1 Basic Accounting Concepts Chapter 2 and Chapter 9 A200 Survey of Accounting University of Tennessee 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 1 Analyze and record business transactions 2 See the integrated financial statement framework slide 3 for recording business transactions Controls 3 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 2012 Kimble 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 5 Ch 2 Business Activity Financing Transaction 2 In January 2012 Kimble 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 6 Ch 2 Business Activity Investing Transaction 3 In January Kimble 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 225 000 Cash out Investing INCOME STATEMENT and STATEMENT OF RETAINED EARNINGS explains the change in the equity Retained Earnings Cash Assets Building Equipment 225 000 100 000 125 000 Liabilities This transaction changes the mix of assets Equity 7 Ch 2 Business Activity Investing Transaction 4 In January Kimble 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 This transaction increases assets and equity 8 000 Fees Revenue 8 Ch 2 Business Activity Operating Transaction 5 In January Kimble Corporation incurred the following expenses and miscellaneous 750 paid cash wages 3 000 rent 2 600 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 This transaction decreases assets and equity 9 Ch 2 Business Activity Financing Transaction 6 Kimble Corporation distributed 200 of its January 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 This transaction decreases assets and equity 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 Kimble Corporation Income Statement For the month ended January 31 2012 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 Kimble Corporation Statement of Retained Earnings For the month ended January 31 2012 Retained Earnings January 1 2012 Net Income Dividends Retained Earnings January 31 2012 0 1 650 200 trans 6 1 450 Ch 2 Financial Statements Balance Sheet Kimble Corporation Balance Sheet as of January 31 2012 Assets Cash trans 1 6 Building trans 3 Equipment trans 3 Liabilities 96 450 Note Payable 120 000 trans 1 100 000 125 000 Stockholders Equity Capital Stock trans 2 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 Kimble Corporation Statement of Cash Flows For the month ended January 31 2012 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 flows from Financing Activities Cash inflow from issuing stock trans 2 Cash inflow from issuing notes payable trans 1 Cash outflow for dividends to stockholders trans 6 Net Cash In from Financing Activities 200 000 120 000 200 319