Introduction to Accounting
EMBA Summer 2007
ACCT 6322
Introduction to Accounting
Focus of this class and our whole course course is “financial accounting”,
and the “financial reporting” that firms do to parties external to the
firm. We will focus first on how the financial statements are
constructed and why, and then focus on issues of interpretation.
The purpose of financial reporting is to provide information to
shareholders and others to make informed investment decisions
Much of financial reporting in this country and others is heavily regulated.
Financial reporting is a critical element of efficient allocation of resources
in the economy. Economic success depends on investment going to
the areas of greatest return, and accounting/financial reporting
provides important information to facilitate.
2
Accounting Provides Information about…
•
Firm’s operating activities
– Purchase of raw materials, labor and other costs.
– Selling products and services.
•
Firm’s investing activities
– Long term assets such as plant and machinery, land, buildings, etc.
– Investment in R&D and other intangible assets
– Investment in other companies (M&A)
•
Firm’s financing activities
– Issue or repurchase of securities, loans etc.
– How the firm is financed.
•
The information is provided via following major financial statements
– Balance Sheet
– Income Statement
– Statement of Cash Flows
– Statement of Shareholders’ Equity
3
Regulatory Backdrop
The role of government in the standard setting process.
Financial Statements are prepared using Generally Accepted Accounting Principles (GAAP)
“If you look at the history of the American capital market, there's probably no innovation
more important than the idea of generally accepted accounting principles”.
Prof. Larry Summers (Former Treasury Secretary and the former President of Harvard
University) as quoted on PBS on 4/24/2001.
The SEC (Securities and Exchange Commission, created in 1934).
• Determines and enforces GAAP.
• For the most part, the standard setting is left to Financial Accounting
Standards Board (FASB)
4
The Components of the Financial Statements
•
•
•
•
•
•
•
Management Discussion & Analysis
Balance Sheet
Income Statement = Changes in Retained Earnings
Cash Flow Statement = Changes in Cash
Statement of Stockholder’s Equity – Details of changes in the accounts
relating to shareholders
Footnotes
Auditor’s Report
5
Balance Sheet
The balance sheet shows what the firm has (assets); what the firm owes
(liabilities); and owners' claims on assets (stockholders' or owner's equity)
Keep in mind:
ASSETS = LIABILITIES + OWNER'S EQUITY
Details:
ASSETS - Resources that will provide a future economic benefit
that can be 1) quantified; 2) were acquired in an
exchange transaction.
6
Balance Sheet
Assets: Subheadings for Assets
Current Assets – Consumed or turned into cash within one year or operating cycle.
Examples:
Cash
Accounts Receivable – amounts owed from product/services already delivered
Inventory
What is the operating cycle?
Non-Current Assets – Assets that are expected to provide benefits over longer than one
year
Property, Plant & Equipment
Investments
Intangible Assets – Sizable intangible asset called goodwill for Tyson. Goodwill results
from an acquisition
7
Tyson Foods Balance Sheet - Assets
September 30, 2006, and October 1, 2005
in millions, except per share data
2006
2005
Assets
Current Assets:
Cash and cash equivalents
Short-term investment
Accounts receivable, net
Inventories
Other current assets
Total Current Assets
Net Property, Plant and Equipment
Goodwill
Intangible Assets
Other Assets
Total Assets
$
28
770
1,183
2,057
149
4,187
3,945
2,512
136
341
$ 11,121
$
40
-1,214
2,062
169
3,485
4,007
2,502
142
368
10,504
8
Balance Sheet
LIABILITIES:
Fixed, unavoidable, obligations that must be settled at a definite time, that (in general)
result from a transaction.
SUBHEADINGS FOR LIABILITIES
Current Liabilities – Discharged within one year
Long Term Liabilities – Long term debt; long term liabilities related to environmental
remediation
9
Balance Sheet
OWNER'S EQUITY:
Two categories of stockholders' equity, or owner's equity:
1) Contributed Capital = Amount paid for stock;
2) Retained Earnings =
Accumulated earnings - dividends.
SUBHEADINGS FOR OWNER'S EQUITY:
Common stock at par value – Part of amount paid for stock
Additional paid in capital – Part of amount paid for stock
Retained Earnings – Firm’s accumulated earnings that haven’t been distributed
Preferred Stock
Treasury Stock – The firm’s own stock that has been repurchased.
10
Tyson Foods Balance Sheet - Liabilities
in millions, except per share data
2006
2005
Current Liabilities:
Current debt
Trade accounts payable
Other current liabilities
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Other Liabilities
$
992
942
912
2,846
2,987
495
353
$
126
961
1,070
2,157
2,869
657
169
11
Balance Sheet
OWNER'S EQUITY:
Two categories of stockholders' equity, or owner's equity:
1) Contributed Capital = Amount paid for stock;
2) Retained Earnings = Accumulated earnings - dividends.
SUBHEADINGS FOR OWNER'S EQUITY:
Common stock at par value – Part of amount paid for stock
Additional paid in capital – Part of amount paid for stock
Retained Earnings – Firm’s accumulated earnings that haven’t been distributed
Preferred Stock
Treasury Stock – The firm’s own stock that has been repurchased.
12
Tyson Foods Balance Sheet – Owner’s Equity
Shareholders' Equity:
Common stock ($0.10 par value):
Class A-authorized 900 million shares:
issued 284 million shares in 2006 and
268 million shares in 2005
Class B-authorized 900 million shares:
issued 86 million shares in 2006 and 102
million shares in 2005
Capital in excess of par value
Retained earnings
Accumulated other comprehensive income
Less treasury stock, at cost15 million shares in 2006 and 2005
Less unamortized deferred compensation
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
2006
2005
28
27
9
1,835
2,781
17
4,670
10
1,867
3,032
28
4,964
230
-4,440
$ 11,121
238
55
4,671
10,504
13
Income Statement
Accountant's measure of profitability for the owner.
Revenues -- Inflows of assets or reductions in liabilities from providing goods or services
in the ordinary course of business
Simple – sales value of goods and services delivered during the period
Expenses - Resources consumed, or liabilities generated as a result of producing
revenue
Accrual accounting -- Revenues and Expenses are not necessarily measured when cash
flows.
14
Income Statement
Timing of cash flows causes problems as a potential measure of performance.
“Accrual accounting” smooths these inflows and outflows to better reflect performance.
“Accruals” refers to the way we separate the cash flow from the transaction recognition –
e.g., when we use power to operate the lights, we “accrue” the expense in the period
when we use the lights – not necessarily when we pay the light bill.
Additional example: We buy a building. When do we recognize the cost on the income
statement. We recognize “depreciation expense” over the life of the building.
15
Income Statement
More on Expenses:
Two expense categories:
Product Costs or Product Expenses
These are "matched" with sales -- e.g., COGS
Period Costs - Difficult to match with a particular sale. Recognized when incurred.
16
Tyson Foods – Income Statement
Sales
Cost of Sales
Three years ended September 30, 2006
in millions, except per share data
2006
2005
2004
$ 25,559
26,014 $ 26,441
24,631
24,294
24,558
928
1,720
1,883
Operating Expenses:
Selling, general and administrative
Other charges
Operating Income (Loss)
Other (income) Expense:
Interest income
Interest Expense
Other, Net
Income (Loss) before Income Taxes
Income Tax Expense (Benefit)
Income (Loss) before Cumulative
Effect of Change in Accounting Principle
Cumulative Effect of Change in Accounting
Principle, Net of Tax
Net Income (Loss)
935
70
(77)
$
928
47
745
880
86
917
(30)
268
(22)
216
(293)
(102)
(10)
237
(10)
217
528
156
(5)
282
7
282
635
232
(191)
372
403
(5)
(196)
$
-372
$
-403
See accompanying notes.
17
Articulation of Balance Sheet and Income Statement
Income Statement measures net inflow of assets from conducting business.
Balance Sheet measures level of assets, liabilities and owner’s equity
Beginning Owner’s Equity + Net Income – Dividends = Ending Retained Earnings
Dividends -- Not an expense
Distribution of Earnings
Tyson: Beginning Retained Earnings 3032 (2005 End/2006 Beginning)
(196) Net Loss
(55) Dividends
2781 (2006 Ending)
18
Statement of Cash Flows
Statement seeks to explain the sources of change in the cash balance over the
period. Most analysts focus a great deal of attention on the Income
Statement, but the accounting rulemakers felt that financial statement users
should be able to examine the flows of cash in a statement.
Three Sections:
Operating -- Cash generated by day-to-day operations of the firm
Investing -- How the firm invested or disinvested in fixed assets
Financing -- Items that affected the capital structure --e.g. dividends, issues of
stock
Why do we need this statement?
19
Tyson Statement of Cash Flows
Big Picture on the Tyson Cash Flow Statement
2006
287
Cash Provided by Operating Activities
Cash Used for Investing Activities
(1,224)
Cash Used for Financing Activities
Effect of Exchange Rate Change on Cash
Increase (Decrease) in Cash and
Cash Equivalents
Cash and Cash Equivalents at
Beginning of Year
Cash and Cash Equivalents at End of Year
929
$
2005
999
2004
932
(561)
(600)
(443)
(326)
(4)
12
2
(12)
7
8
33
40
25
33
40
28
$
$
20
Tyson – Operating Cash Flows
Cash Flows From Operating Activities:
Net income
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation
Amortization
Plant closing related charges
Impairment and write-down of assets
Deferred taxes
Cumulative effect of change in accounting
principle, before tax
Other
Decrease in accounts receivable
(Increase) decrease in inventories
Increase in trade accounts payable
Net change in other current assets and
liabilities
Cash Provided by Operating Activities
2006
$ (196)
2005
$ 372
2004
$ 403
481
36
51
18
(130)
465
36
10
25
(93 )
458
32
28
46
8
9
(21)
43
8
(43)
31
-(2 )
24
13
11
138
-4
67
(65)
109
(158)
287
999
932
21
Tyson – Investing and Financing Cash
Cash Flows From Investing Activities:
Additions to property, plant and equipment
Proceeds from sale of assets
Purchases of marketable securities
Proceeds from marketable securities
Purchase of short-term investment
Other, Net
Cash Used for Investing Activities
(531)
21
(191)
214
(750)
13
(1,224)
Cash Flows From Financing Activities:
Payments of debt, net
Net proceeds from borrowings of debt
Purchase of treasury shares
Dividends
Stock options exercised and other
Cash Provided by (Used for) Financing Activities
Effect of Exchange Rate Change on Cash
Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents at Beginning of Year
Cash and Cash Equivalents at End of Year
$
(8)
992
(42)
(55)
42
929
(4)
(12)
40
28
(571)
47
(543)
504
2
(561)
(486)
27
(99)
(42)
(600)
(720)
(242)
353
(45)
(72)
(55)
(55)
24
43
(443)
(326)
12
2
7
8
33
25
$ 40 $
33
22
Creating the Financial Statements
First part of the course this fall will reinforce our introduction of the above statements.
We will also learn about how to take basic transaction data and generate financial
statements. We want to do a basic version of this today.
“The Accounting Cycle”
Steps:
1) The whole financial statement creation process is tied to transactions. In the actual
process, each transaction will be entered into a source referred to as a “journal”.
2) These individual transactions are aggregated into “ledgers” for purposes of preparing
the financial statements (T-accounts is another term for the aggregating places for
the transactions.)
3) More in class during the semester, but a number of “adjusting entries” are required to
get the books right – e.g., recording depreciation on a machine. Adjusting entries
refer to entries that are made without a transaction.
4) Prepare the statements.
23
Creating the Financial Statements
Some thoughts on financial statement preparation.
1) Assets – Non-Monetary -- Recorded at Acquisition Cost
Monetary – Recorded at “Present Value” – What I would settle for in
cash now
Monetary – Specific Amount of Money Promised – Example: $100 to be paid in 5 years
Non-Monetary – Inventory, Machines, etc.
2) Liabilities – At Present Value in General.
Many times the “Present Value” Calculation is Trivial – If you borrow $100 million when
you issue bonds, the present value of the bonds is the $100 million.
24
Creating the Financial Statements
Some thoughts on financial statement preparation.
Owner’s Equity
Common Stock
“Additional Paid in Capital”
Together two accounts above represent the amounts paid by shareholders for stock.
Retained Earnings – Recorded based on the amount of Income the firms has recognized,
less any dividends that have been paid out
25
Creating the Financial Statements
Some thoughts on financial statement preparation.
Income Statement
Revenues and Expenses
Revenues – Sales value of goods or services delivered this period.
Expenses – Assets consumed this period to deliver revenues; Examples: Cost of Sales,
Operating Expenses, Depreciation Expense, etc.
26
Creating the Financial Statements
An Example of the Process
1) Firm issues 10,000 shares of $1 par value common stock for $100,000.
2) Buy a building for $50,000.
3) Borrow $100,000 from a bank. Let’s call this a “Note Payable”.
4) Buy equipment for $40,000
5) Buy inventory for $40,000 “on account” from several suppliers.
6) Pay some of the suppliers in transaction 5 $15,000.
27
Creating the Financial Statements
Record the transactions:
1) Firm issues 10,000 shares of $1 par value common stock for $100,000.
Cash (an account we always see) increases by $100,000
Common Stock at Par (an account we almost always see) increases by $10,000.
Additional Paid-in Capital increases by $90,000.
If we were doing journal entries:
Debit Cash $100,000
Credit
Common Stock at Par
Credit
Additional Paid in Capital
$10,000
$90,000
28
Creating the Financial Statements
Record the transactions:
2) Buy a building for $50,000.
Cash decreases by $50,000.
An asset account increases by $50,000. A typical possibility is “Property, Plant, and
Equipment”.
If we were doing journal entries:
Debit Property, Plant, and Equipment
Credit
Cash
$50,000
$50,000
29
Creating the Financial Statements
Record the transactions:
3) Borrow $100,000 as a note from the bank
Cash increases by $100,000.
Note Payable, a liability, increases by $100,000.
If we were doing journal entries:
Debit Cash
$100,000
Credit Note Payable $100,000
30
Creating the Financial Statements
Record the transactions:
4) Buy equipment for $40,000.
Cash decreases by $40,000.
Property, Plant and Equipment increases by $40,000
If we were doing journal entries:
Debit Property, Plant, and Equipment
Credit
Cash
$40,000
$40,000
31
Creating the Financial Statements
Record the transactions:
5) Buy inventory on account for $40,000.
Inventory increases by $40,000.
Accounts Payable (a liability) increases by $40,000
If we were doing journal entries:
Debit Inventory $40,000
Credit
Accounts Payable $40,000
32
Creating the Financial Statements
Record the transactions:
6) Pay some of the suppliers $15,000
Accounts Payable decreases by $15,000
Cash decreases by $15,000
If we were doing journal entries:
Debit Accounts Payable $15,000
Credit
Cash
$15,000
33
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were
going to prepare a balance sheet after above transactions.
Cash
----------------|
$100,000 |
| $50,000
$100,000 |
| $40,000
| $15,000
----------------$ 95,000 |
(Beginning Balance 0)
(Transaction 1 – Issue Stock)
(Transaction 2 – Buy Building)
(Transaction 3 – Borrow $100,000)
(Transaction 4 – Buy Equipment $40,000)
(Transaction 6 Pay Suppliers
(Ending Balance that would reported on the
balance sheet.)
34
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were
going to prepare a balance sheet after above transactions.
Property, Plant, and Equipment
----------------|
(Beginning Balance 0)
$ 50,000 |
(Transaction 2 – Buy Building)
$ 40,000 |
(Transaction 4 – Buy Equipment 40,000)
----------------$ 90,000 |
(Ending Balance that would reported on the
balance sheet.)
35
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were
going to prepare a balance sheet after above transactions.
Inventory
----------------|
(Beginning Balance 0)
$ 40,000 |
(Transaction 5 – Buy Inventory)
----------------$ 40,000 |
(Ending Balance that would reported on the
balance sheet.)
36
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were
going to prepare a balance sheet after above transactions.
Accounts Payable
----------------|
(Beginning Balance 0)
| $40,000 (Transaction 5 – Buy Inventory)
$15,000|
(Transaction 6 - Pay Suppliers)
----------------| $25,000 (Ending Balance that would reported on the
balance sheet.)
37
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were
going to prepare a balance sheet after above transactions.
Additional Paid In Capital
----------------|
(Beginning Balance 0)
| $90,000 (Transaction 1 – Issue Stock)
----------------| $90,000 (Ending Balance that would reported on the
balance sheet.)
38
Creating the Financial Statements
Finally, the Balance Sheet. Enter the ending balances from all the balance
sheet account .
Assets:
Current:
Cash
$ 95,000
Inventory
40,000
NonCurrent:
Property,
Plant & Equipment 90,000
Total Assets
$225,000
Liabilities:
Current:
Accounts Payable
$ 25,000
NonCurrent:
Note Payable
100,000
Total Liabilities $125,000
Owner’s Equity:
Common Stock at Par 10,000
Additional Paid-In
Capital
90,000
Owner’s Equity
100,000
Total “Equities”
$225,000
39
Creating the Financial Statements
Our example firm commences operations for a month:
1) Labor costs for the month are $10,000.
2) Pay the workers $8,000 by the end of the month.
3) Accrue but not pay $800 of interest on the note.
4) Sell inventory that originally cost $20,000 for $50,000. The $50,000 of
sales are on credit. $40,000 collected by end of month.
5) Recognize depreciation on the Building and Equipment of $1,000.
40
Creating the Financial Statements
Record the transactions:
1) Labor costs are $10,000. As we will discuss more in class, this transaction affects the income
statement. Income statement accounts are “temporary accounts”, in that they are “closed” at
the end of the accounting period. Ultimately, the expense represents a costs the owner’s bear
to do business (it decreases retained earnings). So, in terms of recording, the labor cost
decreases income (retained earnings). Act like for purposes of recording, wages are accrued
and then paid later.
Wage Expense is $10,000. This decreases net income (and therefore owner’s equity) by $10,000.
Wages Payable (a liability) increases by $10,000
If we were doing journal entries:
Debit Wage Expense $10,000 (Ultimately, retained earnings decreases)
Credit
Wages Payable $10,000.
The liability “accrues” as the people work, independent of the pay schedule. Their costs are a cost of
generating revenues this period.
41
Creating the Financial Statements
Record the transactions:
2) We pay the workers $8,000 by the end of the month. We will wind up at the end of the month
owing our workers $2,000 resulting in a payable on the ending balance sheet. Why? In
accounting terms, workers did the work, but haven’t been paid at the end of the period for
work already done.
Paid wages decreases the wages we showed in the last slide by $8,000. So Wages Payable
decreases by $8,000
Cash decreases by $8,000.
If we were doing journal entries:
Debit Wages Payable $8,000
Credit
Cash $8,000
42
Creating the Financial Statements
Record the transactions:
3) We accrue interest on the note. We used the money this period to generate revenue,
so the cost of funds is an expense.
Interest Expense of $800 (decreases net income and ultimately retained earnings).
An Interest Payable (Liability) or “Accrued Expenses” account would be increases by
$800.
If we were doing journal entries:
Debit Interest Expense $800 (Ultimately, retained earnings decreases)
Credit
Interest Payable Payable $800
43
Creating the Financial Statements
Record the transactions:
4) We record sales, and the cost of these sales is $20,000. Income effects are the sale (revenue of
$50,000) and the cost of the sale ($20,000). $40,000 is collected from customers.
Sales increases net income (revenue – ultimately retained earnings) by $50,000, and firm would
record an “Account Receivable” when the revenue is recognized. Collection would decrease
the receivable by $40,000 and increase cash by $40,000.
Cost of sales would decrease net income (expense- ultimately retained earnings) by $20,000, and
would decrease inventory by $20,000.
If we were doing journal entries:
Debit Accounts Receivable $50,000
Credit
Sales Revenue $50,000 (Retained Earnings Increases)
Debit Cash
$40,000
Credit
Accounts Receivable $40,000
Debit Cost of Sales $20,000 (Retained Earnings Decreases)
Credit Inventory
$20,000
44
Creating the Financial Statements
Record the transactions:
5) Record depreciation on the Building and Equipment. Equipment is used up. This is a cost of doing
business that the owner’s will bear. The accounting term is depreciation (recording is maybe
not obvious as discussed in class). The depreciation decreases net income, and
simultaneously decreases assets
Accumulated Depreciation of $1,000. This is an “offset” account (technical name “contra-asset”) that
reduces the reported Property, Plant, and Equipment account on the balance sheet
Depreciation Expense $1,000 reduces net income and ultimately retained earnings by $1,000.
If we were doing journal entries:
Debit Depreciation Expense $1,000
Credit Accumulated Depreciation $1,000
45
Creating the Financial Statements
Producing a Finished Set of Financial Statements
We can now prepare the financial statements (balance sheet and income statement). Here is how the
process would proceed. We would start with the balances from the balance sheet we
previously prepared (there would be a T-account for each account in the balance sheet).
We would then record the new transactions, opening new accounts as necessary. We would have to
open “temporary accounts” to record the income transactions.
Starting Point:
Cash
------95K|
|
Inventory
-------40K|
|
Prop, Plant
& Equip.
---------90K|
|
Accts Pay
-------|25K
|
Note Pay
-------|100K
|
Stock
at Par
------|10K
|
Add’l Paid
in Cap.
--------|90K
|
46
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet after new transactions.
Wage Expense (Temporary Account – Decreases Retained Earnings)
----------------|
(Beginning Balance 0)
10,000 |
(Transaction 1 – Wages Recorded)
----------------10,000 | (Ending Balance would reflect this in retained earnings This would be shown on Income Statement )
Wages Payable (New Liability Account)
----------------|
(Beginning Balance 0)
| 10,000 (Transaction 1 – Wages Recorded)
8,000 |
(Transaction 2 – Wages Paid)
----------------| 2,000 (Ending Balance on Balance Sheet)
47
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet and income statement after new transactions.
Interest Expense (Temporary Account – Decreases Retained Earnings)
----------------|
(Beginning Balance 0)
800 |
(Transaction 3 – Interest Recorded)
----------------800 | (Ending Balance would reflect this in retained earnings This would be shown on Income Statement )
Interest Payable Payable (New Liability Account)
----------------|
(Beginning Balance 0)
|
800 (Transaction 3 - Interest Recorded)
|
----------------|
800 (Ending Balance on Balance Sheet)
48
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet after new transactions.
Sales Revenue
----------------|
|$50,000
----------------| 50,000
(Temporary Account – Increases Retained Earnings)
(Beginning Balance 0)
(Transaction 4 – Revenue Recorded)
(Ending Balance would reflect this in retained
earnings - This would be shown on Income Statement )
Accounts Receivable (New Asset Account)
----------------|
(Beginning Balance 0)
50,000 |
(Transaction 4 – Sales Recorded)
| 40,000 (Transaction 4 – Cash Collected)
----------------10,000 |
(Ending Balance on Balance Sheet)
49
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet after new transactions.
Cost of Sales (Temporary Account – Decreases Retained Earnings)
----------------|
(Beginning Balance 0)
20,000 |
(Transaction 4 – Cost of Sales Recorded)
----------------20,000 |
(Ending Balance would reflect this in retained
earnings - This would be shown on Income Statement )
Inventory (Asset Account)
----------------40,000 |
(Beginning Balance from Previous Balance Sheet)
| 20,000 (Transaction 4 – Cost of Sales Recorded)
|
----------------20,000 |
(Ending Balance on Balance Sheet)
50
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet after new transactions.
Depreciation Expense (Temporary Account – Decreases Retained Earnings)
----------------|
(Beginning Balance 0)
1,000 |
(Transaction 5 – Depreciation Expense Recorded)
----------------1,000 |
(Ending Balance would reflect this in retained
earnings - This would be shown on Income Statement )
Accumulated Depreciation (Contra-Asset Account – offsets PPE)
----------------|
(Beginning Balance 0)
| 1,000
(Transaction 5 – Depreciation Recorded)
|
----------------| 1,000
(Ending Balance on Balance Sheet)
51
Creating the Financial Statements
Net effects of all of the above, shown in T-account form. Suppose we were going to
prepare a balance sheet after new transactions.
Cash (Balance Sheet – From Last Period)
----------------95,000 |
(Beginning Balance from Last Period)
| 8,000
(Transaction 2 – Pay Wages)
40,000 |
(Transaction 4 – Cash Collections)
----------------127,000 |
(Ending Balance on Balance Sheet)
52
Creating the Financial Statements
To complete the “accounting cycle” we would “close” the revenue and expense accounts
(zero them out), and reflect all their effects in retained earnings. Our Income
Statement would appear as follows:
Sales Revenue
Cost of Sales
Other Expenses:
Wages
Interest
Depreciation
Net Income
$50,000
20,000
10,000
800
1,000
$18,200
53
Creating the Financial Statements
Finally, the Balance Sheet.
sheet accounts.
Assets:
Current:
Cash
$ 127,000
Accounts Receiv.
10,000
Inventory
20,000
NonCurrent:
Property,
Plant & Equipment 90,000
Less: Accum. Dep. (1,000)
Net PP&E
89,000
Total Assets
$246,000
Enter the ending balances from all the balance
Liabilities:
Current:
Accounts Payable
$ 25,000
Interest Payable
800
Wages Payable
2,000
Non-Current:
Note Payable
100,000
Total Liabilities $127,800
Common Stock at Par 10,000
Additional Paid Cap 90,000
Retained Earnings
18,200
Owner’s Equity
118,200
Total “Equities”
$246,000
54
Some Parting Items
You probably know that you will be receiving your textbooks from the EMBA
Office. I have put the introduction (preface and related blah-blah)
and first three chapters of the course text (and the solutions to the
problems at the end of these chapters) on the course page in pdf
form, which we will use throughout the semester. (Sorry, but we
can’t get you the book in pdf form.) The address of the course page
and login information is below:
http://jmagliolo.cox.smu.edu/acct6322
The page is password-protected:
username:
acct6322
password:
leisenring
See next page for a bibliography of some relevant materials.
trouble, my e-mail is jmagliol@mail.cox.smu.edu
If you have
55
Some Parting Items
Bibliography of the files on the course page:
Introduction.pdf – Material at the beginning of the book, including the
preface.
Chapter_1.pdf – Chapter 1 of the text.
Chapter_2.pdf – Chapter 2 of the text.
Chapter_3.pdf – Chapter 3 of the text.
Ch1_solutions.pdf – Answers to Chapter 1 problems
Ch2_solutions.pdf – Answers to Chapter 2 problems
Ch3_solutions.pdf – Answers to Chapter 3 problems
The PowerPoint slides of this presentation are stored in a file called
EMBA_INTRO.ppt on the course page.
The Tyson 2006 annual report is also on the course page, and is titled
2006_Tyson_Annual_Report.pdf. You might want to refer to this as you
go through the slide material.
56
Some Parting Items
Where we are going the first weekend in class is to get through (sort of)
the first three chapters of the text. If you want to plunge ahead
now -- after you do the introductory material we sent you (from Ivy
Software by Holt), you can read through the first three chapters of
the text and work on the following problems (likely the problems I
will ask you to prepare for class discussion for the first weekend - note that you have the answers supplied by the text authors in the
files referenced above).
1- 20(part a only); 1-24; 1-27 (part a only); 29 (part a only); 2-22; 223; 2-24; 2-27; 2-31; 2-39(part a only); 3-29; 3-31; 3-32 (part b
only); 3-35
57