Financial Accounting

Özlem Olgu AKDENIZ

CAS 202, 0212 338 1457
oolgu@ku.edu.tr

1
Conceptual Framework and
Financial Statements
Chapter 1

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1.What is accounting?
2. Why do we need accounting?
3. How can accounting help a firm?
4. Financial accounting vs managerial
accounting?

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 The Language of Business
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 Types of Accounting
Financial Managerial
• Provides information • Provides information
for external users for internal users –
▫ Investors managers
▫ Creditors • Includes:
▫ Government ▫ Budgets
▫ The public ▫ Forecasts

5
How can we evaluate business
operations?

6
7
 Steps of Accounting
1. Recording transactions
2. T-accounts
3. Trial Balance
4. Adjusting entries
5. Adjusted trial balance
6. Financial statements
7. Closing entries
8. Adjusted Trail Balance
 IFRS
• Historically, different countries use their own
accounting standards.
▫ Difficult for investors to compare companies that
operate in different countries
• The IASB has developed international standards
(IFRS)
▫ In the past, U.S. considered its GAAP to be the
strongest set of standards
• In November 2008, all U.S. public companies
are required to adopt IFRS

9
 Assumptions

Accrual Accounting

• Transactions and other events are recognized when they occur

Going- concern assumption

• Entity will continue to exist indefinitely

10
 Accounting Equation Elements
Assets
•Economic resources
•Produce future benefits

Liabilities
•Present obligations
•Result in an outflow of economic benefits

Equity
•Represents shareholders’ residual claim to the
entity’s assets

Income
•Increases in economic benefits during an
accounting period

Expenses
•Decreases in economic benefits during an
accounting period

11
Assets = Liabilities + Equity

Liabilities
$600
Assets
$1,000
Equity
$400

12
Total Revenue and Gain – Total Expenses
and Losses = Net Income (or Loss)

Total Revenue Total Net Income

and Gains Expenses and (or Loss)
Losses
$1,000 $200
$300

13
 The Components of Retained Earnings
Revenues for
the period

minus

Expenses for
the period

equals
Plus
Beginning or Ending
minus Net Income minus equals
Balance of Dividends for Balance of
(or Net Loss)
Retained the period Retained
for the period
Earnings Earnings

14
 The Financial Statements

Income Statement of
Changes in
Statement Equity

Balance Statement of
Sheet Cash Flows
15
 The Income Statement
• part of Statement of Comprehensive Income
• Reports two main categories
▫ Revenues and gains
▫ Expenses and losses
• Shows the “bottom line”
▫ Net income or net loss for the period

16
 ABC Corporation
Income Statement
Financial Year Ended December 31
Net sales $$,$$$
Other income $$,$$$
Total income $$,$$$
Cost of sales $$,$$$
Gross margin $$,$$$
Selling, general and administrative expenses $$,$$$
Depreciation, amortization and provisions $$,$$$
Non-recurring income and expenses $$,$$$
Earnings before interest and tax $$,$$$
Finance costs $$,$$$
Income tax $$,$$$
Other income items $$,$$$
Net Income $$,$$$ 17
 Statement of Changes in Equity
• The Statement of Changes in Equity shows a
company’s transactions with its owners.
• Net income (or net loss) flows from the Income
Statement to the Statement of Changes in
Equity.

18
 ABC Corporation
Statement of Changes in Equity
For the year ending December 31, 2010
Shareholder equity as of December 31, 2009 $$,$$$
Plus: Net income $$,$$$
Less: Dividends $$,$$$
Reclassifications and other reserves $$,$$$
Shareholder equity as of December 31, 2010 $$,$$$

19
 The Balance Sheet
• Also called the Statement of Financial Position
• Reports
▫ Assets
▫ Liabilities
▫ Shareholders’ equity

20
 Assets on the Balance Sheet
Current Non-current
• Expected to be converted to • Will be held longer than one
cash, sold or consumed in year
the next 12 months or • Include
within the business’
operating cycle ▫ Property, plant and
equipment
• Include
 Land
▫ Cash
 Buildings
▫ Short-term investments
 Computers
▫ Receivables (or debtors)
 Equipment
▫ Inventory
▫ ▫ Intangibles
Prepaid expenses
▫ Long-term investments

21
 Liabilities on the Balance Sheet
Current Non-current
• Obligations or debts • Debts payable more than
payable in the one year or one year from balance sheet
within the business’s date
operating cycle • Include
• Include ▫ Long-term notes payable
▫ Accounts payable ▫ Bonds payable
▫ Taxes payable
▫ Short-term notes payable
▫ Salaries/wages payable

22
 Shareholders’ Equity on the Balance
Sheet
• Represents shareholders ownership of the
business assets
• Consists of:
▫ Paid-in capital (sometimes labeled Share Capital
or simply, Capital)
▫ Additional paid-in capital (depends on
jurisdictions)
▫ Retained earnings

23
 ABC Corporation
Balance Sheet
December 31, 2010
Assets Liabilities and Shareholders' Equity
Cash and cash equivalents Accounts payable
Trade receivables Taxes payable
Inventories Total current liabilities
Other current assets Long-term debt
Total current assets Total liabilities
Property and Equipment Common stock
Share capital
Less: accumulated depreciation Additional paid-in capital
Net Property and Equipment Retained earnings
Other assets Total shareholders' equity
Total assets Total liabilities & shareholders' equity

24
 The Statement of Cash Flows
• Measures cash receipts and cash payments
• Fourth required financial statement
• Categorizes into three types of activities:
▫ Operating
▫ Investing
▫ Financing

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 Cash Flow Categories

Operating

• Cash receipts and payments from selling goods and services

Investing

• Purchasing & selling long-term assets

Financing

Issuing
• Issuing shares and borrowing
stock and borrowing
26
Relationships between Financial
Statements
Income Statement
For the year ended December 31, 2010
Revenues $$$,$$$
Expenses ($$,$$$)
Net income $$,$$$

Statement of Changes in Equity

For the year ended December 31, 2010
Beginning equity $$$,$$$
Net income $$,$$$
Cash dividends ($$,$$$)
Ending equity $$,$$$
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 Statement of Changes in Equity
For the year ended December 31, 2010
Beginning equity $$$,$$$
Net income $$,$$$
Cash dividends ($$,$$$)
Ending equity $$,$$$

Balance Sheet
December 31, 2010
Assets $$$,$$$
Liabilities $$$,$$$
Shareholders’ equity:
Share capital $$$,$$$
Retained earnings $$$,$$$
Total liabilities and equity $$$,$$$
28
 Balance Sheet
December 31, 2010
Assets $$$,$$$
Liabilities $$$,$$$
Cash from
the Asset
Shareholders’ equity:
section of
Share capital $$$,$$$
the
Retained earnings $$$,$$$
Balance
Total liabilities and equity $$$,$$$ Sheet
Statement of Cash Flows equals
For the year ended December 31, 2010
ending
Cash flows from operating activities $$$,$$$
Cash on
Cash flows from investing activities $$,$$$ the
Cash flows from financing activities $$,$$$ Statement
Net cash flows $$,$$$ of Cash
Cash balance, December 31, 2009 $$,$$$ Flows
Cash balance, December 31, 2010 $$,$$$
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 Evaluating a Company
Question/Decision What to look for

Can the company sell its products or Sale revenue

services?
What are the main income measures
to watch for trends?
What percentage of sales revenue ends Divide net income by sales revenue
up as profit?
Can the company collects its
receivables?
Can the company pay its liabilities?
Where is the company’s cash coming
from?
Increasing or Decreasing?
Gross profit
Operating income and Net income
Compare change in receivables to
change in sales
Compare assets to liabilities
Observe the line items on the cash
flow statement

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Transaction Analysis
Chapter 2

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 Transactions
• Events that have a financial impact on the
business and can be measured reliably
▫ Selling products
▫ Paying expenses
• Have two sides:
▫ Giving
▫ Receiving
• Accounting records both sides of transactions

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 The Account

Assets Liabilities Shareholders’

Equity

• Account is a record of all the changes in a

particular asset, liability and shareholders’
equity element
▫ Basic summary device of accounting

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 Assets
Accounts &
Inventor
Cash Notes
Receivable y

Prepaid
Expenses Land Buildings

Equipment,
Furniture &
Fixtures

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 Liabilities

Accounts payable Notes payable Accrued liabilities

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 Shareholders’ Equity

Share Dividend
Capital s

Retained
Revenues
Earnings
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 ACCOUNTING CYCLE
1. Journal entries
2. Post to T accounts
3. Unadjusted Trial Balance
4. Adjusting entries
5. Adjusted Trial Balance
6. Financial statements
7. Closing entries
8. Post closing Trial Balance
 Double-Entry Accounting
• Business transactions include two parts
▫ Giving
▫ Receiving
• Accounting based on a double-entry system
▫ Each transaction affects at least two accounts

38
 Exercise
• Van Gray opened ShineBrite Car Wash, Inc., in
April 2010.
• Transaction 1. Gray and a few friends invest
$50,000 to open ShineBrite Car Wash, and the
business issues ordinary share capital to the
shareholders.
• Transaction 2. ShineBrite purchases land for a
new location and pays cash of $40,000.
• Transaction 3. The business buys supplies on
account, agreeing to pay $3,700 within 30 days.
• Transaction 4. ShineBrite earns $7,000 of
service revenue by providing services for
customers. The business collects the cash.
• Transaction 5. ShineBrite performs $ 3000
service on account.
• Transaction 6. During the month, ShineBrite
Car Wash pays $2,700 for the following
expenses: equipment rent, $1,100; employee
salaries, $1,200; and utilities, $400.
• Transaction 7. ShineBrite pays $1,900 on
account.
• Transaction 8. Van Gray, the major
shareholder of ShineBrite Car Wash, paid
$30,000 to remodel his home.
• Transaction 9. In transaction 5, ShineBrite
performed services for UPS on account. The
business now collects $1,000 from UPS. We say
that ShineBrite collects the cash on account.
• Transaction 10. ShineBrite sells some land for
$22,000, which is the same amount that
ShineBrite paid for the land.
• Transaction 11. ShineBrite Car Wash declares
a dividend and pays the shareholders $2,100
cash.
ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity
Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
1 50,000 50,000 issued share capital
2 -40000 40,000
10,000 40,000 50,000
3 3,700 3,700
10,000 3,700 40,000 3,700 50,000
4 7,000 7,000 revenue
17,000 - 3,700 40,000 3,700 50,000 7,000
5 3,000 3,000 revenue
17,000 3,000 3,700 40,000 3,700 50,000 10,000
6 -1100 -1100 expense
-1200 -1200 expense
-400 -400 expense
14,300 3,000 3,700 40,000 3,700 50,000 7,300
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ShineBrite Car Wash, Inc Shareholders'
Assets Liabilities Equity
Accounts Accounts Share Retained
Txn Cash receivable Supplies Land = payable + Capital Earnings
14.300 3.000 3.700 40.000 3.700 50.000 7.300
7 -1900 40.000 -1900
12.400 3.000 3.700 40.000 1.800 50.000 7.300
8 not a transaction by the company
12.400 3.000 3.700 40.000 1.800 50.000 7.300
9 1.000 -1000
13.400 2.000 3.700 40.000 1.800 50.000 7.300
10 22.000 -22000
35.400 2.000 3.700 18.000 1.800 50.000 7.300
11 -2100 -2100
33.300 2.000 3.700 18.000 1.800 50.000 5.200

$57,000 $57,000
43
 ShineBrite Car Wash, Inc
Shareholders'
Assets Liabilities Equity Type of
Accounts Accounts Share Retained Equity

Statement of Changes in Equity Data

Txn Cash receivable Supplies Land = payable + Capital Earnings Transaction
1 50,000 50,000 issued share capital
Statement of Cash Flows Data

Income Statement Data

2 -40000 40,000
3 3,700 3,700
4 7,000 7,000 revenue
5 3,000 3,000 revenue
6 -1100 -1100 expense
-1200 -1200 expense
-400 -400 expense
7 -1900 -1900
9 1000
10 22000
5 -2100 (2,100) Dividends
Bal 33,300 3,000 3,700 40,000 1,800 50,000 5,200
$57,000
Balance Sheet Data 44
 T-Account

Account Title
Left side Right side

Debit Credit

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 Rules of Debit and Credit
Shareholders’
Assets Liabilities Equity

Debit Credit Debit Credit Debit Credit

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 Additional Shareholders’ Equity
Accounts: Revenues & Expenses

Liabilities
Share Capital
Assets +
Beginning Retained Earnings
Shareholders’ +
Revenues
Equity
Expenses

Dividends

47
 Rules of Debit and Credit
Shareholders’ Equity
Assets Liabilities Share Capital Retained earnings

Debit Credit Debit Credit Debit Credit Debit Credit

- - - Dividends
-

Debit Credit
Revenue
- Expenses

Debit Credit Debit Credit

- -
48
 The Journal
• Chronological record of transactions
• Three steps
▫ Specify each account affected by the transaction
and classify by type
▫ Determine if each account is increased or
decreased
 Use debit credit rules
▫ Record in journal

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 Journal Entry

JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

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 Posting
JOURNAL
Date Accounts and explanation Debit Credit
May 1 Cash 50,000
Share Capital 50,000
Issued ordinary shares

Cash Share Capital

$50,000 $50,000

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 Trial Balance
• Lists all accounts with their balances
• Assets listed first, then liabilities and
shareholders’ equity
• Shows that debits equal credits
• Usually prepared at the end of the period

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 Analyzing Accounts
Cash
Beginning balance
Cash receipts Cash payments ?
Ending balance

54
 Analyzing Accounts
Accounts receivable

Beginning balance
Sales on account
Collections on account ?
Ending balance

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 Analyzing Accounts
Accounts payable

Beginning balance

Payments on account ? Purchases on account

Ending balance

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Correcting Accounting Errors

Missing •Trace each account from

account journal to ledger

Divide out-of- •Reversing debits and credits

balance amount
by 2 doubles the error

Divide out-of- •If even, error may be a

balance amount •Slide or
•Transposition
by 9

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 Chart of Accounts
Balance Sheet Accounts

Assets Liabilities Shareholders’ Equity

101 Cash 201 Accts. payable 301 Share capital

111 Accts. receivable 231 Notes payable 311 Dividends

141 Office supplies 312 Retained earnings

151 Office furniture Income Statement Accounts

191 Land Revenues Expenses

401 Service revenue 501 Rent expense

502 Salary expense

503 Utilities expense

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 Normal Balances of Accounts
Assets Debit
Liabilities Credit
Shareholders’ Equity overall Credit
Share capital Credit
Retained earnings Credit
Dividends Debit
Revenues Credit
Expenses Debit

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 EXERCISES
E2-18A
E2-19A
E2-33B

HOME-WORK
Decision Cases: CASE 1, P 117
The Adjusting Process
CHAPTER 3
PART 1

61
 The Two Bases of Accounting:
Accrual-basis:
Transactions are Cash-basis:
recorded Transactions are
when revenues are recorded when
earned or expenses cash is paid or
are incurred. cash is received.

62
 Accrual Versus Cash Example
• In January 2002, Prensa Insurance sells a
three-year health insurance policy to a business
client.
• The contract specifies that the client had to pay
$150,000 in advance.
• Yearly expenses amount to $20,000.
• What is the income or loss?

63
 Accrual Versus Cash Example
Accrual-Basis Accounting
(000 omitted)2002 2003 2004

enues $50 $50

enses 20 20
income (loss) $30 $30 $30

64
 Accrual Versus Cash Example
Cash-Basis Accounting
(000 omitted) 2002 2003 200

h inflows $150 $ 0
h outflows 20 20 20
income (loss) $130 ($20) ($20

65
 Accounting Period
Managers adopt an
artificial period of time
to evaluate performance.

Interim Period Statements

Monthly
Quarterly
Semi-annually
66
 Revenue Principle
• When is revenue recognized?
• When it is deemed earned.
• Recognition of revenue and cash receipts do not
necessarily occur at the same time.

67
 The Matching Principle
• What is the matching principle?
• It is the basis for recording expenses.
• Expenses are the costs of assets and the increase
in liabilities incurred in the earning of revenues.
• Expenses are recognized when the benefit from
the expense is received.

68
 Matching Expenses with
Revenues Example
• Parker Floor sells a wood floor for $15,000 on
the last day of May.
• The wood was purchased from the manufacturer
for $8,000 in March of the same year.
• The floor is installed in June.
• When is income recognized?

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 Matching Expenses with
Revenues Example

May
Revenues $15,000
Cost of goods sold 8,000
Net income $ 7,000

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 The Time Period Concept
• It requires that accounting information be
reported at regular intervals.

Interacts with the Requires that income

revenue principle and be measured
the matching principle accurately each period

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 Adjusting Entries
• Assign revenue to the period earned.
• Assign expenses to the period incurred.
• Bring related asset and liability accounts into
correct balance.

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Two Types Of Adjusting Entries

Prepaids or Deferrals

Accruals

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Five Categories Of Adjusting Entries

Prepaid expenses Accrued revenues

Depreciation

Accrued expenses Unearned revenues

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 Prepaid Insurance Example
On January 2, 2005, Parker Floor paid $24,000
for a two-year health insurance policy.

Prepaid Insurance Cash

24,000 24,000

75
 Prepaid Insurance Example
• What is the journal entry on December 31,
2005?
• Dec. 31, 2005 Insurance
Expense 12,000 Prepaid
Insurance 12,000 To record
insurance expense

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 Supplies Example
• Wood Enterprise started business the beginning
of the month.
• $800 worth of office supplies were purchased on
November 15, 2004, for cash.

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 Supplies Example
Office Supplies Cash
800 800

An inventory at month end indicated

that $200 in office supplies remained.
What is the supplies expense?
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 Supplies Example
Supplies Expense Supplies
600 800 600
Bal. 200

What was the determining factor

in matching this expense? Usage

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 Depreciation Example
• On January 2, Wood Enterprise purchased a
truck for $30,000 cash.
• The truck is expected to last for 3 years.

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 Depreciation Example
• The cost of the truck must be matched with the
accounting periods in which it was used to earn
income.
• What is the journal entry for the year ended
December 31, 2005?

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 Depreciation Example
Dec. 31, 2005
Depreciation Expense 10,000
Accumulated Depreciation 10,000
To record depreciation on truck

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 Contra Accounts
A contra account
has a companion A contra account’s
account. normal balance is
opposite that of
the companion
Accumulated account.
depreciation is a
contra account to
plant assets.
83
 Wood Enterprise Example
Partial Balance Sheet
December 31, 2005
ets:
y
ry $30,
cumulated depreciation 10,000
al

Contra account
Book value
84
 Accruals

• What is an accrual?
• It is the recognition of an expense or revenue
that has arisen but has not yet been recorded.
• Expenses or revenues are recorded before the
cash settlement.

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 Accrued Expenses Example
• Employees at Mary Business Services are paid
every Friday.
• Weekly salaries total $30,000.
• The business is closed on Saturday and Sunday.
• The employees were last paid on April 26, which
was a Friday.
• They will be paid on May 3.

86
 Accrued Expenses Example
• What is the adjusting entry on April 30?
• They worked April 29 and 30.
• $30,000 ÷ 5 = $6,000 per day
• $6,000 × 2 days = $12,000
• April 30, 2002 Salaries
Expense 12,000 Salaries
Payable 12,000 To accrue salary
expense

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 Accrued Revenues Example
• During the month of April, Mary Business
Services rendered services to customers totaling
$15,000.
• At the end of April, the customers have not as yet
been billed.

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 Accrued Revenues Example
• What is the April 30 adjusting entry?
• April 30, 2005 Accounts
Receivable 15,000 Service
Revenue 15,000 To accrue service
revenue

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 Unearned or Deferred Revenue
Example
• In January 2005, Prensa Insurance received
$150,000 from a business client to provide
health insurance coverage for three years.
• January 2, 2005 Cash
150,000 Unearned
Revenue 150,000 Received revenue in
advance

90
 Unearned or Deferred Revenue
Example
• What is the journal entry on December 31,
2005?
• Unearned revenue 50,000
Revenue 50,000 To
record revenue collected in advance

Correct Total Correct

liability accounted for revenue
$100,000 $150,000 $50,000
91
 Notice
• Adjusting entries always have...
– one income statement account and...
– one balance sheet account.
• Adjusting entries never involve cash.

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 Adjusted Trial Balance
• The adjusting process starts with the unadjusted
trial balance.
• Adjusting entries are made at the end of the
accounting period and then an adjusted trial
balance is prepared.
• The adjusted trial balance serves as the basis for
the preparation of the financial statements.

93
 Financial Statements
• Financial statements have two parts:
1 The first part includes the following:
– name of the entity
– title of the statement
– date or period covered
2 The second part is the body of the statement.

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 Financial Statements Example
Prensa Insurance
Income Statement
Year Ended December 31, 2005
Revenue from insurance services $50,000
Less: Salaries expense 14,275
Supplies expense 250
Rent expense 3,600
Utilities expense 625
Interest expense 600
Depreciation 650
Net income $30,000
95
 Financial Statements Example
Prensa Insurance
Statement of Owner’s Equity
Year Ended December 31, 2005

urance Equity, January 1, 2002 $100,000

income
urance Equity, December 31, 2002 $130,000

96
 Financial Statements Example
Prensa Insurance
Balance Sheet
Year Ended December 31, 2002

$
unts receivable 5,000
lies inventory 100
aid rent 1,00
e equipment 5,000
Accumulated depreciation 250
Total assets $200,00
97
 Financial Statements Example
ies and Equities:
es payable $ 15
st payable 60
unts payable (supplies) 250
es payable 4,10
loan
abilities $

s equity 1
abilities and owner’s equity $200,000
98
 The Accounting Work Sheet
• Used to help move data from the trial balance to
the financial statements
• An internal document – not financial statement

99
 The Accounting Work Sheet
• What is the work sheet?
• A work sheet is a multi-columned
document used by accountants to
help move data from the trial balance
to the financial statements.
• It is an internal document.
100
 The Accounting Work Sheet
Trial Balance Adjustments
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash 12,100
Accounts receivable 1,350
Supplies 250
Equipment 15,500
Accum. depreciation 7,500
Accounts payable 1,200
Salary payable 1,100
Unearned revenue 1,500
Capital 7,200
Withdrawals 1,000
Revenue 23,700
Salary expense 12,000
Supplies expense
Depreciation expense
Totals 42,200 42,200

©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4-9
 Exercises
• Mid chapter summary problem, p 159

102
CHPTER 3
PART 2

103
 Closing the Accounts
• Closing the accounts is the end of
period process that prepares the
accounts for recording transactions
during the next period.

104
 Closing the Accounts
• Prepares accounts for recording transactions during
next period
• Updates retained earnings account

• Permanent Accounts: assets, liabilities

and capital
• Temporary Accounts: revenues,
expenses, dividends, withdrawals, income
summary
105
 Closing the Accounts
• Revenues and Expense accounts are
closed to Income Summary (or
retained earnings).
• Income Summary is closed to Capital.
• Withdrawals are closed to Capital.
• In a corporation, Dividends are
closed to Retained Earnings.
106
 Closing the Accounts
(Close Revenue Account)

Income
Revenue Summary
28,500 12,000 (Close Expense
7,500 Accounts) 4,450 28,500
9,000 24,050
Salary Exp (Close Income
Summary)
1,500 3,300 Capital
1,800 Account
Rent Exp
(Close 2,500 24,050
800 800
Supplies Exp Withdrawals Withdrawals
Account) 2,500 2,500
350 350
©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 4 - 23
 Postclosing Trial Balance
• The accounting cycle ends with the
postclosing trial balance.
• The postclosing trial balance is dated
as of the end of the period for
which the statements have been
prepared.
108
 Current Assets
• Current assets are cash, or will be
converted to cash, in one year or
within the normal business operating
cycle.
• What are some other examples?
–short-term receivables
–inventory
–prepaid expenses
109
 Current Liabilities
• Current liabilities are debts or
obligations due within one year or
within the operating cycle.
• What are some examples?
–accounts and salary payables
–short-term notes payable
–unearned revenue

110
 Long-term Assets and Liabilities

• Long-term assets include all other assets.

–property, equipment, and intangibles

• Long-term liabilities are all other debts

due in longer than one year or the
entity’s operating cycle.

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 The Classified Balance Sheet
Debit side Credit side
Current assets Current liabilities
Long-term assets Long-term liabilities

Listed in the order Listed in the order

of decreasing of how soon they
liquidity must be paid

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 The Classified Balance Sheet
XYZ Services
January 31, 20XX
Assets Liabilities
Current assets: Current liabilities:
Cash 12,100
Accounts payable 1,200
Accounts receivable 3,050 Salary
payable 1,100
Supplies 150 Unearned
revenue 1,500
Total current assets 15,300 Total liabilities
3,800
Plant assets Owner’s equity
Equipment 15,500 Capital
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19,300
 Different Formats of Balance
Sheet
Report Format Account Format
Assets Assets = Liabilities +
Liabilities Owner’s Equity
Owner’s Equity

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 Using current ratio and
debt
ratio to evaluate a
company

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Comparative Financial Statements

• They enhance the user’s ability to analyze

a company’s past performance.
• What are two common ratios used to
measure liquidity?
1 Current ratio
2Debt ratio

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 Current Ratio
• This measures the ability of a
business to pay its current
liabilities with its current assets.

Current ratio = Current assets ÷ Current liabilities

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 Debt Ratio
• It indicates the proportion of a
business’s assets that are financed
with debt.
• It measures their ability to pay both
current and long-term debt.

Total liabilities ÷ Total assets

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 EXERCISES
• E3-45B, P193
• E3-49, P195

HOME WORK
• P3-73A, 74A, 75A

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