Basic Accounting Concepts Chapter 2 2014 Cengage Learning

Learning Objectives After studying this chapter, you should be able to: • Describe the basic elements of a financial accounting system • Analyze, record, and summarize transactions for a corporation’s first period of operations • Prepare financial statements for a corporation’s first period of operations • Analyze, record, and summarize transactions for a corporation’s second period of operations • Prepare financial statements for a corporation’s second period of operations • Financial Analysis: Describe and illustrate the use of common-sized income statements in assessing a company’s financial performance © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 1 Describe the basic elements of a financial accounting system © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Basic Elements of a Financial Accounting System • The three elements of financial accounting system are: • ____ to record each economic event • ____ to prepare the financial statements • ____ to detect the errors in the recording process © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Rules of an Accounting System • Rules determine: WHAT transactions are to be recorded WHEN transactions are to be recorded HOW transactions are to be recorded AMOUNT of the transaction to be recorded • A _____ is an economic event that can affect one, two or more items in the financial statements © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Framework of an Accounting System Accounting Equation: _____ = _______ + _____ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Template • By expanding the accounting equation, transactions can be analyzed, summarized, and recorded within the integrated financial statement framework Impact of transaction on ______ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Controls of an Accounting System THE ACCOUNTING EQUATION MUST BALANCE Ending Cash on Statement of Cash Flows = Cash on _________ Net Income on Income Statement = Net Effects of ______/______ on ____________ © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 2 Analyze, record, and summarize transactions for a corporation’s first period of operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Starting Family Health Care, P. C. • Dr. Landry deposits $6, 000 in a bank account in the name of Family Health Care, P. C. , in return for shares of stock in the corporation © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Borrowing Money • Family Health Care, P. C. borrows $10, 000 from First National Bank finance its operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Buying Land • Family Health Care buys land for $12, 000 cash © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Earning of Fees • During the first month of operations, Family Health Care earned patient fees of $5, 500, receiving the fees in cash © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Paying of Expenses • Family Health Care paid expenses during September as follows: wages, $1, 125; rent, $950; utilities, $450; interest, $100; and miscellaneous, $275 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statement Framework: Paying of Dividends • Family Health Care paid $1, 500 to stockholders (Dr. Lee Landry) as dividends © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statements: Family Health Care, P. C. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Observations from Family Health That Apply to All Companies © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Learning Objective 3 Prepare financial statements for a corporation’s first period of operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Preparation of Financial Statements • This exhibit lists Family Health’s transactions in the order they occurred; it does not group and summarize like transactions together Balance Sheet components Statement of Cash Flow components Income Statement components © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Income Statement © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied

Retained Earnings Statement © 2014 Cengage Learning. All Rights Reserved. May not be scanned,

Balance Sheet © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied

Statement of Cash Flows © 2014 Cengage Learning. All Rights Reserved. May not be

Integrated Financial Statements © 2014 Cengage Learning. All Rights Reserved. May not be scanned,

Learning Objective 4 Analyze, record, and summarize transactions for a corporation's second period of operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Summary of October Transactions © 2014 Cengage Learning. All Rights Reserved. May not be

Learning Objective 5 Prepare financial statements for a corporation’s second period of operations © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Integrated Financial Statements for October © 2014 Cengage Learning. All Rights Reserved. May not

Learning Objective 6 Financial Analysis: Describe an illustrate the use of common-sized income statements in assessing a company’s financial performance © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Common-Sized Income Statements • Common-sized financial statements: prepared by expressing financial statement amounts as a percent of a base amount • _____________: expresses income statement amounts as a percent of sales • _____________: expresses each asset as a percent of total assets © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Common-Sized Income Statements • Data (in millions) adapted from recent financial statements of The Kroger Co. © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.

Common-Sized Income Statements • Data (in millions) adapted from recent financial statements of The Kroger Co. Year 2 Sales Cost of sales Gross profit Operating expenses: Selling and administrative Other expenses Total operating expenses Operating income Other income (expense) Interest expense Tax expense Other income (expense) Net income Year 1 $ 90, 374 (71, 494) $ 18, 880 100. 0% (79. 1) 20. 9 $ 82, 049 100. 0% (63, 803) (77. 8) $ 18, 246 22. 2 $ (15, 345) (2, 257) $ (17, 602) $ 1, 278 (17. 0) (2. 5) (19. 5) 1. 4 $ (13, 823) (16. 9) (2, 241) (2. 7) $ (16, 064) (19. 6) 2. 6 $ 2, 182 $ $ (435) (247) 6 602 (0. 5) (0. 2) 0. 0 0. 7 $ $ (601) (448) (17) 1, 116 (0. 7) (0. 5) (0. 0) 1. 4 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.