INVESTING AND FINANCING DECISIONS AND THE BALANCE SHEET
INVESTING AND FINANCING DECISIONS AND THE BALANCE SHEET Chapter 2 Mc. Graw-Hill/Irwin © 2009 The Mc. Graw-Hill Companies, Inc.
Objective of Financial Reporting To provide useful economic information to external users for decision making and for assessing future cash flows. Qualitative Characteristics Relevancy Reliability Comparability Consistency Primary Characteristics • Relevancy: predictive value, feedback value, and timeliness. • Reliability: verifiability, representational faithfulness, and neutrality. Secondary Characteristics • Comparability: across companies. • Consistency: over time.
Assumptions _________: Activities of the business are separate from activities of owners. ________: The entity will not go out of business in the near future. ________: Accounting measurements will be in the national monetary unit (i. e. , $ in the U. S. ). Principle _______: Cash equivalent cost given up is the basis for the initial recording of elements.
� ASSET: Economic resources with probable future benefits owned or controlled by an entity as a result of past transactions. � LIABILITY: Probable debts or obligations (claims to a company’s resources) that result from an entity’s past transactions AND will be paid for with assets or services. � STOCKHOLDERS’ EQUITY: Financing provided by the owners (contributed capital) and by business operations (Retained Earnings).
� Listed in order of liquidity (how soon an asset is expected to be turned into cash or used) � Categorized as CURRENT (used or turned into cash with 1 year) and LONG-TERM.
� Listed in order of maturity (how soon the obligation will be paid) � Classified as CURRENT or LONG-TERM
� For simplicity, usually only includes two accounts: Contributed Capital and Retained Earnings � Will get more complex later in the quarter.
External events: events exchanges of assets and liabilities between the business and one or more other parties. Borrow cash from the bank
Internal events: events not an exchange between the business and other parties, but have a direct effect on the accounting entity. Loss due to fire damage.
The Balance Sheet Assets Cash Short-Term Investment Accounts Receivable Notes Receivable Inventory (to be sold) Supplies Prepaid Expenses Long-Term Investments Equipment Buildings Land Intangibles Liabilities Accounts Payable Accrued Expenses Notes Payable Taxes Payable Unearned Revenue Bonds Payable Stockholders’ Equity Contributed Capital Retained Earnings
The Income Statement Revenues Expenses Sales Revenue Fee Revenue Interest Revenue Rent Revenue Cost of Goods Sold Wages Expense Rent Expense Interest Expense Depreciation Expense Advertising Expense Insurance Expense Repair Expense Income Tax Expense
w Every transaction affects at least two accounts (duality of effects). w The accounting equation must remain in balance after each transaction. A = L + SE (Assets) (Liabilities) (Stockholders’ Equity)
Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.
Step 1: Accounts and effects Identify the accounts affected and classify them by type of account (A, L, SE, Rev, Exp, Div). Determine the direction of the effect (increase or decrease) on each account. Step 2: Balancing Verify that the accounting equation (A = L + SE) remains in balance.
Papa John’s issues $2, 000 of additional common stock to new investors for cash. Identify & Classify the Accounts 1. _______ 2. ________ Determine the Direction of the Effect 1. ________ 2. ________
Papa John’s issues $2, 000 of additional common stock to new investors for cash. A = L + SE
The company borrows $6, 000 from the local bank, signing a three-year note. Identify & Classify the Accounts 1. _______ 2. ________ Determine the Direction of the Effect 1. ________ 2. __________
The company borrows $6, 000 from the local bank, signing a three-year note. A = L + SE
Papa John’s purchases $10, 000 of new equipment, paying $2, 000 in cash and signing a two-year note payable for the rest. Identify & Classify the Accounts 1. _________ 2. __________ 3. __________ Determine the Direction of the Effect 1. ________ 2. ________ 3. _________
Papa John’s purchases $10, 000 of new equipment, paying $2, 000 in cash and signing a two-year note payable for the rest. A = L + SE
Papa John’s board of directors declares and pays $3, 000 in dividends to shareholders. Identify & Classify the Accounts 1. ________ 2. __________ Determine the Direction of the Effect 1. _________ 2. _____________
Papa John’s board of directors declares and pays $3, 000 in dividends to shareholders. A = L + SE
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Transaction Type: Operating/Investing/Financing? Amount
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
Accounts Account Type Incr. /Decr. Amount Transaction Type: Operating/Investing/Financing?
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