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

1
Fundamental Financial Accounting ConceptsThird
EditionbyEdmonds, McNair, Milam, Olds

• PowerPoint presentation by
• J. Lawrence Bergin

2
Chapter 3

• Accounting
• for
• Deferrals

3
What is a deferral?

• A deferral event occurs when cash is received or
  paid before revenue is earned or an expense is
  incurred.
• Deferral events are a part of the accrual basis
  of accounting

4
Accruals vs. Deferrals

• Accrual event
• Business action Cash
  exchange
• Deferral event
• Cash exchange Business
  action

5
Deferred Expenses
Youve paid the cash up-front but you
havent received the goods or services yet.
Prepaid Expenses Rent Insurance Supplies
paid in advance
6
Deferred Expenses
Youve paid the cash up-front but you
havent received the goods or services yet.
Recognizing an expenditure by spreading it over
several years, allocating a part of the expense
to each of several periods during which the
asset is used
Prepaid Expenses Rent Insurance Supplies
Depreciation of plant and equipment
7
Depreciation

• The portion of the cost of an asset allocated to
  any one accounting period--
• DEPRECIATION EXPENSE
• Depreciation of an asset is an allocation
  process--spreading the cost of an asset that
  benefits more than one accounting period over the
  estimated useful life of the asset

8
Example of Depreciation

• ABC Co. bought a satellite dish for 5000. The
  asset is expected to last five years and have no
  salvage value at the end of its useful life. How
  will the purchase and use of the asset affect the
  financial statements?

9

• We want to allocate the cost of the asset to the
  income statement as an expense during the time
  period we use the asset.
• If we depreciate the asset using the STRAIGHT
  LINE method, we will divide the cost of the asset
  (minus any estimated salvage value) by the useful
  life 5000/5 1000 each year.

10
Effect on the financial statements

• Purchase of asset
• Balance Sheet
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

11
Effect on the financial statements

• Purchase of asset
• Balance Sheet
• Increases assets may decrease an asset (thus, no
  effect on net assets) or increase a liability
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

12
Effect on the financial statements

• Purchase of asset
• Balance Sheet
• Increases assets may decrease an asset (cash) or
  increase a liability (payable) if we havent paid
  yet.
• Income Statement
• No effect
• Statement of Changes in Equity
• Statement of Cash Flows

13
Effect on the financial statements

• Purchase of asset
• Balance Sheet
• Increases assets may decrease an asset (cash) or
  increase a liability (payable) if we havent paid
  yet.
• Income Statement
• No effect
• Statement of Changes in Equity
• No effect
• Statement of Cash Flows

14
Effect on the financial statements

• Purchase of asset
• Balance Sheet
• Increases assets may decrease an asset (cash) or
  increase a liability (payable) if we havent paid
  yet.
• Income Statement
• No effect
• Statement of Changes in Equity
• No effect
• Statement of Cash Flows
• Depends on whether or not the asset was
  purchased for cash

15
Use of the asset

• Balance Sheet
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

16
Use of the asset

• Balance Sheet
• Reduces the net value of the asset by increasing
  a contra-asset called accumulated depreciation
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

17
Use of the asset

• Balance Sheet
• Reduces the net value of the asset by increasing
  a contra-asset called accumulated depreciation
• Income Statement
• Reduces income via depreciation expense
• Statement of Changes in Equity
• Statement of Cash Flows

18
Use of the asset

• Balance Sheet
• Reduces the net value of the asset by increasing
  a contra-asset called accumulated depreciation
• Income Statement
• Reduces income via depreciation expense
• Statement of Changes in Equity
• Since there is an expense which will affect Net
  Income
• Retained Earnings Owners
  Equity, it will decrease OE
• Statement of Cash Flows

19
Use of the asset

• Balance Sheet
• Reduces the net value of the asset by increasing
  a contra-asset called accumulated depreciation
• Income Statement
• Reduces income via depreciation expense
• Statement of Changes in Equity
• Since there is an expense which will affect Net
  Income
• Retained Earnings Owners
  Equity, it will decrease OE
• Statement of Cash Flows
• No effect on cash flows

20
Deferred Revenue

• Youve received payment for something you have
  NOT yet provided.
• Revenue is not recognized until the service is
  performed or the goods are delivered...but you
  have to record the fact that you have received
  the cash.

21
1. Provided services to customers for 6,000 on
account.
Continuation of Merry Maidsthese transactions
are in 20X7.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

22
1. Provided services to customers for 6,000 on
account.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 6,000 6,000
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

23
1. Provided services to customers for 6,000 on
account.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 6,000 6,000
• Income Statement Increases income
• Statement of Changes in Equity
• Statement of Cash Flows

24
1. Provided services to customers for 6,000 on
account.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 6,000 6,000
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows

25
1. Provided services to customers for 6,000 on
account.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 6,000 6,000
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows No effect on cash flows

26
2. Collected 1,000 cash from customers for
services that we agreed to provide in the future.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

27
2. Collected 1,000 cash from customers for
services that we agreed to provide in the future.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 1,000 1,000
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

28
2. Collected 1,000 cash from customers for
services that we agreed to provide in the future.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 1,000 1,000
• Income Statement No effect
• Statement of Changes in Equity
• Statement of Cash Flows

29
2. Collected 1,000 cash from customers for
services that we agreed to provide in the future.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 1,000 1,000
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows

30
2. Collected 1,000 cash from customers for
services that we agreed to provide in the future.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 1,000 1,000
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows Increases cash flow from
  Operating Activities.

31
3. Paid 200 on accounts payable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

32
3. Paid 200 on accounts payable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -200 -200
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

33
3. Paid 200 on accounts payable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -200 -200
• Income Statement No effect
• Statement of Changes in Equity
• Statement of Cash Flows

34
3. Paid 200 on accounts payable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -200 -200
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows

35
3. Paid 200 on accounts payable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -200 -200
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows Decreases cash flow
  from Operating Activities.

36
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

37
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab. Cont. Cap.
  Retained Earnings
• Recall that the interest for 20X6 had been
  accrued at 12/31/X6. What does that mean???
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

38
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Recall that the interest for 20X6 was accrued at
  12/31/X6. What does that mean???
• 8 1000 1yr. 80 of interest had been
  booked as Interest Payable on 12/31/X6.

39
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State.
• State.of Ch. in Eq.
• State.of Cashflow.

4A
4B
4A 4B
40
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State.
• State.of Ch. in Eq.
• State.of Cashflow

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
4A 4B
41
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I.
• State.of Ch. in Eq.
• State.of Cashflow

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
4A 4B
42
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I.
• State.of Ch. in Eq. Decr. Eq.
• State.of Cashflow

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
4A 4B
43
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I.
• State.of Ch. in Eq. Decr. Eq.
• State.of Cashflow No Effect.

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
4A 4B
44
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I.
• State.of Ch. in Eq. Decr. Eq.
• State.of Cashflow No Effect

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
- 1100 Cash - 100 Int. Pay.
- 1000 Note Pay.
4A 4B
45
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I. No
  effect on N.I.
• State.of Ch. in Eq. Decr. Eq.
• State.of Cashflow No Effect

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
- 1100 Cash - 100 Int. Pay.
- 1000 Note Pay.
4A 4B
46
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I. No
  effect on N.I.
• State.of Ch. in Eq. Decr. Eq. No effect on
  Equity
• State.of Cashflow No Effect

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
- 1100 Cash - 100 Int. Pay.
- 1000 Note Pay.
4A 4B
47
4. On March 31, 20X7, repaid the 1,000 that was
borrowed on 12/31/X5, plus interest. (Terms were
8 interest to be included with repayment of the
principal.)

• Assets Liab.
  Cont. Cap. Ret. Earn.
• .
• Inc. State. Decr. N.I. No
  effect on N.I.
• State.of Ch. in Eq. Decr. Eq. No effect on
  Equity
• State.of Cashflow No Effect 1000 dec. from
  Fin.Act.
  100 decr. from Op.Act.

20 Int.Pay.
- 20 ( Int. Exp.)
4A
4B
- 1100 Cash - 100 Int. Pay.
- 1000 Note Pay.
4A 4B
48
Now, whats going on????!!!!

• Total interest expense over the life of the loan
• 8 x 1000 x 1.25 yrs 100, over 2 years.
• The first 12 months worth of interest expense,
  80, was reflected on the income statement for
  the year ending 12/31/X6.
• The interest expense for Jan.-March of 20X7, 20,
  will be reflected on the income statement for the
  year ending 12/31/X7.
• The interest payable at 12/31/X6 carries over to
  20X7. At the end of the loan, all of the
  interest will have to be paid (Total interest
  100).

49
5. Collected 5,200 cash from account receivable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

50
5. Collected 5,200 cash from account receivable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 5200
• -5200
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

51
5. Collected 5,200 cash from account receivable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 5200
• -5200
• Income Statement No effect
• Statement of Changes in Equity
• Statement of Cash Flows

52
5. Collected 5,200 cash from account receivable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 5200
• -5200
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows

53
5. Collected 5,200 cash from account receivable.

• Assets Liab. Cont. Cap.
  Retained Earnings
• 5200
• -5200
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows Increases cash flow
  from Operating Activities.

54
6. Incurred cash expenses of 3,000.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

55
6. Incurred cash expenses of 3,000.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -3000 -3000
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

56
6. Incurred cash expenses of 3,000.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -3000 -3000
• Income Statement Decreases income
• Statement of Changes in Equity
• Statement of Cash Flows

57
6. Incurred cash expenses of 3,000.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -3000 -3000
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows

58
6. Incurred cash expenses of 3,000.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -3000 -3000
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows Decreases cash flow
  from Operating Activities.

59
7. On July 1, purchased a computer for 2,400
cash that had an expected life of 3 years and no
salvage value

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

60
7. On July 1, purchased a computer for 2,400
cash that had an expected life of 3 years and no
salvage value

• Assets Liab. Cont. Cap.
  Retained Earnings
• 2,400
• -2,400
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

61
7. On July 1, purchased a computer for 2,400
cash that had an expected life of 3 years and no
salvage value

• Assets Liab. Cont. Cap.
  Retained Earnings
• 2,400
• -2,400
• Income Statement No effect
• Statement of Changes in Equity
• Statement of Cash Flows

62
7. On July 1, purchased a computer for 2,400
cash that had an expected life of 3 years and no
salvage value

• Assets Liab. Cont. Cap.
  Retained Earnings
• 2,400
• -2,400
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows

63
7. On July 1, purchased a computer for 2,400
cash that had an expected life of 3 years and no
salvage value

• Assets Liab. Cont. Cap.
  Retained Earnings
• 2,400
• -2,400
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows Decreases cash flow
  from Investing Activities.

64
8. On Dec. 1 paid 500 cash to rent office space
for the next two months

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

65
8. On Dec. 1, paid 500 cash to rent office space
for the next two months

• Assets Liab. Cont. Cap.
  Retained Earnings
• -500
• 500
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

66
8. On Dec. 1, paid 500 cash to rent office space
for the next two months

• Assets Liab. Cont. Cap.
  Retained Earnings
• 500
• -500
• Income Statement No effect
• Statement of Changes in Equity
• Statement of Cash Flows

67
8. On Dec. 1, paid 500 cash to rent office space
for the next two months

• Assets Liab. Cont. Cap.
  Retained Earnings
• 500
• -500
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows

68
8. On Dec. 1, paid 500 cash to rent office space
for the next two months

• Assets Liab. Cont. Cap.
  Retained Earnings
• 500
• -500
• Income Statement No effect
• Statement of Changes in Equity No effect
• Statement of Cash Flows Decreases cash flow
  from Operating Activities.

69
9. On Dec. 31, recognized that one-fourth of the
revenue collected in advance (see transaction 2)
had been earned.

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

70
9. On Dec. 31, recognized that one-fourth of the
revenue collected in advance (see transaction 2)
had been earned.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 250
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

71
9. On Dec. 31, recognized that one-fourth of the
revenue collected in advance (see transaction 2)
had been earned.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 250
• Income Statement Increases income
• Statement of Changes in Equity
• Statement of Cash Flows

72
9. On Dec. 31, recognized that one-fourth of the
revenue collected in advance (see transaction 2)
had been earned.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 250
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows

73
9. On Dec. 31, recognized that one-fourth of the
revenue collected in advance (see transaction 2)
had been earned.

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 250
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows No effect on cash flow.

74
10. On Dec. 31, recorded depreciation on computer
(see transaction 7).

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

75
10. On Dec. 31, recorded depreciation on computer
(see transaction 7).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -400 -400
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

76
10. On Dec. 31, recorded depreciation on computer
(see transaction 7).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -400 -400
• Income Statement Decreases income
• Statement of Changes in Equity
• Statement of Cash Flows

77
10. On Dec. 31, recorded depreciation on computer
(see transaction 7).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -400 -400
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows

78
10. On Dec. 31, recorded depreciation on computer
(see transaction 7).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -400 -400
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows No effect on cash flow

79
11. On Dec. 31, recorded the expired rent that
had been prepaid on Dec. 1 (see transaction 8).

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

80
11. On Dec. 31, recorded the expired rent that
had been prepaid on Dec. 1 (see transaction 8).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 -250
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

81
11. On Dec. 31, recorded the expired rent that
had been prepaid on Dec. 1 (see transaction 8).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 -250
• Income Statement Decreases income
• Statement of Changes in Equity
• Statement of Cash Flows

82
11. On Dec. 31, recorded the expired rent that
had been prepaid on Dec. 1 (see transaction 8).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 -250
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows

83
11. On Dec. 31, recorded the expired rent that
had been prepaid on Dec. 1 (see transaction 8).

• Assets Liab. Cont. Cap.
  Retained Earnings
• -250 -250
• Income Statement Decreases income
• Statement of Changes in Equity Decreases equity
• Statement of Cash Flows No effect on cash flow

84
12. On Dec. 31, recorded the interest revenue on
the investment purchased in Transaction 5 in 20X6
(Chapter 2).

• Assets Liab. Cont. Cap.
  Retained Earnings
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

85
12. On Dec. 31, recorded the interest revenue on
the investment purchased in Transaction 5 in 20X6
(Chapter 2).

• Assets Liab. Cont. Cap.
  Retained Earnings
• 50 50
• Income Statement
• Statement of Changes in Equity
• Statement of Cash Flows

86
12. On Dec. 31, recorded the interest revenue on
the investment purchased in Transaction 5 in 20X6
(Chapter 2).

• Assets Liab. Cont. Cap.
  Retained Earnings
• 50 50
• Income Statement Increases income
• Statement of Changes in Equity
• Statement of Cash Flows

87
12. On Dec. 31, recorded the interest revenue on
the investment purchased in Transaction 5 in 20X6
(Chapter 2).

• Assets Liab. Cont. Cap.
  Retained Earnings
• 50 50
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows

88
12. On Dec. 31, recorded the interest revenue on
the investment purchased in Transaction 5 in 20X6
(Chapter 2).

• Assets Liab. Cont. Cap.
  Retained Earnings
• 50 50
• Income Statement Increases income
• Statement of Changes in Equity Increases equity
• Statement of Cash Flows No effect on cash flow

89
Summary of transactions for 20X7
Assets Liabilities
Cont. Cap. Retained Earnings
BB 4,100 1,280
2,000 820

• 1. 6000 (A/R)
  
  6000 (revenue)
• 2. 1000 (cash) 1000
  (unearned rev.)
• 3. - 200 (cash) - 200
  (A/P)
• 4A.
  20 (Int/P) -20 (interest)
• B. - 1100 (cash) - 1000
  (N/P)
• -
  100 (Int./P)
• 5. 5200 (cash)
• -5200 (A/R)
• 6. -3000 (cash)
  -3000 (expenses)
• 7. 2400 (PPE)
• - 2400 (cash)
• 8. 500 (prepaid rent)
• - 500 (cash)
• 9.
  -250 (unearned rev.) 250 (revenue)
• 10. -400 (Acc.dep.)
  
  -400 (expenses)
• 11. -250 (prepaid rent)
  
  -250 (expenses)
• 12. 50 (interest/rec.) 50
  (revenue)

6200 750
2000 3450
90
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue Interest
revenue Total Revenue Expenses
Operating expenses Interest expense Total
Expenses Net Income
91
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue Total Revenue Expenses
Operating expenses Interest expense Total
Expenses Net Income
92
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue Expenses
Operating expenses Interest expense Total
Expenses Net Income
93
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue 6,300 Expense
s Operating expenses Interest
expense Total Expenses Net Income
94
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue 6,300 Expense
s Operating expenses 3,650 Interest
expense Total Expenses Net Income
95
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue 6,300 Expense
s Operating expenses 3,650 Interest
expense 20 Total Expenses 3,670 Net
Income
96
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue 6,300 Expense
s Operating expenses 3,650 Interest
expense 20 Total Expenses 3,670 Net
Income 2,630
97
Merry Maids, Inc.Income StatementFor the year
ended December 31, 20X7
Revenue Service revenue 6,250 Interest
revenue 50 Total Revenue 6,300 Expense
s Operating expenses 3,650 Interest
expense 20 Total Expenses 3,670 Net
Income 2,630
98
Merry Maids, Inc.Statement of Changes in Owners
EquityFor the year ended December 31, 20X7

• Beginning contributed capital
• Plus Contributions
• Ending contributed capital
• Beginning retained earnings
  
• Plus Net income
• Less Distributions
  
• Ending retained earnings
  
• Total equity

99
Merry Maids, Inc.Statement of Changes in Owners
EquityFor the year ended December 31, 20X7

• Beginning contributed capital 2000
• Plus Contributions 0
• Ending contributed capital
  2,000
• Beginning retained earnings 820
  
• Plus Net income 2,630
  
• Less Distributions
  0
• Ending retained earnings
  3,450
• Total equity 5,450

100
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Total Assets
Liabilities Owners Equity Total Liab.
OE
101
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Total
Assets
Liabilities Owners Equity Total Liab.
OE
102
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Total Assets
Liabilities Owners Equity Total Liab.
OE
103
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100
Total Assets
Liabilities Owners Equity Total Liab.
OE
104
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable
100 Prepaid rent 250 Total Assets
Liabilities Owners Equity Total Liab.
OE
105
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 Total Assets
Liabilities Owners Equity Total Liab.
OE
106
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE
2400 A.D. (400) 2000 Total
Assets
Liabilities Owners Equity Total Liab.
OE
107
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE
2400 A.D. (400) 2000 Land 1500 Total
Assets 6,200
Liabilities Owners Equity Total Liab.
OE
108
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Owners Equity
109
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Unearned Revenue 750 Owners Equity

110
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Unearned Revenue 750 Total
Liabilities 750 Owners Equity
111
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Unearned Revenue 750 Total
Liabilities 750 Owners
Equity Contributed Capital 2000
112
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Unearned Revenue 750 Total
Liabilities 750 Owners
Equity Contributed Capital 2000 Retained
Earnings 3450
113
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6,200
Liabilities Accounts Payable
0 Unearned Revenue 750 Total
Liabilities 750 Owners
Equity Contributed Capital 2000 Retained
Earnings 3450 Total Owners Eq. 5450

114
Merry Maids, Inc.Balance SheetAt December 31,
20X7
Assets Cash 550 Acct.
Receivable 1300 Interest Receivable 100 Prepaid
rent 250 Investments 500 PPE 2400
A.D. (400) 2000 Land 1500 Total Assets
6200
Liabilities Accounts Payable
0 Unearned Revenue 750 Total
Liabilities 750 Owners
Equity Contributed Capital 2000 Retained
Earnings 3450 Total Owners Eq. 5450
Total Liab. O.E. 6200
115
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services
• Cash payments for expenses
• Cash payments for interest
  
• Net cash flow from operations
• Cash from Investing Activities
• Cash payment for equipment
• Net cash flow from investments
• Cash from Financing Activities
• Repayment of note payable
• Net cash flow from financing
  
• Net Increase (Decrease) in cash
• Plus Cash balance, Jan. 1, 1997
• Cash balance, Dec. 31, 1997

116
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services 6,200
• Cash payments for expenses (3,700)
• Cash payments for interest ( 100)
  
• Net cash flow from operations
• Cash from Investing Activities
• Cash payment for equipment
• Net cash flow from investments
• Cash from Financing Activities
• Repayment of note payable
• Net cash flow from financing
  
• Net Increase (Decrease) in cash
• Plus Cash balance, Jan. 1, 1997
• Cash balance, Dec. 31, 1997

117
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services 6,200
• Cash payments for expenses (3,700)
• Cash payments for interest ( 100)
  
• Net cash flow from operations
  2,400
• Cash from Investing Activities
• Cash payment for equipment
• Net cash flow from investments
• Cash from Financing Activities
• Repayment of note payable
• Net cash flow from financing
  
• Net Increase (Decrease) in cash
• Plus Cash balance, Jan. 1, 1997
• Cash balance, Dec. 31, 1997

118
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services 6,200
• Cash payments for expenses (3,700)
• Cash payments for interest ( 100)
  
• Net cash flow from operations
  2,400
• Cash from Investing Activities
• Cash payment for equipment (2,400)
• Net cash flow from investments
  (2,400)
• Cash from Financing Activities
• Repayment of note payable
• Net cash flow from financing
  
• Net Increase (Decrease) in cash
• Plus Cash balance, Jan. 1, 1997
• Cash balance, Dec. 31, 1997

119
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services 6,200
• Cash payments for expenses (3,700)
• Cash payments for interest ( 100)
  
• Net cash flow from operations
  2,400
• Cash from Investing Activities
• Cash payment for equipment (2,400)
• Net cash flow from investments
  (2,400)
• Cash from Financing Activities
• Repayment of note payable (1,000)
• Net cash flow from financing
  (1,000)
• Net Increase (Decrease) in cash
• Plus Cash balance, Jan. 1, 1997
• Cash balance, Dec. 31, 1997

120
Merry Maids, Inc.Statement of Cash FlowsFor the
year ended December 31, 20X7

• Cash from Operations
• Cash receipts for services 6,200
• Cash payments for expenses (3,700)
• Cash payments for interest ( 100)
  
• Net cash flow from operations
  2,400
• Cash from Investing Activities
• Cash payment for equipment (2,400)
• Net cash flow from investments
  (2,400)
• Cash from Financing Activities
• Repayment of note payable (1,000)
• Net cash flow from financing
  (1,000)
• Net Increase (Decrease) in cash
  (1,000)
• Plus Cash balance, Jan. 1, 1997
  1,550
• Cash balance, Dec. 31, 1997
  550

121
Analysis of Financial Statements Using Ratios

• Return on assets
• Net income
• Total assets
• Debt to assets
• Total debt
• Total assets
• Return on equity
• Net income
• Owners equity

122
Analysis of Financial Statements Using Ratios

• Return on assets
• Net income 2,630 42.4
• Total assets 6,200
• Debt to assets
• Total debt
• Total assets
• Return on equity
  Net income
• Owners equity

123
Analysis of Financial Statements Using Ratios

• Return on assets
• Net income 2,630 42.4
• Total assets 6,200
• Debt to assets
• Total debt 750 12.1
• Total assets 6,200
• Return on equity
  Net income
• Owners equity

124
Analysis of Financial Statements Using Ratios

• Return on assets
• Net income 2,630 42.4
• Total assets 6,200
• Debt to assets
• Total debt 750 12.1
• Total assets 6,200
• Return on equity
  Net income 2,630
  48.3 Owners equity 5,450

125
Using Financial Leverage
Using borrowed money to increase the return on
the Owners Investment.
Ex Borrow money at 10 to buy equipment. Earn
12 investment return on operating the equipment.
Net 2 increase to owners.
126
Chapter 3
The End