Financial accounting 9th jamie pratt chapter 04

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Chapter 4: The Mechanics of Financial Accounting  The Mechanics of Financial Accounting • • The first step in the accounting process is transaction analysis This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Equity  Now look at E4-2 Spreadsheet  Using a spreadsheet approach, analyze the transactions (Spreadsheet on next slide)  Note that effects may be on both sides of the equation, in the same direction, or effects may be on one side of the equation with offsetting directions  Exercise 4-2 Spreadsheet Cash + A/R + Land = N/P 30,000 (20,000) 30,000 20,000 = 8,000 (5,500) (500) _ 9,000 = 9,000 _ CC + RE = + 8,000 = (5,500) Exp = _ = Tot 13,000 + 8,000 + 20,000= Rev _ 9,000 _ _ (500) Div + 30,000 + 2,000  Exercise 4-3 Financial Statements Income Statement Revenues $8,000 Expenses Net Income 5,500 $2,500 Statement of Retained Earnings RE (beginning) Add: Net Income Less: Dividends RE (ending) $ 2,500 (500) $2,000  Exercise 4-3 Financial Statements Balance Sheet Assets Cash $13,000 A/R 8,000 Land 20,000 Total $41,000 Liabilities and S.E N/P $ 9,000 CS 30,000 RE (ending) 2,000 Total $41,000  Now look at E4-2 Spreadsheet  Note that the transaction analysis was relatively simple with a few transactions and a few accounts However, with thousands of transactions and hundreds of accounts, the spreadsheet program is inefficient  Therefore accountants use a “double entry” system based on debits and credits  Double Entry Accounting  The journal entry is an efficient representation of economic events and how they affect the accounting equation  Debit (dr) - means an entry to the left hand side of an account  Credit (cr) - means an entry to the right hand side of an account  Note that a debit or credit, per se, does not indicate increase or decrease  To decide the effect of a debit or credit, the type of account must be considered  Effect of Debits and Credits  Based on the accounting equation, we can increase or decrease various accounts depending on their classification:  Note that we use debits and credits instead of plusses and minuses  10 Revaluation Adjustments  These are adjustments that not fall into the categories of accruals or deferrals  They serve to restate certain accounts to keep their reported values in line with existing facts  Examples include the revaluation of:  Short-term investments  Accounts receivable  Inventories  29 Preparing Adjusting Journal Entries - P4-8 a AJE at 12/31 for supplies used: (85,000 - 30,000 unused = $55,000 used) Supplies Expense 55,000 Supplies 55,000 b AJE at 12/31 for rent owed: Rent Expense Rent Payable 2,400 2,400  30 Preparing Adjusting Journal Entries - P4-8 c AJE at 12/31 for services performed: (18,000 x 2/3 = 12,000 earned by 12/31) Unearned Revenue 12,000 Service Revenue 12,000 d AJE at 12/31 for depreciation: (500,000/10 = 50,000 per year) Depreciation Expense 50,000 Accumulated Depr 50,000  31 Preparing Adjusting Journal Entries - P4-8 e AJE at 12/31 for interest owed to the bank on the notes payable Use Principal x Rate x Time to calculate the interest owed from July to Dec 31 (6 months): P 10,000 x x R x T 12 per year x 6/12 of a year Interest Expense Interest Payable 600 600  32 Preparing Adjusting Journal Entries - P4-8 f AJE at 12/31 for amount owed for advertising: Advertising Expense 28,000 Advertising Payable 28,000 g AJE at 12/31 for insurance used from 7/1 to 12/31: ($350 x 1/2 year) Insurance Expense Prepaid Insurance 175 175  33 Reporting Difficulties Faced by Multinational Companies  Multinationals have a home in one country but operate, own subsidiaries, or raise capital in others   Financials must be consolidated – data is in difference  Languages  Currencies  Using difference accounting standards Conversion and consolidation  Costly  Time consuming  34 Adjusted Trial Balance  The Adjusted Trial Balance reflects totals after the AJEs are posted to the general ledger  The balance sheet accounts reflect the end-of-year balances, and the income statement accounts reflect the proper revenues and expense to be recognized for the year  This list of accounts and amounts is used to prepare the balance sheet and income statement  35 Financial Statements • The financial statements for Kelly Supply (upcoming slides), and other examples in text, can be used as guidelines to prepare financial statements • The financials should be prepared in the following order: • • • • Income Statement (I/S) Statement of Stockholders’ Equity (SSE) Balance Sheet (B/S) Note that the statement of cash flow (SCF) is not prepared from the adjusted trial balance, but from a detailed analysis of the cash flow activities of the company (see appendix)  36 Financial Statements  Comments on the preparation of financial statements from adjusted trial balance (ATB): • • • • Revenue and expense balances from the ATB are carried to the income statement Net income is carried to the retained earnings column in the SSE Other activity, like dividends and issue of stock, are reflected in the SSE Ending balances in the SSE are carried to the stockholders’ equity section of the balance sheet • Asset and liability balances from the ATB are carried to the balance sheet  37 Financial Statement Examples - Kelly Supply  38 Figure 4-23  39 Figure 4-23  40 T-Account Analysis and the statement of Cash Flows *Appendix 4-A  Two methods are used to present the statement of cash flows—the direct method and the far more common indirect method  41 *Appendix 4-A  The statement of cash flows can be prepared from two balance sheets, an income statement, and some additional information The approach involves Taccount analysis  42 Copyright © 2014 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein  43 .. .Chapter 4: The Mechanics of Financial Accounting  The Mechanics of Financial Accounting • • The first step in the accounting process is transaction analysis... based on debits and credits  Double Entry Accounting  The journal entry is an efficient representation of economic events and how they affect the accounting equation  Debit (dr) - means an... Prepared at the end of the accounting period to align revenues and expenses (matching)  Usually NO document flow to trigger recording  Based on the accrual system of accounting which records
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