1-1 WELCOME TO MY CLASS https://sites.google.com/site/ketoantuyduc 1-2 Chapter Environmental and Theoretical Structure of Financial Accounting 1-3 Learning Objectives Describe the function and primary focus of financial accounting 1-4 Financial Accounting Environment Providers of Financial Information Profit-oriented companies Not-for-profit entities Households External User Groups Relevant Financial Information Investors Creditors Employees Labor unions Customers Suppliers Government agencies Financial intermediaries 1-5 Financial Accounting Environment Relevant financial information is provided primarily through financial statements and related disclosure notes     Balance Sheet Income Statement Statement of Cash Flows Statement of Shareholders’ Equity Investment-Credit Decisions A Cash Flow Perspective Corporate shareholders receive cash from their investments through   Periodic dividend distributions from the corporation The ultimate sale of the ownership shares of stock 1-6 1-7 Learning Objectives Explain the difference between cash and accrual accounting 1-8 Cash Versus Accrual Accounting Cash Basis Accounting Revenue is recognized when cash is received Expenses are recognized when cash is paid 1-9 Cash Versus Accrual Accounting Cash Basis Accounting Carter Company has sales on account totaling $100,000 per year for three years Carter collected $50,000 in the first year and $125,000 in the second and third years The company prepaid $60,000 for three years’ rent in the first year Utilities are $10,000 per year, but in the first year only $5,000 was paid Payments to employees are $50,000 per year Let’s look at the cash flows 1-10 Cash Versus Accrual Accounting Cash Basis Accounting SFAC No Gains and Losses Gains are increases in equity peripheral, or incidental, transactions of an entity Losses represent decreases in equity arising from peripheral, or incidental, transactions of an entity 1-20 1-21 Accounting for Business Transactions What is a transaction?  It is any event that both affects the financial position of the business and can be reliably recorded  1-22 Accounting for Business Transactions Gay Gillen invests $30,000 to begin Gay Gillen eTravel Gillen purchases an office location, paying $20,000 in cash She buys office supplies, agreeing to pay $500 in 30 days She earns and collects $5,500 revenues 1-23 Accounting for Business Transactions  Gillen performs services, and the client agrees to pay $3,000 within one month During the month, she pays $3,300 for expenses incurred Gillen pays $300 to the store from which she purchased $500 worth of supplies What is the effect of these transactions on the accounting equation? 1-24 Accounting for Business Transactions Owner’s Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash – 20,000 Land + 20,000 3) Supplies + 500 + 500 4) Cash + 5,500 + 5,500 5) Receivable + 3,000 + 3,000 6) Cash – 3,300 – 3,300 7) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200 1-25 Accounting for Business Transactions Notice that the equation always stays in balance  Each transaction affects at least two accounts, sometimes more  Some transactions affect only one side of the equation; some affect both sides  1-26 Accounting for Business Transactions Other transactions that took place were as follows:  The business collected $1,000 from the client  She sold some land at cost for $9,000  She withdrew $2,000 from the business  1-27 Prepare Financial Statements Financial Statements – are the final product of the accounting process – tell how the business is performing and where it stands 1-28 Financial Statements – – – – income statement statement of owner’s equity or retained earnings balance sheet statement of cash flows 1-29 1-30 Relationships Among the Statements: Income Statement Revenue: Fees earned Expenses: Salary expense Utilities and telephone expense Equipment rental expense Office rent expense Net income $8,500 $1,200 400 600 1,100 3,300 $5,200 Relationships Among the Statements: Statement of Owner’s Equity G Gillen, capital, April 1, 20xx Contribution of capital Net income Cash distributions G Gillen, capital, April 30, 20xx $ 30,000 $ 5,200 – 2,000 $33,200 1-31 1-32 Relationships Among the Statements: Balance Sheet Liabilities Assets Cash Accounts receivable Supplies Land Total assets $19,900 2,000 500 11,000 $ 33,400 Accounts payable $ 200 Owner’s equity, G Gillen, capital 33,200 Total liabilities and owner’s equity $33,400 1-33 Remember     Read the text book Do all examples in text book Do Review Exercise Do homework 1-34 End of Chapter