chapter two understanding the accounting cycle copyright © 2011 by the mcgraw-hill companies, inc....
TRANSCRIPT
Chapter Two
Understanding the Accounting Cycle
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Cato Consultants began 2011 with the following account balances:
= Liab. +
Cash + Supplies = + Common
Stock + Retained Earnings
15,000 + 200 = n/a + 10,000 + 5,200
Assets Stockholders' Equity
Event 1: Cato Consultants acquired $70,000 cash by issuing common stock.
= Liab. +
Cash + Supplies = + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
70,000 + n/a = n/a + 70,000 + n/a n/a - n/a = n/a 70,000 FA
Assets Stockholders' Equity
Cash Flow
Asset Source
Transaction
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Event 2: During 2011, Cato Consultants provided $180,400 of consulting services to its clients but no cash has been collected.
1. Increase assets (accounts receivable).
2. Increase stockholders’ equity (retained earnings).
Asset Source Transaction
= Liab. +
Cash + Accounts
Receivable = Salaries Payable +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
n/a + 180,400 = n/a + n/a + 180,400 180,400 - n/a = 180,400 n/a
Assets Stockholders' Equity
Cash Flow
Event 3: Cato collected $165,000 cash from customers in partial settlement of its accounts receivable.1. Increase assets
(cash).
2. Decrease assets (accounts receivable).
Asset Exchange
Transaction
= Liab. +
Cash + Accounts
Receivable = Salaries Payable +
Common Stock +
Retained Earnings Revenue - Expenses =
Net Income
165,000 + (165,000) = n/a + n/a + n/a n/a - n/a = n/a 165,000 OA
Assets Stockholders' Equity
Cash Flow
2-4
Event 4: Cato paid the instructors $42,000 cash to teach the training courses.1. Decrease cash
(assets).
2. Decrease stockholders’ equity (retained earnings).
Asset Use Transaction
= Liab. +
Cash + Accounts
Receivable = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(42,000) + n/a = n/a + n/a + (42,000) n/a - 42,000 = (42,000) (42,000) OA
Assets Stockholders' Equity
Cash Flow
Event 5: Cato paid $22,000 for advertising costs. The advertisements appeared in 2011.1. Decrease assets
(cash).
2. Decrease stockholders’ equity (retained earnings).
Asset Use Transaction
= Liab. +
Cash + Accounts
Receivable = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(22,000) + n/a = n/a + n/a + (2,000) n/a - 22,000 = (22,000) (22,000) OA
Assets Stockholders' Equity
Cash Flow
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Event 6: Cato signed a one-year lease agreement and paid $12,000 in advance for the lease, which begins on March 1.
1. Decrease assets (cash).
2. Increase assets (prepaid rent).
Asset Exchange
Transaction= Liab. +
Cash + Prepaid
Rent = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(12,000) + 12,000 = n/a + n/a + n/a n/a - n/a = n/a (12,000) OA
Assets Stockholders' Equity
Cash Flow
Event 7: Cato received $18,000 cash in advance from Westberry Company for consulting services to be performed over a one-year period beginning on June 1.1. Increase assets (cash).
2. Increase liabilities (unearned revenue).
Asset Source Transaction
Assets = Liab. +
Cash = Unearned Revenue +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
18,000 = 18,000 + n/a + n/a n/a - n/a = n/a 18,000 OA
Stockholders' Equity
Cash Flow
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Event 8: Cato paid $800 cash to purchase supplies.
1. Decrease assets (cash).
2. Increase assets (supplies).
Asset Exchange
Transaction
Event 9: Cato incurred $86,000 of other operating expenses on account.
1. Increase liabilities (accounts payable).
2. Decrease stockholders’ equity (retained earnings).
Claims Exchange
Transaction
Assets = Liab. +
= Accounts Payable +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
n/a = 86,000 + n/a + (86,000) n/a - 86,000 = (86,000) n/a
Stockholders' Equity
Cash Flow
= Liab. +
Cash + Supplies = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(800) + 800 = n/a + n/a + n/a n/a - n/a = n/a (800) OA
Assets Stockholders' Equity
Cash Flow
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Event 10: Cato paid $60,200 cash in partial settlement of accounts payable.
1. Decrease assets (cash).
2. Decrease liabilities (accounts payable).
Asset Use Transaction
Assets = Liab. +
Cash = Accounts Payable +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
(60,200) = (60,200) + n/a + n/a n/a - n/a = n/a (60,200) OA
Stockholders' Equity
Cash Flow
Event 11: Cato paid $100,000 for land it planned to use in the future to build a home office.
1. Decrease assets (cash).
2. Increase assets (land).
Asset Exchange
Transaction= Liab. +
Cash + Land = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(100,000) + 100,000 = n/a + n/a + n/a n/a - n/a = n/a (100,000) IA
Assets Stockholders' Equity
Cash Flow
2-8
Event 12: Cato paid $21,000 in cash dividends to its stockholders.
1. Decrease assets (cash).
2. Decrease stockholders’ equity (retained earnings).
Asset Use Transaction
Assets = Liab. +
Cash = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(21,000) = n/a + n/a + (21,000) n/a - n/a = n/a (21,000) FA
Stockholders' Equity
Cash Flow
Event 13: Cato signed contracts for $27,000 of consulting services to be performed in 2012.
Assets = Liab. +
Cash = + Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
n/a = n/a + n/a + n/a n/a - n/a = n/a n/a
Stockholders' Equity
Cash Flow
2-9
Adjustment 1: As of December 31, 2011, Cato had earned $500 of accrued interest revenue.1. Increase assets (interest
receivable).
2. Increase stockholders’ equity (retained earnings).
Asset Source Transaction
Assets = Liab. +
Interest Receivable = +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
500 = n/a + n/a + 500 500 - n/a = 500 n/a
Stockholders' Equity
Cash Flow
Adjustment 2: As of December 31, 2011, Cato had earned $10,500 of the $18,000 it collected in advance on June 1.
1. Decrease liabilities (unearned revenue).
2. Increase stockholders’ equity (retained earnings).
Claims Exchange
Transaction
Assets = Liab. +
= Unearned Revenue +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
n/a = (10,500) + n/a + 10,500 10,500 - n/a = 10,500 n/a
Stockholders' Equity
Cash Flow
2-10
Adjustment 3: As of December 31, 2011, Cato had $10,000 of accrued salary expense that will be paid in 2012.
1. Increase liabilities (salaries payable).
2. Decrease stockholders’ equity (retained earnings).
Claims Exchange
Transaction
Assets = Liab. +
= Salaries Payable +
Common Stock +
Retained Earnings Revenue - Expenses = Net Income
n/a = 10,000 + n/a + (10,000) n/a - 10,000 = (10,000) n/a
Stockholders' Equity
Cash Flow
Adjustment 4: As of December 31, 2011, Cato had used $10,000 of the $12,000 of rent that was prepaid on March 1. 1. Decrease assets (prepaid
rent).
2. Decrease stockholders’ equity (retained earnings).
Asset Use Transactio
nAssets = Liab. +
Prepaid rent = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(10,000) = n/a + n/a + (10,000) n/a - 10,000 = (10,000) n/a
Stockholders' Equity
Cash Flow
2-11
Adjustment 5: As of December 31, 2011, a physical count of the supplies on hand revealed that $150 of supplies remained available for future use.
1. Decrease assets (supplies).
2. Decrease stockholders’ equity (retained earnings).
Asset Use Transaction
Beginning supplies balance
$0
+
Supplies purchased
$800
=
Supplies available for
use$800
-
Ending supplies balance
$150
=
Supplies used
$650Assets = Liab. +
Supplies = + Common
Stock + Retained Earnings Revenue - Expenses = Net Income
(650) = n/a + n/a + (650) n/a - 650 = (650) n/a
Stockholders' Equity
Cash Flow
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Preparing Financial Statements
2-13
Preparing Financial Statements
2-14
Preparing Financial Statements
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Matching Concept
The objective of accrual accounting is to improve matching of revenues with expenses.
Cash basis accounting can distort the measurement of
net income because it sometimes fails to properly
match revenues with expenses.
The problem is that cash is not always received or paid
in the period when the revenue is earned or when
the expense is incurred.
The Conservatism Principle
When faced with a recognition dilemma, conservatism guides
accountants to select the alternative that produces the
lowest amount of net income.
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