Lutilsky - Accounting Lecture/predavanja BDIB

Introduction to Accounting
Ivana Drai Lutilsky
Room 35, 2.floor, North Tutorials: Wednesday 10 -12 18-19
The act of gathering and reporting about the financial information of a company Accounting is a continual process of:
Capturing financial data Organizing it Producing financial reports
Accountancy
(profession) or accounting (methodology) is the measurement, statement, or provision of assurance about financial information primarily used by managers, investors, tax authorities and other decision makers to make resource allocation decisions within companies, organizations, and public agencies.
Accounting
is a service activity. Its function is to provide quantitative information primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions, and in making reasoned choices among alternative courses of action.
It
is also the discipline of measuring, communicating and interpreting financial activity. Accounting is also widely referred to as the "language of business".
Accounting/accountancy
attempts to create accurate financial reports that are useful to managers, regulators, and other stakeholders such as shareholders, creditors or owners. The day-to-day record-keeping involved in this process that is known as bookkeping.
Internal Users - managers use it to plan, organize and run a business. External Users
Investors (Current and Potential) Creditors Others
Taxing authorities Regulatory agencies Customers Labor unions Economic planners
An organizations financial statements provides managers with information to determine present and future decisions. Such actions include:
Granting credit Making investments Borrowing money Adhering to regulations Determining executive compensation Evaluating competition Evaluating potential litigation
Accounting planning
Bookkeeping Accounting control
Accounting analysis
Providing information
Financial
accounting
Cost
accounting
accounting
Managerial
At
the heart of modern financial accounting is the double-entry bookkeping system. This system involves making at least two entries for every transaction: a debit in one account, and a corresponding credit in another account. The sum of all debits should always equal the sum of all credits, providing a simple way to check for errors. This system was first used in medieval Europe, although claims have been made that the system dates back to Ancient Rome or Greece.
Organization (Entity)
Operates in an environment that makes decisions and takes actions to make it economically better or worse
Filter
Economic Concepts Accounting Conventions Institutional Context
Financial Reports
Balance Sheet Income Statement Cash Flow Statement
Sole Proprietorship - owned by one person

Partnership - owned by more than one person Corporation - organized as a separate legal entity and owned by stockholders
Sole

Proprietorship
Simple to establish Owner controlled Tax advantages Same as sole proprietorship except now with additional individual(s) the organization has a broader skill base (i.e., finance and marketing) Easier to transfer ownership or raise money No personal liability
Partnership
Corporation

Economic
Concepts The economic principles guiding the construction of accounting reports. Accounting Conventions The accounting rules that apply the economic concepts to practical situations. Institutional Context The environment that shapes the consequences of adopting specific accounting conventions.
The filters can be viewed as the financial process the organization goes through in producing the annual report, specifically the financial statements.
Economic Concepts
Financial Values
Attach to individual assets, liabilities, revenues and expense items by the accounting process
Financial Statements
Balance Sheet
Assets Liabilities Equity
Income Statement
Revenue Expenses Net Income
Wealth
Measured by equity at a point in time
Cash Flow Statement

Operating cash flow Investing cash flow Financing cash flow
Economic Income
Change in wealth measured by net income
Balance
Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings Notes to the financial statements
The financial statements are part of a comprehensive financial report referred to as the annual report.
Asset Liabilities
Equity
Revenues Expenses
Financial
results
Shows
relationship between assets, liabilities and equities--on a particular date (i.e., point in time).
Assets
and liabilities and stockholders' equity must balance. A= L + SE
Assets
A probable future economic benefit obtained by entering into a transaction. The resources owned by the business.
The probable future sacrifice of economic benefits arising from an entitys obligation to transfer assets or provide services
Liabilities
for a past transaction. Creditors claims on total assets (obligations or debts of the business).
Stockholders'
Equity The difference between an
entitys assets and liabilities. The owners claim on total assets.
Reports
success or failure of the company's operations during the period. all revenue and expenses for period-month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
Summarizes
Revenues
increases in net assets resulting from an entitys operation over a period of time. Expenses decreases in net assets resulting from an entitys operation over a period of time.
Net
Income - the excess of revenues over expenses.
The Cash Flow Statement - describes the flow of cash into and out of an organization during an accounting period. These flows are classified in three categories:
Operating activities The change in cash resulting from actions intended to generate net income. Investing activities The change in cash resulting from actions taken to acquire or dispose of productive company assets.
Financing activities The change in cash resulting from payments to or receipts from suppliers of money to the firm (e.g., common shareholders or debt holders).
Indicates
amount invested by owners, amount paid out in dividends, and amount of net income or net loss for period.
changes in retained earnings balance during period covered by statement.
Shows
Financial value The amount of money an item would bring if sold.

Accurate
financial valuation depends on how well a market functions. In a well-functioning market, goods and services will be properly valued.
Competitive The market should reflect the true financial value. No chance for a seller to make abnormal profits. Low transaction costs The price paid to buy/sell the good requires few operational resources to complete the transaction. Organized and regulated The market in which the good is traded has standard definitions for making transactions and is open to new, efficient methods for improvement.
Wealth The sum of the financial values of all things an organization owns. Defined by the balance sheet (i.e., accounting identity) description: Assets = Liabilities + Equity
Economic income The change in an organizations wealth, excluding capital transactions with its owners.
This
measure describes an organizations success using its economic resources in a period. Reflected in the income statement (revenues minus expenses) for a period. Owner investments (issuing new shares of stock) are excluded because the increase in wealth attributable to them is NOT generated by use of the organizations resources!
Generally Accepted Accounting Principles known as GAAP are the commonly understood and accepted conventions for gathering, organizing, and reporting the financial history of an organization.
Generally GAAP applies to one or more of the following three broad areas:

Accounting Valuation Recognition Disclosure
Accounting Valuation - GAAP helps to specify the value of the items reported. It provides guidance and restrictions on the accounting values used in the financial statements.
Example: describes how Union Plaza values plant and equipment. Plant and equipment are carried at cost less accumulated depreciation and amortization.
Recognition How should an item be treated in the accounting records? Should an item be treated as an asset or an expense? For instance, does an advertising campaign have future benefits? Example: shows how Novell utilizes GAAP to guide their recognition. An advertising campaign is deemed to have no future value and the cost of advertising is expensed as incurred.
Disclosure The act of providing information about the organization and construction of its accounting reports. GAAP requires the disclosure of measurement methods, assumptions, etc., that add to the information content of the annual report.
Example: shows that Kmart values its inventory using LIFO and discloses the value of the inventory. It also discloses what the inventory would be valued if Kmart used an alternative method (FIFO).
Market richness Where the market for a good is a well-functioning one (i.e., it is competitive and experiences low transaction costs), GAAP will use market valuations to drive the accounting.
Complexity of the transactions When transactions are simple (e.g., exchange of cash for a Big MacTM , GAAP is simple. When transactions are complex (e.g., CEO compensation including a salary, bonus, pension plan and stock options), GAAP will be complex.
Form of the organization GAAP differs depending upon the type of business entity (e.g., sole proprietor, partnership, corporation, not-for-profit, governmental).
Croatian Association of Accountants and Financial Experts has approx. 30.000 members. In order to be an accountant, the Law does not define formal education requirements or diplomas, while auditors need to obtain the license from the Chamber of auditors (formed in 2006). An accountant does not need to have an university diploma or any form of certificate to prove his adequacy; he/she needs to follow the regulations set by the Law of accounting and by the profession itself.
Accountants have not yet obtained qualifications compliant with International federation of accountants education requirements it is an important notion for legislative authorities!
The basic division between types of companies according to the accounting regulations: A) Small companies: Total asset is not larger than 32.5 mil. Kn Max. revenue of 65 mil. Kn Have at most 50 employees B) Medium companies:
Total asset is not larger than 130 mil. Kn Max. revenue not larger than 260 mil. Kn Have no more than 250 employees C) Large companies: These have larger asset, revenues and more employees than the medium companies. Regardless to their asset, revenue and number of employees, large companies are also all banks, all other saving institutions, insurance companies, investment funds, leasing companies, and pension plans.
Defines the institutional accounting framework in Croatia. The newest one has been issued in 2007. It defines:
subjects that are obliged to use the law, bookkeeping documents, business books, list of assets and liabilities, financial reports, standards of their presentation, penalties, It foresees the usage of International financial reporting standards, and the act determines the Financial reporting council.
The Act functions in compliance with the Company act (largely influenced by the German legal system). The Act must be used by all private and legal entities who are working in the interest of obtaining profit and thus have an obligation to pay income tax, except: Government agencies Central and local state funds Health institutions, Religious institutions Political parties, Sindycates, Other nonprofit institutions. Besides defining the bookkeeping documents, business books and financial reports the act also states that: most documents are to be kept within the company for 7 years, financial reports are to be kept in original form for at least 11 years.
The international financial reporting standards are to be used in all EU Countries, and thus in those who want to join the EU, like Croatia. In Croatia, only large companies, financial institutions and those listed on the Zagreb stock exchange are obligatory to use the IFRS.
In other words, only entities of public interest are obligatory to use IFRS.
Smaller companies must use the standards defined by the croatian Financial reporting council that is controlled by the Ministry of finance. - Croatian Financial Reporting Standards Both sets of accounting standards are to be published in the Narodne novine (National newspapers) before they are put into use.
FINA
(financial agency)
Receives all financial statements and reports from every profit & non-profit institution in Croatia, Publishes standardized summary financial statements of all companies (it includes only the key financial figures without the audit report). ***NOTE: Ensuring public availability of full financial statements is not common practice in Croatia.
HNB
(Croatian national bank), HANFA (Croatian financial services supervisory agency) and the MoF (Department for financial systems of the Ministry of finance) are responsible for financial
reporting of the financial sector:
HNB responsible for the development and implementation of financial reporting requirements applicable to the banking sector, HANFA responsible for the rest of the financial sector
Management
Notes
Discussion and Analysis
to Financial Statements Report
Auditor's
Covers three aspects of a company:

liquidity
- ability to pay near-term obligations capital resources - ability to fund operations and expansions results of operation - profitability and efficiency
Provide Does
additional information not included in body of statements not have to be numeric
Examples:
Description of accounting policies or explanation of uncertainties and contingencies (e.g. Exhibits 1.4 and 1.5) Company statistics (e.g., market share, percentage of international sales, etc.)
Auditor,
a professional accountant who conducts an independent examination of the financial accounting data presented by a company.
Auditor
gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.
Ivana Drai Lutilsky
Different
countries have developed their own accounting principles over time, making international comparisons of companies difficult. To ensure uniformity and comparability between financial statements prepared by different companies, a set of guidelines and rules are used. Commonly referred to as Generally Accepted Accounting Principles (GAAP), these set of guidelines provide the basis in the preparation of financial statements.
Recently there has been a push towards standardizing accounting rules made by the International Accounting Standards Board ("IASB"). IASB develops International Financial Reporting Standards that have been adopted by Australia, Canada and the European Union (for publicly quoted companies only), are under consideration in South Africa and other countries. The United States Federal Accounting Standards Board has made a commitment to converge the U.S. GAAP and IFRS over time.
generally accepted accounting concepts generally accepted principles generally accepted standards
Concepts (or conventions, assumptions) are theoretical basis and their appliance is taking into consideration formulation of accounting principles. Concepts by the IFRS are:
- accrual basis of accounting concept, - going concern concept.
Concepts
- monetary
by the GAAP are:
unit, - going concern concept, - economic entity and - time period.
Monetary Unit Money is the unit used to measure economic activity. Economic Entity This concept provides a context or point of view for the economic events (i.e., transactions) captured by the financial statements. In short, it answers the questions, Whose asset is it?; Whose liability is it?
Time Period A business can be divided into artificial time periods. The most commonly used time periods for public corporations is quarterly and annually.
Going Concern - A company is expected to carry out its operations into the foreseeable future.
Principles
are based on concepts and they are further determining accounting and its basic characteristics for accounting policies.
Principles by the GAAP are: Cost principle (trokovno naelo) Objecivity principle (naelo objektivnosti) Realization principle (naelo realizacije) Matching principle (naelo sueljavanja prihoda i rashoda) Materiality principle -substance over form principle (sutina vanija od forme)
Full-disclosure principle (naelo potpunosti) Consistency principle (naelo konzistentnosti) Conservatism principle (naelo opreznosti)
Principles by the IFRS are:

understand ability principle relevance principle materiality principle reliability principle
truly presentation principle substance over form principle neutrality principle prudence principle full disclosure principle
comparability principle.
Relevance
- information makes a difference in
decisions.
Reliability
- information must be free of error and
bias.
Comparability
- ability to compare information of different companies. - companies must use the same accounting principles and methods from year to year.
Consistency
Cost Principle Assets acquired are recorded at cost. Full Disclosure Principle Information that would effect an investor or creditors view of the company should be disclosed.
Permits companies to modify GAAP without hurting the usefulness of information

Materiality
- if item doesnt make a difference, GAAP doesnt have to be followed - in gray areas choose guide which does not overstate assets or income
Conservatism
They
are further concretization of accounting principles in a view of methods in recording accounting data, providing accounting information and presentations of financial statements and its elements.
IFRS
International financial reporting standards precondition for globalization NS national standards made for national levels and their specifics in accounting
They
are part of company business policies With accounting policies company can deliberate influence the elements in financial statements Freedom of choices is given through accounting standards
Companies
have obligation of presenting their accounting policies through notes Accounting policies could influence financial statements, like: - amortization, - Inventories, - Revenues.
Generally contains the following standard classifications:

Current Assets Long-Term Investments Property, Plant, and Equipment Other Assets
Current Liabilities
Long-Term Liabilities Stockholders' Equity
ASSETS
NON CURRENT CURRENT
NON CURRENT ASSETS

INTANGIBLE TANGIBLE FINANCIAL RECEIVABLES
- license - patents - concession - other rights - goodwill - advance payments for intangible assets
land buildings plants equipments motor cars advance payments for tangible assets
bought securities given deposits given loans other long term investments
- account receivables
is expected to be realized within more than 1 year after the balance sheet date
CURRENT
INVENTORIES
- raw materials - production inventories - work in progress - merchandise inventories - advance payments for inventories
RECEIVABLES
FINANCIAL
CASH
- account receivables - employee receivables - state receivables - other receivables
- bought securities - given deposits - given loans - other short term investments
- cash at bank - cash in hand
is expected to be realized within 1 year after the balance sheet date
The probable future economic benefit an entity obtains by entering into a transaction
Assets that are expected to be converted to cash or used in the business within a short period of time, usually one year. Current assets are listed in order of liquidity. Examples:

Cash Short-term investments Receivables Inventories Prepaid expenses
Cash - Money in the form of cash or bank deposits (e.g., checking and/or money market account). Short-term investments - An entitys investment in another entitys stock or debt (i.e., bonds). Sometimes referred to as Marketable Securities. These assets yield a higher return (dividends, appreciation or interest) than is available through checking and money market accounts.
Inventories - The goods an entity has on hand is referred to as a finished good. The material that it needs to make the goods is referred to as raw materials. The raw material in process of being completed (i.e., finished) is referred to as work in process.
Prepaid expenses The amounts an entity has already paid for services/goods to be delivered in the future (e.g., car insurance).
Accounts Receivable - The amounts due from customers for goods they purchased on credit. Because all customers do not pay their bills, the balance is reduced by an allowance (an estimate of what will not be collected).
Example - OshKosh December 29, 2001: Total Accounts receivable $ 32,542 Less: Allowance ( 7,075) Net accounts receivable $ 25,467
Assets that are expected to benefit the business over a long period of time. Non-current assets are usually listed in order of importance to the entity. Examples:

Property plant and equipment Long-term investments Other assets
Property, Plant, and Equipment - The land, buildings, equipment, furniture and fixtures that are used in operating the business.
SOURCES OF ASSETS
EQUITY
NON CURRENT LIABILITIES CURRENT LIABILITIES
SOURCES OF ASSETS
EQUITY NON CURRENT LIABILITIES CURRENT LIABILITIES
owners equity legal reserves statutory reserves revalorization reserves other reserves retention (retained earnings) - net income - loss
- received long term loans
- issued long term securities - accounts payables (long term)
accounts payables salaries payables received short term loans issued short term securities issued checque income tax liabilities VAT liabilities dividend payables received advanced payments
Liabilities The probable future sacrifice of economic benefits arising from an entitys obligations to transfer assets or provide services as a result of a past transaction or event.
Liabilities that are expected to be paid by the business within a short period of time, usually one year. Current liabilities are listed in order of liquidity. Examples:

accounts payable accrued liabilities short-term borrowings dividend payable unearned revenue
Accounts payable The amount an entity owes to suppliers for goods previously delivered. Sometimes referred to as trade payables or trade accounts payable.
Accrued liabilities - The amounts an entity owes for taxes, rent, wages, etc. More detail is offered in the Notes to the Financial Statements. Example: OshKosh A summary of 12/29/01 accrued liabilities follows:
Compensation Workers compensation Income taxes Other Total $ 7,181 8,900 5,182 17,140 $38,403
Short-term borrowings Monetary amounts due within one year for repayment of bank loans, notes payable and other commercial paper.
Dividends payable The amount owed by a corporation to its shareholders when dividends declared by the board of directors have not yet been paid.
Unearned revenues The monetary amounts received by an entity that accepts up-front payments of cash in exchange for future delivery of its products. Example: Your advance cash payment for a threeyear subscription to Fortune Magazine requires their sacrifice of future economic benefits (they are liable) to provide the magazine. It is termed unearned as it represents a service (i.e., the subscription) that has NOT yet been completed (i.e., delivered to your door). It will be earned as delivery takes place.
Debts expected to be paid after one year. Examples:

warranties employee benefit plan liabilities leases bonds payable long-term obligations
Warranties The entitys obligation to replace defective merchandise within a specified time period.
Employee benefit plan liabilities The sacrifice of cash that an entity must make for pensions, retirement health care and other retirement benefits.
Lease The sacrifice of cash that an entity must make to secure equipment or for the use of property to conduct operations
Bonds payable The amount due to bond purchasers under terms of the bond issue. Long-term borrowings Monetary amounts for bank loans, notes payable and other commercial paper that does not have to be repaid within one year.
Stockholders' Equity The difference between total assets and total liabilities. Stockholders equity arises from the contributions of owners.
Risk capital, liable capital, proprietorship, net worth After all liabilities are paid, ownership equity is the remaining interest in assets Equity = Assets - Liabilities At the start of a business, owners put some funding into the business to finance assets (equity capital) Bankruptcy creditors have the first claim on the proceeds, ownership equity is paid at the end Shareholders equity when the owners are shareholders
Owner s equity
Paid in capital comes from the shareholders through the purchase of the companys stock
Earned capital comes from profitable operations (retained earnings)
Net worth of a company is reflected in its balance sheet as owners (shareholders') equity Net worth is an important determinant of the value of a company, considering it is composed primarily of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation Net worth can be used to determine creditworthiness because it gives a snapshot of the company's investment history Market price per share equity per share
Common Stock Shareholders investment in the entity through acquisition of stock. Ownership of a share entitles the holder to a vote on major corporate decisions and a residual claim to the entitys assets in the event of liquidation. The amount recorded in this account represents the legal capital per share that must be retained in the business.
Additional paid-in-capital The amount paid by the investor for a share of stock in excess of its par value.
Preferred Stock Another vehicle available to corporations for raising owner contributions. A preferred owner typically is not allowed to vote on major corporate issues. In the event of liquidation, these shareholders receive the stated value of their shares.
Retained Earnings - equity (net income) generated from operations less what has been returned to the shareholders in dividends. The adjective retained reveals that these earnings have not been distributed to shareholders in the form of dividends.
Constructing the Balance Sheet
Analyze the effect of business transactions on the basic accounting identity:
Assets = Liabilities + Stockholders Equity

Remember: The Accounting Identity must always balance.
Transaction Analysis
Transaction Analysis determines if and how the transaction impacts the financial statements.
Transactions can be divided into two types:

F
External events
Internal events
Only external transactions must be recorded in the financial statements.
External events occur between the company and some outside party. It involves an exchange of assets, liabilities, or stockholders' equity between a company and an outside party
Internal events are economic events that occur entirely within one company. For example the act of hiring of an employee.
1.
2. 3.
Analyze each transaction

Journalize each transaction Post each transaction to a T account. An account would be cash, accounts payable etc.
Analyze - determine how the transaction affects the balance sheet (i.e., increase or decrease assets, liabilities etc.). Journal - accounting record where the transactions are recorded in chronological order.
Posting - transferring of information from the journals to the general ledger accounts (i.e., T - Accounts)
Account
An individual accounting record of increases and decreases in a specific Asset, Liability, or Stockholders Equity item. Three parts :
1) the Title of the account 2) a left or Debit side 3) a right or Credit side
T - Account
TITLE
DEBIT CREDIT
Total the Entries to Each Side
TITLE Debit Credit
Total Debits Total Credits
If the greater sum is on the left, the account has a Debit Balance
Total the Entries to Each Side
TITLE Debit Credit
Total Debits Total Credits
If the greater sum is on the right, the account has a Credit Balance
DEBITS
Increase Assets
Decrease Liability and Equity Accounts

CREDITS
Decrease Assets
Increase Liability and Equity Accounts
The term normal balance for an account is the side (i.e., debit or credit) that is increased.
Normal Debit Balance: Assets Normal Credit Balance: Liabilities Stockholders Equity
Lets Practice
The basic steps in the recording process are:

Analyze
each transaction in terms of its effect on the accounts. the debit and credit effects on specific accounts for each transaction.
Record
On January 1, $40,000 is invested in Rhody Corporation in exchange for common stock. How does this affect the accounting equation?
A +
Assets
SE +
increase Stockholders equity increases What asset account and stockholders equity account is affected?
Cash (debit)
$40,000
Common Stock (credit) $40,000

Note: Debits are always written first
and you always indent the credit.
Also on January 1 Rhody purchases $20,000 of equipment for cash. How does this affect the accounting equation?
A + Assets
= =
SE
increase Assets decrease What asset accounts are affected?
Equipment (debit)
$20,000
Cash (credit)
$20,000
On January 5 Rhody purchases inventory of $14,000 on account. How does this affect the accounting equation?
A +
Assets
L +
SE
increase Liabilities increase What asset account and liability account is affected?
Inventory
(debit)
$14,000
Accounts Payable (credit) $14,000

On March 6 Rhody buys $4,000 of supplies for cash. How does this affect the accounting equation?
A + Assets
= =
SE
increase Assets decrease
What asset accounts are affected?
Supplies (debit)
$4,000
Cash (credit)
$4,000

On April 1 Rhody pays $12,000 to insure its cars for the next year. How does this affect the accounting equation?
A + +
Assets
SE
increases Assets decrease

What asset accounts are affected?
Prepaid Insurance (debit)
$12,000
Cash (credit)
$12,000
Note: Debits are always written first and you
always indent the credit.
On September 1, Rhody receives $18,000 in advance for services to be performed in the future. How does this affect the accounting equation?
A +
Assets
L +
SE
increase Liabilities increase What asset account and liability account is affected?
Cash (debit)
$18,000
Unearned Revenue $18,000
(credit)
Note: Debits are always written first and you always indent the credit.
October 1, 2004, Rhody lends the Minutemen Corporation $10,000 in the form of a note receivable. The note is due on September 30, 2005, and carries an interest rate of 9%. How does this affect the accounting equation?
A + Assets
SE
increase Assets decrease What asset accounts are affected?
Note Receivable (debit)
$10,000
Cash (credit)
$10,000
Note: Debits are always written first and you always indent the credit.
Remember every journal entry will be posted to the appropriate account. For example, based on the entries made, the T-Account for cash would have an ending debit balance of $12,000 (see next slide).
1/1 1/1 3/6 4/1 9/1 10/1
40,000
CASH
18,000 58,000
20,000 4,000 12,000

10,000 46,000
Balance
12,000 (Debit)
A list of all the accounts and their balances at a given time.

It serves to prove the mathematical equality of debits and credits after posting (shouldnt be critical, assuming credible software is used).
It aids in the preparation of financial statements.
Rhody Corporation Trial Balance December 31, 2004

Cash Note Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Unearned Service Revenue Common Stock
Debit Credit $12,000 10,000 4,000 14,000 12,000 20,000
14,000 18,000 40,000 $ 72,000 $72,000
Income Statement Concepts: Income, Revenues, and Expenses
Income statement
Income statement reports about the revenues and expenses for a specific period of the time. Dinamic statement
As a minimum, the face of the income statement shall include line items that present the following amounts for the period:
(a)revenues; (b) expenses (costs); (f) profit or loss.
Revenue is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
Expenses (cost) are decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrence's of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.
Revenue Recognition Principle

Dictates that revenue be recognized in the accounting period in which it is earned. Revenue is earned when the service has been provided or when the goods are delivered (i.e., an exchange has taken place. You are reasonably certain to collect the revenue.
Income Concepts
Net Income (Loss) The increase (decrease) in net assets; resulting from operations; over a period of time. Net Assets The excess of an entitys economic resources (assets) over its obligations (liabilities).
NET ASSETS (EQUITIES) = ASSETS LIABILITIES

Equities Another name for net assets.
Changes in Net Assets

Generally, the cause of an increase (decrease) in NET ASSETS from one period of time is INCOME (LOSS). However, since INCOME only results from operations, exchanging shares of the entitys common stock for cash increases net assets; it does not result from INCOME, but rather from an additional equity investment by owners.
8
Changes in Net Assets

Also, the payment of dividends reduces net assets as it does not result from LOSS, but rather from the withdrawal of assets from the entity for use by the stockholders (i.e., owners).
Effect of Net Income From Operations on Net Assets

Beginning Balance Sheet 1/01/10 Ending Balance Sheet 12/31/10
Income for the Period 1/1/10 12/31/10
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Revenue
Revenues increase in net assets resulting from an entitys operation over a period of time. Alternative Names for Revenue:
Sales Used by merchandising entities and manufacturing concerns. Sales of Services or Total Billings Used by service firms.
11
Revenue (continued)
Interest Revenue Used by financial institutions that earn revenues by lending money and charging interest.
Commissions, Asset Management and Portfolio Service Fees Used by brokerage firms (e.g., Merrill Lynch) for fees charged for the different financial services performed for customers.
Premium Revenue Used by insurance companies.
12
Gains and Losses

The difference between what is received by an entity and the book value of what is given up by the entity is reported as a gain or loss. An example is the sale of equipment. Since the selling of assets is not the primary purpose of the business, the gain (loss) is reported separately on the income statement and not as part of income from continuing operations.
13
Income Statement
Reports success or failure of the company's operations during the period.
Summarizes all revenue and expenses for period of time --month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).
14
Retained Earnings
Retained earnings is net income minus dividends paid since the formation of the business. It is net income that is retained in the business not paid to shareholders.
The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation.
15
Retained Earnings
Example: A balance of $100,000 in retained earnings does not mean that there should be $100,000 in cash. The income resulting from the excess of revenues over expenses may have been used to purchase other assets--buildings, equipment, etc.
16
Articulation of The Financial Statements

Assets = Liabilities + Stockholders Equity
A = L + Common + Retained Stock Earnings
Revenue (R) - Expenses (E) = NI One should view the retained earnings statement as the bridge that connects the income statement with the balance sheet.
17
Matching Principle
Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded.
18
Accounting Conventions - Expenses

Accounting conventions relating to expenses are more involved than revenues substantial completion of the earnings process. Some expenses follow the earning of revenue (e.g., salaries of administrative staff). Others follow a systematic process (e.g., depreciation of plant and equipment is often straightline or simply a fixed amount per year).
19
Expense Concepts
Expenses The resources consumed in the process of earning revenues. This consumption results in a decrease in net assets over a period of time. Examples of expenses: Cost of sales The expense associated with the cost of merchandise sold to customers by a merchandiser. Rent expense The cost of renting offices or warehouses. Depreciation The cost of using long-term assets such as Property, Plant and Equipment.
20
Depreciation
Depreciation - is the rational and systematic process of allocating the cost of a plant asset over its useful (service) life. By expensing an assets cost over its useful life results in a better match of the expense to the periods the asset is expected to generate revenue.
21
Effect of Debits/Credits on Accounts

DEBITS
Increase Expenses and Dividends
Decrease Revenues
CREDITS
Decrease Expenses and Dividends

Increase Revenues
22
Normal Balance
The term normal balance for an account is the side (i.e., debit or credit) that is increased.
Normal Debit Balance:Expenses, Dividends Normal Credit Balance: Revenues
23
Lets Continue With
24
Recall the basic steps in the recording process are: Analyze each transaction in terms of its effect on the accounts.
Record the debit and credit effects on specific accounts for each transaction.
25
Recording A Transaction
On October 17 Rhody receives $40,000 in cash for services performed.
How does this affect the accounting equation?
26
A +
SE +
Assets increase Stockholders equity increases via retained earnings (i.e., revenue) What asset account and indirectly what Stockholders equity account is affected?
27
Cash (debit) $40,000 Service Revenue (credit) $40,000
Note: The income statement account revenue is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
28
On November 5 Rhody pays its employees $5,000 for work performed.
29
Recording A Transaction A = L + SE -
Assets decrease Stockholders equity decreases via retained earnings (i.e., wage expense) What asset account and indirectly what Stockholders equity account is affected?
30
Salary Expense (debit)$5,000 Cash (credit) $5,000
Note: The income statement account expense is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
31
On November 22 Rhody performs services and bills the client $15,000 for the services
32
Recording A Transaction A + = L + SE +
Assets increases Stockholders equity increases via retained earnings (i.e.,revenue) What asset account and indirectly what Stockholders equity account is affected?
33
Accounts Receivable (debit)$15,000 Revenue (credit) $15,000 Note: The income statement account revenue is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
34
On December 12 Rhody pays a dividend to its stockholders.
How does this effect the accounting equation?
35
A -
SE -
Assets decrease Stockholders equity decreases via retained earnings (i.e., dividends) What asset account and indirectly what Stockholders equity account is affected?
36
Dividends (debit) Cash $500 (credit) $500
Note: The retained earnings statement is directly affected. However, this indirectly affects stockholders equity Recall: Debits are always written first and you always indent the credit.
37
T-Account
Remember every journal entry will be posted to the appropriate account. For example, based on the entries made, the T-Account for revenue would have an ending credit balance of $55,000 (see next slide).
38
T - Account
10/17 11/22 Balance REVENUE 40,000 15,000 55,000 55,000 (Credit)
39
Rhody Corporation Trial Balance (From lecture 2) December 31, 2004

Cash Note Receivable Supplies Inventory Prepaid Insurance Office Equipment Accounts Payable Unearned Service Revenue Common Stock
Debit Credit $12,000 10,000 4,000 14,000 12,000 20,000
14,000 18,000 40,000 $ 72,000 $72,000
40
Rhody Corporation Updated Trial Balance December 31, 2004

Cash Supplies Accounts Receivable Note Receivable Inventory Prepaid Insurance Office Equipment Accounts Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries Expense
Debit
$46,500 4,000 15,000 10,000 14,000 12,000 20,000
Credit
14,000 18,000 40,000

500 55,000 5,000 $127,000 $127,000 41
Accrual Basis Accounting

Thus, revenue is recorded only when earned not when cash is received and Expense is recorded only when incurred not when cash paid
42
The Need for Adjusting Entries

Companies are on a calendar or fiscal year and business transactions can cut across two years.
Therefore, adjusting entries are needed to ensure that the revenue recognition and matching principles are followed.
43
The Need for Adjusting Entries

Calendar year
Jan. 1
Sept.1
Dec. 31
Mar.1
Transaction Period
44
Rule For Adjusting Entries

Every adjusting entry will affect an income statement account and a balance sheet account. The balance sheet account NEVER will be CASH.
45
Major Types Of Adjusting Entries

Adjusting entries can be classified as either
Prepayments or
Accruals
Each of these classes has two subcategories.
46
Adjusting Entries For Prepayments

Prepayments fall into two categories- Prepaid expenses
and
Unearned revenues.
47
Prepayments
Cash has been spent but the item acquired has not been used or consumed or
Cash has been collected before revenue is earned
48
Prepaid Expenses
Prepaid expenses - expenses have been paid in cash and are recorded as assets until they are used or consumed.
Prepaid expenses expire with the passage of time (i. e., rent or insurance) or they are consumed (i. e., supplies or depreciation).
49
Prepaid Expenses
Recall on April 1, Rhody paid $12,000 for a one-year insurance policy. Original Entry: Prepaid Insurance (debit) $12,000 Cash (credit)
$12,000
50
Prepaid Expenses
Adjusting Entry: Insurance Expense (debit) $9,000 Prepaid Insurance (credit)
Calculation: $12,000 x 9 = $9,000 12
$9,000
51
Prepaid Expenses
Recall on January 1, Rhody paid $20,000 for equipment. The equipment has a useful life of 5 years.
Original Entry: Equipment (debit) $20,000 Cash (credit) $20,000
52
Prepaid Expenses
Adjusting Entry: Depreciation Expense (debit) $4,000 Accumulated Depreciation (credit) 4,000
Calculation: $20,000 / 5 = $4,000
53
Unearned Revenues
Revenues received in cash and recorded as liabilities before they are earned.
54
Unearned Revenues
Recall On September 1, Rhody received $18,000 for rent from one of its tenants. The lease is for 1 year. Original Entry: Cash (debit) $18,000 Unearned rent revenue (credit) 18,000
55
Unearned Revenues
Adjusting Entry: Unearned rent revenue (debit) $6,000 Rent revenue (credit) $6,000
Calculation:
$18,000 x 4 = $6,000 12
56
Adjusting Entries For Accruals

Accruals fall into two categories
Accrued revenue
and
Accrued expenses
57
Accrued Revenue
Accrued revenues are revenues that have been earned but not yet received in cash.
58
Accrued Revenues
Recall on October 1, 2004, Rhody lent the Minutemen Corporation $10,000 in the form of a note receivable. The note is due on September 30, 2005, and carries an interest rate of 9%.
Original Entry: Note Receivable (debit) $10,000 Cash (credit) $10,000
59
Accrued Revenues
Interest receivable is the amount of income a company receives for the use of its money. Information needed to compute interest income: Face value of note Interest rate (expressed as annual rate) The length of time note is outstanding
60
Accrued Revenues
Adjusting Entry: Interest Receivable (debit) $225 Interest income (credit) $225
Calculation: $10,000 x 9% = $900 x 3 = $225 12
61
Accrued Expenses
Accrued expenses are expenses that have been incurred but not yet paid in cash and there is no original entry.
62
Accrued Expenses
Rhody pays its workers every 2 weeks on Friday. The total payroll is $80,000 every two weeks. The employees work only Monday - Friday. Assume that the last payday in December is the 26th and that the next payday is January 9. What adjusting entry must be made at the end of December? Original Entry:
NO ENTRY
63
Accrued Expenses
December/January
TH
21
28
22
29
23
30
24
31
25
1
26
2
27
3
10
Green days in 2004 - (3) Red days in 2005 (7) The 26th and 9th are paydays
64
Accrued Expenses
Adjusting Entry: Salary expense (debit)$24,000 Salary payable (credit) $24,000
Calculation:
$80,000 x 3 days = $24,000 10 days
65
The Accounting Cycle

Analyze business transactions.
Journalize the transactions.
Put in proper T accounts (done by computer).

Prepare a trial balance. Journalize and post adjusting entries--prepayments and accruals. Prepare an adjusting trial balance.
66
The Accounting Cycle

Prepare financial statements. Note the financial statements must be prepared in this order since the income flows into the retained earnings statement which flows into the balance sheet: Income statement Retained earnings statement Balance sheet
Close out all temporary accounts

67
The Nature And Purpose of an Adjusted Trial Balance

The adjusted trial balance is prepared after all adjusting entries have been journalized and posted.
The adjusted trial balance shows the balances of all accounts. Financial statements are prepared from the adjusted trial balance.
68
Rhody Corporation Adjusted Trial Balance December 31, 2004

Debit
Cash Supplies Note Receivable Interest Receivable Accounts Receivable Inventory Prepaid Insurance Office Equipment Accum. Depreciation Accounts Payable Salary Payable Unearned Service Revenue Common Stock Dividends Service Revenue Salaries Expense Insurance Expense Depreciation Expense Interest Income Rent Revenue Totals $46,500 4,000 10,000
225 15,000 14,000 12,000 20,000 14,000 24,000 18,000 40,000 500 55,000 5,000 24,000 9,000 4,000 29,000 9,000 4,000 6,000 500 55,000
Credit
Debit Credit Debit Credit

46,500 4,000 10,000 225 15,000 14,000 3,000 20,000
4,000 14,000 24,000 12,000 40,000
9,000
4,000
$127,000
$127,000
225 225 6,000 6,000 $43,225 $43,225 $155,225 $155,225

69
Rhody Corporation Income Statement January 1, 2004 - December 31, 2004
Revenue: Service Revenue Rent Revenue Interest Income Total Revenue

Expenses: Salaries Expense Insurance Expense Depreciation Expense Total Expenses Net Income
$55,000 6,000 225 $61,225
$29,000 9,000 4,000 42,000 $19,225

70
Rhody Corporation Retained Earnings Statement December 31, 2004
Retained Earnings on 1/1/04 + Net Income (From Income Statement) - Dividends Retained Earnings on 12/31/04
0 19,225 500 $18,725
71
Rhody Corporation Balance Sheet January 1, 2004 - December 31, 2004

ASSETS Cash Accounts Receivable Note Receivable Interest Receivable Supplies Inventory Prepaid Insurance Total Current Assets Office Equipment Accum. Depreciation TOTAL ASSETS $ 46,500 15,000 10,000 225 4,000 14,000 3,000 $92,725 16,000 $108,725
$20,000 (4,000)
LIABILITIES Accounts Payable Salary Payable Unearned Service Revenue Total Current Liabilities STOCKHOLDERS EQUITY Common Stock Retained Earnings (FROM Retained Earnings Statement) TOTAL LIABILITIES & STOCKHOLDERS EQUITY
$14,000 24,000 12,000 $50,000

40,000 18,725 $108,725
72
Temporary/Permanent Accounts
The computer will zero out all temporary accounts (i.e., income statement accounts revenue and expenses) and the dividend account. The income statement accounts are zeroed out because an income statement is limited to a period of time (i.e., one year).
The permanent balance sheet accounts are never zeroed out since they continue forever (i.e., going concern concept).
73
Common-Sized Financials
A common-sized statement recast, either the balance sheet or the income statement as a percentage of a selected number. For the balance sheet, that number is assets, and for the income statement, that number is sales. Thus, all assets should be stated as a percentage of total assets and all expenses should be stated as a percentage of sales.
74
Rhody Corporation Common-Sized Income Statement January 1, 2004 - December 31, 2004
Revenue: Service Revenue Rent Revenue Interest Income Total Revenue Expenses: Salaries Expense Insurance Expense Depreciation Expense Total Expenses Net Income
$55,000 6,000 225 $61,225
100.00%
$29,000 9,000 4,000 $42,000 $19,225
47.36% 14.70% 6.53% 68.59% 31.41%

75
Rhody Corporation Common-Sized -Balance Sheet January 1, 2004 - December 31, 2004
ASSETS Cash Accounts Receivable Note Receivable Interest Receivable Supplies Inventory Prepaid Insurance Total Current Assets Office Equipment Accum. Depreciation TOTAL ASSETS LIABILITIES Accounts Payable Salary Payable Unearned Service Revenue Total Current Liabilities STOCKHOLDERS EQUITY Common Stock Retained Earnings TOTAL LIABILITIES & STOCKHOLDERS EQUITY $ 46,500 15,000 10,000 225 4,000 14,000 3,000 $92,725 20,000 (4,000) $108,725 42.77% 13.80% 9.20% .02% 3.68% 12.88% 2.76% 85.28% 18.39% (3.68)% 100.00%
14,000 24,000 12,000 50,000

40,000 18,725 $108,725
12.88% 22.07% 11.04% 45.99%

36.79% 17.22% 100.00%
76
Statement of Cash Flows Operating, Investing, and Financing Activities
Purpose of Cash Flow Statement

The purpose of a cash flow statement is to convert the income statement from an accrual basis to a cash basis. This conversion may be done using either of two methods: Indirect Method Direct method We will focus only on the Indirect Method.
Why Focus on Cash?

Because investors, creditors, and other interested parties want to now what is happening to a companys most liquid asset, CASH.
Statement of Cash Flows

The Statement of Cash Flow helps to evaluate:
1. The entity's ability to generate future cash flows. 2. The entity's ability to pay dividends and meet obligations
3. The reasons for the difference between net income and net cash provided (used) by operating activities
4. The investing and financing transactions during the period.
Statement of Cash Flows

The Statement of Cash Flow can help answer the following questions:
How did cash increase when there was a net loss for the period? Is cash flow greater or less than net income? How was the expansion in the plant and equipment financed? How was the the debt retired? How much money was borrowed during the year? What amount was paid in dividends?
The Statement of Cash Flows

The cash flow statement provides information about the companys cash receipts and cash payments the net change in cash resulting from: operating, investing, and financing activities of a company during a period.
Sources of Information for the Statement of Cash Flows

Recall (see next slide) that the cash flow statement is a created statement that relies on information from the income statement and balance sheet. Notice wealth, financial value, and economic income dont affect the cash flow statement. Therefore, to prepare the cash flow statement, you need: Current income statement (only current year) Comparative balance sheet (2 years) Additional information
Framework for Understanding Accounting Information

Economic Concepts
Financial Values
Attach to individual assets, liabilities, revenues and expense items by the accounting process
Balance Sheet
Assets Liabilities Equity
Income Statement
Revenue Expenses Net Income
Wealth
Measured by equity at a point in time
Cash Flow Statement

Operating cash flow Investing cash flow Financing cash flow Significant non-cash
Economic Income
Change in wealth measured by net income
Format of the Statement of Cash Flows

Cash Flow Statement has Four Sections:
operating
investing
financing
significant non-cash investing and financing activities
Operating Activities
Operating activities captures the effects operating transactions (i.e., normal revenues and expenses transactions) have on the companys cash flow.
Operating Activities
Income Statement Information Needed:
Net income
Depreciation and amortization (non-cash expenditures) Gain(loss) on sale of assets or investments
Balance Sheet Information Needed: Change in Current Assets Change in Current Liabilities
Examples of Cash Flows Operating Activities

Cash inflows: From sale of goods or services From interest received and dividends received Cash outflows: To suppliers for inventory To employees for services To government for taxes To lenders for interest To others for expenses
Investing Activities
Investing activities - captures a companys purchase and sale of assets and its use of cash to acquire a long-term investment position in another company and the sale of these investments.
Investing Activities
Income Statement Information Needed : Gain(Loss) of Assets Balance Sheet Information Needed : Change in Long-Term Assets
Property Plant and Equipment Long-Term Investments
Examples of Transactions That Affect Investing Activities

Cash inflows: From sale of property, plant, and equipment From sale of debt or equity securities of other entities From collection of principal on loans to other entities Cash outflows: To purchase property, plant, and equipment To purchase debt or equity securities of other entities To make loans to other entities
Financing Activities
Financing activities - captures a company borrowing and repaying long-term loans and selling or buying back shares of its own stock. In addition, it reflects any dividends paid by the company.
Financing Activities
Income Statement Information Needed: None Balance Sheet Information Needed: Change in Long-Term Liabilities Change in Stockholders Equity
Retained Earnings Stmt Information:
Dividends Paid
Examples of Transactions That Affect Financing Activities

Cash inflows: From issuance of equity securities (company's own stock) From issuance of debt (bonds and notes) Cash outflows: To stockholders as dividends To redeem long-term debt or reacquire companys stock
Significant Non-Cash Activities

Transactions that do not affect cash are NOT reported in the body of the statement of cash flows. However, these items are reported:
In a separate schedule at the bottom of the statement of cash flows or In a separate note or supplementary schedule to the financial statements.
Examples of Significant Non-Cash Activities

1. Issuance of common stock to purchase assets. 2. Conversion of bonds into common stock. 3. Issuance of debt to purchase assets. 4. Exchanges of plant assets.
Converting Net Income to Cash Flow From Operations

Accrual Method
Revenue Earned
Cash Method
+
Noncash expenses (e.g, depreciation)
- Expenses Incurred
+
-
Net Income
Decreases in Current Assets Increases in Current Liabilities

Increases in Current Assets Decreases in Current Liabilities
Cash Flow From Operations
Steps in Preparing Cash Flow Statement

1. Determine the net Increase (decrease) in cash. Note: This will serve as the check figure. 2. Determine the cash provided (used) by operations. 3. Determine the cash provided (used) by investing. 4. Determine the cash provided (used) by financing. 5. Determine any significant noncash transactions that should be disclosed.
Determine Net Cash Provided (Used) Operating Activities
By
1. Get net income from the income statement. 2. Add to net income for items that did not affect cash (i.e. depreciation and amortization). 3. Add (subtract) the changes in the current asset and current liability accounts. An increase (decrease) in current assets is a decrease (increase) in cash flow. Whereas, an increase (decrease) in current liabilities is an increase (decrease) in cash flow.
Cash Flow Statement

Lets Do An Example
Cash Flow Example

Assume that Rhody has a beginning cash balance of $20,000 and an ending cash balance of $244,000. In addition, for the year Rhody has net income of $200,000 and depreciation and amortization of $15,000. What impact does this information have on the cash flow statement?
Change in Cash Account

The $224,000 increase between the beginning cash balance of $20,000 and an ending cash balance of $244,000 indicates that Rhodys total cash flow for the year will increase by $224,000. The cash flow statement will show how this $224,000 increase was achieved. In essence, this will serve as a check figure to make sure the sum of cash flow from operations, investing, and financing reflects an increase of $224,000.
Depreciation and Amortization

The $15,000 of depreciation is a non-cash expense, so that amount must be added to net income. Remember, the goal is to go from net income (accrual basis) to net income on the cash basis. Therefore, we need to increase net income by $15,000, since we have overstated our cash expenses by the amount of depreciation.
Rhody Company Statement of Cash Flows--Indirect Method For the Year Ended December 31, 2004
Cash flows from operating activities

Net income Depreciation & amortization Net cash flow from operations $200,000 15,000 $215,000
Impact of Change in Accounts Receivable (Current Asset)

Assume that Rhody had sales of $385,000 and all of its sales are on credit. The beginning balance in accounts receivable was $42,000 and the ending balance is $55,000. What impact does this have on the cash flow statement? Remember, the goal is to go from net income (accrual basis) to net income on the cash basis.
Analysis Via TAccount

ACCOUNTS RECEIVABLE 1/1 42,000 Sales 385,000 Cash Collections 372,000 12/31 55,000
Notice that the income statement reports $385,000 as sales. However, we only collected $372,000 of it in cash. Thus, we need to reduce net income by the increase in the accounts receivable.

Net income Depreciation & amortization Increase in accounts receivable Net cash flow from operations $200,000 15,000 (13,000) $202,000
Impact of Change in Accounts Payable (Current Liability)

Assume that Rhodys operating expenses reported in the income statement were $185,000, of which $170,000 were expenditures requiring the future outlay of cash (i.e., other than depreciation). The beginning balance in accounts payable was $25,000 and the ending balance is $35,000. What impact does this have on the cash flow statement? Remember, the goal is to go from net income (accrual basis) to net income on the cash basis.

ACCOUNTS PAYABLE 1/1 25,000 Expenses Incurred 170,000 Cash Payments 160,000 12/31 35,000
See explanation on next slide!
Impact of Change in Accounts Payable (Current Liability)

The income statement reports $185,000 of expenses.
However, $15,000 of these expenses are for depreciation, which is a non-cash expense and would not be recorded as a payable (i.e., recall the credit is to accumulated depreciation). This leaves $170,000 of potential expenses to be paid for with cash. Since the payable account increased by $10,000, only $160,000 of these expenses were actually paid in cash. Thus, we need to increase net income by the increase in the accounts payable.

Net income Depreciation & amortization Increase in Accounts receivable Increase in Accounts payable Net cash flow from operations $200,000 15,000
(13,000) 10,000 $212,000
Determine Net Cash Provided (Used) Investing Activities
By
Add (subtract) the changes in the noncurrent asset accounts (i.e., property, plant, and equipment) . An increase (decrease) in property, plant, and equipment is a decrease (increase) in cash flow.
Impact of Change in PP&E (Non Current Asset)

Assume that Rhody acquired $40,000 of equipment and sold equipment with a book value (original cost minus accumulated depreciation) of $20,000 for $25,000. What impact does this have on the cash flow statement? Remember, the goal is to go from net income (accrual basis) to net income on the cash basis.
Analysis of Impact
The purchase of equipment is a cash outflow and the sale of the equipment is a cash inflow. However,
the sale of equipment also affects the accrual basis income statement, since the $5,000 gain ($25,000 sales price - $20,000 book value) on the sale is included in net income. Since we are creating a cash flow statement, the gain must be removed from net income (see operating activities section) and the cash flow from this transaction (e.g., $20,000) is reported in the investing activities section.
Cash flows from operating activities:
Net income Depreciation & amortization Increase in Accounts receivable Increase in Accounts payable Gain on sale of equipment Net cash flow from operations $200,000 15,000 (13,000) 10,000 (5,000) $207,000 $ 25,000 (40,000) (15,000)
Cash flows from investing activities:

Sale of equipment Purchase of equipment Net cash flow from investing
Determine Net Cash Provided (Used) Financing Activities
By
Add (subtract) the changes in the noncurrent liabilities accounts (i.e.,long-term debt) and add (subtract) the changes the stockholders equity accounts. An increase (decrease) in long-term debt is an increase (decrease) in cash flow.
Impact of Change in Long-Term Debt (Non-Current Liability)

Assume that Rhody borrowed $40,000 from Explorer bank and paid $8,000 in dividends to its shareholders. What impact does this have on the cash flow statement? Remember, the goal is to go from net income (accrual basis) to net income on the cash basis.
Analysis of Impact
The borrowing of money from the bank is a financing transaction that increases the amount of cash Rhody has available. Thus, this is a $40,000 increase in Rhodys cash flow from financing. The payment of $8,000 in
dividends is a financing transaction that reduces Rhodys cash flow.
Net cash flow from operations Net cash flow from investing $207,000 (15,000)
Cash flows from financing activities:

Cash from long-term borrowings Payment of dividends Net cash flow from financing 40,000 (8,000) 32,000
Net Increase (Decrease) in Cash Cash at beginning of period Cash at end of period
$224,000 20,000 $244,000
Lets Do Another Cash Flow Example-Comparative Basis
Rhody Company Comparative Balance Sheet With Change in Accounts December 31, 2004
Assets Cash Accounts Receivable Prepaid Expenses Land Building Accumulated depreciation-building Equipment Accumulated depreciation-equipment Total 2004 $56,000 20,000 4,000 130,000 160,000 (11,000) 27,000 (3,000) $383,000 2003 $34,000 30,000 0 0 0 0 10,000 0 $74,000 Change Increase/Decrease $22,000 increase 10,000 decrease 4,000 increase 130000 increase 160,000 increase 11,000 increase 17,000 increase 3,000 increase
Rhody Company Comparative Balance Sheet With Change in Accounts December 31, 2004
Liabilities and Stockholders Equity Accounts payable Bonds payable Common stock Retained earnings Total 2004 $59,000 130,000 50,000 144,000 $383,000 2003 $4,000 0 50,000 20,000 $74,000 Change $55,000 increase 130,000 increase No Change 124,000 increase
Rhody Company Income Statement For the Year 1/1/04 through 12/31/04
Revenues Operating expenses Depreciation expenses

Loss on sale of equipment Income from operations Income tax expense Net income
$507,000 261,000 15,000

3,000 279,000 228,000 89,000 $139,000
Additional Information
In 2004, the company declared and paid a $15,000 cash dividend. The company obtained land through the issuance of $130,000 of long-term bonds. An office building costing $160,000 was purchased for cash; equipment costing $25,000 was also purchased for cash. During 2004, the company sold equipment with a book value of $7,000 (original cost $8,000 less accumulated depreciation $1,000) for $4,000 cash.
Determine Net Cash Provided (Used) Operating Activities
By
1. Get net income from the income statement. 2. Add to net income for items that did not affect cash (i.e. depreciation and amortization). 3. Add (subtract) any loss (gain) on sale of assets or investments. 4. Add (subtract) the changes in the current asset and current liability accounts. An increase (decrease) in current assets is a decrease (increase) in cash flow. Whereas, an increase (decrease) in current liabilities is an increase (decrease) in cash flow.

Net income Depreciation & amortization Loss on sale of equipment Decrease in Accounts receivable Increase in Prepaid expenses Increase in Accounts payable Net cash flow from operations $139,000
15,000 3,000 10,000 (4,000) 55,000
79,000 $218,000
Analysis of Impact of Equipment Sale

The sale of the equipment is a cash inflow (shown later in the investing section).
However, the $3,000 loss ($4,000 sales price $7,000 book value) on the sale of equipment is shown in net income. Since we are creating a cash flow statement, the loss must be added back to net income.
By
Study the balance sheet to determine changes in non-current assets.

Changes in each non-current account are analyzed using selected transaction data to determine the effect, if any, the changes had on cash.
By
The land of $130,000 was purchased through the issuance of long-term bonds. Although the exchange of bonds payable for land has no effect on cash, it is a significant noncash investing and financing activity that must be disclosed.

The increase in the building of $160,000 is a use of cash. The equipment account increased by $17,000. The additional information provided reveals that this net increase resulted from two transactions: sale of equipment costing $8,000 for $4,000. a purchase of equipment for $25,000 The purchase of equipment should be shown as a $25,000 outflow of cash and the sale of equipment should be shown as a cash inflow of $4,000.
By

1/1 Sale Purchase 12/31 EQUIPMENT 10,000 $8,000 25,000 27,000
Cash flows from operating activities:
Net income Depreciation & amortization Loss on sale of equipment Decrease in Accounts receivable Increase in Prepaid expenses Increase in Accounts payable Net cash flow from operations $139,000
15,000 3,000 10,000 (4,000) 55,000
79,000 $218,000
Cash flows from investing activities:

Purchase of building Purchase of equipment Sale of equipment Net cash flow from investing (160,000) (25,000) 4,000
(181,000)
By
Study the balance sheet to determine changes in non-current liabilities and stockholders equity.
Changes in each non-current liability and stockholders equity are analyzed using selected transaction data to determine the effect, if any, the changes had on cash.
By
The net increase in Retained Earnings of $124,000 is a result of net income of $139,000 and the $15,000 payment of dividends that decreased Retained Earnings.
Net income is the starting point of the cash flow statement and is presented in net cash provided by operations. Payment of the dividend is a cash outflow that is reported as a financing activity.
Net cash flow from operations Net cash flow from investing $218,000 (181,000) $15,000 (15,000)
Cash flows from Financing investing activities:

Payment of dividends Net cash flow from financing
Net Increase (Decrease) in Cash Cash at beginning of period Cash at end of period Noncash investing and financing activities:
Issuance of bonds payable to buy land
$22,000 34,000 $56,000
$130,000
A Company Life Cycle

A series of phases all companies experience. The phases are often referred to as the: introductory phase growth phase maturity phase decline phase.
The phase a company is in affects its cash flows.
Cash Flow
All companies go through business phases. The whole business might not go through each phase, but a segment of the business or a product line of the business will experience these phases.The phases are often referred to as the: introductory phase growth phase maturity phase decline phase. The phase a company is in will affect its cash flows.
Introductory Phase
To support asset purchases, the company needs to issue stock or debt. Since the operations are just starting,
Expect:
cash from operations to be negative cash from investing to be negative. cash from financing to be positive.
Growth Phase
The company is striving to expand its production and sales. Expect:
cash from operations to generate a small amount of cash cash from investing to be negative. cash from financing to be positive.
Growth Phase
The companys sales and production begin to level off. Thus, investing will consist of replacing some long-term assets and selling others.
Expect: cash from operations to be moderately positive.

cash from investing to be neutral. cash from financing to be negative (paying back loans).
Decline Phase
The companys sales and production begin to decline. Note: This phase is not true of all companies, but will certainly affect a segment of a company. Expect:
cash from operations to be minimally positive.
cash from investing to be neutral or negative. cash from financing to be negative (paying back loans).
Cash-Based Ratio Measures
Accrual-based measures allow too much management discretion. One disadvantage to the cash-based measures is that no published industry averages are readily available for comparison.
Liquidity
Recall that liquidity is the ability of a business to meet its immediate obligations and that one measure of liquidity is the current ratio.
A disadvantage of the current ratio is that it uses year-end balances of current assets and current liabilities (may not be representative of a company's position during most of the year.)
Current Cash Debt Coverage Ratio

A ratio that partially corrects this is the current cash debt coverage ratio. Cash provided by operations Average current liabilities
Since cash from operations involves the entire year rather than a balance at one point in time, it is often considered a better representation of liquidity on the average day.
Solvency
Recall that solvency is the ability of a firm to survive over the long term. One measure of solvency is the debt to total assets ratio.
Solvency
A measure of solvency that uses cash figures Is the cash debt coverage ratio. Cash Provided By Operations Average Total Liabilities This ratio measures a company's ability to repay its liabilities from cash generated from operations.
Statement of changes in equity

Shows the changes in owners equity for a specific period of time. It shows: (a) profit or loss for the period; (b) each item of income and expense for the period that, is recognised directly in equity, and the total of these items; (c) for each component of equity, the effects of changes in accounting policies and corrections of errors recognised in accordance with IAS 8. (d) the amounts of transactions with equity holders acting in their capacity as equity holders, showing separately distributions to equity holders; (e) the balance of retained earnings (ie accumulated profit or loss) at the beginning of the period and at the balance sheet date, and the changes during the period; and
Notes
The notes shall: (a) present information about the basis of preparation of the financial statements and the specific accounting policies; (b) disclose the information required by IFRSs that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement; and (c) provide additional information that is not presented on the face of the balance sheet, income statement, statement of changes in equity or cash flow statement, but is relevant to an understanding of any of them.
Disclosure of accounting policies

An entity shall disclose in the summary of significant accounting policies: (a) the measurement basis (or bases) used in preparing the financial statements; and (b) the other accounting policies used that are relevant to an understanding of the financial statements.
RECEIVABLES
CASH
INVENT ORIES
FINANCIAL ASSETS
(CURRENT ASSETS)
are assets which fulfil following conditions:
It is expected that it will be realized or it is held for sale or for consumption in regular business performance; Primarily is held for trading; It is expected that it will be realized in the 12 month period from the balance-sheet date; Cash or cash equivalent, except if it has limited possibility of exchange or liabilities settlement for period of at least 12 month from the balance-sheet date.
Short term assets 2
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Types of short-term assets:

Inventories
Receivables
Financial assets
Cash
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Short term assets
S0 x procuration of inventories
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consumption of inventories
Si x
4
Short term assets
occur in several
forms:
Inventories of merchandise; Inventories of raw materials and materials; Production inventories (work in progress); Inventories of finished goods; Inventories of spare parts; Inventories of small inventory; Advances for inventories.
14.11.2012
Short term assets
Are held for sale in regular business performance by subjects that are performing commercial services ( wholesale and retail sale).
Evaluation:
INITIAL EVALUATION per purchasing cost AFTERWARDS EVALUATION per purchasing cost or
per net market value, depending on what is lower (IAS 2 Inventories, art. 9.)
14.11.2012 Short term assets 6
Procuration and stocking of merchandise in
1)
Per purchasing cost Per selling price (purchasing cost + difference in price)
2)
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Short term assets
1) Recording of merchandise procuration per purchasing cost
Purchasing price
Depending costs
discounts
Purchasing cost
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Short term assets
1) Recording of merchandise on inventories per purchasing cost

Accounts payables Purchasing price
Calculation of supply Merchandise inventories
(1a)
Transportation costs
(3)
(3)
(2) Purchasing cost
(1b)
Customs
(1c)
(3)
(1d)
Irreversible taxes
(3)
VAT receivables
(1a) (1b)
2) Recording of merchandise on inventories per selling prices
Purchasing price
Depending costs
Purchasing cost
Difference in price (margin)
Selling price Without VAT
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Short term assets
10
Recording of merchandise on inventories per selling price

Accounts payables Purchasing price
Calculation of supply Merchandise inventories
(1a)
Transportation cost
(3)
(3)
(2) Purch. cost
(2) Selling price Difference in price
(1b)
Customs
(1c)
(3)
(2) DIP (1d)

Irreversible taxes
(3)
VAT receivables
(1a) (1b)
Merchandise wholesale and decrease of inventories ( for merchandise inventories held per
ACCOUNT RECEIVABLES (1) SP+VAT VAT PAYABLES VAT(1) REVENUES FROM SOLD MERCHANDISE SP (1)
MERCHANDISE INVENTORIES
SX PC (2)
EXPENSES FROM SOLD MERCHANDISE (COSTS OF PURCHASED MERCHANDISE) (2) PC
Expenditures methods: FIFO method Weighted average price method

There are some methods for determening those costs. They are: FIFO, LIFO, HIFO and AVERAGE COST. By Croatian Law: FIFO method and average cost.
13
FIFO method: first in, first out. LIFO method: last in, first out. HIFO method: highest in, first out. Average costs: total value in HRK dividing with total quantity of raw material.
14
Merchandise wholesale and decrease of inventories (for merchandise inventories held per
ACCOUNTS RECEIVABLES (1) SP+VAT VAT PAYABLES VAT (1) REVENUES FROM SOLD MERCHANDISE SP (1)
MERCHANDISE INVENTORIES
SX SP without VAT (2)
RASHODI OD PRODAJE (TROKOVI NABAVE ROBE) (2) SP without VAT (2a) DIFFERENCE IN PRICE (2a) DIP of sold SX merchandise
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Short term assets
15
Procuration and stocking of merchandise in

1)
Transfer of merchandise from wholesale in retail sale

Direct procuration in shop (recording of merchandise per selling price with calculated VAT)
2)
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Short term assets
16
Calculation of retail price
Calculation of retail price include
According to regulation this calculation must be in shops. Calculation per selling price can be managed as
Calculation in margin system, Calculation with known selling price or as Calculation in discount system.
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INVENTORIES IAS 2
17
Transfer of merchandise from wholesale to retail shop

WHOLESALE MERCHANDISE MERCHANDISE IN SHOP
DIFFERENCE IN THE PRICE OF MERCHANDISE RETAIL MARGIN
CALCULATED VAT CALCULATED VAT
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Short term assets
18
(recording of merchandise per selling price with calculated VAT)

ACCOUNTS PAYABLES PURCHASING COSTS DIFFERENCE IN THE PRICE OF MERCHANDISE RETAIL MARGIN MERCHANDISE IN RETAIL SHOP
CALCULATED VAT CALCULATED VAT
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Short term assets
19
Merchandise retail selling and decrease of inventories

ACCOUNTS RECEIVABLES (1) SP+VAT VAT PAYABLES VAT (1) REVENUES FROM SOLD MERCHANDISE SP (1)
MERCHANDISE IN SHOP SX SP + VAT (2)
EXPENSES FROM SOLD MERCHANDISE (COSTS OF PURCHASED MERCHANDISE) (2) SP+ VAT (2a) (2b)
CALCULATED VAT (2b) calculated VAT of sold merchandise

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SX
DIFFERENCE IN PRICE (2a) DIP of sold SX merchandise

Short term assets 20
costs x
Transfer of costs on revenues burden
TRADE COSTS (EXPENSES OF THE PERIOD) x
costs x
costs
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Short term assets
21
OTHER TYPES OF INVENTORIES:

Inventories of raw and material; Production inventories; Finished goods inventories; Inventories of spare parts; Inventories of small inventory.
Initially are recorded at , and afterwards at
, depending on what is lower.
Note: Inventories of raw and material, production inventories and finished goods inventories will be explained in detail within PRODUCTION.
Inventories of spare parts and inventories of small inventory, package and cartyres PLEASE READ IN YOUR BOOKS.
S0 x
decrease of receivables
increase of receivables
Si x
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Short term assets
23
Include receivables with maturity under one year. Most often that are receivables from:

related companies; customers (accounts receivables); participation interests; employees; government; and other short term receivables.
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Occur as a consequence of goods and services delivery. That asset is REAL in its appearance and is treated as transient form of asset from material form to cash.
There are:
ACCOUNTS RECEIVABLES (DOMESTIC) ACCOUNTS RECEIVABLES IN ABROAD.
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Short term assets
25
Occur on the basis of:

Extrapayed salaries to employees;
Given short term loans;

Shortages and other damages (responsibility of
employees); Payed advances for official trips.
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Short term assets
26
The most common that are VAT RECEIVABLES by ingoing invoices. Except that receivables from government can also occur also for:
overpaid personal income tax on salaries; overpaid contributions from and on salaries; overpaid income tax;
overpaid custom duties;

and similar.
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Short term assets
27
S0 x
increase of assets
decrease of assets
Si x
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Short term assets
28
Occurs as a consequnce of invested money of certain business subject on the period up to one year. Money is invested in form of:
Given short term loans to other business subjects, Investemnts in short term securities (investment in
commercial bills, investemnt in treasury bills, investment in short term bonds), Investemnt in shares and stakes in related companies, Given deposits on the period within one year, Other short term investments.
S0 x increase of cash
decrease of cash Si x
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Short term assets
30
Payments between business subjects are made CASHLESS above cash at bank account. Cash is divided on cash in bank and cash in register.
Cash in bank and cash in register consist of:

Cash at bank account, Currency account, Letter of credit, Other cash assets.
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CASH AT BANK So X X (2)
CASH REGISTER So X (1) X
(2) Received bank statement
X (1)
(1) Cash withdrawal from cash at bank account and payment on cash register
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Short term assets
32
CASH AT BANK So X (2) X
CASH REGISTER So X x (1)
(2) Received bank statement for that payment
(1) X
X (2)
(1) Cash withdrawal from cash register and payment on cash at bank
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Short term assets
33
LETTER OF CREDIT an instrument of payment

insurance
A letter of credit is a document that a financial institution or
similar party issues to a seller of goods or services which provides that the issuer will pay the seller for goods or services the seller delivers to a third-party buyer
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34
CASH AT BANK So X X (1)
ACCOUNTS PAYABLES (2) X So X
(1) X
(1) Letter of credit opening
X (2)
(2) Payment to a supplier from open letter of credit
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Short term assets
35
Thank You for Your attention!!!
14.11.2012
kratkotrajna imovina
36
PhD. Ivana Drai Lutilsky
Is
not aimed for sale and has characteristic of permanency is expected that it will be realized into money in period longer than one business year its value gradually on new effects
It
Transfers
21.11.2012
LONG-TERM ASSETS
INTANGIBLE
expenditures for
development patents licence software concession franchise trademarks goodwill Advance payment for intangible assets
TANGIBLE
land and forest
buildings machines and equipment tools plant and office inventory furniture transport vehicles long-term biological assets advanced payment for tangible assets tangible assets in preparation other tangible assets
FINANCIAL
stakes (shares) by related companies given loans to related companies participate intersts investments in securities given deposits other long-term financial assets
RECEIVABLES
receivables from related companies
receivables from slaes on credit other receivables
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softwer
Trade mark
franchise
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Intangible assets that is not in physical format Assets acquired because of its usage in business performance Heavily predictible life cycle Heavily measurement of future economic benefits from its usage Heavily transferabillity of those assets Sometimes does not exsist the possibility of individual sale because that asset is specific for certain company

Tax regulation: value> 3.500 kn, n > 1 god.
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INTERNAL DEVELOPMENT EXTERNAL ACQUIRING (PURCHASE OR OTHER RELATIONS WITH OTHERS) Examples of external acquiring:

Separete acquiring of long-term intangible assets (for instance, licence purchase), Acquiring of long-term intangible assets as a part of business acquisitions (for instance, value of goodwill of acquired company), Acqisition of long-term intangible assets by using government injections (for instance, government injection in form of import allowance), Acquiring of long-term intangible assets by asset exchange (exchange of patents between two companies)
21.11.2012
INTERNAL DEVELOPMENT For internaly developed positions of long-term intangible assets purchasing cost is detemined on the basisi of all investments (costs) that have occured during creating, production or preparation of that position for its usage. In internally developed intangible assets which is not recognized as balance sheet position following positions are included: internally developed trademarks, signs, publication names, lists of buyers and other similar positions. ACQUIRED ASSETS IS CAPITALIZED IF FOLLOWING REQUIREMENTS ARE FULFILLED: IF IT IS SEPARABLE, IF IT HAS LIMITED TIME OF USAGE.
21.11.2012
MRS
38 INTANGIBLE ASSETS
Link on standard: IAS 38 Intangible assets
CFRS
5 Long-term intangible assets
Determines issues of recognition, measurement and recording of long-term intangible assets as well as IAS 38, but in shorter form
21.11.2012
Expenditures for research and development Patents Licence Software Concession Franchise
Trademarks
Other rights Goodwill (externally acquired) Advances for intangible assets
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1. EXPENDITURES FOR RESEARCH which are
recognized as expense in period in which they ocurr;
The exsistance of long-term intangible assets which should give certain future economic benefits can not be proved in research phase Examples of those activities are activities which goal is acquiring new knowledge In the moment of research work and acquiring of new knowledges when it is not sure in which activity new knowledge will be applied
21.11.2012
2.
EXPENDITURES FOR DEVELOPMENT are recognized as intangible assets if following requirements are fulfilled: Technical feasibility of intangible assets which is finished in order to be available for usage or sale; Intention for finishing of intangible assets and its usage or sale; Possibility of usage or sale of intangible assets; Way in which intangible assets will give promising economic benefits. Business subject needs to prove market exsistance for the production of intangible assets or for intangible assets itself, or for usefulness of intangible assets in case that it is used 21.11.2012 internally;
Subject needs to prove market existance for intangible assets production or for intangible assets itself, or for usefulness of intangible assets in case that is is used internally; Avalilability of appropriate technical, financial and other sources for finishing of development and usage or sale of intangible assets; Possibility of reliable cost detrmining which can be credited to intangible assets development
IF ABOVE MENTIONED REQUIREMENTS ARE NOT SATISFIED, DEVELOPMENT COSTS ARE PERIOD EXPENSES!
21.11.2012
Costs which ocurr related with research activity, and which could be capitalized are:
Material and service costs which are used or spent in creating of intangible assets Salaries, wages and other costs of employees that are directly included in creating of that asset, Fees for legal rights registering, Depreciation of patents and licences which are used for creating of tangible assets
21.11.2012
Concession is an agreement by which concession provider (government or other unit) is obliged to divide certain economic rights to concessionaire for ceratin fee Concessions are usually divided on public interests (building of roads, bridges) and on concessions which are related to natural resources exploatation (water, oil, gass, etc.) Concession payment according to contract is recorded as intangible long-term assets and through depreciation calculation is divided on periods of concession
21.11.2012
Patent is exclusive right of uage of own inovation after patent registration by competent governement institution. By patent registering, inovation is protected from incompetent usage, the owner of the patent retain exclusive right of usage, offer or selling that patented inovation Patent can be ycquired externally (purchase from others) or developed internally
21.11.2012
If patent is developed internally it a result of research and development activities and in that case is recognized through positions of development Patent can be separate position of long-term intangible assets if it is acquired externally In that case patent is recorded per purchasing cost which consists of purchasing price enlarged for depending purchasing costs (fees for legal services, administartive fees and similar)
21.11.2012
Licence is redeemed right of usage of foreign patented inovation. Licence purchase means, for instance, purchase of production rights of certain product on certain period of time. Franchise is exclusive right in case when one company pays to other company fee for certain business for certain period of time, purpose and field. For example, franchise in fast-food industry For recording of patents, licences and franchise it is important to know if the fee is payed in advance for several periods (business years) or it is payable in rates. In first case patent, licence or franchise are recorded as long-term intangible assets.
21.11.2012
Trademark represents symbol of certain company by which this company is different from other companies and similar products. Trademark has promotion goals and is needed to be patented in order to protect it from fraud Trademark can be:
developed internally it is not recognized as intangible assets, Item of purchase it is recognized as intangible assets.
21.11.2012
Goodwill is company reputation which can be a result of companys reputation or monopolistic position or competitive strenght. Goodwill cant be seperatly identified and valued . Goodwill is esential part of the whole company and its value and couldnt be measured as seperate item. Internally acquired goodwill isnt capitalized.
21.11.2012
Eksternally acquired goodwill can be capitalized.
Goodwill is recorded only when there is a transaction that involves the purchase of an entire business. Goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired. Goodwill is not amortized but it must be written down if its value is determined to have declined (been permanently impaired).
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Acquisition
Usage
Alienation
21.11.2012
Acquisition at market, Acquisition under business combinations, Acquisition under governement support, Acquisition by exchange for some other type of asset, Internally acquired.
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At
beginning:
under cost principle (acquisition cost)
After
valuation( after the begininng valuation):
Cost model acquisition cost minus amortization and minus losses for write offs of value (value adjustments); or Revalorization model under fair value
21.11.2012
Acquisition

cost are:
Purchasing price after all deductions of discounts, Dependable costs of acquisition, customs, Excise duties.
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Account payables
(1) (2)
LTIA in preparation
Purchasing (1) price + (2) Dependable cost
(1) + (2)
LTIA in usage
Acquisition cost
Vat receivables
(1)
(2)
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acquisition
Usage
Alienation
21.11.2012
Amortization Is the allocation of the cost of an asset expense over its useful life in a rational and systematic manner. Depreciation is a process of cost allocation, not a process of asset valuation. Why depreciable asset? Because the usefulness to the company and revenue producing ability of each asset will decline over the asset useful life. Asset which amortize must satisfiy following terms:
a)
b)
c)
It is expected that this asset will be used in business activity for a longer period That asset must have usefull life That asset is held by the company for production, selling goods or providing services, or for renting or for administrative purposes.
Amortization will started after that asset has started to be used (next month).
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Basis for amortization is acquisition cost; Period of amortization period of usage (usefull life) AMORTIZATION METHODS 1) TIMELINE METHODS
a) b) c)
Proportional or straightline method progressiv degressiv
21.11.2012
Accumulated deprecistion of LTIA
Amortization cost
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acquisition
usage
alienation
21.11.2012
Some forms of LTIA are not transferable or reneweable or there isnt a possibility of independent valuation (goodwill, trade mark and similar). Some forms are acquired under special terms and because of that it sales is limited (concession).
LTTA stops being recognized in business books.
21.11.2012
Write down (value adjustment) is necessary if in afterwards valuation estimates that recovarable amount is lower than book-keeping value.
Recovarable amount is higher amount between fair value and value in usage. Book-keeping amount is acquisition cost minus accumulated depreciation.
21.11.2012
Value correction LTIA
Expenses of write downs off LTTA X
21.11.2012
Long term tangible asset
28.11.2012
Long term asset
Intangible
Tangible
land and forest buildings machines and equipment tools plant and office inventory furniture transport vehicles long-term biological assets advanced payment for tangible assets tangible assets in preparation other tangible assets
Financial
Receivables
28.11.2012
Disclosure framework
IAS 16 Property, plant and equipment IAS 36 Imapairment of asset IAS 40 Investment property IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations' CFRS 6 Long term asset CFRS 7 Investment property CFRS 8 Non-current Assets Held for Sale and Discontinued Operations
28.11.2012
Asset in material form (touchable, tangible) is those which: Is used in production, delivering goods or for providing services, for renting or in administrative purposes; It will remain in the same form for a period longer then 1 year and it will not be spent in one production cycle.
Transfers its value gradually on new effects
Tax regulation: value> 3.500 kn, n > 1 year.
28.11.2012
Accounting process
Acquisition
Usage
Alienation
28.11.2012
Acquisition of LTTA
Acquisition on market; Internally deployed; Exchange; Business combinations; Government support; Financial leases; Surpluses; Donations.
28.11.2012
Acquisition cost of LTTA should be recognized as asset if:

It is probable that it will bring future economic benefits, and If acquisition cost could be realiable measured.
28.11.2012
Initial recognition of LTTA

ACQUISITION COST of LTTA when purchased comprehend:
Purchasing price including custom and excise duties after all discounts, Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site.
28.11.2012
Accounting recording
Account payables
(1) (2)
LTTA in preparation
Purchasing (1)
(1) + (2)
LTTA in usage
Acquisition costs
price + (2) Other costs
VAT receivables
(1)
(2)
28.11.2012
Cost includes all costs necessary to bring the building to working condition for its intended use :
Preparation of building site; Projects and other documentation based on which building was build (architect, geodesist etc.) Necessary licenses for water, heating, telephone, etc. Costs for arrangement of surfaces ment for usage (acess roads, enviroment etc).
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Temporary settlement situation
has a character of invoices Used when is a longterm period of building Method for gradation of finishing buiding
After every ethap there is a settlement by temporary situation,
Total settlement situation - has a total amount of all

temporary situations.
Method of completed contract (finished building)

28.11.2012
Afterwards recognition:
Cost method After initial recognition as asset, property, plat and equipment should be shown under cost reduced for accumulated depreciation and accumulated losses from value adjustments, Revaluation method or revalorization (under fair value) Property, plant and equipment whose fair value could be reliable measured should be recognized under revaluated amount fair value on the date of revaluation reduced for latter accumulated depreciation and latter accumulated losses from value adjustments.
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Advance paymemt
Given advances for LTTA
Money
Given advances for LTTA
S0 X
Taken advances
Money
Payables for takn advances
S0 X
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Inventory process and inventory differences

INVENTORY PROCESS is a list of asset and liabilities of a company and it is done with a purpose of adjustments bookkepping balance with an actual balance. If actual balance is higher then the bookkepping balance INVENTORY SURPLUS
VALUE CORRECTION ASSET
(1) (1)
SURPLUS
(1)
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2) If actual balanve is lower then bookkepping balance
INVENTORY DEFICIT
VALUE CORRECTION (1) (1) S0 X
ASSET S0 X
DEFICIT (1)
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Accounting process
Acquisition
Usage
Alienation
28.11.2012
Amortization of LTTA
Amortization Is the allocation of the cost of an asset expense over its useful life in a rational and systematic manner. Depreciation is a process of cost allocation, not a process of asset valuation. Why depreciable asset? Because the usefulness to the company and revenue producing ability of each asset will decline over the asset useful life. Asset which amortize must satisfiy following terms:
a) b) c) It is expected that this asset will be used in business activity for a longer period That asset must have usefull life That asset is held by the company for production, selling goods or providing services, or for renting or for administrative purposes.
Amortization will started after that asset has started to be used (next month).
28.11.2012
Basis for amortization is acquisition cost;
Period of amortization period of usage (usefull life)

AMORTIZATION METHODS 1) TIMELINE METHODS
a) Proportional or straightline method b) progressiv c) Degressiv 2) Functional method or units of activity
28.11.2012
Depreciation is not used for:

Land, Forrest, Art, Archives, Asset in preparation, Advances for LTTA.
28.11.2012
Depreciation recording
Accumulated depreciation of LTTA Depreciation cost
28.11.2012
Timeline methods
o PROPORTIONAL amount of depreciation is the same in useful life o DEGRESSIV MEHOD amount of depreciation declines in useful life o PROGRESSIV METHOD amount of depreciation inclines in useful life.
Depreciation is an accounting policy which is influencing financial result
Proportional method
Annual depreciation rate = 100/useful life (years)
Annual depreciation amount = (acquisition cost * annual depreciation rate)/100
Quaterly amount ofdepreciation = annual amount/4
Functional method or units of activity
Is based on estimations of possible effects

Annual depreciation amount= (acquisition cost/ n) * n1
n = estimated number of effects in total useful life n1 = actual number of effects in one period
Accounting process
Acquisition
Usage
Alienation
28.11.2012
Alienation processes:
Sale Disposal Donations Inventory surplases
Extraordinary revenue / expenses
28.11.2012
SALES
Accumulated depreciation Expenses of sold LTTA carrying amount .
LTTA in usage
S0
AC
DEP
S0
CA
Account receivables
VAT payables
Revenues from sold LTTA
SP and VAT
VAT
SP
Carrying amunt(CA) = AC-DEP +all other costs related to sale

28.11.2012 26
donation
LTTA in usage
Accumuated depreciation
Carrying amount
S0
AC
DEP
S0
CA
28.11.2012
27
Impairing test of LTTA (Value adjustments)

Bookkepping value>recovarable amount
Recognized as loss of value adjustment Value adjustment alue correction and expenses
External and internal sources of information Determening of recovarable amount

net sales value or value in usage depending in which is higher
28.11.2012
Value adjustment recording
Value correction of LTTA
Expenses of value adjustments
28.11.2012
Long term financial asset
28.11.2012
LONG TERM ASSET
INTANGIBLE
TANGIBLE
FINANCIAL
stakes (shares) by related companies given loans to related companies participate intersts investments in securities given deposits other long-term financial assets
RECEIVABLES
28.11.2012
TERM definitions
Financial asset is considered to be all financial instrumemt which could be measured and recognized. LTFA are all financial investments for a period longer than 1 year. By investments and holding financial asset they could gain certain benefits which depends about the type of investments like interest rate, dividends , etc.
28.11.2012
Disclosure framework
IAS 32 FINANCIAL INSTRUMENTS IAS 39 FINANCIAL INSTRUMENTS IFRS 7 FINANCIAL INSTRUMENTS: disclosure CFRS 9 FINANCIAL ASSET
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LT RECEIVABLES
28.11.2012
LT RECEIVABLES
Comprehend receivables with the maturity date longer then 1 year.
FORMS:
Receivables from related companies, receivables from sales on credit, other receivables
28.11.2012
Equities
Corporation
Is a legal entity that is formed through a corporate charter and can operate in various states (must have a license from each state in which it does business), but is incorporated in only one state.
Classified by purpose and ownership Purpose - profit or nonprofit Ownership - publicly or privately held
Transparency 13-2
Corporation
Corporate charter The legal document establishing a corporation under the laws of its appropriate jurisdiction. It specifies the types of equities and their terms, number of shares that can be issued (authorized), and the par value of these issues.
Transparency 13-3
Ownership
Publicly Held Corporation May have thousands of stockholders and its stock is regularly traded on national securities markets. Privately Held Corporation May have few stockholders and does not offer its stock for sale to general public.
Transparency 13-4
Characteristics of a Corporation
Separate legal existence Limited liability of stockholders Transferable ownership rights Ability to acquire capital Continuous life Corporation management Government regulations Additional taxes
Transparency 13-5
Separate Legal Existence

Acts under its own name and may buy, own, sell property; borrow money; enter into legally binding contracts; may sue or be sued; pays its own taxes.
Stockholders cannot bind corporation unless the stockholder is acting as an agent of the corporation.
Transparency 13-6
Limited Liability of Stockholders

Creditors have recourse only against corporate assets to satisfy claims. Liability of stockholders limited to investment in corporation. Thus, creditors have no legal claim on personal assets of owners unless fraud has occurred.
Transparency 13-7
Transferable Ownership Rights

Transfer of ownership among stockholders has no effect on corporations operating activities or assets, liabilities and total stockholders' equity. Remember that a corporation does not receive any payments on the transfer (i.e., sale) of shares after the original issuance of the stock.
Transparency 13-8
Continuous Life
Corporation is separate legal entity; thus, a corporation is continuous and is not affected by withdrawal, death, or incapacity of any stockholder.
Transparency 13-9
Corporation Management
The corporation establishes by-laws upon incorporation. Stockholders manage corporation indirectly through board of directors. Board of directors formulates operating policies selects officers to execute policy and to perform daily management functions.
Transparency 13-10
Stockholder Rights
Vote on the election of Board of Directors Can share in corporate profits through dividends assuming declared Entitled to keep the same percentage of ownership if new shares are offered for sale. Entitled to pro rata share (based on ownership percentage) of the assets in liquidation
Transparency 13-11
Difference Between Equity and Debt

First, debt agreements specify payments due to their holders. In other words, debt determines the maximum payment a debt holder can receive. This is not the case with equity (i.e., dividends can be unlimited). Second, debt holders are entitled to receive payments specified in the debt agreement and possess legal recourse if promised payments are not made (i.e., there is no requirement to pay dividends).
Transparency 13-12
Difference Between Equity and Debt

Third, if a corporation defaults, debt holders have the right to be paid before equity holders (i.e., a senior position). Fourth, equity holders possess decision rights in the entity (as discussed in previous slides), as long as a default has not occurred.
Transparency 13-13
Questions in Issuing Stock

How many shares should be issued? At what price should the shares be issued?
Transparency 13-14
Factors Involved in Setting Price of Stock

Company's anticipated future earnings
Its expected dividend rate per share Its current financial position
Current state of the economy

Current state of the securities market
Transparency 13-15
Stock Terms
Authorized Stock Maximum amount of stock a corporation is allowed to sell as authorized by corporate charter. Amount must be disclosed on balance sheet. Issued Stock Number of shares originally sold to stockholders.
Outstanding Stock Number of shares held by stockholders (i.e.,shares issued minus shares reacquired treasury stock).
Transparency 13-16
Par Value
Par value is the legal capital per share that must be retained in the business.
NOTE: Par value has NO relationship to the market value of the stock.
Transparency 13-17
Stockholders Equity Section of The Balance Sheet

Stockholders equity consists of two categories (contributed capital and earned capital): Contributed capital (paid capital) Par Value Additional paid-in capital Earned capital Retained earnings
Transparency 13-18
Accounting for Common Stock Issues

The issuance of common stock affects only the contributed capital accounts. When the issuance of common stock for cash is recorded, the par value of the shares is credited to Common Stock. The portion of the proceeds above par value is recorded in a separate paid-in account referred to as either additional paid-in capital or paid-in capital in excess of par.
Transparency 13-19
Issuing Stock at Par

Rhody issues 100,000 shares of the $1 par value common stock for cash at $1 per share. The entry is: Cash Common Stock 100,000 100,000
NOTE: Since the stock is issued at par, there is no additional paid-in capital
Transparency 13-20
Issuing Stock Above Par

Assume Rhody issues another 100,000 shares of the $1 par value common stock for cash at $5 per share. The entry is: Cash 500,000 Common Stock 100,000 Additional Paid-in Capital 400,000
Transparency 13-21
Rhodys Balance Sheet

Stockholders' Equity Paid-in capital Common stock Paid-in capital in excess of par Total paid-in capital Retained earnings Total stockholders' equity
$200,000 400,000 $600,000 200,000* $800,000
* For illustrative purposes, we assume beginning retained earnings is $200,000.
Treasury Stock
Treasury stock is a corporation's issued and outstanding stock that has been reacquired by the corporation and held in treasury for future use.
Transparency 13-23
Why Does A Corporation Reacquire Its Own Stock?

Reissue shares to officers and employees under bonus and stock compensation plans.
Increase trading of company's stock in securities market in hopes of enhancing market value.
Have additional shares available for use in acquisition of other companies.
Transparency 13-24
Why Does A Corporation Reacquire Its Own Stock

Reduce number of shares outstanding, thereby increasing earnings per share.
Prevent a hostile takeover.
Transparency 13-25
Purchase of Treasury Stock

On February 1, 2004, Rhody acquires 4,000 shares of its stock at $8 per share.
Treasury Stock Cash
32,000
32,000
Transparency 13-26
Treasury Stock
The Treasury Stock account is debited for the cost ($32,000) of the shares (i.e., contra equity account).
The original amount of Common Stock is not affected because the number of issued shares does not change.
Treasury stock is considered a contra equity account (i.e., it has a debit balance when the normal balance is a credit) and thus reduces the stockholders' equity section of the balance sheet.
Transparency 13-27
Rhodys Balance Sheet After Treasury Stock

Stockholders' equity Paid-in capital Common stock,$5 par value, 200,000 shares issued and 196,000 outstanding Additional Paid-in Capital Retained Earnings Total stockholders equity Less: Treasury Stock Total stockholders equity
$ 200,000 400,000 200,000 800,000 32,000 $768,000
Preferred Stock
A type of stock that has contractual preferences over common stock. Preferred stockholders do not have voting rights.
Preferences
Dividends Assets in the event of liquidation
Transparency 13-29
Preferred Stock
Assume Rhody issues 1,000 shares of $100 par value preferred stock for $12 cash per share. Cash 120,000 Preferred Stock Additional Paid-in Capital - PS
100,000 20,000
Transparency 13-30
Rhodys Balance Sheet After Preferred Stock

Stockholders' equity Common stock,$5 par value, 200,000 shares issued and 196,000 outstanding Additional Paid-in Capital Preferred stock, $100 par value 1,000 shares issued and 1,000 outstanding Additional Paid-in Capital PS Retained Earnings Total stockholders equity Less: Treasury Stock Total stockholders equity
$ 200,000 400,000 100,000 20,000 200,000 920,000 32,000 $888,000
Dividend Preferences
Preferred stockholders have the right to the distribution of corporate income before common stockholders. Therefore, common shareholders will not receive any dividends until preferred stockholders have received their dividends.
Generally, the per share dividend amount is stated as either a percentage of the par value or as a specified amount.
Transparency 13-32
Cumulative Preferred Stock

As we have discussed, owning common or preferred stock does not guarantee the payment of a dividend. Therefore, to protect preferred stockholders, most preferred stock is cumulative. While being cumulative does not guarantee that a company will pay preferred stockholders a dividend in a specific year, it does require that before the company can pay a dividend to common stockholders, it must pay preferred stockholders a dividend for all prior years that they did not receive a dividend (including a dividend for the current year).
Transparency 13-33
Dividends in Arrears
Unpaid prior-year dividends are referred to as dividends in arrears and are not considered a liability. No liability exists until the dividend is declared by the board of directors. However, the amount must be disclosed in the notes to the financial statements. Thus, this is an example of an unrecorded economic liability.
Transparency 13-34
Dividends in Arrears Example

Rhody has 1,000 shares of 7%, $100 par value cumulative preferred stock outstanding. The annual dividend is $7,000 (1,000 x $7 per share). Dividends are 2 years in arrears. What amount must Rhody pay preferred stockholders before common stockholders can receive a dividend?
Dividends in arrears ($7,000 x 2) $ 14,000 Current-year dividends 7,000 Total preferred dividends $ 21,000
Transparency 13-35
Dividend
A dividend is a distribution by a corporation to its stockholders on a pro rata basis. Pro rata means that if you own 10% of the common shares, you will receive 10% of the dividend. However, dividends are reported on a per share amount. Dividends come in two forms: cash stock.
Transparency 13-36
Cash Dividend
A cash dividend Is a pro rata distribution of cash to stockholders.
Generally, a corporation must have 2 things to pay cash dividends

Retained earnings Adequate cash
Transparency 13-37
Entries for Cash Dividends

Three dates are important in connection with dividends:
the declaration date
the record date the payment date
Transparency 13-38
The Declaration Date

The declaration date is the date that the board of directors declares the cash dividend and commits the corporation to a binding legal obligation that cannot be rescinded.
Transparency 13-39
Accounting on the Declaration Date

On December 1, 2004, the directors of Rhody declare a $. 25 per share cash dividend on 196,000 shares (200,000 issued 4,000 treasury) of $1 par value common stock. The dividend is $49,000 (196,000 x $.25). Retained Earnings 49,000 Dividends Payable
49,000
NOTE: We dont pay dividends on treasury stock, since that, in essence, would be paying dividends to ourselves.
Transparency 13-40
Accounting on the Date of Record

Represents the date ownership of the outstanding shares is determined for dividend purposes. Since this is an internal not external transaction: NO ENTRY IS NECESSARY
Transparency 13-41
Rhodys Balance Sheet After Declaration of Dividend

Stockholders' equity Common stock,$5 par value, 200,000 shares issued and 196,000 outstanding Additional Paid-in Capital Preferred stock, $100 par value 1,000 shares issued and 1,000 outstanding Additional Paid-in Capital PS Retained Earnings Total stockholders equity Less: Treasury Stock Total stockholders equity
$ 200,000 400,000 100,000 20,000 151,000 921,000 32,000 $839,000
Accounting on the Date of Payment

When the dividend is paid on January 20, 2005, the entry is
Dividends Payable Cash
49,000
49,000
Transparency 13-43
A Stock Dividend
A stock dividend Is a pro rata distribution of the corporation's own stock to stockholders. Results in a decrease in retained earnings and an increase in paid-in capital.Thus, it does not decrease total stockholders' equity or total assets. Is often issued by companies that do not have adequate cash to issue a cash dividend.
Transparency 13-44
Stock Dividends
Assume you own 2% of Rhody (3,920 of its 196,000 shares of outstanding common stock) and it declares a 10% stock dividend. Rhody would issue an additional 19,600 shares (196,000 x 10%) and you would receive 392 (2% x 19,600) shares. After the stock dividend your ownership interest would remain at 2% (4,312 /215,600). Note: You now own more shares of stock, but your ownership interest has not changed.
Transparency 13-45
Reasons for a Stock Dividend

To satisfy stockholders' dividend expectations without spending cash. To increase marketability of its stock by increasing number of shares outstanding and decreasing market price per share.
To emphasize that a portion of stockholders' equity has been permanently reinvested in business and is unavailable for cash dividends.
Transparency 13-46
Accounting for Stock Dividends

Generally, most stock dividends are considered small stock dividends. That is, the number of new shares created does not increase the total number of shares outstanding by more than 25%. A small stock dividend reduces retained earnings by the number of new shares issued multiplied by the fair market value of the stock.
Transparency 13-47
Stock Dividend Example

Rhodys declares a 2% stock dividend on its shares of $1 par value common stock. The current fair market value of the stock is $7 per share. Recall that its balance in retained earnings is $151,000. How many shares will be issued? What is the journal entry to record the stock dividend?
Transparency 13-48
Accounting on the Declaration Date

The number of shares to be issued is 9,800 (200,000 - 4,000) x 2%). The number of new shares is then multiplied by the fair market value ($7) of the stock and Retained Earnings is decreased by $68,600 (9,800 x $7). Journal Entry:
Retained Earnings 68,600 Common Stock to be distributed 9,800 Additional Paid-in Capital 58,800
Transparency 13-49
Accounting on the Issuance Date

Journal Entry:
Common Stock to be distributed Common Stock 9,800 9,800
Note: Although total stockholders' equity remains the same, a stock dividend rearranges the composition of stockholders' equity.
Transparency 13-50
Rhodys Balance Sheet After Declaration of Dividend

Before After Dividend Dividend Stockholders' equity Common stock $200,000 $209,800 Additional paid-in capital - CS 400,000 458,800 Preferred stock 100,000 100,000 Additional paid-in capital - PS 20,000 20,000 Total paid-in capital 720,000 788,600 Retained earnings 151,000 82,400 Less: Treasury stock ( 32,000) (32,000) Total stockholders' equity $839,000 $839,000 Outstanding shares 196,000 205,800
Transparency 13-51
Stock Split
Is the issuance of additional shares of stock to stockholders accompanied by: A reduction in the par or stated value. An increase in number of shares. A stock split does not have any effect on total paid-in capital, retained earnings, and total stockholders' equity
Transparency 13-52
Stock Split
Assume that instead of issuing a 2% stock dividend, Rhody issues a 2-for-1 stock split on its 196,000 shares of common stock. EFFECTS OF STOCK SPLIT No journal entry is necessary. Par Value per Share decreases and number of shares outstanding increases
Transparency 13-53
Rhodys Balance Sheet After Stock Split

Before Split After Split Stockholders' equity Common stock $200,000 $200,000 Additional paid-in capital - CS 400,000 400,000 Preferred stock 100,000 100,000 Additional paid-in capital - PS 20,000 20,000 Total paid-in capital 720,000 720,000 Retained earnings 151,000 151,000 Less: Treasury stock ( 32,000) (32,000) Total stockholders' equity $839,000 $839,000 Outstanding shares 196,000 392,000
Transparency 13-54
Comparison of Stock Dividend and Stock Split

Item Total paid-in capital Total retained earnings Total par value Par value per share Stock Split No change No change No change Decrease
Stock Dividend Increase Decrease Increase No change
Transparency 13-55
Retained Earnings
Retained earnings represents the net income that is retained in the business. Retained earnings is net income minus dividends paid since the formation of the business. The balance in retained earnings is part of the stockholders' claim on the total assets of the corporation.
Retained earnings does not represent a claim on any specific asset.

Transparency 13-56
Retained Earnings
For example, a $100,000 balance in retained earnings does not mean that there should be $100,000 in cash.
Transparency 13-57
Retained Earnings Restrictions

Are legal, contractual or voluntary circumstances that make a portion of retained earnings currently unavailable for dividends. This can be due to debt covenants as discussed in lecture 8.
Transparency 13-58
Stock Options
Generally, compensation expense is not recorded upon issue of the stock options. This is permitted as long as the stock price equaled or was lower than the exercise price at the time the options were issued. However, the entity must disclose in the pro forma the effect the stock options would have had on net income and diluted EPS if it was recognized as an expense.
Transparency 13-59
Stock Options
On December 1, 2004, Rhody issues 5,000 stock options to the company president. At the time, the fair market value of the stock ($15) is equal to the exercise price ($15). What would Rhody record as compensation expense at the date of issuance?
Transparency 13-60
Stock Options
Rhody would not make a journal entry to record compensation expense. When the stock options are exercised, it would record the entry for the issuance of the stock. However, it must make a footnote disclosure in the financial statements to reflect the effect this would have had on net income and EPS.
Transparency 13-61
Stock Options
On March 1, 2006, the president of Rhody exercises his option to buy the 5,000 shares of stock when the fair market value of the stock is $30. Recall that the exercise price was $15 and the par value of Rhody stock is $1. How does Rhody record the effect of the issuance of stock?
Transparency 13-62
Stock Options
Rhody would make the following journal entry:
Cash $75,000* Common Stock 5,000 Additional paid-in capital 70,000 * ($15 exercise price x 5,000 shares)
Transparency 13-63
Measuring Corporate Performance

One way that companies reward stock investors for their investment is to pay them dividends. The payout ratio and dividend yield measure a corporations dividend performance.
Transparency 13-64
The Payout Ratio

Measures the percentage of earnings distributed in the form of cash dividends to common stockholders Total Cash Dividends on Common Stock
Net Income
Transparency 13-65
The Dividend Yield

The rate of return an investor earns from dividends.
Dividends Per Share of Common Stock

Stock Price at Year-End
Transparency 13-66
Earnings Per Share

Measures the net income earned on each share of common stock.
Net Income - Preferred Stock Dividends Average Number of Shares of Common Stock Outstanding
Transparency 13-67
Price-Earnings Ratio/Market Cap

The price-earnings ratio reflects the investors assessment of a company's future earnings.
Market Price Per Share Earnings Per Share
Alternatively as discussed in Chapter 7:

Market Capitalization Book Value
Transparency 13-68
Return on Common Stockholders Equity Ratio

Measures the profitability from the stockholders point of view.
Net Income Preferred Stock Dividends

Average Common Stockholders Equity
Transparency 13-69

Lutilsky - Accounting Lecture/predavanja BDIB

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Lutilsky - Accounting Lecture/predavanja BDIB

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Introduction to Accounting

Ivana Drai Lutilsky

Room 35, 2.floor, North Tutorials: Wednesday 10 -12 18-19

Capturing financial data Organizing it Producing financial reports

Investors (Current and Potential) Creditors Others

Taxing authorities Regulatory agencies Customers Labor unions Economic planners

Sole Proprietorship - owned by one person

Cash Flow Statement

and liabilities and stockholders' equity must balance. A= L + SE

Equity The difference between an

entitys assets and liabilities. The owners claim on total assets.

Income - the excess of revenues over expenses.

Financial value The amount of money an item would bring if sold.

Accounting Valuation Recognition Disclosure

Discussion and Analysis

to Financial Statements Report

Covers three aspects of a company:

additional information not included in body of statements not have to be numeric

Ivana Drai Lutilsky

- accrual basis of accounting concept, - going concern concept.

by the GAAP are:

unit, - going concern concept, - economic entity and - time period.

Principles by the IFRS are:

- information makes a difference in

- information must be free of error and

Permits companies to modify GAAP without hurting the usefulness of information

Generally contains the following standard classifications:

NON CURRENT ASSETS

- account receivables - employee receivables - state receivables - other receivables

- cash at bank - cash in hand

is expected to be realized within 1 year after the balance sheet date

Cash Short-term investments Receivables Inventories Prepaid expenses

Property plant and equipment Long-term investments Other assets

- received long term loans

- issued long term securities - accounts payables (long term)

Debts expected to be paid after one year. Examples:

Earned capital comes from profitable operations (retained earnings)

Constructing the Balance Sheet

Analyze the effect of business transactions on the basic accounting identity:

Assets = Liabilities + Stockholders Equity

Transactions can be divided into two types:

Only external transactions must be recorded in the financial statements.

Analyze each transaction

Total the Entries to Each Side

TITLE Debit Credit

Total Debits Total Credits

Total the Entries to Each Side

TITLE Debit Credit

Total Debits Total Credits

Decrease Liability and Equity Accounts

The basic steps in the recording process are:

Common Stock (credit) $40,000

and you always indent the credit.

increase Assets decrease What asset accounts are affected?

Note: Debits are always written first

and you always indent the credit.

Accounts Payable (credit) $14,000

and you always indent the credit.

increase Assets decrease

What asset accounts are affected?

Note: Debits are always written first

increases Assets decrease

Prepaid Insurance (debit)