Ch03 Fundamental Of Financial Accounting By Edmonds (4th Edition)
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Fundamental Financial Accounting Concepts Fourth Edition
by Edmonds, McNair, Milam, Olds PowerPoint® presentation by J. Lawrence Bergin
3- 2
Chapter 3
Accounting for Deferrals McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 3
What is a deferral? ◆
A deferral event occurs when: – cash is received before revenue is earned or - cash is paid before an expense is incurred.
◆
Deferral events are a part of the accrual basis of accounting
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 4
Accruals vs. Deferrals (Revenues) ◆
Accrual event Now Business action
Later Cash exchange
Performed Services on account
Collect receivables later.
◆
Deferral event Now Cash exchange
Collected Cash from customers, but services not yet performed. McGraw-Hill/Irwin
Later Business action Perform the services we have already been paid for. © The McGraw-Hill Companies, Inc., 2003
3- 5
Accruals vs. Deferrals (Expenses) ◆
Accrual event Now Business action
Later Cash exchange
Incurred expense on credit. (Haven’t paid yet.)
Use cash to pay for expense previously recorded.
◆
Deferral event Now Cash exchange
Pay Cash now for something that will not be EXPENSED until later. McGraw-Hill/Irwin
Later Business action Record an EXPENSE when item purchased before is used up. © The McGraw-Hill Companies, Inc., 2003
3- 6
Deferred Expenses: You’ve paid the cash “up-front” but you haven’t received the goods or services yet. Prepaid Expenses Prepaid Rent Prepaid Insurance Supplies
Prepaid Expenses are ASSETS! Asset Exchange: Cash asset is decreased Prepaid Expense asset is increased.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 7
Deferred Expenses related to Buildings & Equipment: You’ve purchased an asset that will be used to benefit more than one year of operations. When you buy the asset you do NOT “expense” it. You postpone (defer) the recognition of the expense until you have used the asset over a period of time.
Depreciation
of plant (buildings) and equipment Recognizing an expenditure by spreading it over several years, allocating a part of the expense to each of several periods during which the asset is used, is called depreciation. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 8
Depreciation ◆
◆
The portion of the cost of an asset allocated to any one accounting period is called-DEPRECIATION EXPENSE Depreciation of an asset is an allocation process--spreading the cost of an asset that benefits more than one accounting period over the estimated useful life of the asset.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 9
Example of Depreciation: ◆
McGraw-Hill/Irwin
ABC Co. bought a satellite dish for $6000. The asset is expected to last five years and have a $1,000 salvage value at the end of its useful life. How will the purchase and use of the asset affect the financial statements? © The McGraw-Hill Companies, Inc., 2003
3- 10
◆
We want to allocate the cost of the asset to the income statement as an expense during the time period we use the asset. Why? To comply with the MATCHING principle. Expenses incurred must be “matched” to the same time period the revenues (from using this equipment) are recorded.
If we depreciate the asset using the STRAIGHT LINE method, we will divide the cost of the asset (minus any estimated salvage value) by the useful life: (6000-1000)/5 yrs. = $1000 depreciation expense each year. ◆
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 11
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 12
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆
Increases assets (eg. Equip); may decrease “cash” asset (thus, no effect on net assets) or may increase a liability
✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 13
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 14
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ◆ No effect
✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 15
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ◆ No effect
✿Statement of Cash Flows ◆ Depends on whether or not the asset was purchased for cash. If cash is paid it is an Investing Activity cash flow. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 16
Use of the asset: ✿Balance Sheet ✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 17
Use of the asset: ◆
Balance Sheet ◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
◆
Income Statement
◆
Statement of Changes in Stockholders’ Equity
◆
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 18
Use of the asset: ◆
Balance Sheet ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Income Statement ◆
Increase in depreciation expense reduces Net Income
◆
Statement of Changes in Stockholders’ Equity
◆
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 19
Use of the asset: ◆
Balance Sheet ◆
◆
Income Statement ◆
◆
Increase in depreciation expense reduces Net Income
Statement of Changes in Stockholders’ Equity ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Since the Net Income decreased, the remaining Retained Earnings will decrease causing total Stockholders’ Equity to decrease.
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 20
Use of the asset: ◆
Balance Sheet ◆
◆
Income Statement ◆
◆
Increase in depreciation expense reduces Net Income
Statement of Changes in Stockholders’ Equity ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Since the Net Income decreased, the remaining Retained Earnings will decrease causing total Stockholders’ Equity to decrease.
Statement of Cash Flows ◆
No cash involved. Depreciation is an adjusting entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 21
Deferred Revenue ◆
◆
◆
You’ve received payment for something you have NOT yet provided. Revenue is not recognized until the service is performed or the goods are delivered...but you have to record the fact that you have received the cash, and…. A related LIABILITY (Unearned Revenue) must be recorded and kept on the books until you EARN the revenue.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 22
Below is the horizontal statements model (with beginning balances) for Bob Company, Inc. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
Rent
+ Equip.
-- Deprec.
4,000
= Serv.Rev. + Stk.
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
7,000
=
1
+
+
-
=
+ Earn.
+
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000
+
CASHFLOW STATEMENT $ amt
5,000 bal.
-
=
bal.
Record the following nine transactions for the year ended 12/31/04. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 23
Bob Company’s 2004 transactions 1. 2. 3. 4. 5. 6. 7. 8. 9.
Performed services for customers, charging $7,000 on account. Collected $8,000 cash from customers for services to be provided in the future. Collected $7,000 of the receivables. Paid $2,000 salaries in cash. On July 1st purchased office equipment by paying $9,000 cash. (estimates: life=4 years, salvage value=$1,000) On Nov. 1st paid $3,000 to rent office space for the next three months. Year-end adjustment recognizing 1/4 of the services required by transaction #2 have been performed. Year-end depreciation adjustment. Year-end rent adjustment.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 24
1. Bob performed services for customers for $7,000 on account. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
Rent
+ Equip.
-- Deprec.
4,000
= Serv.Rev. + Stk.
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
7,000
=
1
+
+
-
=
+ Earn.
+
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000
+
CASHFLOW STATEMENT $ amt
5,000 bal.
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 25
1. Performed services for customers for $7,000 on account. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
+
CASHFLOW STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
+
INCOME STATEMENT
$ amt
5,000 bal. 7,000
7,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 26
2. Collected $8,000 cash from customers for services to be provided in the future. future BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
+
CASHFLOW STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
+
INCOME STATEMENT
$ amt
5,000 bal. 7,000
7,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 27
2. Collected $8,000 cash from customers for services to be provided in the future. future BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
8,000
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
CASHFLOW STATEMENT $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 28
3. Collected $7,000 of the receivables. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
8,000
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
CASHFLOW STATEMENT $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 29
3. Collected $7,000 of the receivables. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 30
4. Paid $2,000 salaries in cash. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 31
4. Paid $2,000 salaries in cash. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
(2,000)
+
Salary Expense
+
2,000
-
(2,000)
=
(2,000) OA
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 32
5. On July 1 purchased office equipment by paying $9,000 cash. The equipment is expected to last 4 yrs. with a $1,000 salvage value. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
(2,000)
+
+
2,000
-
(2,000)
=
(2,000) OA
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 33
5. On July 1 purchased office equipment by paying $9,000 cash. The equipment is expected to last 4 yrs. with a $1,000 salvage value. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
=
7
=
8
=
9
=
+
+
-
=
$ amt
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(2,000) OA (9,000) I A
=
6
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 34
6. On Nov. 1 paid $3,000 to rent office space for the next three months. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
=
7
=
8
=
9
=
+
+
-
=
$ amt
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(2,000) OA (9,000) I A
=
6
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 35
6. On Nov. 1 paid $3,000 to rent office space for the next three months. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 36
7. Year-end adjustment recognizing one-fourth of our work related to event #2 is completed. $8,000 in advance x ¼ completed = $2,000 Service Revenue earned. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 37
7. Year-end adjustment recognizing one-fourth of our work related to event #2 is completed. $8,000 in advance x ¼ completed = $2,000 Service Revenue earned. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
Service Revenue
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 38
8. Year-end adjustment to recognize the depreciation of office equipment. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 39
8. Year-end adjustment to recognize the Cost depreciation of office equipment. ($9,000-$1,000) /4 Yrs. = $2,000 per yr. Only owned and used for six months Salvage (July-Dec.) this year. So, expense is $2,000 x 6/ = $1,000. 12 BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 40
8. Year-end adjustment to recognize the Cost depreciation of office equipment. ($9,000-$1,000) /4 Yrs. = $2,000 per yr. Only owned and used for six months Salvage (July-Dec.) this year. So, expense is $2,000 x 6/ = $1,000. 12 BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB 1 2 3 4 5 6
5,000
Rent
+ Equip.
4,000
-- Deprec. = Serv.Rev. + =
7,000
9 EB
7,000
7,000
8,000 = Accumulated Depreciation is a 7,000 (7,000) = CONTRA-ASSET. It is (2,000) (2,000) = SUBTRACTED9,000 from the= other assets (9,000) (3,000) 3,000 the Total Assets. = to calculate
Rev.
- Exp. = Inc.
Adding to Accumulated + + Deprec. +
McGraw-Hill/Irwin
(2,000)
2,000
1,000 =
$ amt
5,000 bal. 7,000
7,000
8,000
=
CASHFLOW STATEMENT
Net OA,IA,FA
2,000
=
7 8
Stk. + Earn.
INCOME STATEMENT
8,000 OA 7,000 OA 2,000
(2,000)
(2,000) OA (9,000) I A (3,000) OA
2,000
2,000
(1,000)
1,000
(1,000)
=
-
=
+
Depreciation Expense
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 41
9. Year-end adjustment to recognize expired (used up) rent. $3,000 /3 Mo. = $1,000 per mo. Two months (Nov. & Dec.) expired = $2,000.
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
1,000 =
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
2,000
2,000
(1,000) +
+
1,000
-
(1,000) =
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 42
9. Year-end adjustment to recognize expired (used up) rent. $3,000 /3 Mo. = $1,000 per mo. Two months (Nov. & Dec.) expired = $2,000.
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
7,000
7,000
8,000
8,000 OA 7,000 OA (2,000)
=
5 (9,000)
9,000
6 (3,000)
3,000
2,000
(2,000)
(9,000) I A
=
(3,000) OA
=
8
1,000 =
(1,000)
1,000
(1,000)
=
(2,000)
2,000
(2,000)
EB
(2,000) +
McGraw-Hill/Irwin
+
+
-
(2,000) OA
=
7 9
$ amt
5,000 bal.
=
4 (2,000)
CASHFLOW STATEMENT
=
(2,000)
2,000
+
Rent Expense
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 43
Summary and Ending Balances
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. +
BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
Rev.
- Exp. = Inc.
2,000 7,000
9,000 3,000
7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(9,000) I A
=
(3,000) OA
=
8
1,000 =
(1,000)
1,000
(1,000)
=
(2,000)
2,000
(2,000)
EB
(2,000) 6,000 + 4,000 +
1,000 + 9,000
-
(2,000) OA
=
7 9
$ amt
5,000 bal.
8,000
=
5 (9,000)
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000) 6 (3,000)
7,000
+ Earn.
INCOME STATEMENT
1,000 =
(2,000)
2,000
6,000 + 7,000 + 6,000
2,000
9,000
2,000
- 5,000 = 4,000
6,000 bal.
Subtract the contra-asset, Accum. Dep. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 44
Summary of General Ledger Accounts
Cash BB
Accts + Receiv.
5,000
1
ACCOUNTING EQUATION ASSETS = LIABILITY + STK. EQUITY Prepd Office Accum. Unearned Com. Ret. + Rent + Equip. - Deprec. = Serv. Rev. + Stk. + Earn.
4,000
7,000
7,000
2
8,000
3
7,000
4
(2,000)
5
(9,000)
6
(3,000)
2,000 7,000
+ Service Revenue
(2,000)
+ Salary Expense
2,000
+ Service Revenue
9,000 3,000
8
1,000
9
(2,000)
McGraw-Hill/Irwin
the change in Ret.Earn.
(7,000)
(2,000)
6,000 +
affected that resulted in
8,000
7
EB
Titles of Nominal accts.
4,000 +
1,000 +
9,000 -
1,000 =
6,000 + 7,000 +
(1,000)
+ Deprec. Exp.
(2,000)
+ Rent Expense
6,000
© The McGraw-Hill Companies, Inc., 2003
3- 45
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004 Revenue: Service revenue Other revenue Total Revenue
$ $
Expenses: Salary expense $ Depreciation expense Rent expense Total Expenses
$
Net Income
$
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 46
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004
Revenue: Service revenue Other revenue Total Revenue
7,000
$9,000 0
McGraw-Hill/Irwin
7,000
2,000
$ 9,000
Expenses: Salary expense $2,000 Depreciation expense 1,000 Rent expense 2,000 Total Expenses $ 5,000 Net Income
INCOME STATEMENT Net Rev. - Exp. = Inc.
(2,000)
2,000
2,000 1,000 (1,000) 2,000 (2,000) 9,000 - 5,000 = 4,000
$ 4,000 © The McGraw-Hill Companies, Inc., 2003
3- 47
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004
Revenue: Service revenue Other revenue Total Revenue
7,000
$9,000 0
McGraw-Hill/Irwin
7,000
2,000
$ 9,000
Expenses: Salary expense $2,000 Depreciation expense 1,000 Rent expense 2,000 Total Expenses $ 5,000 Net Income
INCOME STATEMENT Net Rev. - Exp. = Inc.
(2,000)
2,000
2,000 1,000 (1,000) 2,000 (2,000) 9,000 - 5,000 = 4,000
$ 4,000 © The McGraw-Hill Companies, Inc., 2003
3- 48
Bob Company, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock Plus: Common Stock issued Ending Common Stock Beginning Retained Earnings
$
$ $
Plus: Net income Less: Dividends Ending Retained Earnings $ McGraw-Hill/Irwin Total Stockholders’ Equity
© The McGraw-Hill Companies, Inc., 2003
3- 49
Bob Company, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock Plus: Common Stock issued Ending Commonn Stock
$ 7,000 0
Beginning Retained Earnings Plus: Net income Less: Dividends Ending Retained Earnings
$ 2,000 4,000 0
Total Stockholders’ Equity
McGraw-Hill/Irwin
$ 7,000
$ 6,000 $13,000
© The McGraw-Hill Companies, Inc., 2003
3- 50
Bob Company, Inc. Balance Sheet As of December 31, 2004
Assets Cash
$
Acct. Receivable Prepaid rent Prop., Plant & Eq.
Stockholders’ Equity Common Stock $ Retained Earnings Total Stkhld. Eq. $
Off. Equip. $ Accum. Depr. Off. Eq., net Total Assets McGraw-Hill/Irwin
Liabilities Accounts Payable $ Unearned Revenue Total Liabilities $
$
Total Liab. & S.E. $ © The McGraw-Hill Companies, Inc., 2003
3- 51
Bob Company, Inc. Property = LAND Balance Sheet As of December 31, 2004 Plant = BUILDINGS
Assets Cash
$ 6,000
Acct. Receivable
4,000
Prepaid rent
1,000
Prop., Plant & Eq. Off. Equip.
$9,000
Accum. Depr.
(1,000)
Off. Eq., net Total Assets This is the Book Value (or “Carrying Value”) of the Office Equipment. McGraw-Hill/Irwin
8,000
Liabilities Accounts Payable $ 0 Unearned Revenue 6,000 Total Liabilities $ 6,000 Stockholders’ Equity Common Stock $ 7,000 Retained Earnings 6,000 Total Stkhld. Eq. $13,000
$19,000 Total Liab. & S.E. $19,000 © The McGraw-Hill Companies, Inc., 2003
3- 52
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations Cash from Investing Activities: Cash payment for equipment Net cash flow from investments Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$ $ $ $
$ $ $ $ © The McGraw-Hill Companies, Inc., 2003
3- 53
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 54
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 55
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 56
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations Cash from Investing Activities: Cash payment for equipment Net cash flow from investments Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$ 15,000 (5,000) $10,000 $(9,000) $(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000 © The McGraw-Hill Companies, Inc., 2003
3- 57
Analysis of Financial Statements Using Ratios
Bob Company’s Net Income is $4,000. Is this good or bad? If Bob only invested $1 to start the business, a $4,000 profit sounds great. If he expected a $10,000 profit, he’s not happy. If his competitor only earned $2,000 with a similar investment, Bob’s doing OK. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 58
Analysis of Financial Statements Using Ratios
For a meaningful analysis we need: 1. a way to compare different size companies Use financial RATIOS. 2. A basis of comparison. a. Our past: (Are we getting better?) b. Our budget: (Did we meet expectations?) c. Our competitors: Who is better? Why? McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 59
Analysis of Financial Statements Using Ratios (Data from Bob Co.) ◆
Return on assets Net income Total assets
◆
=
$ $
=
$ $
=
%
Debt to assets Total debt (Liabilities) Total assets
◆
=
$ $
=
%
Return on equity Net income Stockholders’ Equity
McGraw-Hill/Irwin
=
%
© The McGraw-Hill Companies, Inc., 2003
3- 60
Analysis of Financial Statements Using Ratios (Data from Bob Co.) ◆
Return on assets Net income Total assets
◆
=
$ 6,000 31.6% = $19,000
=
$ 4,000 30.8% = $13,000
Debt to assets Total debt (Liabilities) Total assets
◆
=
$ 4,000 21.1% = $19,000
Return on equity Net income Stockholders’ Equity
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 61
Using Financial “Leverage” Using borrowed money to increase the return on the Owners’ (the Stockholders’) Investment. Ex: Borrow money at 10% to buy equipment. Earn 12% investment return on operating the equipment. Net 2% increase to owners. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 62
Chapter 3:
Financial
The End McGraw-Hill/Irwin
Accounting
© The McGraw-Hill Companies, Inc., 2003
by Edmonds, McNair, Milam, Olds PowerPoint® presentation by J. Lawrence Bergin
3- 2
Chapter 3
Accounting for Deferrals McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 3
What is a deferral? ◆
A deferral event occurs when: – cash is received before revenue is earned or - cash is paid before an expense is incurred.
◆
Deferral events are a part of the accrual basis of accounting
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 4
Accruals vs. Deferrals (Revenues) ◆
Accrual event Now Business action
Later Cash exchange
Performed Services on account
Collect receivables later.
◆
Deferral event Now Cash exchange
Collected Cash from customers, but services not yet performed. McGraw-Hill/Irwin
Later Business action Perform the services we have already been paid for. © The McGraw-Hill Companies, Inc., 2003
3- 5
Accruals vs. Deferrals (Expenses) ◆
Accrual event Now Business action
Later Cash exchange
Incurred expense on credit. (Haven’t paid yet.)
Use cash to pay for expense previously recorded.
◆
Deferral event Now Cash exchange
Pay Cash now for something that will not be EXPENSED until later. McGraw-Hill/Irwin
Later Business action Record an EXPENSE when item purchased before is used up. © The McGraw-Hill Companies, Inc., 2003
3- 6
Deferred Expenses: You’ve paid the cash “up-front” but you haven’t received the goods or services yet. Prepaid Expenses Prepaid Rent Prepaid Insurance Supplies
Prepaid Expenses are ASSETS! Asset Exchange: Cash asset is decreased Prepaid Expense asset is increased.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 7
Deferred Expenses related to Buildings & Equipment: You’ve purchased an asset that will be used to benefit more than one year of operations. When you buy the asset you do NOT “expense” it. You postpone (defer) the recognition of the expense until you have used the asset over a period of time.
Depreciation
of plant (buildings) and equipment Recognizing an expenditure by spreading it over several years, allocating a part of the expense to each of several periods during which the asset is used, is called depreciation. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 8
Depreciation ◆
◆
The portion of the cost of an asset allocated to any one accounting period is called-DEPRECIATION EXPENSE Depreciation of an asset is an allocation process--spreading the cost of an asset that benefits more than one accounting period over the estimated useful life of the asset.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 9
Example of Depreciation: ◆
McGraw-Hill/Irwin
ABC Co. bought a satellite dish for $6000. The asset is expected to last five years and have a $1,000 salvage value at the end of its useful life. How will the purchase and use of the asset affect the financial statements? © The McGraw-Hill Companies, Inc., 2003
3- 10
◆
We want to allocate the cost of the asset to the income statement as an expense during the time period we use the asset. Why? To comply with the MATCHING principle. Expenses incurred must be “matched” to the same time period the revenues (from using this equipment) are recorded.
If we depreciate the asset using the STRAIGHT LINE method, we will divide the cost of the asset (minus any estimated salvage value) by the useful life: (6000-1000)/5 yrs. = $1000 depreciation expense each year. ◆
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 11
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 12
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆
Increases assets (eg. Equip); may decrease “cash” asset (thus, no effect on net assets) or may increase a liability
✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 13
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 14
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ◆ No effect
✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 15
Effect on the financial statements: Purchase of asset: ✿Balance Sheet ◆ Increases assets; may decrease an asset (cash) or increase a liability (payable) if we haven’t paid yet.
✿Income Statement ◆ No effect
✿Statement of Changes in Stockholders’ Equity ◆ No effect
✿Statement of Cash Flows ◆ Depends on whether or not the asset was purchased for cash. If cash is paid it is an Investing Activity cash flow. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 16
Use of the asset: ✿Balance Sheet ✿Income Statement ✿Statement of Changes in Stockholders’ Equity ✿Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 17
Use of the asset: ◆
Balance Sheet ◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
◆
Income Statement
◆
Statement of Changes in Stockholders’ Equity
◆
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 18
Use of the asset: ◆
Balance Sheet ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Income Statement ◆
Increase in depreciation expense reduces Net Income
◆
Statement of Changes in Stockholders’ Equity
◆
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 19
Use of the asset: ◆
Balance Sheet ◆
◆
Income Statement ◆
◆
Increase in depreciation expense reduces Net Income
Statement of Changes in Stockholders’ Equity ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Since the Net Income decreased, the remaining Retained Earnings will decrease causing total Stockholders’ Equity to decrease.
Statement of Cash Flows
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 20
Use of the asset: ◆
Balance Sheet ◆
◆
Income Statement ◆
◆
Increase in depreciation expense reduces Net Income
Statement of Changes in Stockholders’ Equity ◆
◆
Reduces the net value of the asset by increasing a contra-asset called accumulated depreciation
Since the Net Income decreased, the remaining Retained Earnings will decrease causing total Stockholders’ Equity to decrease.
Statement of Cash Flows ◆
No cash involved. Depreciation is an adjusting entry.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 21
Deferred Revenue ◆
◆
◆
You’ve received payment for something you have NOT yet provided. Revenue is not recognized until the service is performed or the goods are delivered...but you have to record the fact that you have received the cash, and…. A related LIABILITY (Unearned Revenue) must be recorded and kept on the books until you EARN the revenue.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 22
Below is the horizontal statements model (with beginning balances) for Bob Company, Inc. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
Rent
+ Equip.
-- Deprec.
4,000
= Serv.Rev. + Stk.
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
7,000
=
1
+
+
-
=
+ Earn.
+
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000
+
CASHFLOW STATEMENT $ amt
5,000 bal.
-
=
bal.
Record the following nine transactions for the year ended 12/31/04. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 23
Bob Company’s 2004 transactions 1. 2. 3. 4. 5. 6. 7. 8. 9.
Performed services for customers, charging $7,000 on account. Collected $8,000 cash from customers for services to be provided in the future. Collected $7,000 of the receivables. Paid $2,000 salaries in cash. On July 1st purchased office equipment by paying $9,000 cash. (estimates: life=4 years, salvage value=$1,000) On Nov. 1st paid $3,000 to rent office space for the next three months. Year-end adjustment recognizing 1/4 of the services required by transaction #2 have been performed. Year-end depreciation adjustment. Year-end rent adjustment.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 24
1. Bob performed services for customers for $7,000 on account. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
Rent
+ Equip.
-- Deprec.
4,000
= Serv.Rev. + Stk.
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
7,000
=
1
+
+
-
=
+ Earn.
+
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000
+
CASHFLOW STATEMENT $ amt
5,000 bal.
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 25
1. Performed services for customers for $7,000 on account. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
+
CASHFLOW STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
+
INCOME STATEMENT
$ amt
5,000 bal. 7,000
7,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 26
2. Collected $8,000 cash from customers for services to be provided in the future. future BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
2
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
+
CASHFLOW STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
+
INCOME STATEMENT
$ amt
5,000 bal. 7,000
7,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 27
2. Collected $8,000 cash from customers for services to be provided in the future. future BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
8,000
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
CASHFLOW STATEMENT $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 28
3. Collected $7,000 of the receivables. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
=
8,000
=
3
=
4
=
5
=
6
=
7
=
8
=
9
=
EB
+
McGraw-Hill/Irwin
+
+
-
=
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
CASHFLOW STATEMENT $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 29
3. Collected $7,000 of the receivables. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 30
4. Paid $2,000 salaries in cash. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 31
4. Paid $2,000 salaries in cash. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
(2,000)
+
Salary Expense
+
2,000
-
(2,000)
=
(2,000) OA
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 32
5. On July 1 purchased office equipment by paying $9,000 cash. The equipment is expected to last 4 yrs. with a $1,000 salvage value. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
=
5
=
6
=
7
=
8
=
9
=
+
McGraw-Hill/Irwin
7,000
Rev.
- Exp. = Inc.
2,000 7,000
+
+
-
=
CASHFLOW STATEMENT
Net OA,IA,FA $ amt
5,000 bal. 7,000
7,000
8,000
8,000 OA 7,000 OA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
(2,000)
+
+
2,000
-
(2,000)
=
(2,000) OA
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 33
5. On July 1 purchased office equipment by paying $9,000 cash. The equipment is expected to last 4 yrs. with a $1,000 salvage value. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
=
7
=
8
=
9
=
+
+
-
=
$ amt
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(2,000) OA (9,000) I A
=
6
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 34
6. On Nov. 1 paid $3,000 to rent office space for the next three months. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
=
7
=
8
=
9
=
+
+
-
=
$ amt
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(2,000) OA (9,000) I A
=
6
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 35
6. On Nov. 1 paid $3,000 to rent office space for the next three months. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 36
7. Year-end adjustment recognizing one-fourth of our work related to event #2 is completed. $8,000 in advance x ¼ completed = $2,000 Service Revenue earned. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
+
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 37
7. Year-end adjustment recognizing one-fourth of our work related to event #2 is completed. $8,000 in advance x ¼ completed = $2,000 Service Revenue earned. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
Service Revenue
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 38
8. Year-end adjustment to recognize the depreciation of office equipment. BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
-- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 39
8. Year-end adjustment to recognize the Cost depreciation of office equipment. ($9,000-$1,000) /4 Yrs. = $2,000 per yr. Only owned and used for six months Salvage (July-Dec.) this year. So, expense is $2,000 x 6/ = $1,000. 12 BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
=
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
+
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 40
8. Year-end adjustment to recognize the Cost depreciation of office equipment. ($9,000-$1,000) /4 Yrs. = $2,000 per yr. Only owned and used for six months Salvage (July-Dec.) this year. So, expense is $2,000 x 6/ = $1,000. 12 BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB 1 2 3 4 5 6
5,000
Rent
+ Equip.
4,000
-- Deprec. = Serv.Rev. + =
7,000
9 EB
7,000
7,000
8,000 = Accumulated Depreciation is a 7,000 (7,000) = CONTRA-ASSET. It is (2,000) (2,000) = SUBTRACTED9,000 from the= other assets (9,000) (3,000) 3,000 the Total Assets. = to calculate
Rev.
- Exp. = Inc.
Adding to Accumulated + + Deprec. +
McGraw-Hill/Irwin
(2,000)
2,000
1,000 =
$ amt
5,000 bal. 7,000
7,000
8,000
=
CASHFLOW STATEMENT
Net OA,IA,FA
2,000
=
7 8
Stk. + Earn.
INCOME STATEMENT
8,000 OA 7,000 OA 2,000
(2,000)
(2,000) OA (9,000) I A (3,000) OA
2,000
2,000
(1,000)
1,000
(1,000)
=
-
=
+
Depreciation Expense
+
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 41
9. Year-end adjustment to recognize expired (used up) rent. $3,000 /3 Mo. = $1,000 per mo. Two months (Nov. & Dec.) expired = $2,000.
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
7,000
5 (9,000)
9,000
6 (3,000)
3,000
5,000 bal. 7,000
7,000 8,000 OA 7,000 OA
(2,000)
(2,000) OA (3,000) OA
1,000 =
9
=
-
(2,000)
=
8 +
2,000
(9,000) I A
=
+
$ amt
=
7
McGraw-Hill/Irwin
- Exp. = Inc.
8,000
=
+
Rev.
2,000 7,000
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000)
EB
+ Earn.
INCOME STATEMENT
=
(2,000)
2,000
2,000
2,000
(1,000) +
+
1,000
-
(1,000) =
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 42
9. Year-end adjustment to recognize expired (used up) rent. $3,000 /3 Mo. = $1,000 per mo. Two months (Nov. & Dec.) expired = $2,000.
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. + BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
+ Earn.
7,000
INCOME STATEMENT
Net OA,IA,FA Rev.
- Exp. = Inc.
2,000 7,000
7,000
7,000
8,000
8,000 OA 7,000 OA (2,000)
=
5 (9,000)
9,000
6 (3,000)
3,000
2,000
(2,000)
(9,000) I A
=
(3,000) OA
=
8
1,000 =
(1,000)
1,000
(1,000)
=
(2,000)
2,000
(2,000)
EB
(2,000) +
McGraw-Hill/Irwin
+
+
-
(2,000) OA
=
7 9
$ amt
5,000 bal.
=
4 (2,000)
CASHFLOW STATEMENT
=
(2,000)
2,000
+
Rent Expense
+
2,000
2,000
-
=
bal.
© The McGraw-Hill Companies, Inc., 2003
3- 43
Summary and Ending Balances
BALANCE SHEET (and Accounting Equation) ASSETS = LIABILITY + STK. EQUITY Accts. Prepaid Office Accum. Unearned Com. Retain. Cash + Receiv. +
BB
5,000
1 2
8,000
3
7,000
Rent
+ Equip.
- Deprec.
= Serv.Rev. + Stk.
4,000
=
7,000
= =
(7,000)
Rev.
- Exp. = Inc.
2,000 7,000
9,000 3,000
7,000
7,000 8,000 OA 7,000 OA
(2,000)
2,000
(2,000)
(9,000) I A
=
(3,000) OA
=
8
1,000 =
(1,000)
1,000
(1,000)
=
(2,000)
2,000
(2,000)
EB
(2,000) 6,000 + 4,000 +
1,000 + 9,000
-
(2,000) OA
=
7 9
$ amt
5,000 bal.
8,000
=
5 (9,000)
CASHFLOW STATEMENT
Net OA,IA,FA
=
4 (2,000) 6 (3,000)
7,000
+ Earn.
INCOME STATEMENT
1,000 =
(2,000)
2,000
6,000 + 7,000 + 6,000
2,000
9,000
2,000
- 5,000 = 4,000
6,000 bal.
Subtract the contra-asset, Accum. Dep. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 44
Summary of General Ledger Accounts
Cash BB
Accts + Receiv.
5,000
1
ACCOUNTING EQUATION ASSETS = LIABILITY + STK. EQUITY Prepd Office Accum. Unearned Com. Ret. + Rent + Equip. - Deprec. = Serv. Rev. + Stk. + Earn.
4,000
7,000
7,000
2
8,000
3
7,000
4
(2,000)
5
(9,000)
6
(3,000)
2,000 7,000
+ Service Revenue
(2,000)
+ Salary Expense
2,000
+ Service Revenue
9,000 3,000
8
1,000
9
(2,000)
McGraw-Hill/Irwin
the change in Ret.Earn.
(7,000)
(2,000)
6,000 +
affected that resulted in
8,000
7
EB
Titles of Nominal accts.
4,000 +
1,000 +
9,000 -
1,000 =
6,000 + 7,000 +
(1,000)
+ Deprec. Exp.
(2,000)
+ Rent Expense
6,000
© The McGraw-Hill Companies, Inc., 2003
3- 45
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004 Revenue: Service revenue Other revenue Total Revenue
$ $
Expenses: Salary expense $ Depreciation expense Rent expense Total Expenses
$
Net Income
$
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 46
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004
Revenue: Service revenue Other revenue Total Revenue
7,000
$9,000 0
McGraw-Hill/Irwin
7,000
2,000
$ 9,000
Expenses: Salary expense $2,000 Depreciation expense 1,000 Rent expense 2,000 Total Expenses $ 5,000 Net Income
INCOME STATEMENT Net Rev. - Exp. = Inc.
(2,000)
2,000
2,000 1,000 (1,000) 2,000 (2,000) 9,000 - 5,000 = 4,000
$ 4,000 © The McGraw-Hill Companies, Inc., 2003
3- 47
Bob Company, Inc. Income Statement For the Year Ended December 31, 2004
Revenue: Service revenue Other revenue Total Revenue
7,000
$9,000 0
McGraw-Hill/Irwin
7,000
2,000
$ 9,000
Expenses: Salary expense $2,000 Depreciation expense 1,000 Rent expense 2,000 Total Expenses $ 5,000 Net Income
INCOME STATEMENT Net Rev. - Exp. = Inc.
(2,000)
2,000
2,000 1,000 (1,000) 2,000 (2,000) 9,000 - 5,000 = 4,000
$ 4,000 © The McGraw-Hill Companies, Inc., 2003
3- 48
Bob Company, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock Plus: Common Stock issued Ending Common Stock Beginning Retained Earnings
$
$ $
Plus: Net income Less: Dividends Ending Retained Earnings $ McGraw-Hill/Irwin Total Stockholders’ Equity
© The McGraw-Hill Companies, Inc., 2003
3- 49
Bob Company, Inc. Statement of Changes in Stockholders’ Equity For the Year Ended December 31, 2004 Beginning Common Stock Plus: Common Stock issued Ending Commonn Stock
$ 7,000 0
Beginning Retained Earnings Plus: Net income Less: Dividends Ending Retained Earnings
$ 2,000 4,000 0
Total Stockholders’ Equity
McGraw-Hill/Irwin
$ 7,000
$ 6,000 $13,000
© The McGraw-Hill Companies, Inc., 2003
3- 50
Bob Company, Inc. Balance Sheet As of December 31, 2004
Assets Cash
$
Acct. Receivable Prepaid rent Prop., Plant & Eq.
Stockholders’ Equity Common Stock $ Retained Earnings Total Stkhld. Eq. $
Off. Equip. $ Accum. Depr. Off. Eq., net Total Assets McGraw-Hill/Irwin
Liabilities Accounts Payable $ Unearned Revenue Total Liabilities $
$
Total Liab. & S.E. $ © The McGraw-Hill Companies, Inc., 2003
3- 51
Bob Company, Inc. Property = LAND Balance Sheet As of December 31, 2004 Plant = BUILDINGS
Assets Cash
$ 6,000
Acct. Receivable
4,000
Prepaid rent
1,000
Prop., Plant & Eq. Off. Equip.
$9,000
Accum. Depr.
(1,000)
Off. Eq., net Total Assets This is the Book Value (or “Carrying Value”) of the Office Equipment. McGraw-Hill/Irwin
8,000
Liabilities Accounts Payable $ 0 Unearned Revenue 6,000 Total Liabilities $ 6,000 Stockholders’ Equity Common Stock $ 7,000 Retained Earnings 6,000 Total Stkhld. Eq. $13,000
$19,000 Total Liab. & S.E. $19,000 © The McGraw-Hill Companies, Inc., 2003
3- 52
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations Cash from Investing Activities: Cash payment for equipment Net cash flow from investments Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$ $ $ $
$ $ $ $ © The McGraw-Hill Companies, Inc., 2003
3- 53
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 54
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 55
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004
Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations
$ 15,000 (5,000)
Cash from Investing Activities: Cash payment for equipment Net cash flow from investments
$(9,000)
Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$10,000
$(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000
CASHFLOW STATEMENT OA,IA,FA $ amt 5,000 bal. 8,000 7,000 (2,000) (9,000) (3,000)
OA OA OA I A OA
6,000 bal.
© The McGraw-Hill Companies, Inc., 2003
3- 56
Bob Company, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Cash from Operations: Cash receipts for services Cash payments for expenses Net cash flow from operations Cash from Investing Activities: Cash payment for equipment Net cash flow from investments Cash from Financing Activities Cash receipts from stock issue Dividends paid to stockholders’ Net cash flow from financing Net Increase (Decrease) in cash Plus: Cash balance, Jan. 1, 2004 Cash balance, Dec. 31, 2004
McGraw-Hill/Irwin
$ 15,000 (5,000) $10,000 $(9,000) $(9,000)
$
0 (0) $
(0)
$ 1,000 5,000 $ 6,000 © The McGraw-Hill Companies, Inc., 2003
3- 57
Analysis of Financial Statements Using Ratios
Bob Company’s Net Income is $4,000. Is this good or bad? If Bob only invested $1 to start the business, a $4,000 profit sounds great. If he expected a $10,000 profit, he’s not happy. If his competitor only earned $2,000 with a similar investment, Bob’s doing OK. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 58
Analysis of Financial Statements Using Ratios
For a meaningful analysis we need: 1. a way to compare different size companies Use financial RATIOS. 2. A basis of comparison. a. Our past: (Are we getting better?) b. Our budget: (Did we meet expectations?) c. Our competitors: Who is better? Why? McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 59
Analysis of Financial Statements Using Ratios (Data from Bob Co.) ◆
Return on assets Net income Total assets
◆
=
$ $
=
$ $
=
%
Debt to assets Total debt (Liabilities) Total assets
◆
=
$ $
=
%
Return on equity Net income Stockholders’ Equity
McGraw-Hill/Irwin
=
%
© The McGraw-Hill Companies, Inc., 2003
3- 60
Analysis of Financial Statements Using Ratios (Data from Bob Co.) ◆
Return on assets Net income Total assets
◆
=
$ 6,000 31.6% = $19,000
=
$ 4,000 30.8% = $13,000
Debt to assets Total debt (Liabilities) Total assets
◆
=
$ 4,000 21.1% = $19,000
Return on equity Net income Stockholders’ Equity
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 61
Using Financial “Leverage” Using borrowed money to increase the return on the Owners’ (the Stockholders’) Investment. Ex: Borrow money at 10% to buy equipment. Earn 12% investment return on operating the equipment. Net 2% increase to owners. McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2003
3- 62
Chapter 3:
Financial
The End McGraw-Hill/Irwin
Accounting
© The McGraw-Hill Companies, Inc., 2003
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