of 2)
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The Balance Sheet – Liabilities (1 of 2)
Liabilities
• Current liabilities – debts due within one year
– Examples: accounts payable, salaries payable,
short-term notes payable, accrued liabilities
• Long-term liabilities – debts payable after one year
– Examples: long-term notes payable, long-term
bonds payable
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The Balance Sheet – Liabilities (2 of 2)
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The Balance Sheet – Equity (1 of 2)
Equity (Stockholders’ Equity)
• Represents the stockholders’ ownership of the
business’s assets
• Examples: common stock, additional paid-in capital,
retained earnings, treasury stock, accumulated other
comprehensive income (loss)
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The Balance Sheet – Equity (2 of 2)
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Exhibit 1-9 The Walt Disney Company,
Consolidated Balance Sheets
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The Statement of Cash Flows
• Measures cash receipts and payments
• Three types of activities:
– Operating activities: cash flows from selling
goods and services to customers
– Investing activities: cash flows from purchasing
and selling long-term assets
– Financing activities: cash flows from borrowing
or repaying funds or equity transactions
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Exhibit 1-10 The Walt Disney Company,
Consolidated Statements of Cash Flows
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Learning Objective 1.5
Construct financial statements and analyze the
relationships among them.
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Exhibit 1-11 Relationships among the
Financial Statements (in Millions of $)
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Financial Statements – Construction
and Analysis
Exhibit 1-11 Relationships among the Financial
Statements (in millions of $)
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Learning Objective 1.6
Evaluate business decisions ethically.
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Evaluate Business Decisions
Ethically
Three factors influence business and accounting decisions
• Economics
– Decision should maximize the economic benefits
• Legal
– Free societies are governed by laws written to provide
clarity and prevent abuse of others’ rights
• Ethical
– Recognizes that even when economically profitable
and legal, some actions still may not be right
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AICPA Code of Professional Conduct
• The American Institute of Certified Public
Accountants (AICPA) provides the industry a Code
of Professional Conduct with these principles:
– Responsibilities
– Public Interest
– Integrity
– Objectivity and Independence
– Due Care
– Scope and Nature of Services
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Questions and Answers
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(5 min.) S 1-12
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(5 min.) S 1-13
Roam Corp.
Statement of Retained Earnings
Year Ended December 31, 2016
(millions)
Retained earnings, December 31, 2015 ....... $230
Add: Net income ($490 − $340) ................... 150
Less: Dividends declared ............................. (54)
Retained earnings, December 31, 2016 ....... $326
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Aloha Enterprises
Balance Sheet
December 31, 2016
(in millions)
ASSETS
Current assets:
Cash ............................................................................ $ 50
Accounts receivable .................................................. 19
Total current assets ................................................... 69
Long-term assets ............................................................. 39
LIABILITIES
Current liabilities:
Accounts payable ...................................................... $ 13
Total current liabilities ............................................... 13
Long-term liabilities:
Long-term notes payable ........................................... 25
Total liabilities .................................................................. 38
STOCKHOLDERS’ EQUITY
Common stock ................................................................. 20
Retained earnings ............................................................ 50
Total stockholders’ equity .............................................. 70
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Harmon Corporation
Balance Sheet
September 30, 2016
(in millions)
ASSETS
Current assets:
Cash ................................ ....................................... $ 75
Accounts receivable ............................................. 22
Total current assets .............................................. 97
Property and equipment ............................................. 28
Other long-term assets............................................... 17
Total assets ................................ ................................. $142
LIABILITIES
Current liabilities:
Accounts payable ................................ ................. $ 33
Total current liabilities .......................................... 33
Long-term liabilities:
Long-term notes payable ...................................... 15
Total liabilities ................................ ............................. 48
STOCKHOLDERS’ EQUITY
Common stock ............................................................ 30
Retained earnings ....................................................... 64*
Total stockholders’ equity ................................ ......... 94
Total liabilities and stockholders’ equity .................. $142
_____
*Computation of retained earnings: Total assets ($142) − total liabilities
($48) − common stock ($30) = $64
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Req. 1
_____
*Computation of retained earnings:
Total assets ($150.0) − Total liabilities ($105.4) − Common stock
($27.7) = $16.9
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Req. 1
Ellen Samuel Realty Company
Income Statement
Year Ended May 31, 2016
(Amounts in millions)
Req. 2
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Carson Coffee Roasters Corp.
Income Statement
For the Month Ended August 31, 2017
Revenue:
Service revenue ....................................... $279,600
Expenses:
Salary expense ........................................
$78,400
Utilities expense ...................................... 5,400
Rent expense ........................................... 1,900
Total expenses ........................................
85,700
Net income ................................................... $193,900
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Req. 1
Carson Coffee Roasters Corp.
Balance Sheet
August 31, 2017
Assets Liabilities
Cash .............................. $ 5,900 Accounts payable ....................... $ 9,000
Office supplies ............. 7,500
Equipment .................... 200,400 Stockholders’ Equity
Common stock ............................ 13,200
Retained earnings ....................... 191,600
Total stockholders’ equity 204,800
Total liabilities and
Total assets .................. $213,800 stockholders’ equity ................ $213,800
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Req. 1
David Austin Realty Company
Balance Sheet
January 31, 2016
(Amounts in millions)
ASSETS LIABILITIES
Cash $ 1.3 Current liabilities $ 2.1
Receivables .7 Long-term liabilities 102.1
Property and Total liabilities
equipment, net 104.2
1.8
Investment assets 135.6 STOCKHOLDERS’
Other assets 9.9
EQUITY
Common stock 25.1
Retained earnings 20.0*
Total stockholders’ equity 45.1
______
_____
*Computation of retained earnings:
Total assets ($149.3) − Total liabilities ($104.2) − Common stock ($25.1) =
$20.0
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Req. 1
Req. 2