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Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds

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Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds

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    1. Fundamental Financial Accounting Concepts Fourth Edition by Edmonds, McNair, Milam, Olds PowerPoint® presentation by J. Lawrence Bergin Winona State University

    2. 1- 2 Welcome to the study of Financial Accounting

    3. 1- 3 Chapter 1 Elements of Financial Statements

    4. 1- 4 What is accounting? The language of business Measures financial aspects of a business Communicates this information to decision makers

    5. 1- 5 Why should everyone in business study accounting?? Many business decisions are based on accounting information. Since accounting information is prepared according to “rules,” an understanding of these rules is necessary for the appropriate use of the information.

    6. 1- 6 The Accounting Equation Assets = Claims Assets = Liabilities + Equity Asset: something of value Ex: Cash, Land, Buildings, Equipment, Inventories, Supplies, Prepaid Insurance, Accounts Receivables from customers. Liability: something owed (creditors’ share of the assets) Ex: Accounts Payable, Notes Payable, Mortgage Payable, Interest Payable, Salaries Payable. Equity: what remains (owners’ share of the assets) Ex: Common Stock, Retained Earnings

    7. 1- 7 Equity: The Owners’ Share There are two sources of equity equity acquired from the owners by issuing stock. equity “earned” by operations Expanded accounting equation: Common Retained Assets = Liabilities + Stock + Earnings

    8. 1- 8 Answer: By earning “Net Income*” (*also called “Net Earnings” or “Net Profit”.) Revenue - Expenses = Net Income (Loss) Revenue:

    9. 1- 9 Answer: By earning “Net Income*” (*also called “Net Earnings” or “Net Profit”. Revenue - Expenses = Net Income (Loss) Revenue: Expenses:

    10. 1- 10 Equity: The Owners’ Share-cont’d. Dividends: Retained Earnings:

    11. 1- 11 Equity: The Owners’ Share-cont’d. Dividends: Retained Earnings:

    12. 1- 12 Four Basic Financial Statements Balance Sheet Assets = Liabilities + Equity Income Statement (also called Statement of Operations, Earnings Statement, Profit/Loss (or P&L) Statement Revenues - Expenses = Net income (or Net Earnings) Statement of Changes in Stockholders’ Equity Beginning of period total equity + Stock issued + Net income - Dividends = End of period total equity Statement of Cash Flows Cash inflow - Cash outflow = Net cash flow

    13. 1- 13 Transaction Analysis What is a transaction? a business event involving a transfer of something of value between entities What is transaction analysis? determining the effect of a business event on the financial statements Where do you start? First, determine the transaction’s effects on the accounting equation. Second, determine the effects on other financial statements.

    14. 1- 14 Four Types of Transactions that keep the equation in balance Asset Source Transactions--an asset increases and a corresponding claims account increases Asset Use Transactions--an asset decreases and a corresponding claims account decreases Asset Exchange Transactions--one asset increases and another asset decreases Claims Exchange Transactions--one claims account increases and another decreases (Claims Exchange Transactions will be introduced in Chapter 2.)

    15. 1- 15 The horizontal model is a teaching/learning tool used to show the impact a transaction has on the three basic financial statements (Balance Sheet, Income Statement and Statement of Cash Flows). Notice how the Balance Sheet section is similar to the Accounting Equation.

    16. 1- 16 Horizontal Model Transaction Analysis Record the six transactions that follow in the Horizontal Model below. Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA ..

    17. 1- 17 Horizontal Model Transaction Analysis Record the six transactions that follow in the Horizontal Model below. Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay+C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA ..

    18. 1- 18 Kleen Sweep, Inc. Following are six transactions of Kleen Sweep, Inc., a company that provides janitorial services for local businesses.

    19. 1- 19 Kleen Sweep, Inc. Kleen Sweep was formed on Jan. 1, 2004 by issuing Common Stock in exchange for $2,000 cash. The company provided services to customers for $500 cash. The company incurred $300 of expenses which were paid in cash. The company purchased Land by paying $1,500 cash. The company borrowed $1,000 cash from the bank by issuing a Note Payable on Dec. 31st. The company pays a $50 cash dividend to the company’s owners (the stockholders).

    20. 1- 20 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA ..

    21. 1- 21 Classifications of Cash Flows Operating activities: Inflows: Collection of Revenues Outflows: Payment of Expenses, including interest

    22. 1- 22 Classifications of Cash Flows Operating activities: Inflows: Collection of Revenues Outflows: Payment of Expenses, including interest

    23. 1- 23 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA ..

    24. 1- 24 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    25. 1- 25 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    26. 1- 26 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    27. 1- 27 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    28. 1- 28 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    29. 1- 29 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    30. 1- 30 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    31. 1- 31

    32. 1- 32 Horizontal Model Transaction Analysis Assets = Liabilities + Stk. Equity Amount & Cash + Land = A/Pay+N/Pay +C.Stk.+ R.E. Rev. - Exp. = N. I. OA,IA,FA 1 2000 2000 2000 FA ..

    33. 1- 33 Kleen Sweep, Inc. Income Statement For the Year Ended December 31, 2004 Revenue - Expenses Net income

    34. 1- 34 Kleen Sweep, Inc. Income Statement For the Year Ended December 31, 2004 Revenue - Expenses Net income

    35. 1- 35 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ Plus: Common Stock Issued Ending Common Stock $ Beginning Retained Earnings $ Plus: Net income Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $

    36. 1- 36 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ Plus: Net income Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $

    37. 1- 37 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ 0 Plus: Net income 200 Less: Dividends Ending Retained Earnings $ Total Stockholders’ Equity $

    38. 1- 38 Kleen Sweep, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock $ 0 Plus: Common Stock Issued 2,000 Ending Common Stock $ 2,000 Beginning Retained Earnings $ 0 Plus: Net income 200 Less: Dividends (50) Ending Retained Earnings $ 150 Total Stockholders’ Equity $ 2,150

    39. 1- 39 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ Land Total Assets $ Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $

    40. 1- 40 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land Total Assets $ Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $

    41. 1- 41 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $

    42. 1- 42 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $

    43. 1- 43 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $

    44. 1- 44 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings 150 Total Stockholders’ Equity 2,150 Total Liabilities and Stockholders’ Equity $

    45. 1- 45 Kleen Sweep, Inc. Balance Sheet As of December 31, 2004 Assets Cash $ 1,650 Land 1,500 Total Assets $ 3,150 Liabilities Note payable $ 1,000 Stockholders’ Equity Common Stock $ 2,000 Retained Earnings 150 Total Stockholders’ Equity 2,150 Total Liabilities and Stockholders’ Equity $ 3,150

    46. 1- 46 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004

    47. 1- 47 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash flows from financing activities

    48. 1- 48 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash flows from operating activities Cash receipts from revenues $ 500 Cash payments for expenses (300) Net cash flow from operating activities $ 200 Cash flows from investing activities Cash payment for Land $(1,500) Net cash flow from investing activities $(1,500) Cash flows from financing activities

    49. 1- 49 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004

    50. 1- 50 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004

    51. 1- 51 Kleen Sweep, Inc. Statement of Cash Flows For the Year Ended December 31, 2004

    52. 1- 52 Financial Statements that show the combined results of a “Parent” company and all the “subsidiary” companies in which the parent has a “controlling interest” (usually more than 50% ownership). Many of the “real world” financial statements you look at in this course will be consolidated statements.

    53. 1- 53 Summary of General Ledger Accounts for 2004 Transactions

    54. 1- 54 Price-Earnings Ratio This ratio is used by analysts to evaluate the future prospects of a company. The higher the PE ratio, the more optimistic investors are about a company’s future.

    55. 1- 55 Percentage Change

    56. 1- 56

    57. 1- 57 Chapter 1

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