PART ONE: INTRODUCTION

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PART ONEINTRODUCTION
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ACCOUNTING EVENTS
Accounting events are economic events that
possess the following three qualities

• Specific to an economic entity.
• Capable of being measured in
• financial terms.
• Have two effects that create or change the rights
  and obligations of the entity.

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PAUSE AND REFLECT
Since all 3 qualities are present, this is an
accounting event. The event is specific to
both K-Mart and Mattel (quality 1) it
is measurable in financial terms (quality 2)
and it has changed the rights and/or obligations
of the entities (quality 3).
Assume K-Mart orders 100,000 of Fischer-Price
Toys and sends Mattel a check for 100,000 prior
to the delivery of the toys. Is this an
accounting event? Why or why not?
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ASSETS
Assets are the rights or resources with expected
future benefits for an entity.
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EQUITIES

• Liabilities are obligations to providers of goods
  and services to the business.
• Owners equity is the obligation to transfer
  residual resources to owners (net assets) when
  business ceases.

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EQUITIES THAT REPRESENT LIABILITIES
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PAUSE AND REFLECT
When a buyer purchases something on account,
the buyer is obligated to transfer resources in
the future to the seller and this liability is
know as accounts payable. The seller has a
right to these resources and these rights are
known as accounts receivable.
How is the accounts receivable of the seller
related to the accounts payable of the buyer when
the sale is made on account?
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EQUITIES THAT REPRESENT OWNERS EQUITY
Contributed Capital

• Accumulated net income of the business from
  profit-making activities less dividends paid to
  owners.

• Cash or other resources invested by owners.

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EFFECTS OF ACCOUNTING EVENTS

• Accounting event have two monetarily equal
  effects on the business entity - the creation or
  changes in assets and/or equities.
• If the business purchases a piece of equipment on
  account for 5,000, this is an accounting event
  an increase to assets for 5,000 and an increase
  to liabilities for 5,000.

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COMMUNICATING ACCOUNTING EVENTS THE INCOME
STATEMENT

• Reports to external users the revenues earned and
  expenses incurred during a particular time
  period.
• Reports net income (or loss) generated by
  profit-making activities of the business.

The Income Statement Jan 1-Dec 31, 1998
Revenues 25,000 Expenses 15,000 Net
Income 10,000
Goes to the statement of retained earnings,
statement of owners equity and ultimately the
balance sheet.
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COMMUNICATING ACCOUNTING EVENTS STATEMENT OF
OWNERS EQUITY OR RETAINED EARNINGS

• Statement of Owners Equity reports changes in
  owners equity for the period of time covered by
  the income statement.
• Statement of Retained Earnings reports changes
  that occurred in retained earnings during the
  same period.

From the income statement
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COMMUNICATING ACCOUNTING EVENTS THE BALANCE SHEET

• Reports type and dollar amount of the assets
  managed by the business, and firms obligations
  to its creditors (liabilities) and its owners
  (owners equity).
• Unlike other statements, the balance sheet is
  prepared for one point in time, usually at the
  beginning and end of the period covered by other
  statements.

From the statement of owners equity
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COMMUNICATING ACCOUNTING EVENTS STATEMENT OF
CASH FLOWS

• Reports the firms cash inflows and cash outflows
  from its operating, investing and financing
  activities as well as the net change in cash.
• Prepared for the same time period as the income
  statement.

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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
The owners invest 10,000 cash in the business.
Balance Sheet
Assets (Cash) 10,000
Owners Equity (Contributed Capital) 10,000
This is a financing activity because the business
is acquiring financial resources.
The cash received is reported on the statement
of cash flows as cash from owners
contribution.
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
At the start of the period, the business buys a
computer for 3,000.
Balance Sheet
Assets (Computer) 3,000
-Assets (Cash) 3,000
This is an investing activity because the
business is acquiring a long-term asset.
The cash paid is reported on the statement of
cash flows as cash paid for computer.
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
The revenue is reported on the income statement
for the period.
Customers pay the business 6,000 cash for
services the business rendered during the period.
Balance Sheet
Assets (Cash) 6,000
Owners Equity (Retained Earnings) 6,000
Revenues
This is an operating activity because the
business earned revenue by performing a service
for customers.
The cash received is reported on the statement
of cash flows as cash from customers
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
The revenue is reported on the income statement
for the period.
The company performs 1,000 of services and bills
the customer.
Assets (Accounts Receivable) 1,000
Balance Sheet
Owners Equity (Retained Earnings) 1,000
This is an operating activity because the
business earned revenue by performing a service
for customers.
Revenues
No cash is received so there is nothing to report
on the statement of cash flows
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
The expense is reported on the income statement
for the period.
The business pays 3,000 for employees and other
services used during the period.
Balance Sheet
- Assets (Cash) 3,000
- Owners Equity (Retained Earnings) 3,000
Expense
This is an operating activity because the
services are incurred to enable the business to
produce revenues.
The cash paid is reported on the statement of
cash flows as cash paid for services
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
At the end of the period, the company borrowed
2,000 from a bank and signed a note payable with
a 10 interest rate, due in 3 years.
Balance Sheet
Assets (Cash) 2,000
Liabilities (Note Payable) 2,000
This is a financing activity because the business
is acquiring financial resources.
The cash received is reported on the statement
of cash flows as cash from loan.
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
The expense is reported on the income statement
for the period.
At the end of the period, the company recognized
1/4 of the cost of the computer as depreciation
expense.
Balance Sheet
- Assets (Computer) 750
- Owners Equity (Retained Earnings) 750
This is an operating activity because the
computer is used to enable the business to
produce revenues. Depreciation is an
allocation of the cost of the asset over its
estimated useful life. Depreciation is never a
cash expense.
Expense
No cash is paid so there is nothing reported on
the statement of cash flows.
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ACCOUNTING EVENTS AND THEIR IMPACT ON FINANCIAL
STATEMENTS
Exhibit 3.3
At the end of the period, the company pays 500
in dividends to owners.
Balance Sheet
-Assets (Cash) 500
- Owners Equity (Retained Earnings) 500
This is a financing activity because the company
in rewarding owners who provide the financial
resources for the business.
The cash paid is reported on the statement of
cash flows as cash paid for dividends
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PAUSE AND REFLECT
Dividends are not expenses incurred to enhance
the operations and generate revenue. Rather,
dividends represent profits of the business that
have already been generated that are
distributed to owners for personal use.
Why are dividends not included on the income
statement?