ACCT 209 1nd Edition Lecture 2 Outline of Last Lecture I. What is accounting?II. What is a Business?A. ClassificationsB. FormsC. OrganizationIII. Generally accepted accounting principlesIV. Objectives and characteristics of accountingV. Recognition and measurement criteriaVI. Financial statementsVII. Other elements of 10-k (Annual reports)Outline of Current Lecture VIII. Analyzing Financial statementsIX. How Transactions affect the accounting equationCurrent LectureAnalyzing transactions and the Financial StatementsFinancial statements provide the structure for companies to report financial information.Example #1 Financial StatementsA company reported the following accounts (in alphabetical order) with their balances as of December 31, 20X1.These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.L - Accounts payable $ 170A - Accounts receivable 325I.S (E) -Advertising expense 110Eq -Capital Stock 950A -Cash 2,400I.S (E) - Income tax expense 9L - Notes payable 612A - Other assets 283I.S (E) - Other expenses 10A - Property and equipment 500Eq -Retained earnings 1,776I.S (I) - Revenue 875I.S(E) - Wages expense 250L – Liabilities; A – Assets; Eq – Equity; I.S. – Income Statement; E – Expense; I- Income;Required:1. Determine the following:a. net income for the year 20X1: Revenue (875) – Expenses (110 + 250 + 10 + 9) = 496b. total assets at December 31, 20X1: Assets (325 + 2400 + 283 + 500) = 3508c. total liabilities at December 31, 20X1: Liabilities (170 + 612) = 782d. total equity at December 31, 20X1: Equity: (950+1176) = 3508Note that C and D should add up to get B2. Assume the company began 20X1 with a balance in Retained earnings of $1,650. How much did the company distribute to the owners as dividends during 20X1? Why are dividends not included on the company’s income statement?Beginning Balance: 1650 (From the question - Retained earnings)Net Income: + 496Less dividends: - XEnd Balance: 1776 (From the Table - Retained earnings)1650 + 496 – X = 1776 2146 – X = 1776 - X = -370 X = 370The company distributed to the owners as dividends $370Dividends are distribution of profits to owners. They are not included on the company’s income statement because only revenue and expenses go on income statements. Dividends are not an expense. Transaction – A financial event that is recorded by an accounting entityThe accounting equation – Asset = Liabilities + Stock Equity Every transaction• must maintain the equality of the accounting (or balance sheet) equation• must affect at least two accounts (in order to keep the equation “in balance”)Example #2 Transactions and the accounting equationFor each of the following independent events, determine the effect on the accounting equation.Transaction Assets Liabilities Stockholders’ equitya. owners invested cash in the business Cash (+) Stock (+)b. company borrowed cash from bank Cash (+) Notes Payable (+)c. company paid cash to purchase equipment Cash (-)Equipment (+)d. company purchased equipment by signing a note payable at the bankEquipment (+) Notes Payable (+)e. company completed job for customer and received cashCash (+) Rev(+) => Retained earnings(+) f. company paid employee wages for current monthCash (-) Exp(+) => Netincome(-) => Retained
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