Chapter 2: Reporting Investing Chapter 2: Reporting Investing and Financing Results on the and Financing Results on the Balance Sheet Balance Sheet Learning Objective 1 Learning Objective 1 Identify financial effects of common financing and investing activities. 2-1
35
Embed
Chapter 2: Reporting Investing and Financing Results on the Balance Sheet Learning Objective 1 Identify financial effects of common financing and investing.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Chapter 2: Reporting Investing Chapter 2: Reporting Investing and Financing Results on the and Financing Results on the Balance SheetBalance Sheet
Learning Objective 1Learning Objective 1
Identify financial effects of common financing and
investing activities.
2-1
Building a Balance SheetBuilding a Balance Sheet
Assets
amounts presently owed by a business to creditors.
the amount invested and reinvested in a company by its
shareholders.
resources presently owned by a business that generate future
economic benefit.
Stockholders’ Equity
Liabilities
=
+
2-2
Assets
Debt Financing
Equity Financing
Companies rely on two sources of financing:
Stockholders’ Equity
Liabilities
=
+
Financing and Investing ActivitiesFinancing and Investing Activities
Invest in Assets
&
2-3
Financing and Investing ActivitiesFinancing and Investing Activities
1. A company always documents its activities.
2. A company always receives something and gives something.
3. A dollar amount is determined for each exchange.
Key Features Your Goals
Picture each activity.
Name the items.
Analyze the effects.
2-4
Transactions and Other ActivitiesTransactions and Other Activities
2-5
Learning Objective 2Learning Objective 2
Apply transaction analysis to financing and investing
transactions.
2-6
Study the Accounting MethodsStudy the Accounting Methods
1 Analyze 2 Record 3 Summarize
A systematic accounting process is used to capture and report the financial effects of a company’s transactions.
A transaction is a business activity that affects the basic accounting equation.
Duality of Effects
Every transaction has at least two effects on the basic
accounting equation.
A = L+ SE
Assets must equal liabilities plus stockholders’ equity for every accounting transaction.
2-7
Step 1: Analyze TransactionsStep 1: Analyze TransactionsThe chart of accounts is tailored to each company’s
business, so although some account titles are common across all companies (Cash, Accounts Payable) others
may be used only by that particular company (Cookware). Depending on the company, you may see a liability for a
bank loan called a Note Payable or a Loan Payable.
AccountNumber Account Name Description
101 Cash Dollars amount of coins, paper money, funds in bank113 Cookware Cost of cutlery, pizza pans dishes, ets.135 Equipment Cost of pizza ovens, restaurant booths, dishwasher, etc.201 Accounts Payable Owed to suppliers for goods and services bought on credit222 Note Payable Owed to lenders, as per terms of promissory note.301 Contributed Capital Stock issued for contributions made to the company310 Retained Earnings Accumulated earnings (not yet distributed as dividends)
Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,
Mauricio Rosa incorporates Pizza Aroma Inc., on August 1. The company issues stock to Mauricio and his wife as evidence of their contribution of $50,000 cash,
Current assets will be used up or converted into cash within
the next 12 months.
Long-term assets include resources that will be used or turned into cash more than 12 months after the balance sheet
date.
Current Assets: Cash 10,000$ Cookware 630 Total Current Assets 10,630 Property, Plant, and Equipment: Equipment 60,000 Total Assets: 70,630$ Liabilities and Stockholders' Equity:Current Liabilities: Accounts Payable 630$ Long-Term Liabilities: Note Payable 20,000 Total Liabilities: 20,630 Stockholders' Equity Contributed Capital 50,000 Total Liabilities and Stockholders' Equity 70,630$
Pizza Aroma, Inc.Balance
At August 31, 2010
2-32
Learning Objective 5Learning Objective 5
Interpret the balance sheet using the current ratio and an
understanding of related concepts.
.
2-33
Assessing the Ability to PayAssessing the Ability to Pay
CurrentRatio
=Current Assets
Current Liabilities
A higher current ratio generally means a better ability to pay. Pizza Aroma’s current ratio is unusually high.
Current Assets: Cash 10,000$ Cookware 630 Total Current Assets 10,630 Property, Plant, and Equipment: Equipment 60,000 Total Assets: 70,630$ Liabilities and Stockholders' Equity:Current Liabilities: Accounts Payable 630$ Long-Term Liabilities: Note Payable 20,000 Total Liabilities: 20,630 Stockholders' Equity Contributed Capital 50,000 Total Liabilities and Stockholders' Equity 70,630$
Pizza Aroma, Inc.Balance SheetAt 8/31/2010
16.9
=$ 10,630
$ 630
=
2-34
Balance Sheet Concepts and Balance Sheet Concepts and ValuesValues
What is (is not) recorded?•Includes items acquired through exchange.•Excludes other items (such as secret recipes).
What is (is not) recorded?•Includes items acquired through exchange.•Excludes other items (such as secret recipes).
Current Assets: Cash 10,000$ Cookware 630 Total Current Assets 10,630 Property, Plant, and Equipment: Equipment 60,000 Total Assets: 70,630$ Liabilities and Stockholders' Equity:Current Liabilities: Accounts Payable 630$ Long-Term Liabilities: Note Payable 20,000 Total Liabilities: 20,630 Stockholders' Equity Contributed Capital 50,000 Total Liabilities and Stockholders' Equity 70,630$
Pizza Aroma, Inc.Balance SheetAt 8/31/2010
What amounts?•Initially recorded at cost.•Conservatism leads to recording decreases in asset value but generally not increases.
What amounts?•Initially recorded at cost.•Conservatism leads to recording decreases in asset value but generally not increases.