1 Basic Accounting Concepts Chapter 2 A200 Survey of Accounting University of Tennessee Fall 2015 2 Ch 2 Financial Accounting System Elements Rules 1 Record business transactions based on the eight accounting concepts 2 Record business transactions using Generally Accepted Accounting Principles GAAP Framework 3 Analyze and record business transactions into accounts using journal entries and the integrated financial statement framework slide 3 4 Organize accounts into the four Financial Statements Financial Statement Controls 5 Income Statement Net income must equal the net effects of revenues and expenses on the Statement of Retained Earnings 2 Balance Sheet Assets must equal Liabilities plus Equity 3 Statement of Cash Flows Ending cash must equal Cash on the Balance Sheet 3 Integrated Financial Statement Framework for recording business transactions STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explain the change in the equity Retained Earnings Assets Liabilities Equity A Cash in out from Operating activities Revenues Expenses Net Income Net Loss B Cash in out from Investing activities Dividends C Cash in out from Financing activities Increase or decrease to Retained Earnings Increase or decrease to Cash 4 Ch 2 Business Activity Financing Transaction 1 In January 2015 Warren Corporation raised 200 000 by issuing capital stock to new owners in exchange for cash STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings 200 000 Cash in Financing Assets Cash 200 000 Liabilities Equity Capital Stock 200 000 This transaction increases both assets and equity on the Balance Sheet 5 Ch 2 Business Activity Financing Transaction 2 Also in January Warren Corporation raised 120 000 by issuing a note payable to First National Bank STATEMENT OF CASH FLOWS explains the change in the asset Cash INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings 120 000 Cash in Financing Assets Cash Liabilities Note Payable 120 000 120 000 Equity This transaction increases both assets and liabilities on the Balance Sheet 6 Ch 2 Business Activity Investing Transaction 3 Also in January Warren Corporation used cash to purchase a building for 100 000 and equipment for 125 000 STATEMENT OF CASH FLOWS BALANCE SHEET explains the change in the asset Cash explains the change in the equity Retained Earnings Assets 225 000 Cash out Investing INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Cash Building Equipment 225 000 100 000 125 000 Liabilities Equity This transaction changes the mix of assets on the Balance Sheet 7 Ch 2 Business Activity Operating Transaction 4 Also in January Warren Corporation earned 8 000 by selling services It received cash at the same time STATEMENT OF CASH FLOWS BALANCE SHEET explains the change in the asset Cash 8 000 Cash in Operating INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS Assets Cash 8 000 Liabilities explains the change in the equity Retained Earnings Equity Retained Earnings 8 000 8 000 Fees Revenue Revenue transactions increase assets and equity on the Balance Sheet 8 Ch 2 Business Activity Operating Transaction 5 Also in January Warren Corporation incurred the following expenses 2 600 miscellaneous 750 and paid cash wages 3 000 rent STATEMENT OF CASH FLOWS INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the asset Cash explains the change in the equity Retained Earnings Assets Cash Liabilities Equity Retained Earnings 3 000 Cash out Operating 3 000 3 000 3 000 Wages Expense 2 600 Cash out Operating 2 600 2 600 2 600 Rent Expense 750 Cash out Operating 750 750 750 Misc Expense Expense transactions decrease assets and equity on the Balance Sheet 9 Ch 2 Business Activity Financing Transaction 6 Also in January Warren Corporation distributed 200 of its earnings to the stockholders in cash STATEMENT OF CASH FLOWS INCOME STATEMENT and explains the change in the asset Cash 200 Cash out Financing STATEMENT OF RETAINED EARNINGS BALANCE SHEET explains the change in the equity Retained Earnings Assets Cash 200 Liabilities Equity Retained Earnings 200 Dividend transactions decrease assets and equity on the Balance Sheet 200 Dividends 10 Summarize account balances STATEMENT OF CASH FLOWS BALANCE Assets Cash Building Equipment 0 0 Beg 0 0 1 200 000 Financing 200 000 2 120 000 Financing 120 000 3 225 000 Investing 225 000 4 8 000 Operating 5 INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS SHEET Liabilities Note Payable 0 Equity Capital Stock Retained Earnings 0 0 200 000 120 000 100 000 125 000 8 000 8 000 8 000 Revenue 6 350 Operating 6 350 6 350 6 350 Expenses 6 200 Financing 200 200 200 Dividends End 96 450 96 450 1 450 1 650 Net Income and 1 450 net increase to RE 100 000 TA 321 450 125 000 120 000 TL TE 321 450 200 000 11 Ch 2 Financial Statements Income Statement Warren Corporation Income Statement For the month ended January 31 2015 Revenues Fees Earned 8 000 trans 4 Expenses Wages expense 3 000 Rent expense 2 600 Miscellaneous expense 750 6 350 Net Income trans 5 1 650 Net Income increases Equity Retained Earnings So Revenue increases Equity and Expenses decrease Equity 12 Ch 2 Financial Statements Retained Earnings Statement Warren Corporation Statement of Retained Earnings For the month ended January 31 2014 Retained Earnings January 1 2015 Net Income Dividends Retained Earnings January 31 2015 0 1 650 200 trans 6 1 450 Ch 2 Financial Statements Balance Sheet Warren Corporation Balance Sheet as of January 31 2015 Assets Cash trans 1 6 Building trans 3 Equipment trans 3 Liabilities 96 450 Note Payable 120 000 trans 2 100 000 125 000 Stockholders Equity Capital Stock trans 1 Retained Earnings 200 000 1 450 trans 4 6 Total Assets 321 450 Stockholders Equity Total Liabilities 321 450 13 Ch 2 Financial Statements Statement of Cash Flows Warren Corporation Statement of Cash Flows For the month ended January 31 2015 Cash flows from Operating Activities Cash inflow from customers trans 4 Cash outflow for expenses trans 5 Net Cash In from Operating Activities 8 000 6 350 1 650 Cash flows from Investing Activities Cash inflow from sale of Property Plant Equipment Cash outflow for Property Plant Equipment trans 3 Net Cash Out for Investing Activities 0 225 000 225 000 Cash