Accounting Concepts and Procedures

Accounting Concepts and Procedures - Transcript

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ACCT 640 Sections 601 602

Accounting Concepts and Procedures I

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Adam J Myers III JD CPA
Senior Lecturer

460K Wehner Building 4353 TAMU 979 845 4594 ajmyers tamu edu Office hours 12 00
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MWF 3 00 4 00 TTh 11 00

Financial Accounting 6e with Annual Report 6th Edition Robert Libby Patricia Libby and Daniel G Short Hardcover 2009 ISBN 13 9780077300333 MHID 0077300335

http highered mcgraw hill com sites 0073526886 student view0
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https maysportal tamu edu

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Course Description and Prerequisites
640 Accounting Concepts and Procedures I 3 0 Credit 3 Accounting concepts and relationships essential to administrative decisions use of accounting statements and reports as policymaking and policy execution tools Classification 6 students and non business graduate students may enroll in this course Prerequisite Graduate classification
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Financial Statements Financial and Business Decisions and
Chapter 1

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What is business

FEDERAL RESERVE NOTE

THE UNITED STATES OF AMERICA THE UNITED STATES OF AMERICA
THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE

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WASHINGTON D C

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A
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SERIES 1985

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ONE DOLLAR ONE DOLLAR

Commercial activity engaged in as a means of livelihood
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Business entity

Organization

operated to earn a profit

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Nonbusiness entity
Organization

operated for a purpose other than to earn a profit

For example a government entity or a notfor profit organization e g a charitable or religious organization Uses fund accounting
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Sole proprietorship

Form of organization with a single owner
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Partnership


An association of two or more persons to carry on business as co owners

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Corporation


An entity formed under state law that provides limited liability for the stockholder s i e its owner s

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Limited Liability Company LLC
An

entity formed under state law that provides limited liability for the member s i e its owner s


Hybrid of a corporation and a partnership

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Sources of Capital
Owners

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Share of stock
A


type of security that is a unit of ownership in a corporation
Stockholders are owners of the corporation i e they exchange something e g cash property or services for an ownership interest in the corporation

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Sources of Capital
Owners Creditors
Lenders
Financial Investors

institutions

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Bond
A


type of security that is a debt instrument issued by an entity to investors
Bondholders are creditors i e they lend money to the corporation

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Sources of Capital
Owners Creditors
Lenders
Financial Investors

institutions

Vendors

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Sources of Capital
Owners Creditors
Lenders
Financial Investors

institutions

Vendors

Operations
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Economic entity concept
Assumption

that a single identifiable unit must be accounted for in all situations
Entity Division Branch


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Understanding the Business
The Players Investors Creditors

Managers
1 Purchase parts and labor 2 Manufacture product

The The Business Business Operation s
4 Collect cash from customers and pay creditors 3 Sell products to customers

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Primary Objective of Financial Reporting

Provide information for decision making

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The Accounting System
Managers internal decision makers

Collects and processes financial information

Reports information to decision makers

Investors and Creditors external decision makers

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Users of Accounting Information 1 of 2
Internal management accounting Management Planning and control

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Management Uses of Financial Statements
Marketing managers and credit managers use customers financial statements to decide whether to extend credit

Purchasing managers use suppliers financial statements to decide whether suppliers have the resources to meet the demand for products

Employees union and human resource managers use the company s financial statements as a basis for contract negotiations pay rates
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Users of Accounting Information 2 of 2
External financial accounting


Investors
Existing Potential



Creditors Regulators and tax authorities
SEC IRS NGOs Advisors
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The Accounting System
Accounting System

Financial Accounting System
Periodic financial statements and related disclosures

Managerial Accounting System
Detailed plans and continuous performance reports

External Decision Makers
Investors creditors suppliers customers etc

Internal Decision Makers
Managers throughout the organization

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The Accounting System and Decision Makers An organized format used by companies to accumulate the dollar effects of transactions
Cash Inventory

Equipment

Notes Payable

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Fra Luca Bartolomeo de Pacioli 1445 1517

The Father of Accounting
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Double Entry Bookkeeping

Debits Credits

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ACCOUNTING EQUATION

ASSETS LIABILITIES EQUITY

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The Accounting Equation

Assets

A L SE SE
Liabilities Stockholders Equity

Economic Resources

Sources of Financing for Economic Resources
Liabilities Creditors Stockholders Equity Stockholders

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The Four Basic Financial Statements
BALANCE SHEET BALANCE SHEET All resources owned and amounts owed are listed in order of All resources owned and amounts owed are listed in order of liquidity The difference between the resources owned and the liquidity The difference between the resources owned and the amounts owed represents the stockholders equity in the amounts owed represents the stockholders equity in the business business INCOME STATEMENT INCOME STATEMENT Revenues earned from sales to customers are listed along with Revenues earned from sales to customers are listed along with the expenses incurred to produce those revenues the expenses incurred to produce those revenues STATEMENT OF RETAINED EARNINGS STATEMENT OF RETAINED EARNINGS Net income revenues minus expenses and dividends Net income revenues minus expenses and dividends distributionsto stockholders are listed as changes in the distributions to stockholders are listed as changes in the amount of stockholders equity amount of stockholders equity STATEMENT OF CASH FLOWS STATEMENT OF CASH FLOWS All cash inflows and outflows are listed Cash is generated by the All cash inflows and outflows are listed Cash is generated by the corporation s operations Cash is spent on investments in corporation s operations Cash is spent on investments in buildings manufacturing equipment and other productive buildings manufacturing equipment and other productive assets Cash is received from stockholders and creditors assets Cash is received from stockholders and creditors
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Balance Sheet
MAXIDRIVE CORP Balance Sheet At December 31 2009 in thousands of dollars 2009 ASSETS Cash Accounts receivable Inventories Plant and equipment Land Total assets LIABILITIES Accounts payable Notes payable Total liabilities STOCKHOLDERS EQUITY Contributed capital Retained earnings Total stockholders equity Total liabilities and stockholders equity 4 895 5 714 8 517 7 154 981 27 261 7 156 9 000 16 156 2 000 9 105 11 105 27 261





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The Balance Sheet
Typical Account Titles
Assets Assets Liabilities

Cash Short Term Investment Accounts Receivable Notes Receivable Inventory to be sold Supplies Prepaid Expenses Long Term Investments Equipment Buildings Land Intangibles

Accounts Payable Accrued Expenses Notes Payable Taxes Payable Unearned Revenue Unearned Bonds Payable Bonds
Stockholders Equity Stockholders Equity

Contributed Capital Retained Earnings

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Income Statement
MAXIDRIVE CORP Income Statement For the Year Ended December 31 2009 in thousands of dollars Revenues Sales revenue Total revenues Expenses Cost of goods sold expense Selling general and administrative expense Interest expense Total expenses Operating income Income tax expense Net income 37 436 37 436 26 980 5 606 450 33 036 4 400 1 100 3 300



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The Income Statement
Typical Account Titles
Revenues Revenues Expenses

Sales Revenue Fee Revenue Interest Revenue Rent Revenue

Cost of Goods Sold Wages Expense Rent Expense Interest Expense Depreciation Expense Advertising Expense Insurance Expense Repair Expense Income Tax Expense

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Statement of Retained Earnings
Beginning Retained Earnings Plus Net Income Less Dividends Ending Retained Earnings

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Statement of Retained Earnings

MAXIDRIVE CORP Statement of Retained Earnings For the Year Ended December 31 2009 in thousands of dollars Retained earnings January 1 2009 Net income for 2009 Dividends for 2009 Retained earnings December 31 2009 6 805 3 300 1 000 9 105

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Statement of Cash Flows
MAXIDRIVE CORP Statement of Cash Flows For the Year Ended December 31 2009 in thousands of dollars Operating activities Cash collected from customers Cash paid to suppliers and employees Cash paid for interest Cash paid for taxes Net cash flow from operating activities Investing Activities Cash used to purchase equipment Net cash flow from investing activities Financing Activities Cash received from bank loan Cash dividends paid Net cash provided by financing activities Net increase in cash Cash at beginning of month Cash at end of month

33 563 30 854 450 1 190 1 069 1 625 1 625 1 400 1 000 400 156 5 051 4 895
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Relationships Among the Statements 1 Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings
Income Statement Revenues 15 500 Expenses 8 500 Net income 7 000 Statement of Retained Earnings Beginning retained earnings 59 000 Net income 7 000 Dividends Ending retained earnings 2 500 63 500

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Relationships Among the Statements 2 Ending retained earnings from the statement of retained earnings is one of the two components of stockholders equity on the balance sheet
Statement of Retained Earnings Beginning retained earnings 59 000 Net income 7 000 Dividends Ending retained earnings 2 500 63 500 Balance Sheet Cash Other assets Total assets Liabilities Stockholders Equity Common stock Retained earnings Total liabilities and equity 14 000 171 500 185 500 42 000 80 000 63 500 185 500

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Relationships Among the Statements 3 The change in cash on the statement of cash flows is added to the beginning of year balance in cash to arrive at end of year cash on the balance sheet
Statement of Cash Flows Cash flows from operating activities 21 000 Cash flows from investing activities 16 000 Cash flows from financing activities 3 500 Increase in cash 8 500 Beginning cash balance Ending cash balance 5 500 14 000 Balance Sheet Cash Other assets Total assets Liabilities Stockholders Equity Common stock 80 000 14 000 171 500 185 500 42 000

Retained earnings 63 500 Total liabilities and equity 185 500

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Notes All financial statements must be accompanied by notes which provide the reader with supplemental information about the financial position and results of operations of the company
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Cooking the books

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Exercises
E1 12

p 37

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Responsibilities for the Accounting Communication Process

Effective communication means that Effective communication the recipient understands what the recipient understands what the sender intends to convey sender intends to convey

Decision makers must understand accounting measurement rules
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How are Generally Accepted Accounting Principles Determined
Prior to 1933 the management teams of most companies were free to choose the accounting principles used to keep track of its transactions

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Generally Accepted Accounting Principles
Securities Act of 1933 Securities and Exchange Act of 1934

The Securities and Exchange Commission SEC has been given broad powers to determine measurement rules for financial statements

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Generally Accepted Accounting Principles
The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP

Currently the Financial Accounting Standards Board FASB is recognized as the body to formulate GAAP

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International Perspective Since 2002 there has been substantial Since 2002 there has been substantial movement to develop International Financial movement to develop International Financial Reporting Standards IFRS by the Reporting Standards IFRS by the IInternational Accounting Standards Board nternational Accounting Standards Board IASB IASB

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Management Responsibility for Financial Statements and the Demand for Audits
To ensure the accuracy of the company s financial information management Maintains a system of controls Hires outside independent auditors Shareholders elect a board of directors that reviews these two safeguards

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Generally Accepted Accounting Principles
Companies incur the cost of preparing the financial statements and bear the following economic consequences

Effects on the selling price of stock Effects on the amount of bonuses received by managers and other employees Loss of competitive information to other companies

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Independent Auditors
Auditors

express an opinion as to the fairness of the financial statement presentation Independent auditors have responsibilities that extend to the general public

Overall I believe these financial statements are fair

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Independent Auditors An audit involves
Examining

the financial reports to ensure compliance with GAAP Examining the underlying transactions incorporated into the financial statements Expressing an opinion as to the fairness of presentation of financial information

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Ethics Reputation and Legal Liability The American Institute of Certified Public Accountants AICPA requires all members to adhere to a professional code of ethics

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Ethics Reputation and Legal Liability A CPA s reputation for honesty and competence is her most important asset

Like physicians CPAs have liability for malpractice
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End of Chapter 1