3-1 the accrual basis of accounting chapter 3 electronic presentation by douglas cloud pepperdine...
TRANSCRIPT
3-1
The Accrual Basis of Accounting
Chapter 3
Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
3-2
1. Describe the accrual basis of accounting.2. Use the accrual basis of accounting to
analyze, record, and summarize transactions.3. Describe and illustrate the end-of-the-period
adjustment process.4. Prepare accrual-basis financial statements,
including a classified balance sheet.
Learning GoalsLearning GoalsLearning GoalsLearning Goals
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
3-3
5. Describe how the accrual basis of accounting enhances the interpretation of financial statements.
6. Describe the accounting cycle for the accrual basis of accounting.
7. Describe and illustrate how common-sized financial statements can be used to analyze and evaluate a company’s performance.
Learning GoalsLearning GoalsLearning GoalsLearning Goals
3-4
1Learning GoalLearning GoalLearning GoalLearning Goal
Describe the accrual basis of accounting.
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Under the cash basis, the matching concept is not
emphasized.
Under the cash basis, the matching concept is not
emphasized.Under the cash basis, the receipt or payment
of cash governs the recording process.
Under the cash basis, the receipt or payment
of cash governs the recording process.The cash basis does
not work well for large businesses.
The cash basis does not work well for large
businesses.
Under the accrual accounting basis, transactions are
recorded even though cash is not received or paid unit a later point.
Under the accrual accounting basis, transactions are
recorded even though cash is not received or paid unit a later point.
Under the accrual accounting, revenue is normally recognized
when it is earned.
Under the accrual accounting, revenue is normally recognized
when it is earned.
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Use the accrual basis of accounting to analyze, record, and summarize transactions.
2Learning GoalLearning GoalLearning GoalLearning Goal
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a. On November 1, received $1,800 from a. On November 1, received $1,800 from H.S. Company as rent for the use of H.S. Company as rent for the use of Family Health Care’s land as a Family Health Care’s land as a temporary parking lot from November temporary parking lot from November 2003 through March 2004.2003 through March 2004.
a. On November 1, received $1,800 from a. On November 1, received $1,800 from H.S. Company as rent for the use of H.S. Company as rent for the use of Family Health Care’s land as a Family Health Care’s land as a temporary parking lot from November temporary parking lot from November 2003 through March 2004.2003 through March 2004.
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Cash + Land
Assets
a. 1,800 Bal. 7,320 12,000
Bal. 9,120 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
a. 1,800 Bal. 10,000 6,000 3,320
Retained Earnings
Bal. 10,000 1,800 6,000 3,320
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearned Revenue
+
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b. On November 1, paid $2,400 for an b. On November 1, paid $2,400 for an insurance premium on a two-year, insurance premium on a two-year, general business policy.general business policy.
b. On November 1, paid $2,400 for an b. On November 1, paid $2,400 for an insurance premium on a two-year, insurance premium on a two-year, general business policy.general business policy.
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PrepaidCash + Insurance + Land
Assets
b. –2,400 2,400 Bal. 9,120 12,000
Bal. 6,720 2,400 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
No effect on right sideNo effect on right side
Prepaid Insurance
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c. On November 1, paid $6,000 for an c. On November 1, paid $6,000 for an insurance premium on a six-month insurance premium on a six-month medical malpractice insurance policy.medical malpractice insurance policy.
c. On November 1, paid $6,000 for an c. On November 1, paid $6,000 for an insurance premium on a six-month insurance premium on a six-month medical malpractice insurance policy.medical malpractice insurance policy.
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Prepaid Cash + Insurance + Land
Assets
c. –6,000 6,000 Bal. 6,720 2,400 12,000
Bal. 720 8,400 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
No effect on right sideNo effect on right side
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d. Dr. Landry invested an d. Dr. Landry invested an additional $5,000 in the business additional $5,000 in the business in exchange for capital stock.in exchange for capital stock.
d. Dr. Landry invested an d. Dr. Landry invested an additional $5,000 in the business additional $5,000 in the business in exchange for capital stock.in exchange for capital stock.
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PrepaidCash + Insurance + Land
Assets
d. 5,000 Bal. 720 8,400 12,000
Bal. 5,720 8,400 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
d. 5,000 Bal. 10,000 1,800 6,000 3,320
Retained Earnings
Bal. 10,000 1,800 11,000 3,320
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.++
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e. Purchased supplies for e. Purchased supplies for $240 on account.$240 on account.
e. Purchased supplies for e. Purchased supplies for $240 on account.$240 on account.
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PrepaidCash + Insurance + + Land
Assets
e. 240 Bal. 5,720 8,400 12,000
Bal. 5,720 8,400 240 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Supplies
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
e. 240 Bal. 10,000 1,800 11,000 3,320
Retained Earnings
Bal. 10,000 240 1,800 11,000 3,320
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++
Accts. Pay.
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f. Purchased $8,500 of office equipment. Paid f. Purchased $8,500 of office equipment. Paid $1,700 cash as a down payment with the $1,700 cash as a down payment with the remainder due in five monthly installments of remainder due in five monthly installments of $1,360 beginning December 1.$1,360 beginning December 1.
f. Purchased $8,500 of office equipment. Paid f. Purchased $8,500 of office equipment. Paid $1,700 cash as a down payment with the $1,700 cash as a down payment with the remainder due in five monthly installments of remainder due in five monthly installments of $1,360 beginning December 1.$1,360 beginning December 1.
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PrepaidCash + Insurance + + Land
Assets
f. -1,700 8,500 Bal. 5,720 8,400 240 12,000
Bal. 4,020 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Supplies +
OfficeEquip.
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
f. 6,800 Bal. 10,000 240 1,800 11,000 3,320
Retained Earnings
Bal. 16,800 240 1,800 11,000 3,320
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++Accts. Pay.
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g. Provided services of $6,100 to g. Provided services of $6,100 to patients on account.patients on account.
g. Provided services of $6,100 to g. Provided services of $6,100 to patients on account.patients on account.
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Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
g. 6,100 Bal. 4,020 8,400 240 8,500 12,000
Bal. 4,020 6,100 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
g. 6,100
Bal. 16,800 240 1,800 11,000 3,320
Retained Earnings
Bal. 16,800 240 1,800 11,000 9,420
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++Accts. Pay.
Fees Fees EarnedEarnedFees Fees
EarnedEarned
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h. Received $5,500 for h. Received $5,500 for services provided to services provided to patients who paid cash.patients who paid cash.
h. Received $5,500 for h. Received $5,500 for services provided to services provided to patients who paid cash.patients who paid cash.
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Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
h. 5,500 Bal. 4,020 6,100 8,400 240 8,500 12,000
Bal. 9,520 6,100 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
h. 5,500 Bal. 16,800 240 1,800 11,000 9,420
Retained Earnings
Bal. 16,800 240 1,800 11,000 14,920
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++
Accts. Pay.
Fees Fees EarnedEarnedFees Fees
EarnedEarned
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i. Received $4,200 from insurance i. Received $4,200 from insurance companies, which paid on companies, which paid on patients’ accounts for services patients’ accounts for services that have been rendered.that have been rendered.
i. Received $4,200 from insurance i. Received $4,200 from insurance companies, which paid on companies, which paid on patients’ accounts for services patients’ accounts for services that have been rendered.that have been rendered.
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Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
i. 4,200 –4,200 Bal. 9,520 6,100 8,400 240 8,500 12,000
Bal. 13,720 1,900 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
No effect on right sideNo effect on right side
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j. Paid $100 on account for supplies j. Paid $100 on account for supplies that had been purchased.that had been purchased.
j. Paid $100 on account for supplies j. Paid $100 on account for supplies that had been purchased.that had been purchased.
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Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
j. –100 Bal. 13,720 1,900 8,400 240 8,500 12,000
Bal. 13,620 1,900 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
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Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
j. –100 Bal. 16,800 240 1,800 11,000 14,920
Retained Earnings
Bal. 16,800 140 1,800 11,000 14,920
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++Accts. Pay.
3-34
k. Expenses paid during November k. Expenses paid during November were as follows: wages, $2,790; were as follows: wages, $2,790; rent, $800; utilities, $580; interest, rent, $800; utilities, $580; interest, $100; miscellaneous, $420.$100; miscellaneous, $420.
k. Expenses paid during November k. Expenses paid during November were as follows: wages, $2,790; were as follows: wages, $2,790; rent, $800; utilities, $580; interest, rent, $800; utilities, $580; interest, $100; miscellaneous, $420.$100; miscellaneous, $420.
3-35
Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
k. –4,690 Bal. 13,620 1,900 8,400 240 8,500 12,000
Bal. 8,930 1,900 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
3-36
Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
k. –2,790–800–580–100 –420
Bal. 16,800 140 1,800 11,000 14,920
Retained Earnings
Bal. 16,800 140 1,800 11,000 10,230
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++
Accts. Pay.
Wages Exp.Wages Exp.Wages Exp.Wages Exp.Rent Exp.Rent Exp.Rent Exp.Rent Exp.
Utilities Exp.Utilities Exp.Utilities Exp.Utilities Exp.Interest Exp.Interest Exp.Interest Exp.Interest Exp.
Miscellaneous Exp.Miscellaneous Exp.Miscellaneous Exp.Miscellaneous Exp.
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l. Paid dividends of $1,200 to l. Paid dividends of $1,200 to stockholder (Dr. Landry).stockholder (Dr. Landry).
l. Paid dividends of $1,200 to l. Paid dividends of $1,200 to stockholder (Dr. Landry).stockholder (Dr. Landry).
3-38
Prep. OfficeCash + + Insur. + Supp. + Equip. + Land
Assets
l. –1,200 Bal. 8,930 1,900 8,400 240 8,500 12,000
Bal. 7,730 1,900 8,400 240 8,500 12,000
Left Side of the Left Side of the Accounting EquationAccounting Equation
Left Side of the Left Side of the Accounting EquationAccounting Equation
Ac. Rec.
3-39
Capital Stock
Stockholders’
EquityLiabilities + Notes Payable
l. –1,200 Bal. 16,800 140 1,800 11,000 10,230
Retained Earnings
Bal. 16,800 140 1,800 11,000 9,030
Right Side of the Right Side of the Accounting EquationAccounting Equation
Right Side of the Right Side of the Accounting EquationAccounting Equation
+Unearn.
Rev.+ ++Accts. Pay.
DividendsDividendsDividendsDividends
3-40
Describe and illustrate the end-of-the-period adjustment process.3
Learning GoalLearning GoalLearning GoalLearning Goal
3-41
The accrual basis of accounting requires the accounting records to be
updated prior to preparing financial statements.
The accrual basis of accounting requires the accounting records to be
updated prior to preparing financial statements.
3-42
This updating process is called the
adjustment process.
This updating process is called the
adjustment process.
3-43
Deferrals are created by recording a
transaction in a way that delays or defers the recognition of an expense or a revenue
Deferrals are created by recording a
transaction in a way that delays or defers the recognition of an expense or a revenue
Accruals are created when a revenue or
expense has not been recorded at the end of the accounting period.
Accruals are created when a revenue or
expense has not been recorded at the end of the accounting period.
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
3-44
3-45
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a1. Earlier Family Health Care prepaid two policies—a general business policy for $2,400 and a malpractice policy for $6,000. The general business policy expires at a rate of $100 ($2,400 ÷ 24) per month and the malpractice policy expires at a rate of $1,100 ($6,000 ÷ 6) per month.
a1. Earlier Family Health Care prepaid two policies—a general business policy for $2,400 and a malpractice policy for $6,000. The general business policy expires at a rate of $100 ($2,400 ÷ 24) per month and the malpractice policy expires at a rate of $1,100 ($6,000 ÷ 6) per month.
3-46
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
Assets
Prepaid Insurance
Stockholder’ Equity
Retained Earnings
Balance 8,400 9,030
a1 –1,100 –1,100 Balance 7,300 7,930
Insurance Exp.Insurance Exp.
3-47
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a2. For November, $150 of the supplies were used, leaving $90 of supplies for use during the coming months.
a2. For November, $150 of the supplies were used, leaving $90 of supplies for use during the coming months.
Assets
Supplies
Stockholder’ EquityRetained Earnings
Balance 240 7,930
a2 –150 –150 Balance 90 7,780
Supplies Exp.Supplies Exp.
3-48
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
Fixed assets such as drilling equipment lose their ability to
provide service over time. This reduction
in ability is called depreciation.
Fixed assets such as drilling equipment lose their ability to
provide service over time. This reduction
in ability is called depreciation.
3-49
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
The fixed asset account is not reduced directly by depreciation. Instead, an
offsetting account, called Accumulated Depreciation, is used.
The fixed asset account is not reduced directly by depreciation. Instead, an
offsetting account, called Accumulated Depreciation, is used.
3-50
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a3. Assume that the amount of depreciation for November is $160.
a3. Assume that the amount of depreciation for November is $160.
AssetsOffice
Equipment
Stockholder’ EquityRetained Earnings
Balance 8,500 7,930
a3 160 –160 Balance 8,500 160 7,620
Accumulated– Depreciation
Depreciation Exp.Depreciation Exp.
3-51
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a4. Of the $1,800 received for five-months’ rent, $360 ($1,800 ÷ 5) has been earned.
a4. Of the $1,800 received for five-months’ rent, $360 ($1,800 ÷ 5) has been earned.
LiabilitiesUnearned
Rent
Stockholder’ EquityRetained Earnings
Balance 1,800 7,620
a4 –360 360 Balance 1,440 7,980
Rental Rev.Rental Rev.
3-52
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a5. As of November 30, employees are owed $220 for accrued wages.
a5. As of November 30, employees are owed $220 for accrued wages.
LiabilitiesWages Payable
Stockholder’ EquityRetained Earnings
Balance 7,980
a5 220 –220 Balance 220 7,760
Wages Exp.Wages Exp.
3-53
Deferrals and AccrualsDeferrals and AccrualsDeferrals and AccrualsDeferrals and Accruals
a6. Family Health Care provided $750 in services to patients that have not yet been billed.
a6. Family Health Care provided $750 in services to patients that have not yet been billed.
AssetsAccounts
Receivable
Stockholder’ EquityRetained Earnings
Balance 1,900 7,760
a6 750 750 Balance 2,650 8,510
Fees EarnedFees Earned
3-54
Prepare accrual-basis financial statements, including a classified balance sheet.4
Learning GoalLearning GoalLearning GoalLearning Goal
3-55
Fees earned $12,350Operating expenses:
Wages expense $3,010Insurance expense 1,100Rent expense 800Utilities expense 580Depreciation expense 160Supplies expense 150Interest expense 100Miscellaneous expense 420 Total operating expenses 6,320
Operating income: $ 6,030Other income:
Rent revenue 360Net income $ 6,390
Family Health Care, P.C.Income Statement
For the Month Ended November 30, 2003
3-56
Retained earnings, November 1, 2003 $3,320Net income for November $6,390Less dividends 1,200 5,190Retained earning, November 30, 2003 $8,510
Family Health Care, P.C.Retained Earnings Statement
For the Month Ended November 30, 2003
From the From the income income
statementstatement(Slide 3-55)(Slide 3-55)
From the From the income income
statementstatement(Slide 3-55)(Slide 3-55)
3-57
AssetsCurrent assets:
Cash $ 7,730Accounts receivable 2,650Prepaid insurance 7,300Supplies 90 Total current assets$17,770
Fixed assets:Office equipment $8,500Less accumulated depreciation 160 $ 8,340Land 12,000 Total fixed assets 20,340
Total assets$38,110
Family Health Care, P.C.Balance Sheet
November 30, 2003
ContinuedContinuedContinuedContinued
3-58
LiabilitiesCurrent liabilities:
Accounts payable $ 140Wages payable 220Notes payable 6,800Unearned revenue 1,440 Total current liabilities$ 8,600
Long-term liabilities:Notes payable 10,000
Total liabilities$18,600
Stockholders’ equityCapital stock $11,000Retained earnings 8,510
19,510Total liabilities and stockholders’ equity
$38,110
From the retained From the retained earnings statementearnings statementFrom the retained From the retained earnings statementearnings statement
3-59
Cash flows from operating activities:Cash received from patients $ 9,700Cash received from rental of land 1,800
$11,500Deduct cash payments for expenses:
Insurance premiums $(8,400)Supplies (100)Wages (2,790)Rent (800)Utilities (580)Interest (100)Miscellaneous expense (420) (13,190)
Net cash flow used in operating activities$ (1,690)
Family Health Care, P.C.Statement of Cash Flows
For the Month Ended November 30, 2003
ContinuedContinuedContinuedContinued
3-60
Net cash flow used in operating activities$ (1,690)
Cash flows from investing activities:Purchase of office equipment(1,700)
Cash flows from financing activities:Additional issuance of capital stock $ 5,000Deduct cash dividends (1,200)Net cash flow from financing activities 3,800
Net increase in cash$ 410
November 1, 2003 cash balance 7,320
November 30, 2003 cash balance$ 7,730
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AssetsAssetsAssetsAssets
Assets are resources such as physical items or rights that are owned by the business.
Assets are resources such as physical items or rights that are owned by the business.
3-62
Physical assets of a long-term nature
referred to as fixed assets.
Physical assets of a long-term nature
referred to as fixed assets.
AssetsAssetsAssetsAssets
Buildings Equipment Land Fixtures
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Rights that are long-term in
nature are called intangible assets.
Rights that are long-term in
nature are called intangible assets.
AssetsAssetsAssetsAssets
Patents Copyrights Trademarks Leasehold
improvements
3-64
AssetsAssetsAssetsAssets
Cash and other assets that are expected to be converted
to cash or sold or used up within one year or less,
through the normal operations of the business, are called current assets.
Cash and other assets that are expected to be converted
to cash or sold or used up within one year or less,
through the normal operations of the business, are called current assets.
Accounts receivable
Notes receivable Supplies Other prepaid
expenses
3-65
LiabilitiesLiabilitiesLiabilitiesLiabilities
Liabilities are amounts owed to outsiders… normally referred to as creditors.
Liabilities are amounts owed to outsiders… normally referred to as creditors.
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LiabilitiesLiabilitiesLiabilitiesLiabilities
Liabilities that will be due within a short time (usually
one year or less) and that are paid out of current assets
are called current liabilities.
Liabilities that will be due within a short time (usually
one year or less) and that are paid out of current assets
are called current liabilities.
Accounts payable Wages payable Interest payable Taxes payable
A sizable number A sizable number of liabilities end in of liabilities end in
the word the word “payable.”“payable.”
A sizable number A sizable number of liabilities end in of liabilities end in
the word the word “payable.”“payable.”
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LiabilitiesLiabilitiesLiabilitiesLiabilities
Liabilities that will not be due within a short time
(usually more than a year) or are not paid out of
current assets are called long-term liabilities.
Liabilities that will not be due within a short time
(usually more than a year) or are not paid out of
current assets are called long-term liabilities.
Mortgage payable Bonds payable
3-68
Stockholders’ EquityStockholders’ EquityStockholders’ EquityStockholders’ Equity
Stockholders’ equity is the stockholders’ right to the assets of the business.
Stockholders’ equity is the stockholders’ right to the assets of the business.
Capital stock Retained earnings
3-69
Describe how the accrual basis of accounting enhances the interpretation of financial statements.
5Learning GoalLearning GoalLearning GoalLearning Goal
3-70
Family Health Care, P.C.Cash Basis Income StatementFor the Month Ended November 30, 2003
Fee earned$ 9,700
Operating expenses:Wages expense $2,790Insurance expense 8,400Rent expense 800Utilities expense 580Supplies expense 100Interest expense 100Miscellaneous expense 420 Total operating expenses 13,190
Operating loss$ 3,490
Rental revenue 1,800
Net loss$ 1,690
Note that this Note that this is a cash basis is a cash basis
income income statementstatement
Note that this Note that this is a cash basis is a cash basis
income income statementstatement
3-71
Using the accrual basis, net income for November was $6,390. However, if we
followed the cash basis, the firm shows a loss of $1,690.
Using the accrual basis, net income for November was $6,390. However, if we
followed the cash basis, the firm shows a loss of $1,690.
Cas
h
Acc
rual
3-72
Describe the accounting cycle for the accrual basis of accounting.6
Learning GoalLearning GoalLearning GoalLearning Goal
3-73
The Accounting CycleThe Accounting CycleThe Accounting CycleThe Accounting Cycle
1. Identifying, analyzing and recording the effects of transactions on the accounting equation.
2. Identifying, analyzing, and recording adjustment data.
3. Preparing financial statements.
4. Preparing the accounting records for the next accounting period.
3-74
After the financial statements are prepared, the balances in
the revenue, expense, and dividend accounts are closed
by the closing process.
After the financial statements are prepared, the balances in
the revenue, expense, and dividend accounts are closed
by the closing process.
3-75
In this way, the revenue, expense, and dividend accounts begin each period with a zero balance, and the
transactions of each period are kept separate from one another.
In this way, the revenue, expense, and dividend accounts begin each period with a zero balance, and the
transactions of each period are kept separate from one another.
3-76
Describe and illustrate how common-sized financial statements can be used to analyze and evaluate a company’s performance.
7Learning GoalLearning GoalLearning GoalLearning Goal
3-77
Income Statements for the Year Ending December 31, 2001
Revenues 100.0% 100.0%Operating expenses 86.2% 81.8%Operating income 13.8% 18.2%Other expenses 0.9% 2.5%Income before taxes 12.9% 15.7%Income taxes 4.8% 4.7%Net income 8.1% 11.0%
Common-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial Statements
Wendy’s McDonald’sNote Wendy’s Note Wendy’s
higher proportion of higher proportion of operating expenses operating expenses
to revenue.to revenue.
Note Wendy’s Note Wendy’s higher proportion of higher proportion of operating expenses operating expenses
to revenue.to revenue.
Which is probably the Which is probably the reason for Wendy’s reason for Wendy’s lesser percentage of lesser percentage of
net income.net income.
Which is probably the Which is probably the reason for Wendy’s reason for Wendy’s lesser percentage of lesser percentage of
net income.net income.
3-78
Balance Sheets as of December 31, 2001
Current assets:Cash 5.4% 1.9%Accounts receivable 4.0% 3.9%Inventories and other assets 3.4% 2.3%
Total current assets 12.8% 8.1%Property, plant, and equipment 79.0% 76.7%Other long-term assets 8.2% 15.2%Total assets 100.0% 100.0%
Common-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial Statements
Wendy’s McDonald’s
ContinuedContinuedContinuedContinued
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Balance Sheets as of December 31, 2001
Current liabilities:Accounts payable 5.4% 3.1%Other liabilities 8.9% 6.9%
Total current liabilities 14.3% 10.0%Long-term liabilities 36.1% 47.9%Stockholders’ equity 49.6% 42.1%Total assets 100.0% 100.0%
Common-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial StatementsCommon-Sized Financial Statements
Wendy’s McDonald’s
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The EndThe End
Chapter 3Chapter 3
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