Class 5 Chapter 2 The balance sheetAnnouncementsCourse OutlineInvesting and Financing Decisions and the Balance SheetThe Conceptual FrameworkSlide 6The Conceptual Framework: AssumptionsThe Conceptual Framework: PrinciplesSlide 9The Conceptual Framework: ConstraintsSlide 11Balance sheetWhat business activities cause changes in the balance sheet?Slide 14Transactions AnalysisPowerPoint PresentationSlide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Journal Entries and T-AccountsDirection of Transaction EffectsSlide 36Debit/Credit FrameworkJournal EntriesExample Journal EntrySlide 40Slide 41Slide 42Slide 43Slide 44Slide 45Slide 46Slide 47Slide 48Slide 49Steps in the Accounting CyclePractice problem 1PP1Slide 53Practice problem 2PP2Slide 56Slide 57Next Class1Class 5Chapter 2 The balance sheetAccounting 2610Xiumin Martin1/24/20132AnnouncementsQuiz 1 on Tuesday (Ch1&2)3Course OutlineAn overview: “ Big picture” Classes 1 -3A closer look at financial statements: “Medium picture” Classes 5 -9A detailed examination of specific issues: “Smaller picture”Classes 11 -28An even more detailed examination of these and other issuesIntermediate accounting 3610/36204Investing and Financing Decisions and the Balance SheetPlanThe Conceptual Framework (briefly)The balance sheet Transaction Analysis T-accounts Journal entriesExamplesWarning: This is when students start to fall behind.The Conceptual FrameworkQualitative CharacteristicsRelevancyReliabilityComparableConsistentQualitative CharacteristicsRelevancyReliabilityComparableConsistentElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossObjective of External Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Objective of External Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Elements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossElements of StatementsAssetLiabilityStockholders’ EquityRevenueExpenseGainLossThe Conceptual FrameworkQualitative CharacteristicsRelevancyReliabilityComparableConsistentQualitative CharacteristicsRelevancyReliabilityComparableConsistentObjective of External Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Objective of External Financial ReportingTo provide useful economic information to external users for decision making and for assessing future cash flows.Primary Characteristics•Relevancy: predictive value, feedback value, and timeliness.•Reliability: verifiability, representational faithfulness, and neutrality. Secondary Characteristics•Comparability: across companies.•Consistency: over time.7The Conceptual Framework: AssumptionsSeparate entity assumption (Ch. 2)Transactions of the business are separate from the owners Unit-of-measure assumption (Ch. 2)Accounting measures are in the national monetary unit Going-concern (continuity) assumption (Ch. 2)Entity will not go out of business in the near future Time period assumption (Ch. 3)Life of a company can be broken up into a series of shorter reporting periods (e.g. annually)8The Conceptual Framework: PrinciplesHistorical Cost Principle (Ch. 2)Cash equivalent cost given up is the basis for initial recording of financial statement items Revenue Recognition Principle (Ch. 3)Record revenues when earned and measurable (exchange complete, earnings complete and collection probable). Does not necessarily correspond to cash collection.9The Conceptual Framework: PrinciplesMatching Principle (Ch. 3)Record expenses when incurred in earning revenueFull Disclosure Principle (Ch. 5)Disclose relevant economic information10The Conceptual Framework: ConstraintsMateriality and cost/benefit (Ch. 5)Conservatism (Ch. 5)When uncertainty exists the alternative producing the lowest asset value or least amount of income should be chosenIndustry practices (Ch. 5)Differences in accounting and reporting are permitted IF there is clear precedent in the industry11Investing and Financing Decisions and the Balance SheetPlanThe Conceptual Framework (briefly)The balance sheet Transaction Analysis T-accounts Journal entriesExamples (practice problems)12Balance sheetTo understand amounts on a company’s balance sheet we need to answer the following questions:What business activities cause changes in the balance sheet?How do specific activities affect each balance?How do companies keep track of balance sheet amounts?13What business activities cause changes in the balance sheet?Observe business event - should it be recorded?External eventsInternal events A transaction is an event that should be recorded whenAn exchange of assets/liabilities/shareholders’ equity with external partiesDecide what balances are affected in which direction ( or )14Balance sheetTo understand amounts on a company’s balance sheet we need to answer the following questions:What business activities cause changes in the balance sheet?How do specific activities affect each balance?How do companies keep track of balance sheet amounts?15Transactions Analysis Assets = Liabilities + Owners’ EquityImpact of a transaction must be such that this equality is always maintainedThus, every transaction affects at least two balances (duality of effects) and the equation is kept balanced.Identify & Classify the AccountsIdentify & Classify the AccountsDetermine the Direction of the EffectDetermine the Direction of the EffectPapa John’s issues $2,000 of additional common stock to new investors for cash.Identify & Classify the Accounts1. Cash (asset)2. Contributed Capital (equity)Identify & Classify the Accounts1. Cash (asset)2. Contributed Capital (equity)Determine the Direction of the Effect1. Cash increases.2. Contributed Capital increases.Determine the Direction of the Effect1. Cash increases.2. Contributed Capital increases.Papa John’s issues $2,000 of additional common stock to new investors for cash.Papa John’s issues $2,000 of additional common stock to new investors
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