INTRO TO

ACCOUNTING
Chapter 1

WHO LOOKS AT FINANCIAL

STATEMENTS?
External Users of Financial Statements:
Owners (stockholders, investors)
Other Companies
Creditors banks, credit agencies, etc
General Public

Internal Users of Financial Statements: management,

departments, project managers

CAN I FIND FINANCIAL

STATEMENTS FOR ALL COMPANIES?
Types of Companies:
Public Companies financial statements available to

the public

Private Companies do not have to make financial

statements available

WHO DECIDES THE RULES FOR FINANCIAL

STATEMENTS? WHAT DO YOU CALL THOSE
RULES?
RULES = Generally Accepted Accounting Principles

(GAAP)

RULE SETTERS:
FASB Financial Accounting Standards Board
SEC - Security and Exchange Commission
PCAOB Public Company Accounting Oversight Board

4 FINANCIAL STATEMENTS
Balance Sheet
Income Statement
Statement of Stockholders Equity
Statement of Cash Flows

WRITE DOWN THE

FOLLOWING
What You Have

% You Owe

% You Own

This is
called
your net
worth!

WHAT YOU WROTE DOWN

What You Have
Cash
Car
Furniture
Laptop
Investments

=
$2,000

How Much
You Owe?

+ How Much
You Own?
0
2,000

$15,000

10,000

5,000

$1,000

1,000

$500

200

300

$10,000

10,000

$28,500

$10,200

$18,300

BALANCE SHEET 3
ELEMENTS
Assets What you have
Economic resource to generate revenue
Key Words Prepaid, Receivable

Liabilities What you owe

Obligations to creditors, obligations to provide services, obligations to
employees
Key Words - Payable, Accrued, Unearned
Equity Who owns what is left after liabilities are paid

What You
Have
Assets

How Much
You Owe?
Liabilities

How Much
You Own?
Equity

BALANCE SHEET 3
ELEMENTS
Assets
= Liabilitie + Equity
Balance Sheet is
$500,00
0
$500,0
00

s
100,000

$100,000

400,000

as of a point in time
Example: as of June 30,
2016

$400,00
0alance Sheet
B
Assets

$500,000

Total Assets

$500,000

Liabilities

$100,000

Equity

$400,000

Total Liabilities & Equity

$500,000

ASSETS: HOW DOES THIS

COMPARE
TO
A
BUSINESS?
What You Have =
What Businesses Have =
Assets
Cash
Car
Furniture
Laptop
Investments

Assets
$2,000

Cash

Buildings

$15,000

Receivables

Vehicles

$1,000

Inventory

Supplies

$500

Equipment

Land

$10,000

Investments

Prepaid
Expenses

$28,500

BALANCE SHEET 3
ELEMENTS
Assets
= Liabilities + Equity
Cash

Inventory

Receivable
s

Investment Equipmen
s
t

$150,00
0

$50,000

$20,000

$80,000

$200,000

$100,000

$400,00
0

$150,0
00

$50,000

$20,000

$80,000

$200,000

$100,000

$400,00
0

WHAT TYPE OF
ASSETS DOES
UNDER ARMOUR
HAVE?

LIABILITIES: HOW DOES

THIS COMPARE TO A
BUSINESS? Who Does a Business Owe $
How Much You Owe?
$?
Honda Car Loan
Best Buy Credit Card

$10,00
0
$200
$10,20
0

Bank Loans
Line of Credit
Accounts
Payable
Accrued Payroll

Unearned
Revenue

BALANCE SHEET 3
ELEMENTS
Assets
= Liabilities
Cash

Inventor
y

Receivable
s

Investment
s

Equipmen
t

Accounts Loan
Payable Payable

$150,00
0

$50,000

$20,000

$80,000

$200,000

$20,000

$150,0
00

$50,000 $20,000

$80,000

$200,000

$20,000 $80,000

80,000

+ Equity

$400,000
$400,000

WHAT TYPE OF
LIABILITIES DOES
UNDER ARMOUR
HAVE?

HOW DOES THIS COMPARE

TO A BUSINESS?
How Much You Own?
Cash
2,000

Who Owns a Business?

Common Stock

Car

5,000

Preferred Stock

Furniture

1,000

Additional
Paid-in Capital
Retained
Earnings

Laptop
Investments

300
10,000
$18,30
0

BALANCE SHEET 3
ELEMENTS
Assets
= Liabilities

+ Equity

Cash

Inventor
y

Rec.

Investmen
ts

Equip

Account
s
Payable

Loan
Payable

Commo
n Stock

Retained
Earnings

$150,00
0

$50,000

$20,00
0

$80,000

$200,00
0

$20,000

80,000

$300,000

$100,000

$150,0
00

$50,000

$20,0
00

$80,000

$200,00
0

$20,000

$80,000

$300,00
0

$100,000

$500,000

$500,000

WHAT TYPE OF
EQUITY DOES
UNDER ARMOUR
HAVE?

DONT FORGET
Assets = Liabilities + Equity

PRACTICE QUESTIONS
Trevors Trucks has assets of $4,550 and stockholders

equity of $2,200. What is the amount of liabilities?

Barbs Bakery has liabilities of $4,700 and stockholders

equity of $7,300. What is the amount of assets?

Dans Drones has assets of $490,000 and liabilities of

$280,000. What is the amount of stockholders equity?

INCOME STATEMENT 2
ELEMENTS
1. Revenues (Sales) Providing goods (products) or services to a
customer

Providing goods (products):

Fast food restaurant sells food
Clothing stores sells clothes
Manufacturing plant sells products to retail
stores

INCOME STATEMENT 2
ELEMENTS
1. Revenues (Sales) Providing goods (products) or services to a
customer

Providing services:
Hair Salon provides services to clients

INCOME STATEMENT 2
ELEMENTS
1. Revenues (Sales) Providing goods (products) or services to a
customer

Provides goods and services:

Landscaping company sells plants and provides services of

landscaping (2 sources of revenue)

Car Dealership sells vehicles but also offers repair shop (offers

goods & services)

WRITE DOWN THE

FOLLOWING
Sources of Monthly Income
1.
2.
3.
4.
5.

Amount Earned

WHAT YOU WROTE DOWN

Sources of Monthly Income

Amount Earned

1. Job

$2,000

2. Contributions from parents

$500

3.
4.
5.

WHAT TYPE OF
REVENUES DOES
UNDER ARMOUR
HAVE?

INCOME STATEMENT 2
ELEMENTS
2. Expenses Uses resources or services in

process of generating revenues

Fast food restaurant purchase food, pay

employees, pay rent on building etc.

INCOME STATEMENT 2
ELEMENTS
2. Expenses Uses resources or services in

process of generating revenues

Hair salon pay employees, pay rent on building,

buy hair products

Car Dealership purchase vehicles to sell; purchase

parts, pay employees, rent, insurance, etc.

WRITE DOWN THE

FOLLOWING
5 Largest Monthly Expenses
1.
2.
3.
4.
5.

Amount

WHAT YOU WROTE DOWN

5 Largest Monthly Expenses

Amount

1. Rent

500

2. Food/Bills

300

3. Gasoline

200

4. Entertainment

400

5.

WHAT TYPE OF
EXPENSES DOES
UNDER ARMOUR
HAVE?

Assets

INCOME STATEMENT 2
ELEMENTS
= Liabilitie +
s

Equity

Income Statement is
For a period of time
Example:
for the month ended
6/30/2016
for the quarter ended
9/30/2016 for the year ended
12/31/3016

Revenue - Expense
s
s

Net
Incom
e

= Net Income (Loss)

300,000

280,000

20,000

300,000

350,000

(50,000)

Income Statement

Net
Loss

Revenues

$300,000

Operating expenses

(280,000)

Net Income

$20,000

HOW DOES THIS COMPARE

TO A BUSINESS?
Your Revenue & Expenses

Companys Revenue &

Expenses

Job

Product Sales

$2,000

Contributions from
Parents
Total Revenues:

500
$2,500

Services
Revenues

$200,000
100,000
$300,000

Rent

(500)

Payroll expenses

(80,000)

Gasoline/Bills

(300)

Rent expenses

(50,000)

Food

(200)

Product expenses

(70,000)

Entertainment

(400)

Misc. expenses

(80,000)

WHAT DOES AN
INCOME
STATEMENT LOOK
LIKE FOR UNDER
ARMOUR?

STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY 1
ELEMENT
This financial statement explains how ownership
changed during a period of time

What impacts a companys stockholders equity?

Issue more stock to stockholders
Net income or net loss from the month, quarter or year
Pay dividends to stockholders
Dividends transfer of wealth from company back to

stockholders

Usually paid in cash

Return of earnings to owners

STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY 1
ELEMENT
This financial statement explains how ownership
changed during a period of time

What impacts a companys stockholders equity?

1. Issue more stock to stockholders

2. Net income or net loss from the month,

quarter or year
3. Pay dividends to stockholders

WRITE DOWN THE

FOLLOWING
What do you do with net income or loss from the
month?
1.
2.
3.
4.
5.

HOW THIS LOOKS FOR YOU

FOR THE MONTH
Balance Sheet Activity

Date

Asset
s

5/31/16

28,500 =

June 130
6/30/16

= Liabilitie
s

1,100 =
29,600 =

Income Statement

+Equity

Revenue - Expense = Net Income (Loss)

s
s

10,200 + 18,300
0 +

1,100

10,200 + 19,400

2,500 -

1,400 =

Net income increases

your equity. For you this
meant you had leftover
cash at the end of the
month so your cash
increased in your bank
account and your
ownership increased

1,100

HOW DOES YOUR CHANGE IN

STOCKHOLDERS EQUITY LOOK COMPARED
TO A BUSINESS?
You
5/31/2016 Equity
Junes Net Income
6/30/2016 Equity

$18,30
0
1,100
$19,40
0

Company
5/31/2016
Common Stock
Junes Net Income
Issue Stock
Pay Dividends
6/30/2016 Equity

$400,000
20,000
10,000
(15,000)
$415,000

WHAT DOES A
STATEMENT OF CHANGES
IN STOCKHOLDERS
EQUITY LOOK LIKE FOR
UNDER ARMOUR?

PRACTICE QUESTIONS
As of December 31, 2013, Eber Company had total assets of $156,000,

total liabilities of $85,600, and common stock of $52,400). During 2014

Eber earned $36,000 of cash revenue, paid $20,000 for cash expenses, and
paid a $2,000 cash dividend to the stockholders.

Determine the amount of retained earnings as of December 31, 2013, after

closing
Determine the amount of net income earned in 2014
Determine the amount of retained earnings as of December 31, 2014, after

closing.
Determine the amount of cash that is in the retained earnings account as

of December 31, 2014.

CASH FLOW STATEMENT 3

ELEMENTS
How a company obtained and used cash for a specific
period of time. For the year ending December 31, 2016
Categorize cash into 3 types of activities: Operating,
Investing & Financing
1. Operating Activities day to day operations
Inflow = receiving cash from revenues
Outflow = paying cash for expenses

CASH FLOW STATEMENT 3

ELEMENTS
Categorize cash into 3 types of activities: Operating,
Investing & Financing
2. Investing Activities
Inflow = receiving cash from selling a long-term asset
(building)
Sold building for $100,0000.
Outflow = paying cash to purchase a long-term asset

(equipment)
Purchased oven for restaurant business for $10,000.

CASH FLOW STATEMENT 3

ELEMENTS
Categorize cash into 3 types of activities: Operating,
Investing & Financing
3. Financing Activities
Inflow = receiving cash from obtaining a loan or from issuing
stock
Issued 100 shares of stock for $500
Obtained bank loan for $50,000
Outflow = paying cash for loan payment or paying dividend
Paid principal portion of loan for $600
Paid cash dividend of $50

HOW DOES THIS COMPARE TO

A BUSINESS?
Your Cash Flow

Companys Cash Flow

Cash Receipts from
Customers

Cash Received from Job

Cash Received from
Parents
Cash Paid for Expenses

2,000
500
(1,400)

Cash Flow from

Operating

1,100

Cash Flow from

Investing
Cash Flow from

Cash Paid to Suppliers

Cash Flow from
Operating
Proceeds from sale of
equip.

300,000
(280,000)
20,000
10,000

Cash Flow from

Investing

10,000

Cash paid for dividend

(5,000)

Cash Flow from

(5,000)

HOW THIS LOOKS USING

HORIZONTAL EQUATION
Assets

Cash

$150,0
00

= Liabilities

Invent.

Accts
Rec.

Invest.

$50,00
0

$20,00
0

$80,00
0

Equip

$200,0
00

20,000

(10,000)

(5,000)

= $20,00
0

Loan
Payable

Commo
n Stock

80,000

$300,0
00

10,000

175,00
0

= Accts
Pay.

+ Equity

20,000

80,000

190,00
0

Retaine
d
Earning
s
$100,0
00
20,000

300,000

Expense
s

= Net
Incom
e

280,000

20,000

=
=

50,000

Revenues

= 20,000

(5,000)
80,000

First Row = Beginning Balance for the Year

2nd Row = Revenues & Expenses for the Year
3rd Row = Selling equipment
4th Row = Paying Dividends
Final Row = Ending Balance for the Year

300,00
0

115,00
0

300,000

280,000

20,000

Cash
Impact
?

Typ
e

20,000

OA

10,000

IA

(5,000)

FA

25,000

OA = Operating Activity
IA = Investing Activity
FA = Financing Activity

WHAT DOES A
STATEMENT OF CASH
FLOWS LOOK LIKE FOR
UNDER ARMOUR?

TYPES OF ACCOUNTING
TRANSACTIONS
Asset Source
Asset Use
Asset Exchange

ASSET SOURCE HOW

ASSETS INCREASE
1.Acquiring assets from owners
2.Acquiring assets by obtaining debt
3.Acquiring assets by making a profit

(net income)

ASSET SOURCE= HOW

ASSETS INCREASE
1.Acquiring assets from owners Company was formed 1/1/16
when it acquired $500,000 in cash from issuing stock to 5
stockholders.
Income Statement

Balance Sheet Activity

Date

Assets

Cash

= Liab.

Lan
d

Bank
Note

+ Equity

Rev - Exp =
.
.

Commo
n Stock

Retaine
d
Earning
s

0 + 500,000

Cash Flow

Net
Cash
Incom Impact
e
(Loss)

Typ
e

500,00
0

FA

12/31/15 Balance
1/1/16 - Acquired
cash through stock
issuance

500,00
0

1/31/16 Balance

500,00
0

Increase ASSET; Increase EQUITY

=

0 + 500,000

ASSET SOURCE= HOW

ASSETS
INCREASE
2.
Acquiring assets
by obtaining debt Company acquired
$300,000 loan from JKL Bank on 2/10/2016

Income Statement

Balance Sheet Activity

Date

Assets

= Liab.

Cash

1/31/16 Balance

500,000

2/10/16 Acquired
cash by obtaining
debt

300,000

2/29/16 Balance

800,000

Lan
d

+ Equity

Bank
Note

0 =

Rev - Exp =
.
.

Commo
n Stock

Retaine
d
Earning
s

0 + 500,000

= 300,00 +
0

Increase ASSET; Increase LIABILITY

0 = 300,00 + 500,00
0
0

Cash Flow

Net
Cash
Incom Impact
e
(Loss)

Typ
e

300,00
0

FA

ASSET SOURCE= HOW

ASSETS
INCREASE
3.Acquiring
assets
by making a profit (net income) Company

Net income
Net income
column always
column always
goes to retained
goes to retained
earnings column
earnings column

had revenues of $10,000 all received in cash for the month

ending March 31, 2016.
Income Statement

Balance Sheet Activity

Date

Assets
Cash

2/29/16 Balance

800,000

March Revenues

10,000

= Liab.
Lan
d

+ Equity

Bank
Note

Rev. -

Commo
n Stock

Retaine
d
Earning
s

0 = 300,00 + 500,000
0

0 +

10,000

Increase ASSET; Increase EQUITY ; Increase

3/31/16 BalanceREVENUES;
810,000 Increases
0 = 300,00
+ 500,00
NET INCOME

10,000

10,000 -

Ex =
p

Cash Flow

Net
Cash
Inc. Impact

0 = 10,00
0

10,000

Typ
e

OA

ASSET USE HOW ASSETS

DECREASE
1.Pay expenses of the company
2.Pay assets to owners
3.Pay down on liabilities

ASSET USE= HOW ASSETS

DECREASE
expenses of the company Company paid March expenses

Net income
Net income
column always
column always
goes to retained
goes to retained
earnings column
earnings column

1. Pay

of $8,000.

Income Statement

Balance Sheet Activity

Date

Assets

Cash
2/29/16
Balance

800,000

= Liab.

Lan
d

+ Equity

Bank
Note

Exp =

Net
Inc.

Cash
Impac
t

Typ
e

10,000

10,000

0 =

10,000

10,000

OA

(8,000)

8,00 = (8,000) (8,000)

0

OA

0 = 300,00 + 500,000
0

0 +

March
Expenses

(8,000)

802,000

Retained
Earnings

10,000

3/31/16
Balance

Rev.

Commo
n Stock

March
Revenues

0 = 300,0 + 500,00
00
0

Cash Flow

2,000

Decrease ASSET; Decrease EQUITY ; Increase Expenses;

Decreases NET INCOME

2,000

2,000

ASSET USE= HOW ASSETS

DECREASE
2.Pay
assets to owners On 4/2/2016, pay dividend to
stockholders for $500.

Balance Sheet Activity

Date

Assets

Cash
3/31/16
Balance
4/2/16 Pay
$500 cash
dividend
4/30/16
Balance

802,000
(500)

801,500

= Liab.

Income Statement

+ Equity

Lan
d

Rev.

Exp =

Net
Inc.

Cash Flow
Cash
Impac
t

Typ
e

FA

Common
Stock

Retained
Earnings

500,000

2,000

0 +

(500)

(500)

0 = 300,000 +

500,000

1,500

(500)

0 = 300,000 +
=

Decrease ASSET; Decrease EQUITY

ASSET USE= HOW ASSETS

DECREASE
3.Pay
down on liabilities Make first loan payment of $1,000 and
it all goes to principal on 5/5/2016.
Balance Sheet Activity
Date

Assets

Cash
4/30/16
Balance
5/5/16 Pay
$1,000 on
loan
5/30/16
Balance

801,500
(1,000)

800,500

= Liab.

Lan
d

Income Statement

+ Equity

Bank
Note

Rev.

Exp =

Net
Inc.

Cash Flow
Cash
Impac
t

Typ
e

FA

Common
Stock

Retained
Earnings

500,000

1,500

(1,000) +

(1,000)

0 = 299,000 +

500,000

1,500

(1,000)

0 = 300,000 +
=

Decrease ASSET; Decrease LIABILITY

ASSET EXCHANGE
Exchange one asset for another type of asset
No impact on liabilities
No impact on equity
No impact on income statement

ASSET EXCHANGE= HOW ASSETS INCREASE

& DECREASE IN THE SAME TRANSACTION
1. Exchange one asset for another type of asset The company purchase land for $50,000 cash
on 6/15/16.
Cash Flow
Balance Sheet Activity
Income Statement
Date

Assets

Cash

Land

5/30/16
Balance

800,500

6/15/16
Pay
$50,000
for land.

(50,000)

50,00
0

5/30/16
Balance

750,500

50,00
0

Liab.

+ Equity

Re
v.

Commo
n Stock

Retained
Earnings

299,00 + 500,00
0
0

1,500

0 +

Exp =

Net
Inc.

Cash
Impact

Typ
e

IA

(50,000)

299,00 + 500,00
0
0

1,500

(50,000)

Increase ASSET; Decrease ASSET

CLOSING PROCESS
Temporary Accounts
Income Statement Accounts

Permanent Accounts

Revenues & Expenses

Every year these accounts

start the beginning of the

year at $0
At the end of the year these

accounts are CLOSED

meaning any balance in the
accounts are transferred to
retained earnings

All Balance Sheet Accounts

The balance in these accounts

rollover every year and never are

closed out.

CLOSING PROCESS CYCLE

1. Record transactions in ledger
2. Adjust the accounts (we will learn about in

chapter 2)
3. Prepare the financial statements
4. Close the temporary accounts (income

statements accounts go to zero)

PRACTICE QUESTIONS
Scenario #1
XYZ Company borrowed $800
from the State Bank and used
$500 of this money to purchase
land.

Person
A #2
paid $10,000 cash to buy land from
Scenario
Person B.
1.
a.
b.
c.
d.

As a result of these

transactions, XYZ's total assets

would increase by?
The statement of cash flows for

XYZ Company would report?

2.

Select the statement that is true.

Total liabilities of Person B would increase.
Total assets of Person A would be unaffected.
Person A's equity would increase.
None of the above.

Select the statement that is true.

Person A would have a cash outflow from investing
activities.
b.
Person B would have a cash inflow from investing
activities.
c.
The balance in the cash account on Person A's books
would
decrease, while the balance in the cash account on
Person Bs books would increase.
d.
All of the above statements are true.
a.