Chapter 2: Accounting for Accruals

1
Chapter 1
Business Whats it all About?

2
Simple Model of a Business
The Firm
Value added conversion
INPUTS
OUTPUTS
Acquisition/Payment Cycle
Sales/Collection Cycle
Capital (financing) Property, Plant,
Equipment Raw Materials Labor Inventory Goods
Services
Delivery of Product or Service
3
Types of Businesses

• Service company
• provides a service for customers
• Sales company
• Special case financial services
• Merchandising--buys goods and resells them to
  other businesses (wholesale) or to final
  customers (retail)
• Manufacturing--makes a product and sells it to
  other businesses (wholesale) or to final
  consumers (retail)

4
Ownership Structure of Businesses
Sole Proprietorship--a single owner business
Partnership--a multiple-owner business
Corporation--a business whose ownership is
divided into "shares" and may be owned by a large
number of people
5
Characteristics of Different Forms of Business
Organization

• Issues in deciding between sole
  proprietorship, partnership, or corporation
• Personal liability
• Taxation
• Transfer of ownership
• Ability to raise capital
• Government regulation

6
Acquisition/payment process
Activity
Possible Document(s)
Identify need for good/services
Purchase Requisition
Identify vendor Order goods/services
Purchase Order
Receive and Inspect Goods
Receiving Report
Pay for Goods and/or Services
Check Requisition Check
7
Sales/collection process

• Customer places an order (Customer order)
• Customers credit is approved
• Warehouse selects goods for shipment (Picking
  slip)
• Goods are shipped (Packing slip and Shipping
  notice)
• Customer is billed for goods (Invoice)
• Payment for goods is received (Check)

8
Business Transactions

• Business transactions are exchanges.
• The two transactions that make up an exchange
  are the GIVE part and the GET part.
• The exchange occurs between the business entity
  and a person or business external to the entity.
• The business gives something and then gets
  something in return.

9
Resources, Events, and Agents

• We can model an exchange with these three
  components
• the resources are the things being exchanged
  (goods or services for money)
• the event describes the business action (e.g.
  cash disbursement, sale, etc.)
• the agents are the people involved in the
  exchange (e.g., the customer)

10
Who needs accounting information?

• Management
• Those with direct financial interest
• Current or potential investors
• Current or potential creditors
• Those with an indirect financial interest
• Tax Authorities
• Regulatory Agencies
• Economic Planners
• Labor unions, financial advisors, others.
• Employees

11
The 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)

12
Equity The Owners Share

• Expanded accounting equation

CONTRIBUTED CAPITAL
RETAINED EARNINGS


ASSETS
LIABILITIES
Together, these are called Shareholders Equity,
Stockholders Equity, or Owners Equity. They
are all names for the same thing--the owners
claims to the firms assets.
13
Four Basic Financial Statements

• Balance Sheet
• Assets Liabilities Equity
• Income Statement
• Revenues - Expenses Net income
• Statement of Changes in Owners Equity
• Beginning equity Contributions Net income
  - Distributions Ending equity
• Statement of Cash Flows
• Cash inflow - Cash outflow Net cash flow

14
Dates of Financial Statements are Important!

• Balance sheet is AS OF or AT a particular
  date, sometimes called a snapshot in time
• Income statement
• Statement of changes in owners equity
• Statement of cash flows
• These last three cover a period of time, and thus
  are for the period ended
• Example effects of transactions on the
  accounting equation

15
Assets Liabilities Equity
1. 5,000 cash 5,000 common stk. 2.
500 cash 500 notes payable 3. -400 cash
400 inv. 4. -50 cash - 50
expense 5. 900 cash 900 revenue
-360 inventory - 360 CGS 6. -505
cash -500 notes payable - 5 interest
exp. 7, -100 cash - 100 dividends
5,385 0 5,385
Net Income 485
16
Toms Wear, Inc.Income StatementFor the Month
Ended Jan. 31, 2001

• Revenue
• Sales 900
• Expenses
• Cost of sales 360
• Advertising 50
• Interest 5
• Total expenses (415)
• Net income 485

17
Toms Wear, Inc.Statement of Changes in Owners
EquityFor the month ended Jan. 31, 2001

• Beginning CC 0
• Common stock issued 5,000
• Total Contributed Capital 5,000
• Beginning RE 0
• Net income 485
• Dividends (100)
• Ending RE 385
• Total Owners Equity 5,385
• (contributed capital retained earnings)

18
Toms WearBalance SheetAt Jan. 31, 2001

• Assets Liabilities
  Shareholders Equity
• Cash 5,345 Note payable -0-
• Inventory 40
• Common stock, T. Phillips 5,000
• Total assets 5,385 Retained earnings 385
• Total liabilities SHs equity 5,385
  

19
Assets Liabilities Equity
Look at every CASH transaction and classify it as
operating, investing, or financing. 1. 5,000
cash 5,000 common stk. 2. 500
cash 500 notes payable 3. -400 cash
400 inv. 4. -50 cash - 50
expense 5. 900 cash 900 revenue
-360 inventory - 360 CGS 6. -505
cash -500 notes payable - 5 interest
exp. 7. -100 cash - 100 dividends
5,385 0 5,385
Net Income 485
20
Toms Wear, Inc.Statement of Cash FlowsFor the
month ended Jan. 31, 2001

• Cash from operating activities
• Cash from customers 900
• Cash paid to vendor for T-shirts (400)
• Cash paid for advertising (50)
• Cash paid for interest (5)
• Total cash from operations 445
• Cash from investing activities -0-
• Cash from financing activities
• Owners contributions 5,000
• Dividends (100)
• Total Cash from Financing 4,900
• Net Increase in Cash
  5,345