Title: Fundamental Financial Accounting Concepts Third Edition by Edmonds, McNair, Milam, Olds
1Fundamental Financial Accounting ConceptsThird
EditionbyEdmonds, McNair, Milam, Olds
- PowerPoint presentation by
- J. Lawrence Bergin
2Chapter 1
- Elements
- of
- Financial Statements
3Welcome to the study of Financial Accounting
4What is accounting?
- The language of business
- Measures financial aspects of a business
- Communicates this information to decision makers
5Why 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.
6The Accounting Equation
- Assets Claims
- Assets Liabilities Equity
-
- Asset something of value
- Liability something owed (creditors share of
the assets) - Equity what remains (owners share of the
assets)
7Equity The Owners Share
- There are two sources of equity
- equity contributed invested by owners
- equity earned by operations
- Expanded accounting equation
- Contributed Retained
- Assets Liabilities Capital
Earnings
Owners Equity
8Answer By earning Net Income (also
called Net Earnings or Net Profit.)
How is equity earned by operations?
- Revenue - Expenses Net Income (Loss)
- Revenue
Amounts received or to be received from having
sold a product or provided a service. Ex The
amount the customer pays at the cash register.
9Answer By earning Net Income (also called
Net Earnings or Net Profit.
How is equity earned by operations?
- Revenue - Expenses Net Income (Loss)
- Revenue
- Expenses
Amounts received or to be received from having
sold a product or provided a service. Ex The
amount the customer pays at the cash register.
Assets or services used up in the process of
earning the revenue this period. Ex What it
cost the store for the item it sold to the
customer, rent, wages, utilities, advertising,
taxes
10Equity The Owners Share-contd.
- Distributions
- Retained Earnings
Company assets given to or withdrawn by owners
for their personal use. Other terms used
Withdrawals, Drawings, and Dividends.
11Equity The Owners Share-contd.
- Distributions
- Retained Earnings
Company assets given to or withdrawn by owners
for their personal use. Other terms used
Withdrawals, Drawings, and Dividends.
The Net Income Earnings kept Retained in the
business since its beginning. It is the total of
all net income (minus all losses) and minus all
distributions from the start of the company.
12Four Basic Financial Statements
- Balance Sheet
- Assets Liabilities Equity
- Income Statement
- Revenues - Expenses Net income
- Statement of Changes in Equity
- Beginning equity Contributions Net income
- Distributions Ending equity - Statement of Cash Flows
- Cash inflow - Cash outflow Net cash flow
13Transaction 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 transactions effects on the
accounting equation. - Second, determine the effects on other financial
statements.
14An example of transaction analysis
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
15An example of transaction analysis
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- 2000 2000
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
16An example of transaction analysis
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- 2000 2000
- Income Statement was not affected
- Statement of Changes in Equity
- Statement of Cash Flows
17An example of transaction analysis
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- 2000 2000
- Income Statement was not affected
- Statement of Changes in Equity equity increased
- Statement of Cash Flows
Before analyzing the effect on cashflows lets
look at the different cashflow classifications.
18Classifications of Cash Flows
- Operating activities
- Inflows Collection of Revenues
- Outflows Payment of Expenses, including interest
- Investing activities
- Inflows Disposals of our Land, Building,
Equipment - Collections of loans made to
others - Outflows Purchases of Land, Building, Equipment
- Lending money to others
(our debtors)
- Financing activities
- Inflows Borrowing money from others (our
creditors) - Contributions (investments into the
company) by owners - Outflows Distributions to owners
- Repayment of loans to
creditors, but not interest
19Back to transaction 1
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- 2000 2000
- Income Statement was not affected
- Statement of Changes in Equity equity increased
- Statement of Cash Flows
20Classifications of Cash Flows
- Operating activities
- Inflows Collection of Revenues
- Outflows Payment of Expenses, including interest
- Investing activities
- Inflows Disposals of our Land, Building,
Equipment - Collections of loans made to
others - Outflows Purchases of Land, Building, Equipment
- Lending money to others
(our debtors)
- Financing activities
- Inflows Borrowing money from others (our
creditors) - Contributions (investments into the
company) by owners - Outflows Distributions to owners
- Repayment of loans to
creditors, but not interest
21An example of transaction analysis
- 1. The owners of Merry Maids invested 2,000
cash in the business in 20X1. - Assets Liab. Cont. Cap. Ret. Earnings
- 2000 2000
- Income Statement was not affected
- Statement of Changes in Equity equity increased
- Statement of Cash Flows increased net cash flow
from Financing Activities.
222. Provided services to customers for 500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
232. Provided services to customers for 500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- 500 500
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
242. Provided services to customers for 500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- 500 500
- Income Statement Revenue increased, so net
income increased. - Statement of Changes in Equity
- Statement of Cash Flows
252. Provided services to customers for 500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- 500 500
- Income Statement Revenue increased, so net
income increased. - Statement of Changes in Equity equity increased
R/E - Statement of Cash Flows
262. Provided services to customers for 500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- 500 500
- Income Statement net income increased
- Statement of Changes in Equity equity increased
- Statement of Cash Flows increases net cash flow
from Operating Activities.
273. Incurred 300 of expenses paid cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
283. Incurred 300 of expenses paid cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -300 -300
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
293. Incurred 300 of expenses paid cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -300 -300
- Income Statement Expenses increased, so net
income decreased. - Statement of Changes in Equity
- Statement of Cash Flows
303. Incurred 300 of expenses paid cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -300 -300
- Income Statement Expenses increased, so net
income decreased. - Statement of Changes in Equity equity decreased
R/E - Statement of Cash Flows
313. Incurred 300 of expenses paid cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -300 -300
- Income Statement Expenses increased, so net
income decreased. - Statement of Changes in Equity equity decreased
R/E - Statement of Cash Flows Decreases net cash flow
from Operating Activities.
324. Purchased land for 1500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
334. Purchased land for 1500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -1500
- 1500
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
344. Purchased land for 1500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -1500
- 1500
- Income Statement was not affected
- Statement of Changes in Equity
- Statement of Cash Flows
354. Purchased land for 1500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -1500
- 1500
- Income Statement was not affected
- Statement of Changes in Equity was not affected
- Statement of Cash Flows
364. Purchased land for 1500 cash.
- Assets Liab. Cont. Cap. Ret. Earnings
- -1500
- 1500
- Income Statement was not affected
- Statement of Changes in Equity was not affected
- Statement of Cash Flows decreases net cash flow
from Investing Activities.
375. Borrowed 1,000 cash from the bank by issuing
a Note Payable on 12/31.
- Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
385. Borrowed 1,000 cash from the bank by issuing
a Note Payable on 12/31.
- Assets Liab. Cont. Cap. Ret. Earnings
- 1000 1000
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
395. Borrowed 1,000 cash from the bank by issuing
a Note Payable on 12/31.
- Assets Liab. Cont. Cap. Ret. Earnings
- 1000 1000
- Income Statement was not affected
- Statement of Changes in Equity
- Statement of Cash Flows
405. Borrowed 1,000 cash from the bank by issuing
a Note Payable on 12/31.
- Assets Liab. Cont. Cap. Ret. Earnings
- 1000 1000
- Income Statement was not affected
- Statement of Changes in Equity was not affected
- Statement of Cash Flows
415. Borrowed 1,000 cash from the bank by issuing
a Note Payable on 12/31.
- Assets Liab. Cont. Cap.
Ret. Earnings - 1000 1000
- Income Statement was not affected
- Statement of Changes in Equity was not affected
- Statement of Cash Flows increases net cash flow
from Financing Activities.
426. Distributed 50 cash to the owners.
- Assets Liab. Cont. Cap. Ret. Earnings
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
436. Distributed 50 cash to the owners.
- Assets Liab. Cont. Cap. Ret. Earnings
- -50 -50
- Income Statement
- Statement of Changes in Equity
- Statement of Cash Flows
446. Distributed 50 cash to the owners.
- Assets Liab. Cont. Cap. Ret. Earnings
- -50 -50
- Income Statement was not affected
- Statement of Changes in Equity
- Statement of Cash Flows
456. Distributed 50 cash to the owners.
- Assets Liab. Cont. Cap. Ret.
Earnings - -50 -50
- Income Statement was not affected
- Statement of Changes in Equity equity decreased
R/E - Statement of Cash Flows
466. Distributed 50 cash to the owners.
- Assets Liab. Cont. Cap. Ret. Earnings
- -50 -50
- Income Statement was not affected
- Statement of Changes in Equity equity decreased
R/E - Statement of Cash Flows decreases net cash flow
from Financing Activities
47Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1.
- 2.
- 3.
- 4.
- 5.
- 6.
-
48Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
49Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
50Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
- 3. - 300 - 300
51Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
- 3. - 300 - 300
- 4. 1500
- - 1500
-
52Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
- 3. - 300 -300
- 4. 1500
- - 1500
- 5. 1000 1000
53Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
- 3. - 300 - 300
- 4. 1500
- - 1500
- 5. 1000 1000
- 6. -50 -50
-
-
54Summary of 20X1 Transactions
- Assets Liab. Cont. Cap. Ret. Earnings
- 1. 2000 2000
- 2. 500 500
- 3. - 300 - 300
- 4. 1500
- - 1500
- 5. 1000 1000
- 6. -50 -50
- 3150 1000 2000
150
55Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X1
- Revenue
- - Expenses
- Net income
56Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X1
- Revenue
- - Expenses
- Net income
500 300 200
57Merry Maids, Inc.Statement of Owners Equity
For the year ended December 31, 20X1
- Beginning contributed capital
- Plus Capital acquired from owners
- Ending contributed capital
- Beginning retained earnings
- Plus Net income
- Less Distributions to owners
- Ending retained earnings
- Total equity
58Merry Maids, Inc.Statement of Owners Equity
For the year ended December 31, 20X1
- Beginning contributed capital 0
- Plus Capital acquired from owners 2,000
- Ending contributed capital 2,000
- Beginning retained earnings
- Plus Net income
- Less Distributions to owners
- Ending retained earnings
- Total equity
59Merry Maids, Inc.Statement of Owners Equity
For the year ended December 31, 20X1
- Beginning contributed capital 0
- Plus Capital acquired from owners 2,000
- Ending contributed capital 2,000
- Beginning retained earnings 0
- Plus Net income 200
- Less Distributions to owners
- Ending retained earnings
- Total equity
60Merry Maids, Inc.Statement of Owners Equity
For the year ending December 31, 20X1
- Beginning contributed capital 0
- Plus Capital acquired from owners 2,000
- Ending contributed capital 2,000
- Beginning retained earnings 0
- Plus Net income 200
- Less Distributions to owners (50)
- Ending retained earnings 150
- Total equity 2,150
61Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash
- Fixed Assets Land
- Total assets
-
- Liabilities
- Note payable
- Equity
- Contributed capital
- Retained earnings
- Total Equity
- Total liabilities and equity
62Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land
- Total assets
-
- Liabilities
- Note payable
- Equity
- Contributed capital
- Retained earnings
- Total Equity
- Total liabilities and equity
63Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land 1,500
- Total assets 3,150
-
- Liabilities
- Note payable
- Equity
- Contributed capital
- Retained earnings
- Total Equity
- Total liabilities and equity
64Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land 1,500
- Total assets 3,150
-
- Liabilities
- Note payable 1,000
- Equity
- Contributed capital
- Retained earnings
- Total Equity
- Total liabilities and equity
65Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land 1,500
- Total assets 3,150
-
- Liabilities
- Note payable 1,000
- Equity
- Contributed capital 2,000
- Retained earnings
- Total Equity
- Total liabilities and equity
66Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land 1,500
- Total assets 3,150
-
- Liabilities
- Note payable 1,000
- Equity
- Contributed capital 2,000
- Retained earnings 150
- Total Equity 2,150
- Total liabilities and equity
67Merry Maids, Inc.Balance SheetAs of December
31, 20X1
- Assets
- Cash 1,650
- Fixed Assets Land 1,500
- Total assets 3,150
-
- Liabilities
- Note payable 1,000
- Equity
- Contributed capital 2,000
- Retained earnings 150
- Total Equity 2,150
- Total liabilities and equity 3,150
68Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X1
Cash flows from operating activities
Net cash flow from operating
activities Cash flows from investing
activities Net cash flow from
investing activities Cash flows from
financing activities Net cash flow
from financing activities Net increase
(decrease) in cash Plus Cash
Balance, Jan. 1, 20X1 Cash Balance, Dec.
31, 20X1
69 Merry Maids, Inc.Statement of Cash Flows For
the year ended December 31, 20X1
- Cash flows from operating activities
- Cash receipts from revenues 500
- Cash payments for expenses (300)
- Net cash flows from oper. activities. 200
- Cash flows from investing activities
-
- Cash flows from financing activities
70 Merry Maids, Inc.Statement of Cash Flows For
the year ended December 31, 20X1
- Cash flows from operating activities
- Cash receipts from revenues 500
- Cash payments for expenses (300)
- Net cash flows from oper. 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
71Merry Maids, Inc.Statement of Cash Flows For
the year ended December 31, 20X1
Cash flows from operating activities Cash
receipts from revenues 500 Cash payments for
expenses (300) Net cash flows from oper.
activities. 200 Cash flows from investing
activities Cash payment for Land (1,500) Net
cash flows from investing activities (1,500) Cas
h flows from financing activities Cash receipts
from owners 2,000 Cash receipts from bank
loan 1,000 Cash payment for distribution
(50) Net cash flows from financing
activities 2,950 Net increase in cash
72Merry Maids, Inc.Statement of Cash Flows For
the year ended December 31, 20X1
Cash flows from operating activities Cash
receipts from revenues 500 Cash payments for
expenses (300) Net cash flows from oper.
activities. 200 Cash flows from investing
activities Cash payment for Land (1,500) Net
cash flows from investing activities (1,500) Cas
h flows from financing activities Cash receipts
from owners 2,000 Cash receipts from bank
loan 1,000 Cash payment for distribution
(50) Net cash flows from financing
activities 2,950 Net increase in cash
1,650
73Merry Maids, Inc.Statement of Cash Flows For
the year ended December 31, 20X1
Cash flows from operating activities Cash
receipts from revenues 500 Cash payments for
expenses (300) Net cash flows from oper.
activities. 200 Cash flows from investing
activities Cash payment for Land (1,500) Net
cash flows from investing activities (1,500) Cas
h flows from financing activities Cash receipts
from owners 2,000 Cash receipts from bank
loan 1,000 Cash payment for distribution
(50) Net cash flows from financing
activities 2,950 Net increase in cash
1,650 Plus Cash balance, Jan. 1, 20X1
0 Cash balance, Dec.
31, 20X1 1,650
74What are Consolidated Financial Statements?
- 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.
75 Introducing the
Horizontal Model
- The horizontal model is a teaching/learning
device used to show the impact a transaction has
on the three basic financial statements (Balance
Sheet, Income Statement and Cashflow Statement). - Notice how the Balance Sheet section is similar
to the Accounting Equation.
76 Horizontal Model Transaction Analysis
Record the same six transactions
analyzed previously.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA
77 Horizontal Model Transaction Analysis
Transaction 1 The owners of Merry Maids
invested 2,000 cash in the business.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA
1 2000
2000
2000 FA
78 Horizontal Model Transaction Analysis
Transaction 2 The Company provided services
to customers for 500 cash.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
79 Horizontal Model Transaction Analysis
Transaction 3 The Company incurred 300 of
expenses which were paid in cash.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
80 Horizontal Model Transaction Analysis
Transaction 4 The Company purchased Land by
paying 1,500 cash.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
4 (1500) 1500
(1500) IA
81 Horizontal Model Transaction Analysis
Transaction 5 The Company borrowed 1,000 cash
from the bank by issuing a Note Payable on Dec.
31st.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
4 (1500) 1500
(1500) IA
5 1000 1000
1000 FA
82 Horizontal Model Transaction Analysis
Transaction 6 The Company distributed 50 cash
to the companys owners.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
4 (1500) 1500
(1500) IA
5 1000 1000
1000 FA
6 (50)
(50)
(50)FA
83 Horizontal Model Transaction Analysis
Calculate the end-of-year balances of each
account.
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
4 (1500) 1500
(1500) IA
5 1000 1000
1000 FA
6 (50)
(50)
(50)FA
B 1650 1500 0 1000 2000
150 500 300 200 1650 Bal
Notice where these balances appear on the
financial statements we prepared
earlier.
84Which of the year 1 ending balances are carried
forward to become the beginning balances of year
2?
1. Carry forward all Balance Sheet account
balances.
2. Do NOT carry forward any Income Statement
accounts i.e. Revenues and Expenses.
3. On the Cashflow Statement, the Year 1 ending
cash balance is carried forward to become the
Year 2 beginning cash balance. (but, the
OA, IA, FA categories start Year 2 at 0.)
85 Horizontal Model Transaction Analysis
Show the balances that will be carried over
to start the next year (B2 Balance at
beginning of year 2.)
Balance Sheet
- Assets Liab.
Equity Income Statement Cashflow - Cash Land A/PayN/Pay C.C. R.E.
Rev. - Exp. N. I. OA,IA,FA - 1 2000
2000
2000 FA -
2 500
500 500 500
500 OA
3 (300)
(300) 300 (300)
(300)OA
4 (1500) 1500
(1500) IA
5 1000 1000
1000 FA
6 (50)
(50)
(50)FA
B1 1650 1500 0 1000 2000
150 500 300 200 1650 Bal
Bal. Sheet balances are carried forward. Inc.
Statemt balances are not.
B2 1650 1500 0 1000 2000
150 0 0 0 1650 Bal.
86Wow! You have learned a lot in only one
chapter!!
Now, you should go over each of these slides on
your own. Make sure you UNDERSTAND how and why
everything is done.
87Chapter 1
The End