2 Basic Accounting
Concepts
FINANCIAL
ACCOUNTING
2ND
EDITION
BY
DUCHAC, REEVE, & WARREN
PowerPoint Presentation by
Gail B. Wright
Professor of Accounting
Bryant University
© Copyright 2007 Thomson South-Western, a part of
The Thomson Corporation. Thomson, the Star
Logo, and South-Western are trademarks used herein
under license.
1
LG 1
BASIC ELEMENTS OF FINANCIAL
ACCOUNTING SYSTEM
Basic elements are
•Set of rules to record economic
events
•Framework to prepare financial
statements
•Controls to detect errors
2
LG 1
RULES
Generally Accepted Accounting Principles
(GAAP) determine
•What to record
•When to record
•Amount to record
3
LG 1
FRAMEWORK
Integrated financial statement approach
•Analyzes
•Records
•Summarizes
Transactions
4
LG 1
CONTROLS
Controls are built-in
•Balance sheet
•Assets = Liabilities + Stockholders’ Equity
•Balance sheet cash = Statement of Cash Flows cash
•Income statement Net income (loss) = net effects of
revenues & expenses in Retained Earnings (Balance
Sheet)
5
LG 2
LEARNING GOALS
2
Analyze, record,
summarize transactions
for first period of
operations.
6
TRANSACTION (a)
Dr. Lee Landry starts Family Health
Care, PC by investing $6,000 in her
practice.
7
LG 2
IFSF: Starting Family Health Care, PC
Cash
Flows
Invested
Income
Statement
Balance Sheet
Assets
=
Cash
=
6,000
Liabilities
+
Equity
+ Stock
+ 6,000
Dr. Landry invests $6,000 to
start a practice
Financing 6,000
8
TRANSACTION (b)
Family Health Care, PC borrows
$10,000 to finance the practice.
9
LG 2
IFSF: Borrowed Money
Cash
Flows
Income
Statement
Balance Sheet
Assets
=
Liabilities
Cash
=
Note
Bal
6,000
Loan
10,000
Bal
16,000
+
Equity
Stock
6,000
=
=
10,000
10,000
+
6,000
Family Health Care, PC
borrows money
Financing 10,000
10
TRANSACTION (c)
Family Health Care, PC bought land
for practice.
11
LG 2
IFSF: Bought Land
Cash
Flows
Income
Statement
Balance Sheet
Assets
Cash
+
Land
Balance
16,000
Land
-12,000 + 12,000
Balance
4,000
= Liabilities
+
Equity
= Note
+ Stock
10,000
6,000
+ 12,000 = 10,000
+ 6,000
Family Health Care PC bought
land
Investing -12,000
12
TRANSACTION (d)
Family Health Care, PC earned
revenue (fees) for providing services
to patients.
13
LG 2
IFSF: Earned Fees
Cash
Flows
Income
Statement
Balance Sheet
Assets
= Liabilities
+
Cash + Land
= Note
+ Stock + Ret Earn
Balance
4,000 + 12,000
= 10,000
+ 6,000
Fees
5,500
=
Balance
9,500 + 12,000
= 10,000
5,500
+ 6,000 +
Family Health Care, PC earned
fees
Operating 5,500
Equity
5,500
Fees
Earned
5,500
14
TRANSACTION (e)
Family Health Care, PC, paid wages,
rent, utilities, interest and
miscellaneous expenses of the practice.
15
LG 2
IFSF: Paid Expenses
Cash
Flows
Balance
Income
Statement
Balance Sheet
Assets
= Liabilities
+
Equity
Cash + Land
= Note
+ Stock + Ret Earn
9,500 + 12,000
= 10,000
+ 6,000 +
Expenses -2,900
Balance
-2,900
6,600 + 12,000
= 10,000
+ 6,000 +
Family Health Care, PC paid
expenses
Operating -2,900
5,500
2,600
Wages
1,125
Rent
950
Utilities
450
Interest
100
Misc.
275
Expenses -2,900
16
TRANSACTION (f)
Family Health Care, PC, paid a
dividend to Dr. Landry.
17
LG 2
IFSF: Paid Dividend
Cash
Flows
Balance
Income
Statement
Balance Sheet
Assets
= Liabilities
+
Equity
Cash + Land
= Note
+ Stock + Ret Earn
6,600 + 12,000
= 10,000
+ 6,000 +
Dividend -1,500
Balance
2,600
-1,500
5,100 +12,000
= 10,000
+ 6,000 +
1,100
Family Health Care, PC paid
dividend
Financing –1,500
18
LG 2
Integrated Financial Statement Framework
Cash
Flows
Balance Sheet
Assets
Cash +
Invested
Land
= Liabilities
+
= Note
+ Stock + Ret Earn
6,000
Loan
10,000
Land
-12,000 + 12,000
Fees
Income
Statement
5,500
Equity
+ 6,000
=
10,000
=
5,500
Expenses -2,900
-2,900
Dividend
-1,500
-1,500
Balance
5,100 +12,000
= 10,000
+ 6,000 +
1,100
19
LG 2
STOCKHOLDERS’ EQUITY
Capital
Stock
Investments
+
Retained Earnings
Revenues
Expenses
Dividends
+
-
20
LG 3
FINANCIAL STATEMENTS
• Health Care PC prepares financial
statements to summarize financial activity
for September
• 4 Financial Statements are
–
–
–
–
Income statement
Retained earnings statement
Balance sheet
Cash flow statement
21
LG 3
EXHIBIT 4
Continued
22
LG 3
EXHIBIT 4
Continued
23
LG 3
EXHIBIT 4
Continued
24
LG 3
EXHIBIT 4
25
LG 4
INTEGRATED FINANCIAL
STATEMENTS
• Statement of cash flows linked to cash on
balance sheet
• Net income from income statement linked
to retained earnings statement
• Retained earnings linked to balance sheet in
stockholders’ equity
26
LG 3
EXHIBIT 5
27
LEARNING GOALS
6
Describe,
illustrate vertical
analysis.
28
LG 6
VERTICAL ANALYSIS
• Use comparative financial
statements to
– Compute percentage each item to
total within statement
– Examine trends year to year
29
LG 6
WRIGLEY CO.
Comparative Balance Sheets: Assets
12/04
Cash
12/03
$629
19.9%
$505
20.0%
ST Investments
23
0.7
23
0.9
Acct. Receivable
356
11.2
329
13.0
Inventories
398
12.6
350
13.9
1,143
36.1
956
37.8
618
19.5
365
14.4
Prop. Plant, Eq.
Other
Total
$3,167 100.0% $2,528 100.0%
30
LG 6
WRIGLEY CO.
Comparative Balance Sheets: Liabilities & Equity
12/04
Current liabilities
12/03
$718
22.7%
$ 472
18.7%
Long-term liab.
270
8.5
235
9.3
Total liabilities
$988
31.2%
$707
28.0%
Total
Stockholders’ Eq.
Total
$2,179 68.8% $1,821 72.0%
$3,167 100.0% $2,528 100.0%
31
LG 6
WRIGLEY CO.
Comparative Income Statements
12/04
Net sales
12/03
$3,649
100.0%
$3,069
100.0%
Cost of sales
1,610
44.1
1,317
42.9
Gross profit
$2,039
55.9%
$1,752
57.1%
S&A expenses
1,319
36.1
1,102
35.9
Operating inc.
$720
19.8%
$650
21.2%
Other inc/exp
-
0.0
2
0.1
$720
19.8%
$652
21.3%
Income Tax
227
6.2
206
6.7
Net Income
$493
13.6%
$446
14.6%
Inc. before tax
32
"Expect people to be better than they are;
it helps them to become better. But don't
be disappointed when they're not; it helps
them to keep trying."
- Merry Browne
33