Harrison Fa11 STPPT 01a

FINANCIAL ACCOUNTING
2020-2021
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved.
Course Syllabus
Financial Accounting
Eleventh Edition
Chapter 1
The Financial
Statements
The Walt Disney Company
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
Exhibit 1-1 The Flow of Accounting
Information
Who Uses Accounting Information?
• Individuals
• Investors and creditors
• Regulatory bodies
• Nonprofit organizations
Two Kinds of Accounting (1 of 2)
Financial Accounting
• For decision makers outside the entity
– Investors
– Creditors
– Government agencies
– The public
Two Kinds of Accounting (2 of 2)
Managerial Accounting
• For managers inside the entity
– Budgets
– Forecasts
– Projections
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
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
• 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
• 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
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
Corporation
• Double taxation
– Corporation pays income tax
– Shareholders taxed on dividends
• Stockholders elect board of directors, which
– Sets policy
– Appoints officers
Learning Objective 1.2
Explain and apply underlying accounting concepts,
assumptions, and principles.
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)
Exhibit 1-3 Conceptual Foundation of
Accounting
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
Apply the accounting equation to business
organizations.
Exhibit 1-4 The Accounting Equation
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
• Assets
– Cash and cash equivalents
– Inventories
– Property, plant, and equipment
• Liabilities
– Accounts payable
– Income taxes payable
– Long-term debt
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
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.
Exhibit 1-5 The Components of
Retained Earnings
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
Evaluate business operations through the financial
statements.
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.
Order of the Financial Statements
• Income statement
• Statement of retained earnings
• Balance sheet
• Statement of cash flows
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
Exhibit 1-7 The Walt Disney Company,
Consolidated Statements of Income
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
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
Consolidated Statements of Retained Earnings
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
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
The Balance Sheet – Assets (2 of 2)
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
The Balance Sheet – Liabilities (2 of 2)
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)
The Balance Sheet – Equity (2 of 2)
Consolidated Balance Sheets
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
Consolidated Statements of Cash Flows
Construct financial statements and analyze the
relationships among them.
Exhibit 1-11 Relationships among the
Financial Statements (in Millions of $)
Financial Statements – Construction
and Analysis
Exhibit 1-11 Relationships among the Financial
Statements (in millions of $)
Evaluate business decisions ethically.
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
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
Questions and Answers
(5 min.) S 1-12
O’Conner Services, Inc.

Income Statement
Year Ended December 31, 2016
(millions)
Revenues....................................................... $397
Expenses ....................................................... 164
Net income .................................................... $233
(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
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
Total assets ...................................................................... $108
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
Total liabilities and stockholders’ equity ....................... $108
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
Req. 1
Ellen Samuel Realty Company
Balance Sheet
May 31, 2016
(Amounts in millions)
ASSETS LIABILITIES
Cash $ 1.6 Current liabilities $ 2.6
Receivables 0.5 Long-term liabilities 102.8
Property and equipment, Total liabilities
1.7 105.4
net
Investment assets 135.7 STOCKHOLDERS’
Other assets 10.5 EQUITY
Common stock 27.7
Retained earnings 16.9*
Total stockholders’ 44.6
equity
Total liabilities and
Total assets stockholders’ equity $150.
$150.0 0
_____
*Computation of retained earnings:
Total assets ($150.0) − Total liabilities ($105.4) − Common stock
($27.7) = $16.9
Req. 1
Income Statement
Year Ended May 31, 2016
Total revenue ............................................................... $37.9

Expenses:
Salary and other employee expenses ................... $13.6
Other expenses ...................................................... 5.4
Interest expense ..................................................... 0.4
Total expenses ....................................................... 19.4
Net income ................................................................... $18.5
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:

Year Ended May 31, 2016
Retained earnings, beginning of year .........................

$16.8
Add: Net income for the year (Req. 1).........................
18.5
Subtotal 35.3
Less: Dividends declared ............................................
18.4
Retained earnings, end of year (from Exercise 1-
24A) ............................................................................... $16.9
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

For the Month Ended August 31, 2017
Retained earnings, August 1, 2017.................. $ -0-
Add: Net income for the month ....................... 193,900
Subtotal 193,900
Less: Dividends declared................................. (2,300)
Retained earnings, August 31, 2017................ $191,600
Req. 1
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 assets .................. $213,800 stockholders’ equity................ $213,800
Req. 1
David Austin Realty Company
Balance Sheet
January 31, 2016
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
______

Total assets $149.3 stockholders’ equity $149.3
_____
*Computation of retained earnings:
Total assets ($149.3) − Total liabilities ($104.2) − Common stock ($25.1) =
$20.0
Req. 1
Income Statement
Year Ended January 31, 2016
Total revenue ........................................................ $37.2
Expenses:
Salary and other employee expenses ............ $
13.5
Other expenses ............................................... 5.6
Interest expense .............................................. 0.5
Total expenses ................................................ 19.6
Net income ............................................................ $17.6
Req. 2
The statement of retained earnings helps to compute dividends, as
follows:

Year Ended January 31, 2016
Retained earnings, beginning of $16.9
year
............................................................................................
Add: Net income for the year (Req. 17.6
1)
............................................................................................
Subtotal 34.5
Less: Dividends 14.5
declared
............................................................................................
Retained earnings, end of year (from Exercise 1- $20.0
36B)
............................................................................................

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FINANCIAL ACCOUNTING

O’Conner Services, Inc.

Total assets ...................................................................... $108

Total liabilities and stockholders’ equity ....................... $108

Total revenue ............................................................... $37.9

Ellen Samuel Realty Company

Retained earnings, beginning of year .........................

Carson Coffee Roasters Corp.

Total liabilities and

David Austin Realty Company

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