Financial Accounting
财务会计
March 2010
Lecturer
夏明会
CPA China
CPA Australia
Textbook
Financial Accounting (5th): Weygandt, Kieso, Kimmel
This is US-base textbook
References
任何一本中文的 财务会计
国际会计准则委员会:
中国注册会计师协会:
PWC:
ACCA:
AICPA:
Assessment
100
Total marks
50
Final exam
30
Mid exam
10
Homework
10
Attendance
Question
Chapter 1
ACCOUNTING MATTERS
Study Objectives
What accounting is
Uses and users of accounting
Ethics as a fundamental business concept
GAAP
Monetary unit & economic entity assumptions
The accounting equation
How business transactions affect the accounting equation
Basic financial statements
WHAT IS ACCOUNTING
Accounting is an information system that
Identifies （确认）, records（记录）, and communicates （沟通）the economic events (transactions 业务) of an organization to interested users
Identification
Select economic events
(transactions)
Recording
Record, classify
and summarize
记录、分类
总结
Accounting Reports
SOFTBYTE
Annual Report
Prepare accounting
reports
Analyze and interpret
for users
Communication
THE ACCOUNTING PROCESS
Accounting...
is called the language of business
Why do we need accounting information
Making decisions !
The bigger the decision, the greater the need.
USERS OF ACCOUNTING
Internal Users 内部使用者
Marketing managers
Production supervisors
Finance directors
Company officers
QUESTIONS ASKED BY INTERNAL USERS
Is cash sufficient to pay bills
Can we afford to give employee pay raises this year
What is the cost of manufacturing each unit of product
Which product line is the most profitable
USERS OF ACCOUNTING
External Users 外部使用者
Investors 投资者
Creditors 债权人
Tax Department 税务当局
Customers
Labor unions
QUESTIONS ASKED BY EXTERNAL USERS
Is the company earning satisfactory income?
How does the company compare in size and profitability with its competitors
Will the company be able to pay its debts as they come due到期?
Accounting and bookkeeping
Bookkeeping 记账
Involves only the recording of economic events
Is just one part of accounting
Field of Accounting 会计领域
Accounting can be divided into two fields.
Financial accounting (财务会计): provides information for people outside the company, such as investors and creditors
Managerial accounting (管理会计) : focuses on information for internal decision makers, such as mangers of the company
Financial Accounting
As financial accounting information relates to public
Regulating accounting! 会计规范
All professions have been regulated.
Governing organizations in US
In US, the following organizations relate to the regulation of accounting.
FASB(财务准则委员会): formulates accounting standards
SEC(美国证监会): regulate security markets
AICPA(美国注册会计师协会): regulate Certified Public Accountants 注册会计师
IMA: regulate Certified Management Accountants 注册管理会计师.
Public Sector
(SEC)
Private Sector
(FASB)
Private Sector
(AICPA) (IMA)
GAAP
The rules that govern public accounting information are called Generally Accepted Accounting Principles 公认的会计原则
Reliable information
Investors and creditors need relevant and reliable information about a company.
But is the accounting information of the company reliable?
Reliable information
There are so many ways to keep accounting information reliable.
SEC requires firms to have their financial statements audited 审计 by independent accountants.
Accounting information must be prepared under the standards and the principles
standards and the principles
These standards and the principles are viewed as the building blocks of accounting
THE BUILDING BLOCKS OF ACCOUNTING 会计的基石
ETHICS 道德: A set of standards by which one’s actions are deemed right or wrong, honest or dishonest.
Most individuals in business are ethical. Their actions are both legal and responsible.
ETHICS 道德
Steps for solving an ethical dilemma
Recognize an ethical situation and the issues involved
Identify the principal elements of the situation
Identify alternatives: weigh the impact on stakeholders 利益相关者
Ethic case
After three interviews, Warren Filler, a senior at Great Northern College, received two office interview invitations from the Baltimore offices of two large firms
Both firms offered to cover his out-of-pocket expenses.
He scheduled the interview for both firms on the same day, one in morning and one in the afternoon. At the each interview, he submitted to both firms his total out-of-pocket expenses $254. He got it from the two firms.
Ethic case
Who are the stakeholders in this situation?
What are the ethical issues in case ?
What would you do in this situation?
Ethic case
Warren Filler, Baltimore Firms, Great Northern College.
Is it proper that Warren charged both the firms for the total travel costs rather than splits the actual amount of $254 between the two firms?
Is collecting $508 ethical behavior?
Did Warren deceive both firms or neither firm?
ETHICS 道德
Ethics in accounting are so important!
Most corporations also set standards of ethical conduct for employees.
Truth is always better than dishonesty in accounting, in business, and in life
THE BUILDING BLOCKS OF ACCOUNTING
What is GAAP 一般公认的会计原则: A set of standards generally accepted and universally practiced by accountants
Indicates how economic events are reported
Generated by the Financial Accounting Standards Board (FASB 财务准则委员会) and Securities & Exchange Commission (SEC证监会) in US
Different nations would have different GAAP, example, Chinese GAAP
THE BUILDING BLOCKS OF ACCOUNTING
Accounting principles
Cost Principle 成本原则: assets should be recorded at their cost
Accounting assumptions
Monetary unit assumption 货币单位假设
Accounting entity 会计主体假设
ACCOUNTING ASSUMPTIONS
MONETARY UNIT ASSUMPTION:
Only transaction data that can be expressed in terms of money is included in the accounting records.
The unit of measure (the dollar in the USA) is assumed to remain constant in value
MONETARY UNIT ASSUMPTION
The dollar’s purchasing power购买力 is relatively stable.
This allows us to add and subtract dollar amounts as each dollar has the same purchasing power as any other dollar at any time
ACCOUNTING ASSUMPTIONS
ECONOMIC ENTITY ASSUMPTION
An economic entity includes any organization or unit in society
All activities of an entity are kept separate from the activities of its owners and other economic entities
ECONOMIC ENTITY ASSUMPTION
Entity decides boundary边界 of accounting
Example: Jeff obtained $5000 from the bank loan to start .
Following the entity concept, Jeff would account for the $5000 separately from his personal assets
Jeff
Types of Business Organizations
Proprietorships 独资企业
Partnerships 合伙企业
Corporations 公司
Proprietorship
Has a single owner, who is often the manager.
Small retail stores
From accounting viewpoint, each proprietorship is distinct from its proprietor
From legal perspective, the business is the proprietor.
Proprietorship
What are some advantages
total undivided authority
no restrictions on type of business – must be legal
What are some disadvantages
unlimited liability 无限责任
limitation on size: fund raising power
Partnership
Joins two or more individual as co-owners.
Each owner is a partner合伙人.
Professional organizations such legal firm
Generally small or medium-sized
Accounting treats partnership as a separate organization, distinct from partners.
From a legal point, a partnership is the partners.
Partnership
What are some advantages
better credit standing – possibly
more brain power, but consultation with partners required
What are some disadvantages
unlimited personal liability for general partners
need for written partnership agreement
Corporation
owned by stockholders or shareholders股东.
A business becomes a corporation when the state approves its articles of incorporation 公司章程.
A corporation is a legal entity that conducts business in its own name
Corporations
What are some advantages
separate legal existence
limited liability of stockholders 有限责任
transferability of ownership relatively easy
What are some disadvantages
Taxes: possible double taxation
extensive governmental regulation
THE BASIC ACCOUNTING EQUATION
Assets
资产
Liabilities
负债
Equity
权益
=
+
resources owned by
a business
Claims against
those assets
owners’ residual
claim on total assets
How to get money
How to use money
Assets
Liabilities + Equities
Others
Shoes
Computers
Clothes
Books
Liabilities +equities
Assets
Your Personal Balance sheet
Liabilities ?
Investment
(Equity)?
assets
Assets are resources owned by a business
They are things of value used in carrying out such activities as production, consumption and exchange
The common characteristics possessed by all assets is the capacity to provide future services or benefits to the entities that use them
assets
Some assets are tangible 有形的: computer, cash.
Some assets are intangible 无形的: trademark 商标, patents 专利.
Is reputation an asset?
Liability
Liabilities are claims against assets
They are existing debts 债务and obligations义务
Most claims of creditors attach to total enterprise assets rather than to the specific assets provided by the creditor.
THE BASIC ACCOUNTING EQUATION
As of December 31, 2005, Tick Company has assets of $3,500 and stockholders’
equity of $2,000. What are the liabilities for Tick Company as of December 31, 2005?
Answer: $1,500
Assets – Liabilities = Equity
$3,500 = Liabilities + $2,000
Liabilities = $1,500
STOCKHOLDERS’ EQUITY
Stockholders’ equity 股东权益 is equal to total assets minus total liabilities
It is also referred to as residual equity 剩余权益
There are two general categories of stockholders’ equity:
Paid-in capital 投入资本
Retained earnings 留存收益
PAID-IN CAPITAL
Paid in Capital represents the total amount invested by stockholders in a corporation
Stockholders invest cash or other assets in exchange for common or preferred stock.
RETAINED EARNINGS
Retained earnings represents cumulative profits (or losses) retained in the business over time
Three items make up the balance in retained earnings:
REVENUES 收入
EXPENSES 费用
DIVIDENDS 股息
REVENUES
Revenues are the gross increases in stockholders’ equity from engaging in business activities entered into for the purpose of earning income
Revenues result from sales of merchandise, performance of services, rental of property, or lending of money
Revenues usually result in an increase in an asset
EXPENSES
Expenses are the decreases in stockholders’ equity that result from operating the business
They are the cost of assets consumed or services used in the process of earning revenue
Examples are: utility expense, rent expense, supplies expense, tax expense, insurance expense, depreciation expense
DIVIDENDS
When a company is successful, it generates Net Income 净利润
Dividends: the distribution of cash or other assets to stockholders that are available as a result of Net Income
Dividends are NOT considered an expense of the corporation.
= retained earnings
- Dividend
= net income
- Expenses
Revenues
Dividend is not expense
INCREASES & DECREASES
IN STOCKHOLDERS’ EQUITY
Investments by stockholders
Revenues
Stockholders’ Equity
Dividends to stockholders
Expenses
Increases
Decreases
REVIEW QUESTION
Rebecca Sherrick, Inc., had a stockholders’ equity balance of $164,000 at the beginning of the period. At the end of the period, the stockholders’ equity balance was $198,000.
Assuming no additional investment or distributions During the period, what is the net income for the period?
0
Less: dividends
$198,000
Ending balance
$34,000
net income ($198,000-$164,000)
0
Add: investments
$164,000
Beginning balance
TRANSACTION ANALYSIS
Transactions 业务 are the economic events of the enterprise
They may be identified as external or internal
External transactions 外部业务involve economic events between the company and some outside enterprise or party
Internal transactions 内部业务are economic events that occur entirely within one company
HOW BUSINESS TRANSACTIONS
AFFECT THE ACCOUNTING EQUATION
Every transaction 业务 must have a dual effect on the accounting equation.
If an asset is increased, there must be a corresponding:
Decrease in another asset, or
Increase in a liability, or
Increase in stockholders’ equity
TRANSACTION IDENTIFICATION PROCESS
Events
Purchase computer
Answer phone
Pay rent
Record
Do not record
Record
Criterion
Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed
TRANSACTION 1
Ray and Barbara Neal decide to open a computer programming company to be incorporated as Softbyte, Inc
They invest $15,000 cash in exchange for $15,000 of common stock普通股.
(1) +15,000 = +15,000 Investment
There is an increase in the asset Cash, $15,000, and an equal increase in the stockholders’ equity, Common Stock, $15,000.
Assets
=
Liabilities
+
Stockholders’ Equity
Common
Cash
Stock
TRANSACTION 2
Softbyte purchases computer equipment for $7,000 cash
(2) -7,000 +$7,000
Cash is decreased $7,000 and the asset Equipment is increased $7,000.
=
Stock
+
$7,000
=
Assets
=
Liabilities
+
Stockholders’
Common
Cash
+
Equipment
Old Bal.
$15,000
$15,000
New Bal.
$ 8,000
$15,000
$15,000
Equity
TRANSACTION 3
Softbyte purchases computer paper and other supplies expected to last several months from Acme Supply Company for $1,600
Acme Supply Company agrees to allow Softbyte to pay this bill in October, a month later
This transaction is often referred to as a purchase on account or a credit purchase信用采购
(3) +$1,600 +$1,600
The asset Supplies is increased $1,600 and the liability Accounts Payable is increased by the same amount.
+
=
+
$16,600
Assets
=
Liabilities
+
Equity
Accounts
Common
Cash
+
Supplies
+
Equipment
=
Payable
+
Stock
Old Bal.
$8,000
$7,000
$15,000
New Bal.
$8,000
$1,600
+
$7,000
$1,600
$15,000
$16,600
Stockholders’
TRANSACTION 4
Softbyte receives $1,200 cash from customers for programming services it has provided
This transaction represents the principal revenue-producing activity of Softbyte
(4) +1,200 +1,200 revenue
Cash is increased $1,200 and Retained Earnings is increased $1,200.
Assets
=
Liabilities
+
Stockholders’ Equity
Accounts
Common
Cash
+
Supplies
+
Equipment
=
Payable
+
Stock
Old Bal.
$8,000
$1,600
$7,000
$1,600
$15,000
New Bal.
$9,200
+
$1,600
+
$7,000
=
$1,600
+
$15,000
$17,800
$17,800
Retained
Earnings
$1,200
TRANSACTION 5
Softbyte receives a bill for $250 from the Daily News for advertising the opening of its business but postpones payment of the bill until a later date.
(5) +250 -250 expense
Accounts Payable is increased $250, and Retained Earnings is decreased $250.
Assets
=
Liabilities
+
Accounts
Cash
+
Supplies
+
Equipment
=
Payable
+
Old Bal.
$9,200
$1,600
$7,000
$1,600
$15,000
New Bal.
$9,200
+
$1,600
+
$7,000
=
$1,850
+
$15,000
$17,800
$17,800
Stockholders’ Equity
Common
Stock
Retained
Earnings
$ 950
$1,200
TRANSACTION 6
Softbyte provides programming services of $3,500 for customers
Cash amounting to $1,500 is received from customers, and the balance of $2,000 is billed to customers on account
(6) +1,500 +2,000 +3,500 revenue
Cash is increased $1,500; Accounts Receivable应收账款 is increased $2,000; and Retained Earnings is increased $3,500.
Stockholders’ Equity
Assets
=
Liabilities
+
$21,300
$21,300
TRANSACTION 7
Expenses paid in cash for September are store rent, $600, salaries of employees, $900, and utilities, $200.
(7) -1,700 -600 Rent -900 Salaries -200 Utilities
Cash is decreased $1,700 and Retained Earnings is decreased by $1,700.
Stockholders’ Equity
Assets
=
Liabilities
+
$19,600
$19,600
TRANSACTION 8
Softbyte pays its Daily News advertising bill of $250 in cash.
(8) -250 -250
Stockholders’ Equity
Assets
=
Liabilities
+
Cash is decreased $250 and Accounts Payable is decreased by $250.
$19,350
$19,350
Accounts
Accounts
Common
Retained
Cash
+
Receivable
+
Supplies
+
Equipment
=
Payable
+
Stock
+
Earnings
Old Bal.
$9,000
$2,000
$1,600
$7,000
$1,850
$15,000
$2,750
New Bal.
$8,750
+
$2,000
+
$1,600
+
$7,000
=
$1,600
+
$15,000
+
$2,750
TRANSACTION 9
The sum of $600 in cash is received from customers who have previously been billed for services in Transaction 6
(9) +600 -600
Cash is increased $600 and Accounts Receivable is decreased by the same amount.
Stockholders’ Equity
Assets
=
Liabilities
+
$19,350
$19,350
TRANSACTION 10
The corporation pays a dividend of $1,300 in cash to Ray and Barbara Neal, the stockholders of Softbyte, Inc.
(10) -1,300 -1,300 Dividends
Cash is decreased $1,300 and Stockholders’ Equity is decreased by the same amount.
Stockholders’ Equity
Assets
=
Liabilities
+
$18,050
$18,050
BASIC FINANCIAL STATEMENTS
After all transactions for the period are recorded, financial data is summarized, and that summary data is used to generate the basic financial statements 财务报表
Income Statement 利润表
Statement of Stockholders’ Equity 权益表
Balance Sheet 资产负债表
Statement of Cash Flows 现金流量表
Financial Statements
Income statement (收益表,statement of earnings , statement of operations) : summary of an entity’s revenues and expenses for specific period of time.特别的期间
Net income = revenues – expenses
Financial Statements
Balance sheet(资产负债表): list all the entity’s assets, liabilities and equity as of a specific date某一天.
Statement of owner’s equity(权益表): shows the changes in owner’s equity during a specific time period
Financial Statements
Statement of cash flows(现金流量表): reports the cash coming in and cash going out during a period.
Each financial statement headings: name of business, name of the financial statement, date or time period covered by the statement.
Softbyte
Income statement
For the Month ended September 30, 2006
2750
Net income
1950
Total expenses
200
utilities expenses
250
advertising expenses
600
rent expenses
900
salary expenses
Expenses
service revenues
4700
Revenues
Softbyte
Statement of retained earnings
For the Month ended September 30,2006
1450
Retained earnings, September 30
1300
Less: dividends
2750
Add: Net income
0
Retained earnings, September 1
18,050
Total liabilities and stockholders’ equity
1450
retained earnings
15000
common stock
Stockholder’s equity
1600
Accounts payable
Liabilities
18,050
Total assets
7000
Equipment
1600
Supplies
1400
Accounts receivable
8050
Cash
Softbyte
Balance Sheet
September 30, 2006
8050
Cash at the ending of the period
0
Cash at the beginning of the period
8050
Net cash increase
13,700
Net cash flows from financing activities
(1300)
payment of cash dividends
15000
sales of common stock
Cash flows from financing activities
(7000)
purchase equipment
Cash flows from investment activities
1350
Net cash flows from operating activities
(1950)
cash payment for expenses
3300
cash receipts from the revenue
Cash flows from operating activities
Softbyte
Statement of cash flows
For the Month ended September 30,2006
THE ACCOUNTING PROFESSION
In public accounting 公众会计, you would offer expert service to the general public
Areas of public accounting
Auditing 审计
Taxation 税务
Management consulting 管理咨询
Public Accounting
Certified Public Accountant (CPA): examines financial statements of company and expresses an opinion as to the fairness of presentation.
Junior accountant 2-4 years
Senior accountant 6-8 years
Manager 10 years
Partner
THE ACCOUNTING PROFESSION
In private accounting 私人会计, you would be involved in one of the following activities:
General accounting 一般会计
Cost accounting 成本会计
Budgeting 预算
Accounting information systems 会计信息系统
Tax accounting 税务会计
Internal auditing 内部审计
Junior accountant 2-4 years
Senior accountant 6-8 years
Controller 10 years
CFO (Chief Financial Officer)
THE ACCOUNTING PROFESSION
Not-for profit organizations 非盈利组织 also need sound financial reporting and control.
Donors want information about how well the organization has met its objectives and whether continued support is justified.
Hospitals and colleges must make decisions about the allocation of funds.
Governmental units must provide information to citizens, employees, creditors and legislators
Homework
P1-1A, P1-3A
E1-3, E1-7
Chapter 2
THE RECORDING PROCESS
记账过程
Study Objectives
Account
Debits and Credits
Identify the basic steps in the recording process
Explain what a journal is and how it helps in the recording process
Study Objectives
Explain what a ledger is and how it helps in the recording process
Explain what posting is and how it helps in the recording process
Prepare a trial balance and explain its purpose
How to record transactions’ information
Using Account!
THE ACCOUNT 账户
An account is an individual accounting record of increases and decreases in a specific asset, liability, or stockholders’ equity item.
A company will have separate accounts for such items as cash, salaries expense, accounts payable, and so on.
Cash
Increase
decrease
accounts payable
decrease
increase
T ACCOUNT T型账户
In its simplest form, an account consists of:
the title of the account 账户的名称
a left or debit side 账户的借方(左边)
a right or credit side 账户的贷方(右边)
The alignment of these parts resembles the letter T, and therefore the account form is called a T account.
T Account
Left or
debit
side
Right or
credit
side
Title of Account
Debit Cash Credit
10,000
2,000
8,000
Debit accounts payable Credit
5,000
8,000
3,000
DEBITS AND CREDITS 借和贷
The terms debit and credit mean left and right, respectively
The act of entering an amount on the left side of an account is called debiting the account and making an entry on the right side is crediting the account.
When the debit amounts exceed the credits, an account has a debit balance余额; when the reverse is true, the account has a credit balance
DEBITING AN ACCOUNT
Example: The owner (stockholder) invests $15,000 cash to start the business. Cash is debited and Common Stock is credited for $15,000.
Cash
Debits
Credits
15,000
CREDITING AN ACCOUNT
Example: Monthly rent of $7,000 is paid. Cash is credited as Rent Expense is debited.
Cash
Debits
Credits
7,000
DEBITING AND CREDITING AN ACCOUNT
Example: Cash is debited for $15,000 and credited for $7,000, leaving a debit balance of $8,000.
Cash
Debits
Credits
15,000
7,000
8,000
Debit Cash Credit
March 3 $ 2000
10 $3000
25 $1000
March 4 $ 500
8 $300
11 $200
20 $ 1000
30 $ 150
$ 6000
$2150
$ 3850
Debit Account receivable Credit
March 1 $ 5000
10 $6000
20 $4000
March 5 $ 3000
8 $2000
15 $2000
20 $ 4000
$ 15000
$11000
$ 4000
Debit account payable Credit
March 8 $ 3000
20 $3000
30 $4000
March 2 $ 5000
10 $6000
25 $2000
$ 10000
$13000
$ 3000
DOUBLE-ENTRY SYSTEM
复式记账系统
In a double-entry system, equal debits and credits are made in the accounts for each transaction.
Total debits will always equal total credits and the accounting equation will always stay in balance.
The Double-Entry System 复式记账
One debit
One credit
Each transaction is recorded with at least:
Total debits must equal total credits.
John’s Gas Station Example
On July 1, John invested $500,000 in cash and obtained a $300,000 loan to open a gas station.
How much was the initial increase in cash?
$800,000
Which accounts were affected?
John’s Gas Station Example
Cash
Liabilities
Owner’s Equity
Assets = Liabilities + Equity
Cash
Loan payable
Capital
500
500
300
300
Increase assets Decrease assets
DEBIT AND CREDIT EFFECTS – ASSETS
Debits
Credits
Decrease liabilities Increase liabilities
DEBIT AND CREDIT EFFECTS – LIABILITIES
Debits
Credits
NORMAL BALANCE 正常余额
Normal balance is the side where an increase in the account is recorded
Every account has a normal balance, whether it is a debit or credit
The opposite side entries should not exceed the normal balance.
Normal Balance
Assets
Liabilities
Increase Decrease Decrease Increase
Debit Credit Debit Credit
NORMAL BALANCES – ASSETS AND LIABILITIES
Normal
Balance
Decrease common stock Increase common stock
DEBIT AND CREDIT EFFECT –
COMMON STOCK
Debits
Credits
Normal Balance
NORMAL BALANCE - COMMON STOCK
Common Stock
Decrease Increase
Debit Credit
Normal Balance
Decrease Increase
Debit Credit
DEBIT AND CREDIT EFFECT -
RETAINED EARNINGS
Retained Earnings
Normal Balance
Dividends
Increase Decrease
Debit Credit
DEBIT AND CREDIT EFFECT -
DIVIDENDS
Decrease revenues Increase revenues
DEBIT AND CREDIT EFFECTS –REVENUES
Debits
Credits
Increase expenses Decrease expenses
DEBIT AND CREDIT EFFECTS – EXPENSES
Debits
Credits
Normal Balance
NORMAL BALANCES - REVENUES AND EXPENSES
Revenues
Expenses
Decrease Increase Increase Decrease
Debit Credit Debit Credit
Normal
Balance
Rules of Debit and Credit
Assets = Liabilities + Owner’s Equity
Assets are on the left (debit) side.
Liabilities and Equity are on the right (credit) side.
Rules of Debit and Credit
Owner’s Equity
Assets
Liabilities
Debit
+
Debit
–
Credit
–
Debit
–
Credit
+
Credit
+
=
+
Stockholder’s Equity
Common
Stock
Retained
Earnings
Retained earnings = revenues – expenses - dividends
Dr.
Revenues
- +
EXPANDED BASIC EQUATION AND DEBIT/CREDIT RULES AND EFFECTS
Expanded Basic Equation
+
Assets
Dr.
Cr.
+ -
Liabilities
Dr.
Cr.
- +
Dr.
Cr.
Retained Earnings
- +
Dr.
Cr.
CommonStock
- +
+
Cr.
+
Basic Equation
Liabilities
Assets
+
Stockholders’ Equity
=
=
-
Dr.
Cr.
Expenses
+ -
-
Dr.
Cr.
+ -
Dividends
STEPS IN THE RECORDING PROCESS
The basic steps in the recording process are:
Analyze each transaction会计业务 in terms of its effect on the accounts.
Enter the transaction information in a journal日记账 (book of original entry分录).
Transfer the journal information to the appropriate accounts in the ledger账本 (book of accounts).
Transaction
Journal
Ledger
Recording
Posting 过账
THE JOURNAL 日记账
Transactions are initially recorded in chronological order in a journal before being transferred to the accounts.
Every company has a general journal which contains:
spaces for dates 日期
account titles and explanations 账户名称
References 注
two amount columns 两栏
5,000
5,000
Cash
Account receivable
(take money back from the firm)
Mar
11
Credit
Debit
Ref
Account titles and explanations
Date
General Journal
THE JOURNAL 日记账
The journal makes several significant contributions to the recording process:
It discloses in one place the complete effect of a transaction.
It provides a chronological record of transactions.
It helps to prevent or locate errors because the debit and credit amounts for each entry can be readily compared.
JOURNALIZING 记账
Entering transaction data in the journal is known as journalizing.
Separate journal entries 会计分录are made for each transaction.
JOURNALIZING 记账
A complete entry consists of:
the date of the transaction
the accounts and amounts to be debited and credited
a brief explanation of the transaction.
The date of the transaction is entered in the date column.
The debit account title is entered at the extreme left margin of the Account Titles and Explanation column. The credit account title is indented on the next line.
The amounts for the debits are recorded in the Debit column and the amounts for the credits are recorded in the Credit column.
A brief explanation of the transaction is given.
A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.
The Ref. column is left blank at the time journal entry is made and is used later when the journal entries are transferred to the ledger accounts.
SIMPLE AND COMPOUND JOURNAL ENTRIES 简单分录和复式分录
If an entry involves only two accounts, one debit and one credit, it is considered a simple entry简单分录.
When three or more accounts are required in one journal entry, the entry is referred to as a compound entry复式分录.
2002 July 1 Delivery Equipment 14,000 Cash 8,000 Accounts Payable 6,000 (Purchased truck for cash with balance on account)
COMPOUND JOURNAL ENTRY
This is the wrong format. All debits must be listed before the credits are listed.
COMPOUND JOURNAL ENTRY
THE LEDGER 账薄
The entire group of accounts maintained by a company is referred to as the ledger.
A general ledger总账 contains all the assets, liabilities, and stockholder’s equity accounts.
Account and ledger
Cash
Accounts
Payable
Gay Gillen,
Capital
Ledger
All individual
accounts
combined
make up
the ledger.
Individual asset accounts
Individual liability accounts
Individual owner’s equity accounts
Individual Liabilities
Individual Assets
Individual Stockholders’ Equity
THE GENERAL LEDGER
Equipment
Land
Supplies
Cash
Salaries Expense
Service Revenue
Common Stock
Retained Earnings
Interest Payable
Salaries Payable
Notes Payable
Accounts Payable
Notes payable
Land
Account payable
Cash
Salary payable
Supplies
Interest payable
Equipment
Accounts of liabilities
Accounts of assets
Retained earnings
Dividend
Common stock
Service revenue
Salary expense
Accounts of equities
Debit Equipment Credit
$100,000
Debit salary payable Credit
$20,000
Debit retained earnings Credit
$12,000
POSTING A JOURNAL ENTRY过账
Posting
It is the transfer of information from the journal to the appropriate accounts in the ledger.
Debits in the journal are posted as debits in ledger, and credits in the journal are credits in the ledger.
Example
On April 2, Gay Gillen invested $30,000 in Gay Gillen eTravel.
What is the journal entry?
Received investment from Gay
30000
Capital
30000
Cash
Apr, 2
Credit
Debit
Accounts and explanation
Date
Journal P 1
Journal entry
Journal entry
April 2
Cash 30,000
Capital, Gay 30,000
April 2
Cash 30,000
Capital, Gay 30,000
Cash
Capital , Gay
30,000
30,000
Sept. 1
J1
15,000
15,000
COMMON STOCK
NO. 311
Explanation
Ref.
Debit
Credit
2002
J1
15,000
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
Sept. 1
Cash
101
15,000
Common Stock
311
15,000
(
issued shares of stock for
cash)
GENERAL LEDGER
CASH
NO. 101
Date
Explanation
Ref.
Debit
Credit
Balance
2002
Date
Balance
Sept. 1
15,000
POSTING A JOURNAL ENTRY过账
COMMON STOCK
Sept. 1
J1
15,000
15,000
COMMON STOCK
NO. 311
Date
Explanation
Ref.
Debit
Credit
Balance
2001
Sept. 1
J1
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
Sept. 1
Cash
101
15,000
Common Stock
311
15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH
NO. 101
Date
Explanation
Ref.
Debit
Credit
Balance
COMMON STOCK
15,000
15,000
POSTING A JOURNAL ENTRY
2002
Sept 1
2002
Sept 1
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
Sept. 1
Cash
101
15,000
Common Stock
311
15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH
NO. 101
Date
Explanation
Ref.
Debit
Credit
Balance
2002
Sept. 1
J1
15,000
15,000
COMMON STOCK
NO. 311
Date
Explanation
Ref.
Debit
Credit
Balance
2002
Sept. 1
J1
15,000
15,000
POSTING A JOURNAL ENTRY
GENERAL JOURNAL
J1
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
Sept. 1
Cash
101
15,000
Common Stock
311
15,000
(issued shares of stock for
cash)
GENERAL LEDGER
CASH
NO. 101
Date
Explanation
Ref.
Debit
Credit
Balance
2002
Sept. 1
J1
15,000
15,000
COMMON STOCK
NO. 311
Date
Explanation
Ref.
Debit
Credit
Balance
2002
Sept. 1
J1
15,000
15,000
POSTING A JOURNAL ENTRY
CHART OF ACCOUNTS 账户表
158 Accumulated depreciation
230 interest payable
157 Office equipment
212 salaries payable
130 Prepaid insurance
209 unearned revenue
129 Supplies
201 accounts payable
112 Account receivable
200 notes payable
101 Cash
Liabilities
Assets
CHART OF ACCOUNTS 账户表
905 interest expense
729 rent expense
726 salaries expense
722 insurance expense
711 depreciation expense
611 supplies expense
400 service revenue
Expenses
Revenues
CHART OF ACCOUNTS 账户表
350 income summary
332 dividends
320 retained earnings
311 common stock
Equities
Flow of accounting data
Transaction occur
Source documents are prepared
Transaction analysis
Journalizing
Posting to ledger
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 1, stockholders invest $10,000 cash in an advertising venture to be known as the Pioneer Advertising Agency Inc.
The asset Cash is increased $10,000, and stockholders’ equity (specifically Common Stock) is increased $10,000.
Debits increase assets: debit Cash $10,000.
Credits increase stockholders’ equity: credit Common Stock $10,000.
ILLUSTRATION 2-20 INVESTMENT OF CASH BY STOCKHOLDERS
Journal
Entry
Posting
ILLUSTRATION 2-20 INVESTMENT OF CASH BY STOCKHOLDERS
10,000
10,000
10, 000
10,000
ILLUSTRATION 2-21 PURCHASE OF OFFICE EQUIPMENT
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable.
The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000.
Debits increase assets: debit Office Equipment $5,000. Credits increase liabilities: credit Notes Payable $5,000.
5,000
Posting
Journal
Entry
5,000
ILLUSTRATION 2-21 PURCHASE OF OFFICE EQUIPMENT
5,000
5,000
ILLUSTRATION 2-22 RECEIPT OF CASH FOR FUTURE SERVICE
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31.
The asset Cash is increased $1,200; the liability Unearned Revenue is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned revenues are considered a liability even though the word payable is not used.
Debits increase assets: debit Cash $1,200. Credits increase liabilities: credit Unearned Revenues $1,200.
Journal
Entry
Posting
Unearned Rev 209
Oct. 2
1,200
1,200
1,200
1,200
ILLUSTRATION 2-22 RECEIPT OF CASH FOR FUTURE SERVICE
ILLUSTRATION 2-23 PAYMENT OF MONTHLY RENT
Transaction
October 3, office rent for October is paid in cash, $900.
Basic
Analysis
The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900.
Debit-Credit
Analysis
Debits increase expenses: debit Rent Expense $900. Credits decrease assets: credit Cash $900.
Journal
Entry
Posting
Rent Expense 729
Oct. 3
900
900
900
900
ILLUSTRATION 2-23 PAYMENT OF MONTHLY RENT
ILLUSTRATION 2-24 PAYMENT FOR INSURANCE
Transaction
October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.
Basic
Analysis
The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future.
Debit -Credit
Analysis
Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600.
Journal
Entry
Posting
Cash
101
Oct. 1
10,000
Oct. 3
900
2
1,200
4
600
600
600
600
ILLUSTRATION 2-24 PAYMENT FOR INSURANCE
ILLUSTRATION 2-25 PURCHASE OF SUPPLIES ON CREDIT
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500.
The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500.
Debits increase assets: debit Advertising Supplies $2,500. Credits increase liabilities: credit Accounts Payable $2,500.
Journal
Entry
Posting
2,500
2,500
2,500
2,500
ILLUSTRATION 2-25 PURCHASE OF SUPPLIES ON CREDIT
ILLUSTRATION 2-26 HIRING OF EMPLOYEES
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26.
A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business transaction beginning on October 15.
A debit-credit analysis is not needed because there is no accounting entry.
ILLUSTRATION 2-27
DECLARATION AND PAYMENT OF DIVIDEND BY CORPORATION
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 20, the board of directors declares and pays a $500 cash dividend to stockholders.
The dividends account is increased $500; the asset Cash is decreased $500.
Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500.
Journal
Entry
Posting
Dividends 332
Oct. 20
500
500
500
500
ILLUSTRATION 2-27
DECLARATION AND PAYMENT OF DIVIDEND BY CORPORATION
ILLUSTRATION 2-28 PAYMENT OF SALARIES
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 26, employee salaries of $4,000 are owed and paid in cash. (See October 9 transaction.)
The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000.
Debits increase expenses: debit Salaries Expense $4,000. Credits decrease assets: credit Cash $4,000.
Journal
Entry
Posting
4,000
4,000
4,000
4,000
ILLUSTRATION 2-28 PAYMENT OF SALARIES
ILLUSTRATION 2-29 RECEIPT OF CASH FOR FEES EARNED
Basic
Analysis
Debit -Credit
Analysis
Transaction
October 31, received $10,000 in cash from Copa Company for advertising services rendered in October.
The asset Cash is increased $10,000; the revenue acct. Service Revenue is increased $10,000.
Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Service Revenue $10,000.
Journal
Entry
Posting
Service Revenue 400
Oct. 31
10,000
10,000
10,000
ILLUSTRATION 2-29 RECEIPT OF CASH FOR FEES EARNED
Journalizing and Posting
See P 66-67
THE TRIAL BALANCE 试算平衡表
A trial balance is a list of accounts and their balances at a given time
The primary purpose of a trial balance is to prove the mathematical equality of debits and credits after posting
THE TRIAL BALANCE 试算平衡表
A trial balance also uncovers errors in journalizing and posting.
The steps for preparing a trial balance are:
List the account titles and their balances
Total the debit and credit columns
Prove the equality of the two columns
The total debits must equal the total credits.
PIONEER ADVERTISING AGENCY
Trial Balance
October 31, 2002
Debit
Credit
Cash
$ 15,200
Advertising Supplies
2,500
Prepaid Insurance
600
Office Equipment
5,000
Notes Payable
$ 5,000
Accounts Payable
2,500
Unearned Revenue
1,200
Common Stock
10,000
Dividends
500
Service Revenue
10,000
Salaries Expense
4,000
Rent Expense
900
$ 28,700
$ 28,700
ILLUSTRATION 2-32 A TRIAL BALANCE
LIMITATIONS OF A TRIAL BALANCE
试算平衡表的限制
A trial balance does not prove that all transactions have been recorded or that the ledger is correct.
Numerous errors may exist even though the trial balance columns agree.
LIMITATIONS OF A TRIAL BALANCE
试算平衡表的限制
The trial balance may balance even when
a transaction is not journalized
a correct journal entry is not posted
a journal entry is posted twice
incorrect accounts are used in journalizing or posting
offsetting errors are made in recording the amount of the transaction
Homework
Q2,8,16
BE2-2, 2-3
E2-1,2-2,2-6,2-7
P2-1A, 2-2A
Demonstration problem
P 70.
√
10,000
Cash
√
10,000
Advertising supplies
Supplies
To buy supplies
明细科目
总账科目
记账
贷方
金额
CR
借方
金额
DR
会计科目
Account name
摘要
Explanation
2006年3月23日 第 101号
记账凭证
记账 出纳 审核 制证
10000
DR
10000
Buy supplies
101
March
23
20000
DR
20000
Selling goods
10
March
1
余额
Balance
借
或
贷
贷方
CR
借方
DR
√
摘要
explanation
凭证号数
Voucher
No.
年月日
Date
现金 Cash
10000
DR
10000
√
Buy supplies
101
March
23
余额
Balance
借
或
贷
贷方
CR
借方
DR
√
摘要
explanation
凭证号数
Voucher
No.
年月日
Date
物品 supplies
Transaction 1
October 1, . Byrd invests $10,000 cash in exchange for ownership interest in Pioneer Advertising Agency, Inc.
The asset Cash is increased $10,000, and Common Stock is increased $10,000
Debits increase assets: debit Cash $10,000.
Credits increase stockholders’ equity: credit Common Stock, $10,000
1
Journal
10,000
10,000
101
311
Cash
common stock
(issued shares for cash)
Oct 1
Credit
Debit
Ref
Account titles and explanation
Date
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Common stock 311
Transaction 2
October 1, office equipment costing $5,000 is purchased by signing a 3-month, 12%, $5,000 note payable
The asset Office Equipment is increased $5,000, and the liability Notes Payable is increased $5,000
Debits increase assets: debit Office Equipment $5,000.
Credits increase liabilities: credit Notes Payable $5,000
1
Journal
5,000
5,000
157
200
Office equipment
notes payable
(issued notes for equipment)
Oct 1
Credit
Debit
Ref
Account titles and explanation
Date
5,000
J1
Buying equipment
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Office equipment 157
5,000
J1
Issues notes for equipment
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Notes payable 200
Transaction 3
October 2, a $1,200 cash advance is received from R. Knox, a client, for advertising services that are expected to be completed by December 31
The asset Cash is increased $1,200; the liability Unearned Fees is increased $1,200 because the service has not been rendered yet. Note that although many liabilities have the word “payable” in their title, unearned fees are considered a liability even though the word payable is not used
Debits increase assets: debit Cash $1,200.
Credits increase liabilities: credit Unearned Fees $1,200.
1
Journal
1,200
1,200
101
209
Cash
unearned fees
(received advance for service)
Oct 2
Credit
Debit
Ref
Account titles and explanation
Date
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
1,200
J1
Received advance
Oct 2
balance
Credit
Debit
Ref
explanation
Date
Unearned fees 209
Transaction 4
October 3, office rent for October is paid in cash, $900.
The expense Rent is increased $900 because the payment pertains only to the current month; the asset Cash is decreased $900
Debits increase expenses: debit Rent Expense $900.
Credits decrease assets: credit Cash $900
1
Journal
900
900
729
101
Rent expense
cash
(received advance for service)
Oct 3
Credit
Debit
Ref
Account titles and explanation
Date
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
900
J1
Rent pay
Oct 3
balance
Credit
Debit
Ref
explanation
Date
Rent expense 729
Transaction 5
October 4, $600 is paid for a one-year insurance policy that will expire next year on September 30.
The asset Prepaid Insurance is increased $600 because the payment extends to more than the current month; the asset Cash is decreased $600. Note that payments of expenses that will benefit more than one accounting period are identified as prepaid expenses or prepayments. When a payment is made, an asset account is debited in order to show the service or benefit that will be received in the future
Debits increase assets: debit Prepaid Insurance $600. Credits decrease assets: credit Cash $600
1
Journal
600
600
130
101
Prepaid insurance
cash
(paid one year insurance )
Oct 4
Credit
Debit
Ref
Account titles and explanation
Date
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
600
J1
One year insurance
Oct 4
balance
Credit
Debit
Ref
explanation
Date
Prepaid insurance 130
Transaction 6
October 5, an estimated 3-month supply of advertising materials is purchased on account from Aero Supply for $2,500
The asset Advertising Supplies is increased $2,500; the liability Accounts Payable is increased $2,500
Debits increase assets: debit Advertising Supplies $2,500.
Credits increase liabilities: credit Accounts Payable $2,500.
1
Journal
2,500
2,500
126
201
Advertising supplies
accounts payable
(purchase supplies on account )
Oct 5
Credit
Debit
Ref
Account titles and explanation
Date
2,500
J1
3 month supplies buy on account
Oct 5
balance
Credit
Debit
Ref
explanation
Date
Advertising supplies 126
2,500
J1
Supplies buy on account
Oct 5
balance
Credit
Debit
Ref
explanation
Date
Accounts payable 201
Transaction 7
October 9, hire four employees to begin work on October 15. Each employee is to receive a weekly salary of $500 for a 5-day work week, payable every 2 weeks -- first payment made on October 26
A business transaction has not occurred. There is only an agreement between the employer and the employees to enter into a business transaction beginning on October 15.
A debit-credit analysis is not needed because there is no accounting entry
Transaction 8
October 20, the board of directors declares and pays a $500 cash dividend to stockholders.
The dividends account is increased $500; the asset Cash is decreased $500
Debits increase dividends: debit Dividends $500. Credits decrease assets: credit Cash $500.
1
Journal
500
500
332
101
Dividend
cash
(paid one year insurance )
Oct 20
Credit
Debit
Ref
Account titles and explanation
Date
500
J1
Pay dividend
Oct 20
balance
Credit
Debit
Ref
explanation
Date
Dividend 332
500
J1
Dividend pay
Oct 20
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
Transaction 9
October 26, employee salaries of $4,000 are owed and paid in cash.
The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000
Debits increase expenses: debit Salaries Expense $4,000.
Credits decrease assets: credit Cash $4,000
1
Journal
4,000
4,000
726
101
Salary expense
cash
(salary pay )
Oct 26
Credit
Debit
Ref
Account titles and explanation
Date
4,000
J1
Salary pay
Oct 26
balance
Credit
Debit
Ref
explanation
Date
Salary expense 726
4,000
J1
Salary pay
Oct 26
500
J1
Dividend pay
Oct 20
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
Transaction 10
October 26, employee salaries of $4,000 are owed and paid in cash.
The expense account Salaries Expense is increased $4,000; the asset Cash is decreased $4,000
Debits increase expenses: debit Salaries Expense $4,000.
Credits decrease assets: credit Cash $4,000
1
Journal
4,000
4,000
726
101
Salary expense
cash
(salary pay )
Oct 26
Credit
Debit
Ref
Account titles and explanation
Date
4,000
J1
Salary pay
Oct 26
balance
Credit
Debit
Ref
explanation
Date
Salary expense 726
4,000
J1
Salary pay
Oct 26
500
J1
Dividend pay
Oct 20
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
Transaction 11
October 31, received $10,000 in cash from Copa Company for advertising services rendered in October
The asset Cash is increased $10,000; the revenue Fees Earned is increased $10,000.
Debits increase assets: debit Cash $10,000. Credits increase revenues: credit Fees Earned $10,000
1
Journal
10,000
10,000
101
400
Cash
fees earned
(received service revenue )
Oct 31
Credit
Debit
Ref
Account titles and explanation
Date
10,000
J1
Service revenue
Oct 31
4,000
J1
Salary pay
Oct 26
500
J1
Dividend pay
Oct 20
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
10,000
J1
Service revenue
Oct 31
balance
Credit
Debit
Ref
explanation
Date
Fees earned 400
THE TRIAL BALANCE
A trial balance is a list of accounts and their balances at a given time
The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting
If the debits and credits do not agree, the trial balance can be used to uncover errors in journalizing and posting
THE TRIAL BALANCE
The procedures for preparing a trial balance consist of:
List the account titles and their balances
Total the debit and credit columns
Prove the equality of the two columns.
15,200
6,000
21,200
Total
10,000
J1
Service revenue
Oct 31
4,000
J1
Salary pay
Oct 26
500
J1
Dividend pay
Oct 20
600
J1
One year insurance
Oct 4
900
J1
Rent pay
Oct 3
1,200
J1
Received advance
Oct 2
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Cash 101
10,000
Total
10,000
J1
Service revenue
Oct 31
balance
Credit
Debit
Ref
explanation
Date
Fees earned 400
4,000
Total
4,000
J1
Salary pay
Oct 26
balance
Credit
Debit
Ref
explanation
Date
Salary expense 726
500
Total
500
J1
Pay dividend
Oct 20
balance
Credit
Debit
Ref
explanation
Date
Dividend 332
2,500
Total
2,500
J1
Supplies buy on account
Oct 5
balance
Credit
Debit
Ref
explanation
Date
Accounts payable 201
2,500
Total
2,500
J1
3 month supplies buy on account
Oct 5
balance
Credit
Debit
Ref
explanation
Date
Advertising supplies 126
600
total
600
J1
One year insurance
Oct 4
balance
Credit
Debit
Ref
explanation
Date
Prepaid insurance 130
900
Total
900
J1
Rent pay
Oct 3
balance
Credit
Debit
Ref
explanation
Date
Rent expense 729
1,200
Total
1,200
J1
Received advance
Oct 2
balance
Credit
Debit
Ref
explanation
Date
Unearned fees 209
5,000
Total
5,000
J1
Issues notes for equipment
Oct 1
balance
Credit
Debit
Ref
explanation
Date
notes payable 200
5,000
total
5,000
J1
Buying equipment
Oct 1
balance
Credit
Debit
Ref
explanation
Date
office equipment 157
10,000
Total
10,000
J1
Issues share
Oct 1
balance
Credit
Debit
Ref
explanation
Date
Common stock 311
28,700
28,700
Total
900
Rent expense
4,000
Salary expense
10,000
Fees earned
500
Dividend
10,000
Common stock
1,200
Unearned fees
2,500
Accounts payable
5,000
Notes payable
5,000
Office equipment
600
Prepaid insurance
2,500
Advertising supplies
15,200
Cash
Credit
Debit
Trial Balance
CHAPTER 3
ADJUSTING THE ACCOUNTS
调整账户
Study Objectives
Time period assumption
Accrual basis of accounting
Adjusting entries
Describe the nature and purpose of an adjusted trial balance.
TIME-PERIOD ASSUMPTION
期间假设
The time period assumption assumes that the economic life of a business can be divided into artificial time periods.
Accounting time periods 会计期间 are generally a month, a quarter, or a year.
TIME-PERIOD ASSUMPTION
期间假设
The accounting time period of one year in length is usually known as a fiscal year财政年度.
The accounting period used by most businesses coincides with the calendar year (January 1 to December 31).
Example
You run a small business for CD sales. You sold ten CD to a customer for $50 in March, but the customer would pay $50 in April.
How do you recognize your revenue?
Depend on the system you choose.
Cash- BASIS OF ACCOUNTING
现金收付制会计
Under cash-basis accounting现金收付制, revenue is recorded only when cash is received, and expenses are recorded only when paid.
Example: Under cash-basis accounting, your revenue $50 is recognized in April, not in March.
Cash- BASIS OF ACCOUNTING
现金收付制会计
Example: you paid $1200 for insurance in January of 2006 for the year. Under cash-basis accounting, this amount $1200 would be as expense in January, not be allocated over the following months.
Generally accepted accounting principles do not take cash-basis accounting because the cash basis often causes misleading financial statements
ACCRUAL BASIS OF ACCOUNTING
应计制会计
The revenue recognition principle收入确认原则 states that revenue should be recognized in the accounting period in which it is earned.
Example: Under accrual-basis accounting, your revenue $50 is recognized in March, not in April.
REVENUE RECOGNITION PRINCIPLE收入确认原则
In a service business, revenue is considered to be earned at the time the service is performed.
THE MATCHING PRINCIPLE
配比原则
The practice of expense recognition费用确认 is referred to as the matching principle.
The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues).
THE MATCHING PRINCIPLE
配比原则
Revenues
earned
this month
are offset
against....
expenses
incurred in
earning the
revenue
Mismatch between revenue, expenses and cash
You finished your service in March, but the customer did pay cash to you yet. The service was valued as $ 40,000.
Your customer paid $1200 cash in March for a contract, but your service did not do it.
At end of March, you should pay employees wages $20,000, but did not pay it.
You paid $1200 in March for insurance for the year .
How to deal with
These mismatch ?
You should make adjustment
At the end of month or year
ADJUSTING ENTRIES
调整分录
Adjusting entries are made in order for:
Revenues to be recorded in the period in which they are earned, and for......
Expenses to be recognized in the period in which they are incurred.
ADJUSTING ENTRIES
Adjusting entries are required each time financial statements are prepared.
Adjusting entries can be classified as:
prepayments 先付型(prepaid expenses or unearned revenues) or
accruals 应计型(accrued revenues or accrued expenses)
Prepayments
Prepaid Expenses 先付费用 - expenses paid in cash and recorded as assets before they are used or consumed.
Unearned Revenues预收款 - revenues received in cash and recorded as liabilities before they are earned.
Accruals
Accrued Revenues 应计收入- revenues earned but not yet received in cash or recorded.
Accrued Expenses 应计费用- expenses incurred but not yet paid in cash or recorded.
The Trial Balance is the starting place for adjusting entries.
PIONEER ADVERTISING AGENCY, INC.
Trial Balance
October 31, 2002
Debit
Credit
Cash
$ 15,200
Advertising Supplies
2,500
Prepaid Insurance
600
Office Equipment
5,000
Notes Payable
$ 5,000
Accounts Payable
2,500
Unearned Revenue
1,200
Common Stock
10,000
Retained Earnings
-0-
Dividends
500
Service Revenue
10,000
Salaries Expense
4,000
Rent Expense
900
$ 28,700
$ 28,700
TRIAL BALANCE
PREPAYMENTS
Prepayments are either prepaid expenses or unearned revenues.
Adjusting entries for prepayments are required to record the portion of the prepayment that represents
the expense incurred or
the revenue earned in the current accounting period
Adjusting Entries
Asset
Unadjusted Balance
Credit Adjusting Entry (-)
Expense
Debit Adjusting Entry (+)
Prepaid Expenses
Liability
Unadjusted Balance
Debit Adjusting Entry (-)
Revenue
Credit Adjusting Entry (+)
Unearned Revenues
ADJUSTING ENTRIES FOR PREPAYMENTS
PREPAID EXPENSES
Prepaid expenses are expenses paid in cash and recorded as assets before they are used or consumed.
Prepaid expenses expire with the passage of time or through use and consumption.
An asset-expense account relationship exists with prepaid expenses.
PREPAID EXPENSES
Prior to adjustment, assets are overstated 高估and expenses are understated低估.
The adjusting entry调整分录 results in a debit to an expense account and a credit to an asset account.
Examples of prepaid expenses include supplies易耗品, insurance保险, and depreciation折旧.
October 31, an inventory count reveals that $1,000 of $2,500 of supplies are still on hand.
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES
Beginning inventory: 2500
Ending inventory: 1000
Inventory used = ending inventory – beginning inventory = 2500 – 1000
= 1500
ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES
1500
1500
Advertising supplies expense
advertising supplies
(to record supplies used )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES
DR advertising supplies CR
Oct 5 2500
Oct 31 1000
Oct 31 1500
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS SUPPLIES
DR supplies expense CR
Oct 31 1500
October 31, an analysis of the policy reveals that $50 of insurance expires each month
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Insurance
ADJUSTING ENTRIES FOR PREPAYMENTS Insurance
50
50
Insurance expense
prepaid insurance
(to record expired insurance )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS Insurance
DR prepaid insurance CR
Oct 4 600
Oct 31 550
Oct 31 50
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS Insurance
DR insurance expense CR
Oct 31 50
DEPRECIATION 折旧
Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
The purchase of equipment or a building is viewed as a long-term prepayment长期先付款 of services and, therefore, is allocated in the same manner as other prepaid expenses.
DEPRECIATION
Depreciation is an estimate估计 rather than a factual measurement of the cost that has expired.
In recording depreciation, Depreciation Expense is debited and a contra asset account资产备抵帐户, Accumulated Depreciation累计折旧, is credited.
Depreciation expense
Accumulated Depreciation
XXX
XXX
DEPRECIATION
In the balance sheet, Accumulated Depreciation is offset 相抵 against the asset account.
The difference between the cost of the asset and its related accumulated depreciation is referred to as the book value账面价值 of the asset.
October 31, depreciation on the office equipment is estimated to be $480 a year, or $40 per month.
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Depreciation
ADJUSTING ENTRIES FOR PREPAYMENTS Depreciation
40
40
Depreciation expense
accumulated depreciation
(to record monthly depreciation )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS Depreciation
DR accumulate depreciation CR
Oct 31 40
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS depreciation
DR depreciation expense CR
Oct 31 40
UNEARNED REVENUES
Unearned revenues are revenues received in cash and recorded as liabilities before they are earned.
Unearned revenues are subsequently earned by rendering a service to a customer.
A liability-revenue负债-收入 account relationship exists with unearned revenues.
UNEARNED REVENUES
Prior to adjustment, liabilities are overstated高估 and revenues are understated低估.
The adjusting entry results in a debit to a liability account and a credit to a revenue account.
Examples of unearned revenues include rent, magazine subscriptions, and customer deposits for future services.
October 31, analysis reveals that, of $1,200 in fees, $400 has been earned in October.
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Unearned revenue
ADJUSTING ENTRIES FOR PREPAYMENTS unearned revenue
400
400
Unearned revenue
service revenue
(to record service revenue for provided )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS
Unearned revenue
DR unearned revenue CR
Oct 2 1200
Oct 31 400
Oct 31 800
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS unearned revenue
DR service revenue CR
Oct 31 10000
Oct 31 10400
Oct 31 400
ACCRUALS
The second category of adjusting entries is accruals应计项目
Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period.
The adjusting entry for accruals will increase both a balance sheet and an income statement account.
ADJUSTING ENTRIES FOR ACCRUALS
Adjusting Entries
Asset
Debit Adjusting Entry (+)
Accrued Revenues
Revenue
Credit Adjusting Entry (+)
Accrued Expenses
Expense
Debit Adjusting Entry (+)
Liability
Credit Adjusting Entry (+)
ACCRUED REVENUES
Accrued revenues may accumulate with the passing of time or through services performed but not billed or collected.
An asset-revenue account relationship exists with accrued revenues.
Prior to adjustment, assets and revenues are understated低估.
The adjusting entry requires a debit to an asset account and a credit to a revenue account.
October 31, the agency earned $200 in fees for advertising services that were not billed to clients before October 31.
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued revenue
ADJUSTING ENTRIES FOR PREPAYMENTS Accrued revenue
200
200
Account receivable
service revenue
(to record service revenue for provided )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued revenue
DR accounts receivable CR
Oct 31 200
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS unearned revenue
DR service revenue CR
Oct 31 10000
Oct 31 10600
Oct 31 400
Oct 31 200
ACCRUED EXPENSES
Accrued expenses are expenses incurred but not yet paid or recorded.
A liability-expense account relationship exists
Prior to adjustment, liabilities and expenses are understated低估
The adjusting entry results in a debit to an expense account and a credit to a liability account.
October 31, the portion of the interest to be accrued on a 3-month note payable is calculated to be $50.
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued expense
ADJUSTING ENTRIES FOR PREPAYMENTS Accrued expense
50
50
Interest expense
interest payable
(to record interest on notes payable )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued expense
DR interest expense CR
Oct 31 50
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS accrued expense
DR interest payable CR
Oct 31 50
October 31, accrued salaries are calculated to be $1,200
Adjustment
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued salaries
ADJUSTING ENTRIES FOR PREPAYMENTS Accrued salaries
1200
1200
Salaries expense
salaries payable
(to record accrued salaries )
Oct 31
Credit
Debit
Account titles and explanation
Date
Journal Entry
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS
Accrued salaries
DR salaries expense CR
Oct 31 1200
Oct 26 4000
Oct 5200
Posting
ADJUSTING ENTRIES FOR PREPAYMENTS accrued expense
DR salaries payable CR
Oct 31 1200
ADJUSTED TRIAL BALANCE
调整后的试算平衡表
An Adjusted Trial Balance is prepared after all adjusting entries have been journalized and posted.
It shows the balances of all accounts at the end of the accounting period and the effects of all financial events that have occurred during the period.
ADJUSTED TRIAL BALANCE
调整后的试算平衡表
It proves the equality of the total debit and credit balances in the ledger after all adjustments have been made.
Financial statements can be prepared directly from the adjusted trial balance.
PIONEER ADVERTISING AGENCY, INC.
Trial Balances
October 31, 2002
Before
After
Adjustment
Adjustment
Debit
Credit
Debit
Credit
Cash
$ 15,200
$ 15,200
Accounts Receivable
200
Advertising Supplies
2,500
1,000
Prepaid Insurance
600
550
Office Equipment
5,000
5,000
Accumulated Depreciation - Office Equipment
$
40
Notes Payable
$ 5,000
5,000
Accounts Payable
2,500
2,500
Interest Payable
50
Unearned Revenue
1,200
800
Salaries Payable
1,200
Common Stock
10,000
10,000
Retained Earnings
–0–
–0–
Dividends
500
500
Service Revenue
10,000
10,600
Salaries Expense
4,000
5,200
Advertising Supplies Expense
1,500
Rent Expense
900
900
Insurance Expense
50
Interest Expense
50
Depreciation Expense
40
$ 28,700
$ 28,700
$ 30,190
$ 30,190
TRIAL BALANCE AND
ADJUSTED TRIAL BALANCE COMPARED
40
Accumulated depreciation—office equipment
5000
5000
Notes payable
2500
2500
Accounts payable
5000
5000
Office equipment
550
600
Prepaid insurance
1000
2500
Advertising supplies
200
Accounts receivable
15200
15200
Cash
CR
DR
CR
DR
After adjustment
Before adjustment
Account name
500
500
Dividend
10600
10000
Service revenue
5200
4000
Salaries expense
0
0
Retained earnings
10000
10000
Common stock
1200
Salary payable
800
1200
Unearned revenue
50
Interest payable
CR
DR
CR
DR
After adjustment
Before adjustment
Account name
30190
30190
28700
28700
Total
40
Depreciation expense
50
Interest expense
50
Insurance expense
900
900
Rent expense
1500
Advertising supplies expense
CR
DR
CR
DR
After adjustment
Before adjustment
Account name
Homework
Q9,Q10
BE3-4,BE3-5
E3-3, E3-4,E3-5
P3-1A
CHAPTER 4
COMPLETION OF THE ACCOUNTING CYCLE
完成会计循环
Study Objectives
Prepare a work sheet.
Explain the process of closing the books.
Describe the content and purpose of a post-closing trial balance.
State the required steps in the accounting cycle
Explain the approaches to preparing correcting entries.
Identify the sections of a classified balance sheet
The Accounting Cycle
The accounting cycle is the process by which accountants prepare financial statements for an entity for a specific period of time.
The Accounting Cycle
For a new business, begin by setting up ledger accounts.
For an established business, begin with account balances carried over from the previous period.
Analyzing transaction
Journalizing
Posting
Trial Balance
Adjusting
Adjusted
Trial Balance
Financial
Statements
Journalizing
Posting
Closing entry
Post-closing
Trial
Balance
How to make accounting cycle work
Easier?
Using Worksheet
WORK SHEET 工作底稿
A work sheet is a multiple-column form that may be used in the adjustment process and in preparing financial statements.
CR
DR
CR
DR
CR
DR
CR
DR
CR
DR
Balance
Sheet
Income
Statement
Adjusted
Trial
Balance
Adjustment
Trial
Balance
A/N
Work sheet
WORK SHEET 工作底稿
It is a working tool or a supplementary device for the accountant and not a permanent accounting record.
Use of a work sheet should make the preparation of adjusting entries and financial statements easier.
WORK SHEET
The use of a work sheet is optional.
When a work sheet is used, financial statements are prepared from the worksheet.
Adjustments are journalized and posted from the work sheet after financial statements are prepared.
FORM AND PROCEDURE
FOR A WORK SHEET
STEPS IN PREPARING A WORKSHEET
Prepare a trial balance on the worksheet
Enter the adjustments in the adjustments columns
Enter adjusted balances in the adjusted trial balance columns
STEPS IN PREPARING A WORKSHEET
Extend adjusted trial balance amounts to appropriate financial statement columns
Total the statement columns, compute net income (loss), and complete the worksheet.
1 PREPARING A TRIAL BALANCE
15,200 2,500 600 5,000 5,000 2,500 1,200 10,000 500 10,000
4,000 900 28,700 28,700
2 ENTER THE ADJUSTMENTS
a 1,500 b 50
d 400
d 400 e 200
g 1,200
a 1,500 b 50 c 40 c 40 f 50 e 200 f 50 g 1,200
3 ENTER ADJUSTED BALANCES
15,200 1,000 550 5,000 5,000 2,500 800 10,000 500 10,600
5,200 900
1,500 50 40 40 50
200
50 1,200
4 EXTEND ADJUSTED BALANCES
10,600 5,200 900 1,500 50 40 50
4 EXTEND ADJUSTED BALANCES
15,200 1,000 550 5,000 5,000 2,500 800 10,000 500
40
200 50 1,200
ADJUSTING ENTRIES JOURNALIZED
Advertising Supplies Expense 1,500 Advertising Supplies 1,500
Insurance Expense 50 Prepaid Insurance 50
Depreciation Expense 40 Accumulated Depreciation - Office Equipment 40
Unearned Revenue 400 Service Revenue 400
Accounts Receivable 200 Service Revenue 200
Interest Expense 50 Interest Payable 50 Salaries Expense 1,200 Salaries Payable 1,200
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
a
Oct. 31
b
31
c
31
d
31
e
31
f
31
g
31
$ 10,600
$ 5,200 1,500 900 50 50 40
7,740 $ 2,860
PIONEER ADVERTISING AGENCY
Income Statement
For the Month Ended October 31, 2002
Revenues
Service Revenue
Expenses
Salaries expense
Advertising supplies expense
Rent expense
Insurance expense
Interest expense
Depreciation expense
Total expenses
Net income
INCOME STATEMENT
The income statement is prepared from the income statement columns of the work sheet.
$ -0- 2,860 2,860 500 $ 2,360
RETAINED EARNINGS STATEMENT
The Retained Earnings statement is prepared from the balance sheet columns of the work sheet.
$ 15,200 200 $ 5,000 1,000 2,500 550 50 $ 5,000 800 1,200 40 4,960 9,550 10,000 2,360
$ 21,910 $ 21,910
PIONEER ADVERTISING AGENCY
Balance Sheet
October 31, 2002
Assets
Liabilities and Stockholders’ Equity
Cash
Liabilities
Accounts receivable
Notes payable
Advertising supplies
Accounts payable
Prepaid insurance
Interest payable
Office equipment
Unearned Revenue
Less: Accumulated
Salaries payable
depreciation
Total liabilities
Stockholders’ equity
Common Stock
Retained earnings
Total liabilities and
Total assets
stockholders’ equity
BALANCE SHEET
TEMPORARY (NOMINAL) PERMANENT (REAL) These accounts are closed These accounts are not closed
All revenue accounts All asset accounts
All expense accounts All liability accounts
Dividends Stockholders’ equity
TEMPORARY VERSUS PERMANENT ACCOUNTS 临时性账户与永久性账户
CLOSING ENTRIES 结账分录
Closing entries formally recognize in the ledger the transfer of net income (loss) and dividends to retained earnings.
Journalizing and posting closing entries is a required step in the accounting cycle 会计循环.
A temporary account, Income Summary利润汇总, is used in closing revenue and expense accounts to minimize the amount of detail in the permanent retained earnings account.
1 Debit each revenue account for its balance, and credit Income Summary for total revenues.
2 Debit Income Summary for total expenses, and credit each expense account for its balance.
DIAGRAM OF CLOSING PROCESS
1
2
Revenue 30000
Income Summary 30000
Income summary 8000
Expense 8000
Service revenue
30,000
Rent expense
Salary expense
3000
5000
Income summary
3000
5000
30000
30000
3000
5000
22,000
3 Debit (credit) Income Summary and credit (debit) Retained Earnings for the amount of net income (loss).
3
DIAGRAM OF CLOSING PROCESS
Income summary 22000
Retained earning 22000
22,000
22,000
Income summary
4 Debit Retained Earnings for the balance in the Dividends account and credit Dividends for the same amount.
4
DIAGRAM OF CLOSING PROCESS
Retained earnings 5000
Dividend 5000
Income summary
22000
Dividend
5000
22000
5000
Retained earnings
22000
5000
17,000
10,600 10,600
GENERAL JOURNAL
Date
Account Titles and Explanation
Ref.
Debit
Credit
2002
(1)
Oct. 31
Service Revenue
400
Income Summary
350
(To close revenue account)
INCOME SUMMARY
Date
Explanation
Debit
Credit
Balance
2002
Oct. 31
10,600
10,600
31
31
Service Revenue
NO. 400
Date
Explanation
Debit
Credit
Balance
2002
Oct. 31
10,600
31
–0–
10,600
CLOSING ENTRIES JOURNALIZED
7,740 5,200 1,500 900 50 50 40
INCOME SUMMARY
NO. 350
Date
Explanation
Debit
Credit
Balance
2002
Oct. 31
10,600
10,600
31
7,740
2,860
GENERAL JOURNAL
Date
Ref.
Debit
Credit
(2)
Oct. 31
350
726
Advertising Supplies Expense
611
729
Insurance Expense
722
905
Depreciation Expense
711
Account Titles and Explanation
2002
Income Summary
Salaries Expense
Rent Expense
Interest Expense
(To close expense
accounts)
CLOSING ENTRIES JOURNALIZED
2,860 2,860
CLOSING ENTRIES JOURNALIZED
2,860
2,860
RETAINED EARNINGS
NO. 320
Date
Explanation
Debit
Credit
Balance
2002
Oct. 31
2,860
31
500
2,360
CLOSING ENTRIES JOURNALIZED
500
CAUTIONS RELATING TO CLOSING ENTRIES
Avoid unintentionally doubling the revenue and expense balances rather than zeroing them.
Do not close dividends through the Income Summary account. Dividends are not expenses, and they are not a factor in determining net income.
POSTING CLOSING ENTRIES
All temporary accounts have zero balances after posting the closing entries.
The balance in Retained Earnings represents the accumulated undistributed earnings of the corporation at the end of the accounting period
POSTING CLOSING ENTRIES
The Income Summary account is used only in closing. No entries are journalized and posted to this account during the year.
As part of the closing process, the temporary accounts (revenues, expenses and dividends) are totaled, balanced, and double ruled.
The permanent accounts (assets, liabilities, stockholders’ equity) are not closed.
Salaries Expense
726
4,000
(2)
5,200
1,200
5,200
5,200
Depreciation Expense
711
40
(2)
40
Dividends
332
500
(4)
500
Interest Expense
905
50
(2)
50
Insurance Expense
722
50
(2)
50
Rent Expense
729
900
(2)
900
Advertising Supplies Expense
611
1,500
(2)
1,500
POSTING OF CLOSING ENTRIES
Service Revenue
400
(1)
10,600
10,000
400
200
10,600
10,600
R
etained Earnings
320
(4)
500
–
0
–
(3)
2,860
2,360
Income Summary
350
(2)
7,740
(1)
10,600
(3)
2,860
10,600
10,600
4
3
2
2
1
POST-CLOSING TRIAL BALANCE
After all closing entries have been journalized and posted, a post-closing trial balance is prepared.
The purpose of this trial balance is to prove the equality of the permanent account balances that are carried forward into the next accounting period.
15,200 200 1,000 550 5,000 40 5,000 2,500 50 800 1,200 10,000 2,360
$ 21,950 $ 21,950
PIONEER ADVERTISING AGENCY
Post-Closing Trial Balance
October 31, 2002
Debit
Credit
Cash
Accounts Receivable
Advertising Supplies
Prepaid Insurance
Office Equipment
Accumulated Depreciation — Office Equipment
Notes Payable
Accounts Payable
Interest Payable
Unearned Revenue
Salaries Payable
Common Stock
Retained Earnings
POST-CLOSING TRIAL BALANCE
The post-closing trial balance is prepared from the permanent accounts in the ledger.
The post-closing trial balance provides evidence that the journalizing and posting of closing entries has been properly completed.
STEPS IN THE ACCOUNTING CYCLE
会计循环中的步骤
Analyze business transactions
Journalize the transactions
Post to ledger accounts
Prepare a trial balance
Journalize and post adjusting entries
Prepare an adjusted trial balance
Prepare financial statements
Journalize and post closing entries
Prepare a post-closing trial balance
CORRECTING ENTRIES
改错分录
Errors that occur in recording transactions should be corrected as soon as they are discovered by preparing correcting entries.
Correcting entries are unnecessary if the records are free of errors.
They involve any combination of balance sheet and income statement accounts
EXAMPLE OF CORRECTING ENTRY 1
Cash 50 Service Revenue 50
Cash 50 Accounts Receivable 50
Service Revenue 50 Accounts Receivable 50
EXAMPLE OF CORRECTING ENTRY 2
Delivery Equipment 45 Accounts Payable 45
Office Equipment 450 Delivery Equipment 45 Accounts Payable 405
Office Equipment 450 Accounts Payable 450
STANDARD BALANCE SHEET CLASSIFICATIONS
Financial statements become more useful when the elements are classified into significant subgroups.
A classified balance sheet generally has the following standard classifications:
Intangible Assets
Equity
Property, Land and Equipment
Long-term Liabilities
Long-term Investment
Current Liabilities
Current Assets
Assets = Liabilities + Equity
CURRENT ASSETS 流动资产
Current assets are cash and other resources that are reasonably expected to be realized in cash or sold or consumed in the business within one year of the balance sheet date or the company’s operating cycle, whichever is longer.
Current assets are listed in the order of their liquidity流动性.
CURRENT ASSETS 流动资产
The operating cycle of a company is the average time that is required to go from cash to cash in producing revenues.
Examples of current assets are
Cash
Short-term investments 短期投资
Receivables 应收账款
prepaid expenses 待摊费用.
LONG-TERM INVESTMENTS
Long-term investments长期投资 are resources that can be realized in cash, but the conversion into cash in not expected within one year or the operating cycle, whichever is longer.
Examples include :
investments in stocks 股票投资
and bonds of another company 债券投资
or investment in land held for resale.
PROPERTY, PLANT, AND EQUIPMENT
Tangible resources of a relatively permanent nature that are used in the business and not intended for sale are classified as property, plant, and equipment固定资产.
Examples include:
land,
buildings,
machinery, equipment,
furniture and fixtures.
INTANGIBLE ASSETS
Intangible assets无形资产 are non-current resources that do not have physical substance
Examples include patents, copyrights, trademarks, or trade names that give the holder exclusive right of use for a specified period of time.
CURRENT LIABILITIES
Current liabilities流动负债 are obligations that are reasonably expected to be paid from existing current assets or through the creation of other current liabilities within one year or the operating cycle, whichever is longer.
CURRENT LIABILITIES
Examples include:
accounts payable,
wages payable,
interest payable,
and current maturities of long-term debt.
LONG-TERM LIABILITIES
Obligations expected to be paid after one year are classified as long-term liabilities.
Examples include :
long-term notes payable 长期应付票据
bonds payable, 长期债券
mortgages payable, 应付抵押
and lease liabilities. 应付租赁
STOCKHOLDERS’ EQUITY
The content of the owner’s equity section varies with the form of business organization.
In a proprietorship, there is one capital account.
In a partnership, there are separate capital accounts for each partner.
STOCKHOLDERS’ EQUITY
For a corporation, owners’ (stockholders’) equity is divided into two accounts:
Common Stock
Retained Earnings
CLASSIFIED BALANCE SHEET
IN REPORT FORM
资产负债表的报告格式
Total Assets 21,910
Less: accumulated depreciation (40)
Property, building and equipment 5,000
Total current assets 16,950
Prepaid insurance 550
Supplies 1,000
Accounts receivable 200
Cash 15,200
Current Assets
Assets
Agency Company
Balance Sheet
October 31, 2002
Total liabilities and equity 21910
Retained earnings 2360
Common stock 10000
Stockholder’s Equity
Total Liabilities 9550
Notes payable 4000
Long-term Liabilities
Total current liabilities 5550
Salary payable 1200
Unearned revenue 800
Interest payable 50
Accounts payable 2500
Notes payable 1000
Current Liabilities
Liabilities and Equity
Homework
E 4-1, E4-8
P4-1A, P4-2A
Example
P4-5B
CR
DR
Date
2500
2500
Accounts receivable
service revenue
July 12
1200
1200
Prepaid insurance
Cash
July 5
900
900
Cleaning supplies
Accounts payable
July 3
3000
3000
6000
Equipment
Cash
Accounts payable
July 1
9000
9000
Cash
Common stock
July 1
Journalizing of transactions
200
200
Gas & oil expense
Cash
July 31
CR
DR
Date
900
900
Dividend
Cash
July 31
3000
3000
Accounts receivable
service revenue
July 25
1400
1400
Cash
Accounts receivable
July 21
1200
1200
Salary expense
Cash
July 20
1500
1500
Accounts payable
Cash
July 18
9,000
1,400
3,000
1,200
1,500
1,200
200
900
10,400
8,000
2,400
DR Cash CR
2,500
3,000
1,400
5,500
1,400
4,100
DR Accounts receivable CR
900
900
900
DR Cleaning supplies CR
1,200
1,200
1,200
DR Prepaid insurance CR
6,000
6,000
6,000
DR Equipment CR
1,500
3,000
900
1,500
3,900
2,400
DR Accounts payable CR
9,000
9,000
9,000
DR Common stock CR
2,500
3,000
5,500
5,500
DR service revenue CR
900
900
900
DR Dividend CR
1,200
1,200
1,200
DR salary expense CR
200
200
200
DR Gas & oil expense CR
5500
Service revenue
200
Gas & oil expense
CR
DR
16,900
16,900
Total
900
Dividend
1200
Salaries expense
1200
Prepaid insurance
9000
Common stock
6000
Equipment
900
Cleaning Supplies
2400
Accounts payable
4100
Accounts receivable
2400
Cash
Trial Balance
400
400
Salaries expense
accounts payable
300
300
Cleaning supplies expense
cleaning supplies
100
100
Insurance expense
Prepaid insurance
200
200
Depreciation expense
accumulated depreciation
1100
1100
Accounts receivable
service revenue
July 31
CR
DR
Date
Adjustments of some transaction
4200
Net income
200
Gas & oil expense
100
Insurance expense
200
Depreciation expense
1600
Salaries expense
300
Cleaning supplies expense
Less:
6600
Service revenue
Retained earnings, July 1 $0
Add: net income $4200
Less: dividend 900
Retained earnings, July 31 $3300
Retained earnings statement
Work Sheet 2
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
7,500
1,200
1,100
1,500
7,200
23,700
42,200
Work Sheet 2
The company has earned revenue of $1,700 which will be collected next month.
Inventory of supplies at month end totaled $150.
Depreciation for the period was calculated as $200.
Work Sheet 2
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
12,100
1,350
250
15,500
1,000
12,000
42,200
7,500
1,200
1,100
1,500
7,200
23,700
42,200
a) 1,700
b) 100
c) 200
2,000
b) 100
c) 200
a) 1,700
2,000
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
7,700
1,200
1,100
1,500
7,200
25,400
44,100
Work Sheet 2
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
7,700
1,200
1,100
1,500
7,200
25,400
44,100
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
7,700
1,200
1,100
1,500
7,200
18,700
Work Sheet 2
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
7,700
1,200
1,100
1,500
7,200
25,400
44,100
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
7,700
1,200
1,100
1,500
7,200
18,700
12,000
100
200
12,300
25,400
25,400
Work Sheet 2
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title Dr. Cr. Dr. Cr. Dr. Cr.
Cash
Accounts receivable
Supplies
Equipment
Accum. depreciation
Accounts payable
Salary payable
Unearned revenue
Capital
Withdrawals
Revenue
Salary expense
Supplies expense
Depreciation expense
Totals
Net income
7,700
1,200
1,100
1,500
7,200
25,400
44,100
12,100
3,050
150
15,500
1,000
12,000
100
200
44,100
12,100
3,050
150
15,500
1,000
31,800
31,800
7,700
1,200
1,100
1,500
7,200
18,700
13,100
31,800
12,000
100
200
12,300
13,100
25,400
25,400
25,400
25,400
Chapter 5
ACCOUNTING FOR MERCHANDISING OPERATIONS
商业企业会计
Study Objectives
Identify the differences between a service enterprise and a merchandising company
Explain the entries for purchases under a perpetual inventory system.
Explain the entries for sales revenues under a perpetual inventory system
Study Objectives
Explain the steps in the accounting cycle for a merchandiser
Distinguish between multiple-step and single-step income statement
Explain the computation and importance of gross profit.
MERCHANDISING COMPANY
商业公司
A merchandising company is an enterprise that buys and sells goods to earn a profit
Wholesalers批发商 sell to retailers零售商
Retailers sell to consumers消费者
A merchandiser’s primary source of revenue is sales销售
MEASURING NET INCOME
Expenses for a merchandising company are divided into two groups:
cost of goods sold 销售商品成本
operating expenses 经营费用
MEASURING NET INCOME
Cost of goods sold is the total cost of merchandise sold during the period
Operating expenses are expenses incurred in the process of earning sales revenue. Examples are sales salaries and insurance expense.
MEASURING NET INCOME
Gross profit毛利 is equal to sales revenue less cost of goods sold.
Net income = gross profit － operating expenses
Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Net
Income
(Loss)
OPERATING CYCLES FOR A MERCHANDISING COMPANY
Cash
Accounts
Receivable
Merchandise
Inventory
Receive Cash
Buy Inventory
Sell Inventory
OPERATING CYCLES FOR A SERVICE COMPANY 服务公司的经营循环
Accounts
Receivable
Cash
Receive Cash
Perform Services
Example
April 1: purchase 100 bottles of water @ $
April 2: purchase 200 bottles of water @ $
April 5: selling 150 bottles at $ 2
April 8: purchase 200 bottles of water @ $
April 12 selling 300 bottles at $2
How to calculate cost of goods sold ?
INVENTORY SYSTEMS
存货系统
Merchandising entities may use either of the following inventory systems:
Perpetual 永续制: Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs
Now super markets use this system !
INVENTORY SYSTEMS
存货系统
Periodic盘存制: Cost of goods sold is determined only at the end of an accounting period.
Generally small shops use this system !
COST OF INVENTORY
存货成本
Under the periodic method, cost of inventory on hand is determined from a physical inventory requiring:
Counting the units on hand for each inventory item
Applying unit costs to the total units on hand for each inventory item
Aggregating the cost of each item of inventory to determine total cost of goods on hand
COST OF GOODS SOLD
销售商品成本
The cost of goods sold (COGS) may be determined each time a sale occurs or at the end of an accounting period.
To make the determination when the sale occurs, a company uses a perpetual inventory system.
When the cost of goods sold is determined only at the end of an accounting period, a company is said to be using a periodic inventory system.
COST OF GOODS SOLD (COGS)
UNDER PERIODIC
To determine the cost of goods sold under a periodic inventory system, it is necessary to:
Determine cost of goods on hand at beginning of accounting period
Add the cost of goods purchased to the cost of goods on hand
Subtract cost of goods on hand at end of accounting period.
COGS = beginning cost of goods
+ cost of goods purchased
- ending cost of goods
COGS= $ 15,000
+ $ 20,000
- $ 5,000
= $ 30,00
RECORDING PURCHASES OF MERCHANDISE UNDER PERPETUAL
When merchandise is purchased for resale to customers, the account, Merchandise Inventory商品存货, is debited for the cost of goods.
Like sales, purchases may be made for cash or on account (credit).
RECORDING PURCHASES OF MERCHANDISE UNDER PERPETUAL
The purchase is normally recorded by the purchaser when the goods are received from the seller
Each credit purchase should be supported by a purchase invoice购货发票.
RECORDING PURCHASES OF MERCHANDISE
Under the perpetual inventory system, purchases of merchandise for sale are recorded as debits to the Merchandise Inventory account, while Accounts Payable is credited.
To record purchase on account, term 2/10, n/30 ,from seller Electronix
3800
3800
Merchandise Inventory
Accounts payable
May 4
CR
DR
Account name
Date
General Journal
RECORDING PURCHASES OF MERCHANDISE
Term: “ 2/10, n/30 “ means : if the buyer pay cash before the 10th day, the buyer will get 2% cash discount, or the buyer will pay the full cash before the 31th day.
PURCHASE RETURNS AND ALLOWANCES 购买退回和折让
A sales return and allowance on the seller’s books is recorded as a purchase return and allowance on the books of the purchaser
Under the perpetual system, Merchandise Inventory is credited when a purchase return and allowance occurs.
PURCHASE RETURNS AND ALLOWANCES购买退回和折让
The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum.
The debit memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory merchandise.
PURCHASE RETURNS AND ALLOWANCES
Because Merchandise Inventory was debited when the goods were received, Merchandise Inventory is credited when the goods are returned.
To record return of inoperable goods received from seller
Electronix
300
300
Accounts payable
Merchandise Inventory
May 8
CR
DR
Account name
Date
General Journal
PURCHASE DISCOUNTS
购买折扣
Credit terms信用条件 may permit the buyer to claim a cash discount现金折扣 for the prompt payment of a balance due
The buyer calls this discount a purchase discount
Like a sales discount, a purchase discount is based on the invoice cost 发票成本 less returns and allowances, if any.
PURCHASE DISCOUNTS
If payment is made within the discount period, Accounts Payable is debited, Merchandise Inventory is credited for the discount taken, and Cash is credited.
To record payment within discount period
70
3430
3500
Accounts payable
Merchandise Inventory
Cash
May 14
CR
DR
Account name
Date
General Journal
PURCHASE DISCOUNTS
If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount.
To record payment with no discount taken
3500
3500
Accounts payable
Cash
May 14
CR
DR
Account name
Date
General Journal
FREE ON BOARD（FOB）
离岸价格
The sales agreement销售合同 should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business.
FREE ON BOARD（FOB）
离岸价格
FOB Shipping Point
Goods placed free on board the carrier by seller
Buyer pays freight costs运输成本
FOB Destination
Goods placed free on board at buyer’s business
Seller pays freight costs
ACCOUNTING FOR FREIGHT COSTS
Merchandise Inventory is debited if buyer pays freight
Freight-out (or Delivery Expense发送费用) is debited if seller pays freight.
ACCOUNTING FOR FREIGHT COSTS
When the purchaser directly incurs the freight costs, the account Merchandise Inventory is debited and Cash is credited.
To record payment with of freight , term FOB shipping point.
150
150
Merchandise Inventory
Cash
May 6
CR
DR
Account name
Date
General Journal
ACCOUNTING FOR FREIGHT COSTS
Freight costs incurred by the seller on outgoing merchandise are debited to Freight-out (or Delivery Expense) and Cash is credited.
To record payment with of freight on goods FOB destination .
150
150
Freight-out (Delivery expense)
Cash
May 6
CR
DR
Account name
Date
General Journal
RECORDING SALES OF MERCHANDISE
Revenues are reported when earned in accordance with the revenue recognition principle, and in a merchandising company, revenues are earned when the goods are transferred from seller to buyer.
RECORDING SALES OF MERCHANDISE
All sales should be supported by a document such as a cash register tape or sales invoice销售发票
RECORDING CASH SALES
现金销售
For cash sales, the Cash account is debited and the Sales account is credited; and, under the perpetual inventory system, the cost of the merchandise sold and the reduction in merchandise inventory are also recorded.
RECORDING CASH SALES
现金销售
2200
2200
Cash
Sales
(to record cash sales )
May 4
1400
1400
Cost of goods sold
Merchandise Inventory
(to record COGS for cash )
May 4
CR
DR
Account name
Date
General Journal
RECORDING CREDIT SALES
信用销售
For credit sales,
Accounts Receivable is debited and Sales is credited;
and, Cost of Goods Sold is debited and Merchandise Inventory is credited.
RECORDING CREDIT SALES
信用销售
2400
2400
Cost of goods sold
Merchandise Inventory
(to record COGS on accounts )
May 4
3800
3800
Accounts receivable
Sales
(to record sales on accounts )
May 4
CR
DR
Account name
Date
General Journal
SALES RETURNS AND ALLOWANCES 销售返回和折让
Sales returns result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund
Sales allowances result when customers are dissatisfied, and the seller allows a deduction from the selling price.
SALES RETURNS AND ALLOWANCES
To grant the return or allowance, the seller prepares a credit memorandum to inform the customer that a credit has been made to the customer’s account receivable.
Sales Returns and Allowances is a contra revenue account to the Sales account.
The normal balance of Sales Returns and Allowances is a debit balance.
RECORDING SALES RETURNS AND ALLOWANCES
The seller’s entry to record a credit memorandum involves a debit to the Sales Returns and Allowances account and a credit to Accounts Receivable at the $300 selling price, and a debit to Merchandise Inventory.
RECORDING SALES RETURNS AND ALLOWANCES
140
140
Merchandise Inventory
Cost of goods sold
(to record COGS return )
May 8
300
300
Sales return and allowance
Accounts receivable
(to record return )
May 8
CR
DR
Account name
Date
General Journal
SALES DISCOUNTS 销售折扣
A sales discount is the offer of a cash discount to a customer for the prompt payment of a balance due
Example: If a credit sale has the terms 3/10, n/30, a 3% discount is allowed if payment is made within 10 days. After 10 days there is no discount, and the balance is due in 30 days
Sales Discounts is a contra revenue account with a normal debit balance.
CREDIT TERMS 信用条件
Credit terms specify the amount and time period for the cash discount.
They also indicate the length of time in which the purchaser is expected to pay the full invoice price
CREDIT TERMS 信用条件
2/10, n/30: A 2% discount may be taken if payment is made within 10 days of the invoice date
1/10 EOM :A 1% discount is available if payment is made by the 10th of the next month.
RECORDING
SALES DISCOUNTS
When cash discounts are taken by customers, the seller debits Sales Discounts.
To record collection within discount period.
3500
3430
70
Cash
Sales discounts
Accounts receivable
May 14
CR
DR
Account name
Date
General Journal
STATEMENT PRESENTATION OF SALES REVENUE SECTION
As contra revenue accounts, sales returns and allowances and sales discounts are deducted from sales in the income statement to arrive at Net Sales.
STATEMENT PRESENTATION OF SALES REVENUE SECTION
Net sales $460,000
sales discount $ 8,000
Less: sales return and allowance $ 12,000
sales $480,000
Sales revenue
Sellers Electronix
Income Statement (partial )
Gross profit is determined as follows:
Net sales $ 460,000
Cost of goods sold - 316,000
Gross profit $ 144,000
COMPUTATION OF GROSS PROFIT
Net income is determined as follows:
Gross profit $ 144,000
Operating expenses - 114,000
Net income $ 30,000
COMPUTING NET INCOME
ADJUSTING ENTRIES AND CLOSING ENTRIES
Adjusting entries are journalized from the adjustment columns of the work sheet
The journalizing and posting of the entries are the same as they are for a service enterprise
All accounts that affect the determination of net income are closed to Income Summary
Data for the preparation of closing entries may be obtained from the income statement columns of the work sheet
ADJUSTING ENTRIES
5000
5000
Store salary expense
salary payable
Dec 31
8000
8000
Depreciation expense
accumulated depreciation
Dec 31
2000
2000
Insurance expense
prepaid insurance
(to record expired insurance )
Dec 31
CR
DR
Account title
Date
General Journal
CLOSING ENTRIES
480,000
480,000
Sales
Income summary
(to close sales account )
Dec 31
CR
DR
Account title
Date
General Journal
Dec 31
12,000
8,000
316,000
45,000
19,000
7,000
16,000
17,000
8,000
2,000
450,000
Income summary
sales return and allowance
sales discount
cost of goods sold
store salary expense
rent expense
freight-out
advertising expense
utilities expense
depreciation expense
insurance expense
CR
DR
Account title
Date
General Journal
CLOSING ENTRIES
30,000
30,000
Income summary
Retained earnings
(to close net income to RE)
Dec
31
CR
DR
Account title
Date
General Journal
CLOSING ENTRIES
15,000
15,000
Retained earnings
Dividends
(to close dividends to RE)
Dec
31
CR
DR
Account title
Date
General Journal
POST-CLOSING TRIAL BALANCE
147,400
147,400
Total
48,000
Retained earnings
50,000
Common stock
5,000
Salary payable
20,400
Accounts payable
24,000
Accumulated depreciation
80,000
Store equipment
1,800
Prepaid insurance
40,000
Merchandise Inventory
16,100
Accounts receivable
9,500
Cash
CR
DR
Account Title
MULTIPLE-STEP INCOME STATEMENT 多步式利润表
Includes sales revenue, cost of goods sold and gross profit sections
Additional non-operating 非经营业务sections may be added for:
Revenues and expenses resulting from secondary or auxiliary operations
Gains and losses unrelated to operations
MULTIPLE-STEP INCOME STATEMENT 多步式利润表
Non-operating sections are reported after income from operations 经营利润 and are classified as:
Other revenues and gains其他收入
Other expenses and losses其他费用
Operating expenses may be subdivided into:
Selling Expenses 销售费用
Administrative Expenses 管理费用
SINGLE-STEP INCOME STATEMENT单步式利润表
Revenue
Less: expenses
Net income
432,000
total expenses
31,600
Net income
200
casualty loss from vandalism
1,800
interest expenses
38,000
administrative expenses
76,000
selling expenses
316,000
cost of goods sold
Expenses
463,600
Total revenues
3,000
interest revenue
600
gain on sale of equipment
460,000
net sales
Revenues
For the year ended December 31,2002
Income Statement
Sellers Electronix Inc.
Homework
E5-1, E5-4, E5-7
P5-1A, P5-3A
Chapter 6
Inventories
存货
Study Objectives
Describe the steps in determining inventory quantities
Prepare the entries for purchases and sales of inventory under a periodic inventory system
Determine cost of goods sold under a periodic inventory system
Identify the unique features of the income statement for a merchandiser using a periodic inventory system
Study Objectives
Explain the basis of accounting for inventories and describe the inventory cost flow methods
Explain the financial statement and tax effects of each of the inventory cost flow methods
Explain the lower of cost or market basis of accounting for inventories
Study Objectives
Indicate the effects of inventory errors on the financial statements
Compute and interpret the inventory turnover ratio
INVENTORY BASICS
In the balance sheet of merchandising and manufacturing companies, inventory is frequently the most significant current asset
In the income statement, inventory is vital in determining the results of operations for a particular period
Gross profit (net sales - cost of goods sold) is closely watched by management, owners, and other interested parties
MERCHANDISE INVENTORY CHARACTERISTICS
Merchandise inventory has two common characteristics:
it is owned by the company and
it is in a form ready for sale to customers in the ordinary course of business
CLASSIFYING INVENTORY IN A MANUFACTURING ENVIRONMENT
Unlike merchandise inventory, manufacturing inventory may not yet be ready for sale
As a result, inventory is usually classified into three categories:
Finished goods, inventory which is completed and ready for sale.
Work in process, inventory in various stages of production and not yet completed.
Raw materials, components on hand waiting to be used in production.
DETERMINING INVENTORY QUANTITIES
In order to prepare financial statements, it is necessary to determine the number of units of inventory owned by the company at the statement date, and to value them
DETERMINING INVENTORY QUANTITIES
The determination of inventory quantities involves
taking a physical inventory of goods on hand
determining the ownership of goods.
DETERMINING INVENTORY QUANTITIES
Taking a physical inventory involves counting, weighing or measuring each kind of inventory on hand.
TAKING A PHYSICAL INVENTORY
A company, in order to minimize errors in taking the inventory, should adhere to internal control内部控制 principles by adopting the following procedures:
Employees who do not have custodial responsibility for the inventory should do the counting.
Each counter should establish the authenticity of each inventory item
TAKING A PHYSICAL INVENTORY
Another employee should make a second count
All inventory tags should be pre-numbered and accounted for
At the end of the count, a designated supervisor should ascertain that all inventory items are tagged and that no items have more than one tag.
Goods in transit在途商品 should be included in the inventory of the party that has legal title to the goods.
For FOB (free on board) shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
DETERMINING OWNERSHIP OF GOODS
Seller
Buyer
Public
Carrier
FOB Shipping Point
Ownership passes
Here to buyer
For FOB destination point, legal title to the goods remains with the seller until the goods reach the buyer.
DETERMINING OWNERSHIP OF GOODS
FOB Destination Point
Public
Carrier
Buyer
Seller
Ownership passes here to buyer
Under a consignment arrangement代销, the holder of the goods (called the consignee) does not own the goods.
Ownership remains with the shipper of the goods (consignor) until the goods are actually sold to a customer.
Consigned goods should be included in the consignor’s inventory not the consignee’s inventory.
DETERMINING OWNERSHIP OF GOODS IN TRANSIT
Consignee Company
DETERMINING OWNERSHIP OF GOODS IN TRANSIT
Consignor
INVENTORY ACCOUNTING SYSTEMS
One of two basic systems of accounting for inventories may be used:
the perpetual inventory system 永续存货系统
the periodic inventory system 盘存制
PERIODIC INVENTORY SYSTEM
In a periodic inventory system, no attempt is made on the date of sale to record the cost of the merchandise sold.
Instead, a physical inventory count is taken at the end of the period to determine
the cost of the merchandise then on hand and
the cost of goods sold during the period
PURCHASES OF MERCHANDISE
When merchandise is purchased for resale to customers, the temporary account, Purchases采购, is debited for the cost of goods.
Like sales, purchases may be made for cash or on account (credit).
PURCHASES OF MERCHANDISE
The purchase is normally recorded by the purchaser when the goods are received from the seller.
Each credit purchase should be supported by a purchase invoice购买发票.
PERIODIC SYSTEM TRANSACTIONS
3800
3800
Accounts receivable
sales
(to record credit sales to Beyer Video )
May 4
CR
DR
Account title
Date
Sellers Electronix
PERIODIC SYSTEM TRANSACTIONS
3800
3800
Purchases
accounts payable
(to record purchase goods on account from Electronix , term 2/10, n/30 )
May 4
CR
DR
Account title
Date
Beyer Video
Purchases is a temporary account
whose normal balance is a debit.
PERIODIC SYSTEM TRANSACTIONS
300
300
Sales return and allowance
accounts receivable
(to record return goods from Beyer Video )
May 8
CR
DR
Account title
Date
Sellers Electronix
PERIODIC SYSTEM TRANSACTIONS
300
300
Accounts payable
Purchase return and allowance
(to record return goods to Electronix )
May 4
CR
DR
Account title
Date
Beyer Video
Purchases return and allowance is a temporary account whose normal balance is a credit .
PERIODIC SYSTEM TRANSACTIONS
150
150
Freight-in
Cash
(to record payment freight ,terms FOB shipping point )
May 9
CR
DR
Account title
Date
Beyer Video
Freight-in is a temporary account whose normal balance is a debit .
PERIODIC SYSTEM TRANSACTIONS
3500
3430
70
Cash
Sales discount
accounts receivable
(to record collection from Beyer Video within discount period )
May 15
CR
DR
Account title
Date
Sellers Electronix
PERIODIC SYSTEM TRANSACTIONS
3430
70
3500
Accounts payable
Cash
Purchase discount
(to record payment to Sellers within discount period )
May 15
CR
DR
Account title
Date
Beyer Video
Purchase discount is a temporary account whose normal balance is a credit
COST OF GOODS SOLD
To determine the cost of goods sold under a periodic inventory system, it is necessary to:
record purchases of merchandise
determine the cost of goods purchased
determine the cost of goods on hand at the beginning and end of the accounting period
Debit
Credit
Credit
Debit
NORMAL BALANCES: COST OF GOODS PURCHASED ACCOUNTS
We used 4 accounts to record the purchase of inventory under a periodic inventory system. These accounts are:
COST OF GOODS PURCHASED
(COGP)
To determine cost of goods purchased:
Subtract Purchase Returns and Allowances and Purchase Discounts from Purchases to produce net purchases.
Add Freight-in to net purchases to produce cost of goods purchased
COGP= Purchases — Purchase return
— Purchase discounts
+ freight-in
Cost of Goods Purchased is determined as follows:
Purchases $ 325,000
Less: Purchases returns and allowances 10,400
Purchase discounts 6,800 17,200
Net purchases 307,800
Add: Freight-in 12,200
Cost of goods purchased $ 320,000
COMPUTATION OF NET PURCHASES AND COST OF GOODS PURCHASED
DETERMINING COST OF GOODS
ON HAND
Under the periodic method, cost of inventory on hand is determined from a physical inventory requiring:
Counting the units on hand for each inventory item
Applying unit costs to the total units on hand for each inventory item
Totaling the cost of each item of inventory to determine total cost of goods on hand
DETERMINING COST OF GOODS SOLD
Computing cost of goods sold involves 2 steps:
Add the cost of goods purchased to the beginning cost of goods on hand to obtain the cost of goods available for sale.
Subtract the ending cost of goods on hand from the cost of goods available for sale to arrive at the cost of goods sold
Beginning inventory $ 36,000
Add: Cost of goods purchased 320,000
Cost of goods available for sale 356,000
Less: Ending inventory 40,000
Cost of goods sold $ 316,000
COMPUTATION OF COST OF GOODS SOLD
Cost of Goods Sold is determined as follows:
The income statement under a periodic inventory system contains 3 distinctive features:
1 a sales revenue section,
2 a cost of goods sold section, and
3 gross profit.
ILLUSTRATION 6-5 INCOME STATEMENT FOR A MERCHANDISING COMPANY USING A PERIODIC INVENTORY SYSTEM
SELLERS ELECTRONIX INC.
Income Statement
For the Year Ended December 31, 2002
Sales revenues
Sales
$480,000
Less: Sales returns and allowances
$ 12,000
Sales discounts
8,000
20,000
Net sales
460,000
Cost of goods sold
Inventory, January 1
36,000
Purchases
$325,000
Less: Purchases returns and allowances
10,400
Purchases discounts
6,800
Net purchases
307,800
Add: Freight-in
12,200
Cost of goods purchased
320,000
Cost of goods available for sale
356,000
Inventory, December 31
40,000
Cost of goods sold
316,000
Gross profit
144,000
Operating expenses
Store salaries expense
45,000
Rent expense
19,000
Utilities expense
17,000
Advertising expense
16,000
Depreciation expense — store equipment
8,000
Freight-out
7,000
Insurance expense
2,000
Total operating expenses
114,000
Net income
$ 30,000
INVENTORIABLE COSTS
The primary basis of accounting for inventories is cost as required by the cost principle
Under the matching principle, the major objective in accounting for inventories is the matching of appropriate costs with sales revenues
These two principles guide the decisions about determining and allocating inventoriable costs
DETERMINING INVENTORIABLE COSTS
All costs necessary to acquire the goods and place them in a condition ready for sale are included in inventoriable costs
Inventoriable costs include the invoice price plus freight-in less purchase discounts and purchase returns and allowances
DETERMINING INVENTORIABLE COSTS
Inventoriable costs may be regarded as a pool of costs that consist of two elements:
Cost of the beginning inventory and
Cost of the goods purchased during the year
The sum of these elements equals the cost of goods available for sale
DETERMINING INVENTORIABLE COSTS
Inventoriable costs are allocated between ending inventory and cost of goods sold
Under a periodic inventory system, the allocation is made at the end of the accounting period:
DETERMINING INVENTORIABLE COSTS
The costs assignable to the ending inventory are determined
The cost of the ending inventory is subtracted from the cost of goods available for sale to determine the cost of goods sold
Cost of goods sold is then deducted from sales revenues in accordance with the matching principle
Beginning
Inventory
Cost of goods
Purchased
+
Cost of goods available
Ending
inventory
Cost of goods
sold
Beginning inventory + cost of goods purchased
= cost of goods available
Ending inventory + cost of goods sold
$120,000
$15,000 $105,000
ALLOCATION (MATCHING) OF POOL OF COSTS
Costing of the inventory is complicated because the units on hand for a specific item of inventory may have been purchased at different prices.
USING ACTUAL PHYSICAL FLOW COSTING
The specific identification method tracks the actual physical flow of the goods.
Each item of inventory is marked, tagged, or coded with its specific unit cost.
Items still in inventory at the end of the year are specifically costed to arrive at the total cost of the ending inventory.
USING ACTUAL PHYSICAL FLOW COSTING
Other cost flow methods are allowed since specific identification is often impractical.
These methods assume flows of costs that may be unrelated to the physical flow of goods.
USING ASSUMED COST FLOW METHODS
USING ASSUMED COST FLOW METHODS
For this reason we call them assumed cost flow methods or cost flow assumptions. They are:
First-in, first-out (FIFO 先进先出).
Last-in, first-out (LIFO 后进先出).
Average cost (AVC, 平均成本法).
The FIFO method assumes that the earliest goods purchased are the first to be sold.
FIFO often reflects the actual physical flow of merchandise since it is normally sound business practice to sell the oldest units first.
Therefore, under FIFO, the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.
FIFO 先进先出
$ 12,000
FIFO METHOD
$ 5,800 $ 6,200
Selling 550 units
100 $ 10 $ 1,000 200 11 2,200 250 12 3,000
550 $ 6,200
PROOF OF COST OF GOODS SOLD
The accuracy of the cost of goods sold can be verified by recognizing that the first units acquired are the first units sold.
The LIFO method assumes that the latest goods purchased are the first to be sold.
LIFO seldom coincides with the actual physical flow of inventory.
Under LIFO, the costs of the latest goods purchased are the first to be recognized as cost of goods sold.
LIFO 后进先出
$ 12,000
LIFO METHOD
$ 5,000 $ 7,000
400 $ 13 $ 5,200 150 12 1,800
550 $ 7,000
PROOF OF COST OF GOODS SOLD
The cost of the last goods in is the first to be assigned to cost of goods sold. Under a periodic inventory system, all goods purchased during the period are assumed to be available for the first sale, regardless of the date of purchase.
Unit
Total
Date
Units
Cost
Cost
11/27
X
=
X
=
08/24
Total
The average cost method assumes that the goods available for sale are homogeneous.
The allocation of the cost of goods available for sale is made on the basis of the weighted average unit cost incurred.
The weighted average unit cost is then applied to the units on hand to determine the cost of the ending inventory.
AVERAGE COST 平均成本
$ 12,000
AVERAGE COST METHOD
$ 5,400 $ 6,600
USE OF COST FLOW METHODS IN MAJOR . COMPANIES
4%
Other
19%
AVC
33%
LIFO
44%
FIFO
The reasons why companies adopt different inventory cost flow methods
income statement effects
balance sheet effects
tax effects
INCOME STATEMENT EFFECTS COMPARED
Kralik Company buys 200 XR492s at $20 per unit on January 10 and 200 more on December 31 at $24 each. During the year, 200 units are sold at $30 each.
Gross profit $1,200
Less: COGS (200×24) 4,800
Sales (200 ×30 ) $ 6,000
LIFO
Gross profit $2,000
Less: COGS (200×20) 4,000
Sales (200 ×30 ) $ 6,000
FIFO
Difference =2000 – 1200 = $ 800
A company needs to use its chosen cost flow method consistently一致地 from one accounting period to another.
Such consistent application enhances the comparability可比性 of financial statements over successive time periods.
When a company adopts a different cost flow method, the change and its effects on net income should be disclosed in the financial statements.
USING INVENTORY COST FLOW METHODS CONSISTENTLY
When the value of inventory is lower than the cost, the inventory is written down to its market value.
This is known as the lower of cost or market (LCM) method.
Under the LCM basis, market is defined as current replacement cost目前重置成本, not selling price.
LOWER OF COST OR MARKET 市价与成本孰低
$ 159,000 $ 164,000 $ 166,000
LOWER OF COST OR MARKET
Both beginning and ending inventories appear on the income statement.
The ending inventory of one period automatically becomes the beginning inventory of the next period.
Inventory errors affect the determination of cost of goods sold and net income.
INVENTORY ERRORS - INCOME STATEMENT EFFECTS
The effects on cost of goods sold can be determined by entering the incorrect data in the above formula and then substituting the correct data.
FORMULA FOR COST OF GOODS SOLD
+
=
Beginning
Inventory
Cost of
Goods
Purchased
Ending
Inventory
Cost of
Goods
Sold
_
Understate beginning inventory Understated Overstated
Overstate beginning inventory Overstated Understated
Understate ending inventory Overstated Understated
Overstate ending inventory Understated Overstated
An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period.
EFFECTS OF INVENTORY ERRORS ON CURRENT YEAR’S INCOME STATEMENT
The effect of ending inventory errors on the balance sheet can be determined by using the basic accounting equation:
Assets = Liabilities + Owner’s Equity
ENDING INVENTORY ERROR - BALANCE SHEET EFFECTS
Errors in the ending inventory have the following effects on these components:
Ending Inventory
Error
Assets
Liabilities
Stockholders’
Equity
Understated Understated None Understated
Overstated Overstated None Overstated
Inventory is classified as a current asset after receivables in the balance sheet.
Cost of goods sold is subtracted from sales in a multiple- step income statement.
INVENTORY DISCLOSURES
INVENTORY DISCLOSURES
There should be disclosure either in the balance sheet or in accompanying notes of:
major inventory classifications
basis of accounting (cost or lower of cost or market)
costing method (FIFO, LIFO, or average cost)
Homework
BE6-1, 6-3,6-6
E6-1,6-2, 6-5
P6-1A
APPENDIX 6B ESTIMATING INVENTORIES
Two circumstances explain the reasons for estimating rather than counting inventories:
Management may want monthly or quarterly financial statements, but a physical inventory is taken only annually
A casualty such as a fire or flood may make it impossible to take a physical inventory
ESTIMATING INVENTORIES
There are two widely used methods of estimating inventories:
the gross profit method毛利法
the retail inventory method零售存货法
GROSS PROFIT METHOD
The gross profit method estimates the cost of ending inventory by applying a gross profit rate to net sales.
It is used in preparing monthly financial statements when physical inventories are not taken
GROSS PROFIT METHOD
It should NOT be used in preparing the company’s financial statements at year-end.
The gross profit rate is assumed to remain constant from one year to the next.
Step 1 Net sales less estimated gross profit equals estimated cost of goods sold.
Net Sales
Estimated
Gross
Profit
Cost of Goods
Available for
Sale
Estimated
Cost of
Goods Sold
Estimated
Cost of
Goods Sold
Estimated
Cost of
Ending Inventory
Step 2 Cost of goods available for sale less estimated cost of goods sold (from Step 1) equals the estimated cost of ending inventory.
When a store has many different types of merchandise at low unit costs, the retail inventory method is often used.
To use this method, a company must maintain records that show both the cost and retail value of the goods available for sale.
The major disadvantage of this method is that it is an averaging technique.
RETAIL INVENTORY METHOD
Ending Inventory at Retail
Cost to Retail Ratio
Estimated Cost of Ending Inventory
Step 1
Goods
Available for
Sale at Retail
Net Sales
Goods
Available for
Sale at Cost
Goods
Available for
Sale at Retail
Step 2
Step 3
Ending
Inventory
at Retail
Cost to
Retail
Ratio
CHAPTER 7
ACCOUNTING PRINCIPLES
会计原则
Study Objectives
Generally accepted accounting principles and conceptual framework
Objectives of financial reporting
Qualitative characteristics of accounting information and elements of financial statements
Study Objectives
Assumptions used by accountants
Principles of accounting
Constraints in accounting
Understand and analyze classified financial statements
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING会计概念框架
Generally accepted accounting principles一般公认的会计原则 are a set of rules and practices that are recognized as a general guide for financial reporting purposes.
Generally accepted means that these principles must have substantial authoritative support.
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING会计概念框架
This support usually comes from the Financial Accounting Standards Board (FASB美国财务会计准则委员) and Securities and Exchange Commission (SEC美国证监会).
The FASB has the responsibility for developing accounting principles in the United States.
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING
The conceptual framework developed by the FASB serves as the basis for resolving accounting and reporting problems.
THE CONCEPTUAL FRAMEWORK OF ACCOUNTING
The conceptual framework consists of:
objectives of financial reporting财务报告的目标;
qualitative characteristics of accounting information会计信息的质量特征;
elements of financial statements财务报表的成分; and
Operating guidelines 运用指南(assumptions假设, principles原则, and constraints限制).
OBJECTIVES OF FINANCIAL REPORTING
The FASB concluded that the objectives of financial reporting are to provide information that:
Is useful to those making investment and credit decisions对投资信贷决策有帮助
Is helpful in assessing future cash flows对预测未来现金流量有帮助.
Identifies the economic resources (assets), the claims to those resources (liabilities), and the changes in those resources and claims.确认资产,负债及相关化
QUALITATIVE CHARACTERISTICS OF ACCOUNTING INFORMATION
The FASB concluded that the overriding criterion by which accounting choices should be judged is decision usefulness决策有用性
To be useful, information should possess the following qualitative characteristics:
relevance相关
reliability可靠
comparability可比性
consistency一致性
RELEVANCE 相关性
Accounting information is relevant if it makes a difference in a decision
Information must be available to decision makers before it loses its capacity to influence their decisions (timeliness及时性).
RELIABILITY可靠性
Reliability of information means that the information is free of error and bias; it can be depended on
To be reliable, accounting information must be verifiable验证的 – we must be able to prove that it is free of error and bias
The information must be a faithful representation 公正地表示of what it purports to be – it must be factual
COMPARABILITY AND CONSISTENCY
可比性和一致性
Comparability means that the information should be comparable with accounting information about other enterprises
Consistency means that the same accounting principles and methods should be used from year to year within a company
THE OPERATING GUIDELINES OF ACCOUNTING 会计应用指南
Operating guidelines are classified as assumptions, principles, and constraints
Assumptions假设 provide a foundation for the accounting process
ASSUMPTIONS 假设
The monetary unit assumption货币单位假设 states that only transaction data capable of being expressed in terms of money should be included in the accounting records of the economic entity
Example: employee satisfaction and percent of international employees are not transactions that should be included in the financial records.
ASSUMPTIONS
The economic entity assumption会计主体假设 states that economic events can be identified with a particular unit of accountability
Example: BMW activities can be distinguished from those of other car manufacturers such as Honda
ASSUMPTIONS
The time period assumption会计期间假设 states that the economic life of a business can be divided into artificial time periods
Example: months, quarters, and years
ASSUMPTIONS
The going concern assumption持续经营假设 assumes that the enterprise will continue in operation long enough to carry out its existing objectives
Implications: depreciation 折旧 is used, plant assets recorded at cost instead of liquidation value, items are labeled as fixed or long-term
PRINCIPLES
Principles原则 indicate how transactions and other economic events should be recorded
The revenue recognition principle收入确认原则 dictates that revenue should be recognized in the accounting period in which it is earned
When a sale is involved, revenue is recognized at the point of sale
MATCHING (EXPENSE RECOGNITION)配比原则(费用确认原则)
Expense recognition is traditionally tied to revenue recognition
This practice – referred to as the matching principle – dictates that expenses be matched with revenues in the period in which efforts are expended to generate revenues
MATCHING (EXPENSE RECOGNITION)配比原则(费用确认原则)
To understand the various approaches for matching expenses and revenues on the income statement, it is necessary to examine the nature of expenses
Expired costs are costs that will generate revenues only in the current period and are therefore reported as operating expenses经营费用 on the income statement
Unexpired costs are costs that will generate revenues in future accounting periods and are recognized as assets
MATCHING (EXPENSE RECOGNITION)
Unexpired costs become expenses in 2 ways:
Cost of goods sold – Costs carried as merchandise inventory are expensed as cost of goods sold in the period in which the sale occurs – so there is a direct matching of expenses with revenues.
Operating expenses – Unexpired costs become operating expenses through use or consumption or through the passage of time
FULL DISCLOSURE 充分揭示原则
The full disclosure principle requires that circumstances and events that make a difference to financial statement users be disclosed.
FULL DISCLOSURE 充分揭示原则
Compliance with the full disclosure principle is accomplished through
the data in the financial statements and
the notes that accompany the statements
A summary of significant accounting policies is usually the first note to the financial statements
COST PRINCIPLES 成本原则
The cost principle dictates that assets are recorded at their cost.
Cost is used because it is both relevant and reliable.
COST PRINCIPLES 成本原则
Cost is relevant because if represents
the price paid
the assets sacrificed, or
the commitment made at the date of acquisition.
COST PRINCIPLES 成本原则
Cost is reliable because it is
objectively measurable,
factual, and
verifiable.
CONSTRAINTS IN ACCOUNTING
Constraints限制 permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information.
CONSTRAINTS IN ACCOUNTING
Constraints限制 permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information
The constraints are materiality and conservatism
CONSTRAINTS IN ACCOUNTING
Materiality重要性 relates to an item’s impact on a firm’s overall financial condition and operations
Conservatism稳健性 in accounting means that, when in doubt, the accountant chooses the method that will be the least likely to overstate assets and income.
CONCEPTUAL FRAMEWORK
CONSTRAINTS
CONSTRAINTS
Objectives of Financial Reporting
Assumptions
Principles
Operating Guidelines
Qualitative Characteristics of Accounting Information
Elements of Financial Statements
STANDARD CLASSIFICATION OF BALANCE SHEET
The balance sheet is composed of 3 major elements: assets, liabilities, and stockholders’ equity
Additional segregation within these groups is considered useful to financial statement readers
The following classification breakdown is usually found
STANDARD CLASSIFICATION OF BALANCE SHEET
Intangible assets
Stockholders’ equity
Property, Land and Equipment
Long-term liabilities
Long-term investment
Current liabilities
Current assets
Liabilities and Equities
Assets
PROPRIETORSHIP 独资企业 BALANCE SHEET
If the form of organization is a proprietorship, the term owner’s equity is used instead of stockholders’ equity to describe that section of the balance sheet.
The Capital account 1 represents the owner’s investment in the business and 2 is reported in the owner’s equity section of the balance sheet for a proprietorship.
PROPRIETORSHIP 独资企业 BALANCE SHEET
Assume that Sally Field invests $90,000 on July 10 to start up Med/Waste Company.
The company’s balance sheet immediately after the investment is shown below.
Med/West Company
Balance Sheet
July 10, 2002
Cash 90,000 capital 90,000
PARTNERSHIP BALANCE SHEET
If the form of organization is a partnership, each partner has a separate capital account and the owner’s equity section shows the capital accounts of all partners.
Assume that A. Roy and B. Siegfried form a partnership on December 11, 2002 by each investing $60,000.
The company’s balance sheet immediately after their investments is shown below.
60,000
Siegfried ,capital
$60,000
Roy, capital
$ 120,000
Cash
December 11, 2002
Balance Sheet
Roy and Siegfried
FINANCIAL STATEMENT PRESENTATION AND ANALYSIS
The multiple-step income statement 多步式利润表 for Sellers Electronix, Inc. in Chapter 5 included the following:
Sales revenue section – Presents the sales, discounts, allowances, and other related information to arrive at the net amount of sales revenue.
Cost of goods sold – Indicates the cost of goods sold to produce sales
FINANCIAL STATEMENT PRESENTATION AND ANALYSIS
Operating expenses 经营费用– Provides information on both selling and administrative expenses
Other revenues and gains 其它收益– Indicates revenues earned or gains resulting from non-operating transactions
Other expenses and losses其它费用 – Indicates expenses or losses incurred from non-operating transactions
INCOME TAX EXPENSE 所得税费
Income taxes must be paid and reported for a corporation since a corporation is a legal entity that is separate and distinct from its owners.
Corporate income taxes (or income tax expense) are reported in a separate section of the income statement before net income
INCOME STATEMENT WITH INCOME TAXES
Net Income $ 109,200
Less: income tax expense 46,800
Income before income taxes 156,000
Less: other expenses and losses 4,000
Add: Other revenues and gains 10,000
Income from operations $150,000
Less: Operating expenses 50,000
Gross Profit 200,000
Less: cost of goods sold 600,000
Sales $800,000
For the year ended December 31, 2002
Income Statement
Leading Inc.
RECORDING INCOME TAXES
Income tax expense and the related liability for income taxes payable are recorded as part of the adjusting process preceding financial statement preparation. Using the previous data for Leads Inc., the adjusting entry for income tax expense at December 31, 2002, would be as follows:
RECORDING INCOME TAXES
46,800
46,800
Income tax expense
income taxes payable
CR
DR
Account titles
Date
EARNINGS PER SHARE FORMULA
Earnings per share (EPS每股盈利) indicates the net income earned by each share of common stock
Thus, earnings per share is only reported for common stock
The formula for computing earnings per share when there has been no change in outstanding
EARNINGS PER SHARE FORMULA
÷
=
Net income
Shares of
Outstanding
Common
Stock
EPS
EARNINGS PER SHARE FORMULA
Due to its importance, EPS is required to be reported on the face of the income statement
This amount is usually simply reported below net income on the statement
Leads, Inc. has net income of $109,200
Assuming that it has 54,600 shares of common stock outstanding for the year, EPS is $ ($109,200 ÷ 54,600).
FINANCIAL STATEMENT Analysis
财务报表分析
In analyzing and interpreting financial statement information, three major characteristics are generally evaluated:
liquidity 流动性
profitability 盈利性
solvency 偿付能力
244,000
Total L & E
244,000
Total assets
60,000
Equities
14000
Intangible assets
114,000
Long-term liabilities
74000
Plant and equipment
70,000
Current liabilities
156000
Current assets
Liabilities and Equities
Assets
December 31, 2002
Balance Sheet
Genlyte Inc.
FINANCIAL STATEMENTS – GENLYTE INC.
GENLYTE INC.
Income Statement
For the Year Ended December 31, 2002
Net sales
$ 430,000
Cost of goods sales
295,000
Gross profit
135,000
Selling and administrative expenses
109,000
Income from operations
26,000
Other expenses and losses
5,000
Income before income taxes
21,000
Income tax expense
7,000
Net income
$ 14,000
Earnings per share
$
CURRENT RATIO
The current ratio流动比率 is current assets divided by current liabilities.
With its :1 ratio, Genlyte’s short-term debt-paying ability appears to be very favorable compared to reasonable performance standards.
$156,000 ÷ $70,000 = :1
Current Assets
÷
=
Current Liabilities
Current Ratio
WORKING CAPITAL
The excess of current assets over current liabilities is called working capital营运资金.
For Genlyte Inc., working capital is $86,000, as shown below.
$156,000 - $70,000 = $86,000
Current Assets
-
=
Current Liabilities
Working Capital
PROFIT MARGIN
The profit margin percentage利润率 measures the percentage of each dollar of sales that results in net income and is calculated by dividing net income by net sales for the period.
Genlyte Inc’s profit margin percentage is % which seems too low compared to reasonable performance standards.
$14,000 ÷ $430,000 = %
Net Income
÷
=
Net Sales
Profit Margin Percentage
RETURN ON ASSETS
Rate of return on assets (ROA)资产报酬率 is an overall measure of profitability that is calculated by dividing net income by total assets.
Genlyte Inc’s rate of return on assets is relatively low at % – compared to reasonable performance standards – which suggests that Genlyte may not be using its assets effectively.
$14,000 ÷ $244,000 = %
Net Income
÷
=
Total Assets
Return on Assets
RETURN ON COMMON STOCKHOLDERS’ EQUITY
Return on common stockholders’ equity(权益报酬率ROE) is a measure of profitability that is calculated by dividing net income by common stockholders’ equity.
Genlyte Inc’s return on common stockholders’ equity is quite good at % compared to reasonable performance standards.
$14,000 ÷ $60,000 = %
Net Income
÷
=
Common Equity
Return on Common Stockholders’ Equity
DEBT TO TOTAL ASSETS
Debt to total assets ratio资产负债率 is a measure of solvency that is calculated by dividing total debt (liabilities) by total assets.
Genlyte Inc’s debt to total assets ratio is % which means that Genlyte’s creditors have provided about 3/4 of its total assets.
$184,000 ÷ $244,000 = %
Total Debt
÷
=
Total Assets
Debt to Total Assets Ratio
Homework
BE7-10
E7-1, E7-6
P7-4A
CHAPTER 8
INTERNAL CONTROL AND CASH 内部控制和现金
Main Points
Define internal control.
Principles of internal control.
Internal control to cash receipts.
Internal control to cash disbursements.
Operation of a petty cash fund.
Control features of a bank account.
Prepare a bank reconciliation
INTERNAL CONTROL 内部控制
Internal control : consists of the plan of organization and all the related methods and measures adopted within a business in order to
safeguard its assets and
enhance the accuracy and reliability of its accounting records
PRINCIPLES OF INTERNAL CONTROL
Establishment of responsibility 责任的建立: control is most effective when only one person is responsible for a given task
Segregation of duties职责的分离: the work of one employee should provide a reliable basis for evaluating the work of another employee
PRINCIPLES OF INTERNAL CONTROL
Documentation procedures过程证据化: documents should provide evidence that transactions and events have occurred.
Physical, mechanical, and electronic controls 物理控制: relate primarily to the safeguarding of assets and enhancing accuracy and reliability of the accounting records
PRINCIPLES OF INTERNAL CONTROL
Independent internal verification 独立的内部验证: the review, comparison, and reconciliation of information from two sources.
Other controls其他控制: bonding of employees who handle cash, rotating轮换 employee’s duties, and requiring employees to take vacations休假.
Safes, vaults, and safety deposit boxes for cash and business papers
Locked warehouses and storage cabinets for inventories and records
Computer facilities with pass key access
PHYSICAL CONTROLS
MECHANICAL AND ELECTRONIC CONTROLS
Alarms to prevent break-ins
Television monitors to deter theft
Time clocks for recording time worked
INDEPENDENT INTERNAL VERIFICATION
To obtain maximum benefit from independent internal verification:
The verification should be made periodically or on a surprise basis
The verification should be done by an employee who is independent of the personnel responsible for the information
Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action
INDEPENDENT INTERNAL VERIFICATION
Independent internal verification is often assigned to internal auditors内部审计师
Internal auditors evaluate the effectiveness of the company’s system of internal control on a continuous basis.
Internal auditing is a professional activity within a company, often with direct access to the board of directors 董事会.
Maintains cash balances Maintains custody of per books cash on hand
Makes monthly comparisons: reports any unreconcilable differences to treasurer
Independent Internal Verification
COMPARISON OF SEGREGATION OF DUTIES PRINCIPLE WITH INDEPENDENT INTERNAL VERIFICATION PRINCIPLE
Accounting Employee A
Assistant Cashier B
Assistant Treasurer C
Segregation of Duties
Costs of establishing control procedures should not exceed their expected benefits according to the concept of reasonable assurance.
LIMITATIONS OF INTERNAL CONTROL
内部控制的限制
The human element is also an important factor. A good system can become ineffective through employee carelessness
LIMITATIONS OF INTERNAL CONTROL
内部控制的限制
Collusion合谋 may result when two or more individuals work together to get around prescribed controls and may significantly impair the effectiveness of a system.
LIMITATIONS OF INTERNAL CONTROL
内部控制的限制
CASH现金
Cash includes coins, currency, checks, money orders, and money on hand or on deposit at a bank or similar depository
Internal control over cash is imperative in order to safeguard cash and assure the accuracy of the accounting records for cash.
INTERNAL CONTROL OVER CASH RECEIPTS 接受现金的内部控制
Only designated personnel should be authorized to handle or have access to cash receipts.
Different individuals should:
receive cash
record cash receipt transactions
have custody of cash
INTERNAL CONTROL OVER CASH RECEIPTS 接受现金的内部控制
Documents should include: remittance advices, cash register tapes, deposit slips
Cash should be stored in safes and bank vaults
Access to storage areas should be limited to authorized personnel
Cash registers should be used in executing over-the-counter receipts
INTERNAL CONTROL OVER CASH RECEIPTS 接受现金的内部控制
Daily cash counts and daily comparisons of total receipts.
All personnel who handle cash receipts should be bonded and required to take vacations
Control of over-the-counter receipts is centered on cash registers that are visible to customers
INTERNAL CONTROL OVER CASH DISBURSEMENTS现金支付的内部控制
Payments are made by check支票 rather than by cash, except for petty cash 零用现金transactions.
Only specified individuals should be authorized to sign checks
Different departments or individuals should be assigned the duties of approving an item for payment and paying it.
INTERNAL CONTROL OVER CASH DISBURSEMENTS现金支付的内部控制
Pre-numbered checks should be used and each check should be supported by an approved invoice or other document
Blank checks空白支票 should be stored in a safe
Access should be restricted to authorized personnel
A check writer machine should be used to imprint the amount on the check in indelible ink
INTERNAL CONTROL OVER CASH DISBURSEMENTS现金支付的内部控制
Each check should be compared with the approved invoice before it is issued
Following payment, the approved invoice should be stamped PAID
Paid
Electronic Funds Transfer (EFT) is a disbursement system that uses wire, telephone, telegraph, or computer to send cash from one location to another.
Regular payments such as those for house, car, and utilities are frequently made by EFT.
ELECTRONIC FUNDS TRANSFER 电子资金划账
PETTY CASH FUND备用金
A petty cash fund is used to pay relatively small amounts.
Operation of the fund, often called an imprest system, involves:
establishing the fund
making payments from the fund, and
replenishing the fund.
PETTY CASH FUND备用金
Accounting entries are required when:
the fund is established
the fund is replenished, and
the amount of the fund is changed
ESTABLISHING THE FUND
Two essential steps in establishing a petty cash fund are
appointing a petty cash custodian who will be responsible for the fund and
determining the size of the fund.
Ordinarily, the amount is expected to cover anticipated disbursements for a 3-week to 4-week period
To establish a petty cash
100
cash
100
Petty cash
Mar. 1
CR
DR
Account title
Date
General Journal
Laird Company decides to establish a $100 fund on March 1. When the fund is established, a check payable to the petty cash custodian is issued for the stipulated amount.
REPLENISHING THE FUND
When the money in the petty cash fund reaches a minimum level, the fund is replenished.
The request for reimbursement is initiated by the petty cash custodian
The petty cash custodian prepares a schedule of the payments that have been made and sends the schedule, with supporting documentation, to the treasurer’s office
5
Miscellaneous expense
38
Freight-in
To replenish petty cash fund
87
cash
44
Postage expense
Mar. 15
CR
DR
Account title
Date
General Journal
On March 15 the petty cash custodian requests a check for $87. The fund contains $13 cash and petty cash receipts for postage $44, freight-in $38, and miscellaneous expenses, $5.
USE OF A BANK
The use of a bank minimizes the amount of currency that must be kept on hand and contributes significantly to good internal control over cash
A company can safeguard its cash by using a bank as a depository and clearing house for checks received and checks written
New depositors are required to sign a signature card when opening a checking account
WRITING CHECKS 开支票
A check is a written order signed by the depositor directing the bank to pay a specified sum of money to a designated recipient.
Three parties to a check are:
Maker (drawer) issues the check
Bank (payer) on which check is drawn
Payee to whom check is payable
BANK STATEMENTS银行对账单
A bank statement shows:
checks paid and other debits charged against the account
deposits and other credits made to the account
account balance after each day’s transactions
BANK STATEMENTS 银行对账单
MEMORANDA
Bank debit memoranda indicate charges against the depositor’s account.
Example: ATM service charges
Bank credit memoranda indicate amounts that will increase the depositor’s account
Example: interest income on account balance
RECONCILING THE BANK ACCOUNT 银行户头的调整
Reconciliation is necessary because the balance per bank and balance per books are seldom in agreement due to time lags and errors.
A bank reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.
RECONCILING THE BANK ACCOUNT
Steps in preparing a bank reconciliation
Determine deposits in transit
Determine outstanding checks
Note any errors discovered
Trace bank memoranda to the records
Each reconciling item used in determining the adjusted cash balance per books should be recorded by the depositor
The bank statement for the Laird Company shows a balance per bank of $15, on April 30, 2002.
On this date the balance of cash per books is $11,.
BANK RECONCILIATON
Adjusted balance per books
30
bank service charge
Less: NSF check
36
error in recording check
1035
Add: collection of notes receivable ,interest
Cash balance per books
Adjusted balance per bank statement
3000
Less: outstanding checks
Add: deposit in transit
Cash balance per bank statement
To record collection
50
Interest revenue
1000
Notes receivable
15
Miscellaneous expense
1035
Cash
April 30
CR
DR
Account titles
Date
General Journal
Collection of Note Receivable This entry involves four accounts. Interest of $50 has not been accrued and the collection fee is charged to Miscellaneous Expense.
To correct error in recording check
36
Accounts payable
36
Cash
April 30
CR
DR
Account titles
Date
General Journal
Book Error An examination of the cash disbursements journal shows that check No. 443 was a payment on account to Andrea Company, a supplier. The check, with a correct amount of $1,226, was recorded at $1,262.
To record NSF check
Cash
Accounts receivable
April 30
CR
DR
Account titles
Date
General Journal
NSF Check An NSF check becomes an accounts receivable to the depositor.
To record charge for a printing checks
30
Cash
30
Miscellaneous expense
April 30
CR
DR
Account titles
Date
General Journal
Bank Service Charges Check printing charges (DM) and other bank service charges (SC) are debited to Miscellaneous Expense because they are usually nominal in amount.
REPORTING CASH
Cash reported on the Balance Sheet includes:
Cash on Hand
Cash in banks
Petty Cash
Cash is listed first in the balance sheet under the title cash and cash equivalents现金等价物 because it is the most liquid asset.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments with maturities of 3 months or less when purchased that can be converted into a specific amount of cash.
Examples include money market funds货币市场基金会, bank certificates of deposit银行存款单, and . Treasury bills and notes国库券.
Homework
E8-5 , E8-8
CHAPTER 9
ACCOUNTING FOR RECEIVABLES
应收账款会计处理
Study Objectives
Types of receivables
Methods and bases used to value accounts receivable
Entries to record the disposition of accounts receivable
Compute the maturity date of, and interest on, notes receivable
Study Objectives
How notes receivable are valued
Entries to record the disposition of notes receivable
Explain the statement presentation and analysis of receivables
RECEIVABLES
The term receivables 应收款 refers to amounts due from individuals and other companies; they are claims expected to be collected in cash.
RECEIVABLES
Three major classes of receivables are:
Accounts receivable 应收账款 are amounts owed by customers on account.
Notes receivable 应收票据 are claims for which formal instruments of credit are issued
Other receivables 其它应收款 include non-trade receivables such as interest receivable and advances to employees
ACCOUNTS RECEIVABLE
The three primary accounting problems associated with accounts receivable are:
Recognizing 确认 accounts receivable
Valuing 估价 accounts receivable
Disposing 处理 of accounts receivable
RECOGNIZING ACCOUNTS RECEIVABLE
To record sale on account
1000
Sales
1000
Accounts receivable
July 1
CR
DR
Account titles
Date
General Journal
When a business sells merchandise to a customer on credit, Accounts Receivable is debited and Sales is credited.
To record sale on account
100
Accounts receivable
100
Sales return and allowances
July 1
CR
DR
Account titles
Date
General Journal
When a business receives returned merchandise previously sold to a customer on credit, Sales Returns and Allowances is debited and Accounts Receivable is credited
18
Sales discount
July 1
To record collection
900
Accounts receivable
882
Cash
CR
DR
Account titles
Date
General Journal
When a business collects cash from a customer for merchandise previously sold on credit during the discount period, Cash and Sales Discounts are debited and Accounts Receivable is credited
VALUING ACCOUNTS RECEIVABLE
To ensure that receivables are not overstated on the balance sheet, they are stated at their cash realizable value 可收现价值.
Cash (net) realizable value is the net amount expected to be received in cash and excludes amounts that the company estimates it will not be able to collect
net realizable value = accounts receivable – bad debts
VALUING ACCOUNTS RECEIVABLE
Credit losses are debited to Bad Debts Expense 坏账费用 and are considered a normal and necessary risk of doing business
Two methods of accounting for uncollectible accounts are the:
allowance method 计提法
direct write-off method 直接核销法
THE ALLOWANCE METHOD
The allowance method is required when bad debts are deemed to be material in amount
Uncollectible accounts are estimated and matched against sales in the same accounting period in which the sales occurred
To record estimate of uncollectible accounts
12000
Allowance for Doubtful Accounts
12000
Bad debts expense
Dec 31
CR
DR
Account titles
Date
General Journal
Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for Doubtful Accounts 坏账准备 at the end of each period.
To record write-off
500
Accounts receivable—
500
Allowance for Doubtful Accounts
Dec 31
CR
DR
Account titles
Date
General Journal
Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to Accounts Receivable at the time the specific account is written off
RECORDING THE WRITE-OFF OF AN UNCOLLECTIBLE ACCOUNT
To record recovery
500
Allowance for Doubtful Accounts
500
Accounts receivable—
Dec 31
CR
DR
Account titles
Date
General Journal
When there is recovery of an account that has been written off: (1) reverse the entry made to write off the account and...
To record recovery
500
Accounts receivable—
500
Cash
Dec 31
CR
DR
Account titles
Date
General Journal
(2 ) record the collection in the usual manner
BASES USED FOR THE ALLOWANCE METHOD 计提的基础
Companies use either of two methods in the estimation of uncollectibles:
percentage of sales 销售百分比法
percentage of receivables 应收款百分比法
Both bases are in accordance with GAAP. The choice is a management decision.
Percentage of sales
Sales
Bad debts expense
Emphasis on income statement relationships
Percentage of Receivables
Accounts
receivable
Allowance for
doubtful accounts
Emphasis on balance sheet relationships
PERCENTAGE OF SALES BASIS
In the percentage of sales basis, management establishes a percentage relationship between the amount of credit sales and expected losses from uncollectible accounts
Expected bad debt losses are determined by applying the percentage to the sales base of the current period
This basis better matches expenses with revenues
To record estimate of uncollectible accounts
8000
Allowance for Doubtful Accounts
8000
Bad debts expense
Dec 31
CR
DR
Account titles
Date
General Journal
If net credit sales for the year are $800,000, the estimated bad debts expense is $8,000 (1% X $800,000)
PERCENTAGE OF RECEIVABLES BASIS
Under the percentage of receivables basis, the balance in the allowance account is derived from an analysis of individual customer accounts often called aging the accounts receivable 应收账款账龄法
The amount of the adjusting entry is the difference between the required balance and the existing balance in the allowance account
This basis produces the better estimate of cash realizable value of receivables
example
P 381
760
400
300
228
540
2,228
Total estimated bade debts
40
20
10
4
2
Estimated percentage uncollectible (%)
1,900
2,000
3,000
5,700
27,000
39,600
Total
1,500
1,600
2,450
5,200
26,200
36,950
Others
300
300
600
Ebbert
200
500
700
Diker
250
200
450
Carl
300
300
Bortz
100
200
300
600
Adert
Over 90
61-90
31-60
1-30
numbers of days past due
Not yet
Due
Total
customer
This is the required balance
Allowance for doubtful accounts
Bal 528
1,700
2,228
To record estimate of uncollectible accounts
1700
Allowance for Doubtful Accounts
1700
Bad debts expense
Dec 31
CR
DR
Account titles
Date
General Journal
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $1,700 ($2,228 - $528) is necessary
Allowance for doubtful accounts
Bal 528
2,756
2,228
To record estimate of uncollectible accounts
2756
Allowance for Doubtful Accounts
2756
Bad debts expense
Dec 31
CR
DR
Account titles
Date
General Journal
If the trial balance shows Allowance for Doubtful Accounts with a credit balance of $528, an adjusting entry for $2756 ($2,228 +$528) is necessary
DIRECT WRITE-OFF METHOD
Under the direct write-off method, bad debt losses are not anticipated and no allowance account is used
No entries are made for bad debts until an account is determined to be uncollectible at which time the loss is charged to Bad Debts Expense
DIRECT WRITE-OFF METHOD
No attempt is made to match bad debts to sales revenues or to show cash realizable value of accounts receivable on the balance sheet
Consequently, unless bad debt losses are insignificant, this method is not acceptable for financial reporting purposes
To record write-off
200
Accounts receivable –
200
Bad debts expense
Dec 31
CR
DR
Account titles
Date
General Journal
Warden Co. writes off M. E. Doran’s $200 balance as uncollectible on December 12. When this method is used, Bad Debts Expense will show only actual losses from uncollectibles.
Direct Write-off method
DISPOSING OF ACCOUNTS RECEIVABLE 应收账款的处置
To accelerate the receipt of cash from receivables, owners frequently:
sell to a factor such as a finance company or a bank and
make credit card sales
A factor buys receivables from businesses for a fee and collects the payments directly from customers
CREDIT CARD SALES 信用卡销售
Credit cards are frequently used by retailers who wish to avoid the paperwork of issuing credit
Retailers can receive cash more quickly from the credit card issuer
A credit card sale occurs when a company accepts national credit cards, such as Visa, MasterCard, Discover, American Express, and Diners Club
CREDIT CARD SALES
Three parties involved when credit cards are used in making retail sales are:
the credit card issuer 信用卡发行商
the retailer零售商, and
the customer 消费者
The retailer pays the credit card issuer a fee of 2-6% of the invoice price for its services
Customers
Card issuers
Retailers
Buying goods
A\R
Selling A\R
Paying cash
Collecting cash from customers
VISA, MASTERCARD, AND DISCOVER SALES
Sales resulting from the use of VISA, MasterCard, and Discover are considered cash sales by the retailer.
These cards are issued by banks.
Upon receipt of credit card sales slips from a retailer, the bank immediately adds the amount to the seller’s bank balance.
30
Sale charge expense
July 31
To record sales
1000
Sales
970
Cash
CR
DR
Account titles
Date
General Journal
Lee Lenertz purchases a number of compact discs for her restaurant from Brieschke Music Co. for $1,000 using her VISA First Bank Card. The service fee that First Bank charges is 3%.
Visa Sales
Sales using American Express and Diners Club cards are reported as credit sales, not cash sales.
Conversion into cash does not occur until American Express/Diners Club remits the net amount to the seller.
AMERICAN EXPRESS & DINERS CLUB SALES
15
Sale charge expense
July 31
To record sales
300
Sales
285
Accounts receivable
CR
DR
Account titles
Date
General Journal
Four Seasons restaurant accepts an American Express card for a $300 bill. The service fee is 5%.
American Express Sales
NOTES RECEIVABLE 应收票据
A promissory note 本票 is a written promise to pay a specified amount of money on demand or at a definite time
The party making the promise is the maker
The party to whom payment is made is called the payee.
NOTES RECEIVABLE
When the life of the note is expressed in terms of months, the due date is found by counting the months from the date of issue
Example: The maturity date of a 3-month note dated May 31 is August 31.
When the life of the note is expressed in terms of days, it is necessary to count the days.
In counting days, the date of issue is omitted but the due date is included.
Example: The maturity date of a 60-day note dated July 17 is:
The basic formula for computing interest利息 on an interest-bearing note is:
.
Face Value
of Note
Annual
Interest
Rate
Time
in Terms of
One Year
Interest
X
X
=
FORMULA FOR COMPUTING INTEREST
The interest rate 利率 specified on the note is an annual rate of interest
$ 730 X 18% X 120/360 = $ $1,000 X 15% X 6/12 = $ $2,000 X 12% X 1/1 = $
Helpful hint: The interest rate specified is the annual rate.
COMPUTATION OF INTEREST
To record acceptance of Brent Note
1000
Accounts receivable – Brent
1000
Notes receivable
May 1
CR
DR
Account titles
Date
General Journal
Wilma Company receives a $1,000, 2-month, 12% promissory note from Brent Company to settle an open account.
Recognizing of Notes receivable
VALUING NOTES RECEIVABLE
Like accounts receivable, short-term notes receivable are reported at their cash (net) realizable value
The notes receivable allowance account is Allowance for Doubtful Accounts
Honor of Notes receivable
A note is honored when it is paid in full at its maturity date.
For each interest-bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specified on the note.
Betty Co. lends Higley Inc. $10,000 on June 1, accepting a 4-month, 9% interest-bearing note.
Betty Co. collects the maturity value of the note from Higley on October 1.
10000
Notes receivable
Oct 1
To record collection of note
300
Interest revenue
10300
Cash
CR
DR
Account titles
Date
General Journal
Honor of Notes Receivable
To record acceptance of Brent Note
300
Interest revenue
300
Interest receivable
Sep 30
CR
DR
Account titles
Date
General Journal
If Betty Co. prepares financial statements as of September 30, interest for 4 months, or $300, would be accrued.
Recognizing of Notes receivable
10000
Notes receivable
Oct 1
To record collection of note
300
Interest receivable
10300
Cash
CR
DR
Account titles
Date
General Journal
Honor of Notes Receivable
When interest has been accrued, it is necessary
to credit Interest Receivable at maturity.
DISHONOR OF NOTES RECEIVABLE
A dishonored note is a note that is not paid in full at maturity.
A dishonored note receivable is no longer negotiable转让.
Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable.
10000
Notes receivable
Oct 1
To record dishonor of note
300
Interest revenue
10300
Accounts receivable
CR
DR
Account titles
Date
General Journal
Dishonor of Notes Receivable
In the balance sheet, short-term receivables are reported within the current assets section below short term investments.
Both the gross amount of receivables and the allowance for doubtful accounts should be reported.
The following shows the current asset presentation of receivables for Kellogg Company at December 31.
BALANCE SHEET PRESENTATION OF RECEIVABLES
KELLOGG COMPANY
Accounts receivable (in millions)
$
Less: Allowance for doubtful accounts
Net receivables
$
The financial ratio used to assess the liquidity of the receivables is the receivables turnover ratio which measures the number of times, on average, receivables are collected during the period.
If Lands’ End had net credit sales of $1,355 million for the year and a beginning net accounts receivable balance of $ million and and ending accounts receivable balance of million its accounts receivable turnover ratio is computed as follows:
Net Credit Sales
Average Accounts Receivable
Accounts Receivable Turnover
÷
=
ACCOUNTS RECEIVABLE TURNOVER RATIO 应收账款周转率
$1,355
$ + $
2
72 times
÷
=
The average collection period is a conversion of the receivables turnover ratio that makes the liquidity even more evident.
Lands’ End turnover of 72 times is divided into 365 days as follows:
AVERAGE COLLECTION PERIOD FOR RECEIVABLES 平均回收期
Days in Year
Accounts Receivable Turnover
÷
=
Average Collection Period in Days
365 days
days
÷
=
72 times
Homework
E9-1, 9-2, 9-3
P9-3A
CHAPTER 10
PLANT ASSETS, NATURAL RESOURCES, AND INTANGIBLE ASSETS
固定资产、自然资源、无形资产
PLANT ASSETS 固定资产
Plant assets are tangible resources that are used in the operations of a business and are not intended for sale to customers
Plant assets are subdivided into four classes
Land 土地
Land improvements 土地附着物
Buildings 建筑物
Equipment 设备
DETERMINING THE COST OF PLANT ASSETS
Plant assets are recorded at cost in accordance with the cost principle
Cost consists of all expenditures necessary to acquire the asset and make it ready for its intended use
These costs include purchase price, freight costs, and installation costs.
Expenditures that are not necessary should be recorded as expenses, losses, or other assets
MEASUREMENT OF PLANT ASSET COST固定资产成本的计量
Cost is measured by the cash paid in a cash transaction or by the cash equivalent price when non-cash assets are used in payment
The cash equivalent price is equal to the fair market value市场公允价值 of the asset given up or the fair market value of the asset received, whichever is more clearly determinable.
The cost of Land includes:
cash purchase price
closing costs such as title and attorney’s fees
real estate brokers’ commissions
accrued property taxes and other on the land assumed by the purchaser.
All necessary costs incurred in making land ready for its intended use are debited to the Land account.
LAND
Sometimes purchased land has a building on it that must be removed to make the site suitable for construction of a new building. In this case, all demolition and removal costs less any proceeds from salvaged materials are chargeable to the Land account
LAND IMPROVEMENTS
The cost of land improvements includes all expenditures necessary to make the improvements ready for their intended use such as:
parking lots, paving
fencing, and
lighting
BUILDINGS
The cost of buildings includes all necessary expenditures relating to the purchase or construction of a building
When a building is purchased, such costs include the purchase price, closing costs, and real estate broker’s commission.
Costs to make the building ready for its intended use consist of expenditures for remodeling and replacing or repairing the roof, floors, wiring, and plumbing
BUILDINGS
When a new building is constructed, cost consists of the contract price plus payments for architects’ fees, building permits, interest payments during construction, and excavation costs
EQUIPMENT
The cost of equipment consists of the cash purchase price, sales taxes, freight charges, and insurance paid by the purchaser during transit
Cost includes all expenditures required in assembling, installing, and testing the unit
Recurring costs such as licenses and insurance are expensed as incurred.
EQUIPMENT
However, motor vehicle licenses and accident insurance on company cars and trucks are expensed as incurred, since they represent annual recurring expenditures that do not benefit future periods
25500
Cash
1600
Prepaid insurance
80
License expense
23820
Delivery truck
CR
DR
Account titles
54500
Cash
54500
Factory machinery
CR
DR
Account titles
DEPRECIATION 折旧
Depreciation is the process of allocating to expense the cost of a plant asset over its useful (service) life in a rational and systematic manner
Cost allocation is designed to provide for the proper matching of expenses with revenues in accordance with the matching principle
DEPRECIATION 折旧
During an asset’s life, its usefulness may decline because of wear and tear or obsolescence
Recognition of depreciation does not result in the accumulation of cash for the replacement of the asset
Land is the only plant asset that is not depreciated
FACTORS IN COMPUTING DEPRECIATION
Three factors that affect the computation of depreciation are:
Cost: all expenditures necessary to acquire the asset and make it ready for intended use
Useful life使用寿命: estimate of the expected life based on need for repair, service life, and vulnerability to obsolescence
Salvage value 残值: estimate of the asset’s value at the end of its useful life
methods of recognizing depreciation
There are three methods used for depreciation:
Straight-line直线法
Units of activity产量法
Declining-balance余额递减法
Each method is acceptable under generally accepted accounting principles.
Management selects the method that is appropriate in the circumstances. Once a method is chosen, it should be applied consistently
USE OF DEPRECIATION METHODS IN MAJOR . COMPANIES
82% Straight-line
4% Declining balance
5% Units-of-activity
9% Other
STRAIGHT-LINE 直线法
Under the straight-line method, depreciation is the same for each year of the asset’s useful life.
It is measured by the passage of time
In order to compute depreciation expense, it is necessary to determine depreciable cost
Depreciable cost = Cost of asset - salvage value
$13,000 - $1,000 = $12,000
$12,000 ÷ 5 = $2,400
Cost
Salvage
Value
Depreciable
Cost
Depreciable
Cost
Useful
Life
Depreciation
Expense
2,400
12,000
5
$12,000
Total
2,400
12,000
4
2,400
12,000
3
2,400
12,000
2
2,400
12,000
1
Depreciation
expense
Annual depreciation rate
Depreciable Cost
Year
Depreciable cost = cost – salvage cost = 13,000 -1,000 =12,000
UNITS-OF-ACTIVITY 工作量法
Under the units-of-activity method, service life is expressed in terms of the total units of production or expected use from the asset, rather than time
The formulas for computing depreciation expense are:
Depreciable Cost ÷ Total Units of Activity = Depreciation Cost per Unit
Depreciation Cost per Unit × Units of Activity During the Year = Depreciation Expense
$12,000 ÷ 100,000 miles = $
$ × 15000 = $1,800
Depreciable
Cost
Total units of activity
Depreciable
Cost per unit
Depreciable
Cost per unit
Units of year
Depreciation
Expense
÷
×
1,800
15,000
5
$12,000
100,000 (miles)
Total
3,600
30,000
4
2,400
20,000
3
2,400
20,000
2
1,800
15,000
1
Depreciation
expense
Units of year
DepreciableCost per unit
Year
Depreciable cost = cost – salvage cost = 13,000 -1,000 =12,000
UNITS-OF-ACTIVITY 工作量法
In using this method, it is often difficult to make a reasonable estimate of total activity
When the productivity of an asset varies significantly from one period to another, this method results in the best matching of expenses with revenues.
DECLINING-BALANCE 余额递减法
The declining-balance method produces a decreasing annual depreciation expense over the useful life of the asset
The calculation of periodic depreciation is based on a declining book value (cost less accumulated depreciation) of the asset
DECLINING-BALANCE 余额递减法
Annual depreciation expense is calculated by multiplying the book value at the beginning of the year by the declining-balance depreciation rate.
The depreciation rate remains constant from year to year, but the book value to which the rate is applied declines each year
DECLINING-BALANCE 余额递减法
The book value for the first year is the cost of the asset since accumulated depreciation has a zero balance at the beginning of the asset’s useful life
In subsequent years, book value is the difference between cost and accumulated depreciation at the beginning of the year
DECLINING-BALANCE 余额递减法
The formula for computing depreciation expense is:
Book Value at Beginning of Year × Declining Balance Rate = Annual Depreciation Expense
This method is compatible with the matching principle because the higher depreciation in early years is matched with the higher benefits received in these years
Double-declining-balance method
双倍余额递减法
Unlike the other depreciation methods, salvage value is ignored in determining the amount to which the declining balance rate is applied.
A common application of the declining-balance method is the double-declining-balance method双倍余额递减法, in which the declining-balance rate is double the straight-line rate
If Barb’s Florists uses the double-declining-balance method, the depreciation is 40% (2 X the straight-line rate of 20%).
$13,000 x 40% = $5,200
Book Value
at Beginning
of Year
Declining
Balance
Rate
Depreciation
Expense
1,000
12,000
904
-
1,904
5
1,904
11,096
904
-
2,808
4
2,808
10,192
1,872
4,680
3
4,680
8,320
3,120
7,800
2
7,800
5,200
5,200
13,000
1
BV at
Ending
Accumulated
Depreciation
Depreciation expense
Rate
BV at
Begin
Year
Salvage value
REVISING PERIODIC DEPRECIATION
折旧的修正
If wear and tear or obsolescence indicate that annual depreciation is inadequate or excessive, a change in the periodic amount should be made
When a change is made
there is no correction of previously recorded depreciation expense and
depreciation expense for current and future years is revised
To determine the new annual depreciation expense, the depreciable cost at the time of the revision is divided by the remaining useful life
Example
Barb’s Florists decides on January 1, 2005 to extend the useful life of the truck one year because of its excellent condition
The company has used the straight-line method to depreciate the asset to date, and book value is $5,800 ($13,000 - $7,200)
The new annual depreciation is $1,600, calculated as follows
Revised annual depreciation ($4,800 ÷ 3)=
$ 1,600
Remaining useful years 3 years
Depreciable cost 4800
Less: salvage value 1000
Book value ,1/01/04 $ 5800
EXPENDITURES DURING USEFUL LIFE
Ordinary repairs are expenditures to maintain the operating efficiency and expected productive life of the plant asset
They are debited to Repairs Expense as incurred and are often referred to as revenue expenditures 收入性支出
500
Cash
500
Repairs Expense
Cr
Dr
Date
EXPENDITURES DURING USEFUL LIFE
Additions and improvements are costs incurred to increase the operating efficiency, productive capacity, or expected useful life of the plant asset.
These expenditures are usually material in amount and occur infrequently during the period of ownership.
Since additions and improvements increase the company’s investment in productive facilities, they are debits to the plant asset affected, and are referred to as capital expenditures 资本性支出.
500,000
Cash
500,000
Building
Cr
Dr
Date
PLANT ASSET DISPOSALS
Eliminate the book value of the plant asset at the date of sale by debiting Accumulated Depreciation and crediting the asset account for its cost.
Debit Cash to record the cash proceeds from the sale
Compute gain or loss
PLANT ASSET DISPOSALS
If the cash proceeds are greater than the book value, recognize a gain by crediting Gain on Disposal for the difference
If the cash proceeds are less than the book value, recognize a loss by debiting Loss on Disposal for the difference.
GAIN ON DISPOSAL
On July 1, 2002, Wright Company sells office furniture for $16,000 cash. The office furniture originally cost $60,000 and as of January 1, 2002, had accumulated depreciation of $41,000. Depreciation for the first six months of 2002 is $8,000.
The entry to record depreciation expense and update accumulated depreciation to July 1 is as follows:
To record first six months depreciation
8000
Accumulated Depreciation
8000
Depreciation expense
July 1
CR
DR
Accounts title
Date
GAIN ON DISPOSAL
After the accumulated depreciation is updated, a gain on disposal of $5,000 is calculated:
Cost of office furniture $ 60,000
Less: Accumulated depreciation $ 49,000
Book value at date of disposal $11,000
Proceeds from sale $ 16,000
Gain on disposal $ 5,000
60000
Office Furniture
49000
Accumulated Depreciation
July 1
To record sale of furniture
5000
Gain on disposal
16000
Cash
CR
DR
Accounts title
Date
office furniture accumulated depreciation
60,000 49,000
60,000 49,000
0 0
LOSS ON DISPOSAL
Instead of the selling the office furniture for $16,000, Wright sells it for $9,000. In this case, a loss of $2,000 is calculated:
Cost of office furniture $ 60,000
Less: Accumulated depreciation $ 49,000
Book value at date of disposal $11,000
Proceeds from sale $ 9,000
Loss on disposal $ 2,000
2000
Loss on disposal
49000
Accumulated Depreciation
July 1
To record sale of furniture
60000
Office Furniture
9000
Cash
CR
DR
Accounts title
Date
EXCHANGES OF PLANT ASSETS
Exchanges of plant assets can be for similar or dissimilar assets
In an exchange of similar assets, the new asset is the same type as and performs the same function as the old asset
In exchanges of similar assets, it is necessary to determine
the cost of the asset acquired and
the gain or loss on the asset given up
LOSS TREATMENT
Losses on the exchange of similar assets are recognized immediately
The cost of the new asset received is equal to the fair market value of the old asset exchanged plus any cash or other consideration given up
A loss results when the book value is greater than the fair market value of the asset given up
COMPUTATION OF COST OF NEW OFFICE EQUIPMENT
Roland Company exchanges old office equipment for new similar office equipment
The book value of the old office equipment is $26,000 ($70,000 cost less $44,000 accumulated depreciation), its fair market value is $10,000, and $81,000 of cash is paid
The cost of the new office equipment, $91,000, is calculated as follows:
COMPUTATION OF LOSS ON DISPOSAL
Through this exchange, a loss on disposal of $16,000 is incurred. A loss results when the book value is greater than the fair market value of the asset given up. The calculation is as follows:
In recording the exchange at a loss it is necessary to 1 eliminate the book value of the asset given up, 2 record the cost of the asset acquired, and 3 recognize the loss on disposal.
16000
Loss on disposal
44000
Accumulated Depreciation (old)
July 1
81000
Cash
70000
Office Furniture (old)
91000
Office equipment (new )
CR
DR
Accounts title
Date
GAIN TREATMENT
Gains on exchange of similar assets are not recognized immediately. Instead, they are deferred and reduce the cost basis of the new asset
The cost of the new asset received is equal to the fair market value of the old asset exchanged plus any cash or other consideration given up
A gain results when the fair market value is greater than the book value of the asset given up
COST OF NEW EQUIPMENT
Mark’s Express Delivery exchanges old delivery equipment plus $3,000 cash for new delivery equipment
The book value of the old delivery equipment is $12,000 ($40,000 cost less $28,000 accumulated depreciation), its fair market value is $19,000.
The cost of the new delivery equipment, $22,000, is calculated as follows:
For Mark’s Express Delivery, there is a gain of $7,000, calculated as follows, on the disposal:
COST OF NEW DELIVERY EQUIPMENT (AFTER DEFERRAL OF GAIN)
The $7,000 gain on disposal is then offset against the $22,000 cost of the new delivery equipment. The result is a $15,000 cost of the new delivery equipment, after deferral of the gain.
The entry to record the exchange is as follows:
28000
Accumulated Depreciation (old)
3000
Cash
40000
Delivery equipment (old)
15000
Delivery equipment (new )
CR
DR
Accounts title
NATURAL RESOURCES
Natural resources : consist of oil, gas, and minerals
Natural resources have two distinguishing characteristics:
They are physically extracted in operations
They are replaceable only by an act of nature
AQUISITION COST
The acquisition cost of a natural resource is the cash or cash equivalent price necessary to acquire the resource and prepare it for its intended use.
If the resource is already discovered, cost is the price paid for the property
DEPLETION 折耗
The process of allocating the cost of natural resources to expense in a rational and systematic manner over the resource’s useful life is called depletion
The units-of-activity method is generally used to compute depletion, because periodic depletion generally is a function of the units extracted during the year
FORMULA TO COMPUTE DEPLETION EXPENSE
Total Estimated Units
Depletion
Cost per Unit
Total Cost minus Salvage Value
Depletion
Cost per Unit
Number of
Units Extracted and Sold
Depletion
Expense
RECORDING DEPLETION
The Lane Coal Company invests $5 million in a mine estimated to have 10 million tons of coal and no salvage value.
In the first year, 800,000 tons of coal are extracted and sold. Using the formulas, the calculations are as follows:
$5,000,000 ÷ 10,000,000 = $.50 depletion cost per ton
$.50 X 800,000 = $400,000 depletion expense
400000
Accumulated depletion
400000
Depletion expense
CR
DR
Accounts title
The entry to record depletion expense for the first year of operations is as follows:
INTANGIBLE ASSETS 无形资产
Intangible assets are rights, privileges, and competitive advantages that result from the ownership of long lived assets that do not possess physical substance.
Intangibles may arise from government grants, acquisition of another business, and private monopolistic arrangements
ACCOUNTING FOR INTANGIBLE ASSETS
In general, accounting for intangible assets parallels the accounting for plant assets
Intangible assets are:
recorded at cost
written off over useful life in a rational and systematic manner; and
at disposal, book value is eliminated and gain or loss, if any, is recorded
ACCOUNTING FOR INTANGIBLE ASSETS
The systematic write-off of an intangible asset is referred to as amortization摊销.
To record amortization, Amortization Expense is debited and the specific intangible asset is credited.
The amortization period cannot be longer than 40 years.
Amortization is typically computed on a straight-line basis.
PATENTS 专利
A patent is an exclusive right issued by the United States Patent Office that enables the recipient to manufacture, sell, or otherwise control his or her invention for a period of 20 years from the date of grant
The initial cost of a patent is the cash or cash equivalent price paid when the patent is acquired
PATENTS 专利
Legal costs incurred in successfully defending the patent are added to the Patent account and amortized over the remaining useful life of the patent
The cost of the patent should be amortized over its 20-year legal life or its useful life, whichever is shorter
RECORDING PATENTS
National Labs purchases a patent at a cost of $60,000. If the useful life of the patent is 8 years.
the annual amortization expense is $7,500 ($56,000 ÷ 8).
Amortization Expense-Patent is classified as an operating expense in the income statement. The entry to record the annual patent amortization is:
7500
Patents
7500
Amortization expense - patents
CR
DR
Accounts title
COPYRIGHTS 版权
Copyrights are granted by the federal government, giving the owner the exclusive right to reproduce and sell an artistic or published work
Copyrights extend for the life of the creator plus 50 years.
The cost of a copyright consists of the cost of acquiring and defending it
TRADEMARKS AND TRADE NAMES
商标和名称
A trademark or trade name is a word, phrase, or symbol that distinguishes or identifies a particular enterprise or product
If the trademark or trade name is purchased, the cost is the purchase price
If it is developed by a company, the cost includes attorney’s fees, registration fees, design costs and successful legal defense fees
They are amortized over the shorter of useful life or 40 years
FRANCHISES AND LICENSES
特许经营和许可
A franchise is a contractual arrangement under which the franchisor grants the franchisee the right to sell certain products, to render specific services, or to use certain trademarks or trade names, usually within a designated geographical area
FRANCHISES AND LICENSES
特许经营和许可
Another type of franchise, commonly referred to as a license or permit, is entered into between a governmental body and a business enterprise and permits the enterprise to use public property in performing its services
GOODWILL 商誉
Goodwill is the value of all favorable attributes that relate to a business enterprise.
These attributes may include exceptional management, desirable location, good customer relations and skilled employees
Goodwill cannot be sold individually in the marketplace; it can be identified only with the business as a whole
GOODWILL 商誉
Goodwill is recorded only when there is an exchange transaction that involves the purchase of an entire business.
When an entire business is purchased, goodwill is the excess of cost over the fair market value of the net assets (assets less liabilities) acquired
Goodwill is not amortized because it is considered to have an indefinite life, but it must be written down if its value is determined to have declined.
RESEARCH AND DEVELOPMENT COSTS 研发成本
Research and development costs pertain to expenditures incurred to develop new products and processes.
These costs are not intangible costs, but are usually recorded as an expense when incurred
STATEMENT PRESENTATION
报表列示及分析
Usually plant assets and natural resources are combined under Property, Plant, and Equipment, and intangibles are shown separately under Intangible Assets.
Major classes of assets, such as land, buildings, and equipment, and accumulated depreciation by major classes or in total should be disclosed
STATEMENT PRESENTATION
报表列示及分析
The depreciation and amortization methods used should be described and the amount of depreciation and amortization expense for the period disclosed
STATEMENT PRESENTATION OF PROPERTY, PLANT, AND EQUIPMENT AND INTANGIBLE ASSETS
Timberland (net ) $
Buildings and Equipments, at cost $
Less: accumulated depreciations $ $
Total Property, Plant, Equipment $
Intangibles
Patents $
Total $
Homework
E10-1, 10-5, 10-6,10-7
CHAPTER 13
INVESTMENTS
投资
Study Objectives
Discuss why corporations invest in debt and stock securities
Explain the accounting for debt investments
Explain the accounting for stock investments
Distinguish between short-term and long-term investments
TEMPORARY INVESTMENTS
短期投资 AND THE OPERATING CYCLE
At the end of their operating cycles, many companies may have temporarily idle cash on hand pending the start of the next operating cycle
Until the cash is needed in operations, these companies may invest the excess funds to earn interest and dividends
The relationship of temporary investments to the operating cycle is depicted below
Cash
Accounts
receivable
inventory
Temporary
Investment
(capital
Market )
sell
invest
WHY CORPORATIONS INVEST
stocks
To meet strategic goals
Banking bonds
To generate earnings
Government bonds
To house excess cash until needed
Example
Reason
TEMPORARY AND LONG-TERM INVESTMENTS
Temporary investments 短期投资 are securities, held by a company, that are
readily marketable and
intended to be converted into cash within the next year or operating cycle, whichever is longer
Investments that do not meet both criteria are classified as long-term investments 长期投资
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES AT ACQUISITION
Debt investments 债券投资 are investments in government and corporation bonds. In accounting for debt investments, entries are required to record
Acquisition
interest revenue, and
sale.
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES AT ACQUISITION
At acquisition – the cost principle applies, and cost includes all expenditures necessary to acquire these investments
Kuhl Corporation acquires 50 Doan Inc. 12%, 10-year, $1,000 bonds on January 1, 2002, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:
54,000
Cash
54,000
Debt investments
Jan
1
CR
DR
Accounts
Date
The bonds pay $3,000 interest on July 1 and January 1 ($50,000 X 12% X ½). The July 1 entry is:
3,000
Interest revenue
3,000
Cash
July
1
CR
DR
Accounts
Date
It is necessary to accrue $3,000 interest earned since July 1 at year-end. The December 31 entry is:
3,000
Interest revenue
3,000
Interest receivable
Dec
31
CR
DR
Accounts
Date
3,000
Interest receivable
3,000
Cash
Jan
1
CR
DR
Accounts
Date
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES FOR SALE OF BONDS
Any difference between the net proceeds (sales price less brokerage fees) from the sale of bonds and the cost of the bonds is recorded as a gain or loss.
Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2003, after receiving the interest due. Since the securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is:
54,000
Debt investment
4,000
Gain on the sale of debt
investment
58,000
Cash
Jan
1
CR
DR
Accounts
Date
ACCOUNTING GUIDELINES FOR STOCK INVESTMENTS 股票投资
Stock investments are investments in the capital stock of corporations.
Under the different situation, the accounting treatment will be different.
Consolidated financial statement
合并财务报表
Controlling
More than 50%
Equity method
权益法
Significant
Between 20% and 50%
Cost method
成本法
Insignificant
Less than 20%
Accounting
guidelines
Presumed influence on investee
Investor’s ownership interest in investee’s common stock
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS LESS THAN 20%
In accounting for stock investments of less than 20%, the cost method is used.
The investment is recorded at cost
revenue is recognized only when cash dividends are received.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS LESS THAN 20%
On July 1, 2002, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock at $40 per share plus brokerage fees of $500. The entry for the purchase is:
40,500
Cash
40,500
Stock investment
July
1
CR
DR
Accounts
Date
Entries are required for any cash dividends received during the time the stock is held. If a $2 per share dividend is received by Sanchez Corporation on December 31 the entry is:
2,000
Dividend revenue
2,000
Cash
Dec
31
CR
DR
Accounts
Date
Dividend Revenue is reported under Other Revenue and Gains in the income statement.
When stock is sold, the difference between the net proceeds from the sale and the cost of the stock is recognized as a gain or loss.
Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation common stock on February 10, 2003. Because the stock cost $40,500, a loss of $1,000 has been incurred. The entry to record the sale is:
1,000
Loss on sale of stock investment
40,500
Stock investment
39,500
Cash
Feb
10
CR
DR
Accounts
Date
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
When an investor owns between 20% and 50% of the common stock of a corporation, it is usually presumed that the investor has significant influence over the financial and operating activities of the investee
Subsequently, the investor should record its share of the net income of the investee in the year when it is earned.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
Under the equity method, the investment in common stock is initially recorded at cost;
the investment account is adjusted annually to show the investor’s equity in the investee.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
Each year, the investor:
debits the investment account and credits revenue for its share of the investee’s net income and
credits dividends received to the investment account
Milar Corporation acquires 30% of the common stock of Beck Company for $120,000 on January 1, 2002. The entry to record this transaction is:
120,000
Cash
120,000
Stock investment
Jan
1
CR
DR
Accounts
Date
Beck reports 2002 net income of $100,000 and declares and pays a $40,000 cash dividend
Milar is required to record:
its share of Beck’s net income, $30,000 (30% X $100,000) and
the reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%).
The entries are:
30,000
Revenue from investment
30,000
Stock investment
Dec
31
CR
DR
Accounts
Date
12,000
Stock investment
12,000
Cash
Jan
1
CR
DR
Accounts
Date
INVESTMENT AND REVENUE ACCOUNTS
AFTER POSTING
Dec 31 $12,000
Jan 1 $120,000
Dec 31 $30,000
Dec 31 $138,000
Stock Investment
Dec 31 $30,000
Revenue from stock Investment
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS OF MORE THAN 50%
A company that owns more than 50% of the common stock of another entity is known as a parent company母公司
The entity whose stock is owned by the parent company is called the subsidiary (affiliated) company子公司
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS OF MORE THAN 50%
The parent company is perceived to have a controlling interest控制性利益 in the subsidiary due to its stock ownership
When one company owns more than 50% of the common stock of another company, consolidated financial statements合并报表 are usually prepared.
VALUATION GUIDELINES 估价指南
Fair value公允价值 is the amount for which a security could be sold in a normal market and offers the best approach at investment valuation since it represents the expected cash realizable value of the securities.
VALUATION AND REPORTING OF INVESTMENTS
For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into the following three categories of securities:
Trading securities交易性金融资产 - held with the intention of selling them in a short period of time (generally less than a month).
VALUATION AND REPORTING OF INVESTMENTS
Available-for-sale securities可供销售证券 - may be sold in the future.
Held-to-maturity securities持有到期证券 - debt securities that the investor has the intent and ability to hold to maturity。
VALUATION OF TRADING SECURITIES
Trading securities are reported at fair value, and changes from cost are reported as part of net income
The changes are reported as unrealized gains or losses since the securities have not been sold
The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value
7,000
147,000
140,000
Total
9,000
99,000
90,000
Stock
(2,000)
48,000
50,000
Bonds
Unearned gain (loss )
Fair value
Cost
Investment
Trade Securities , Dec 31, 2002
Pace Corporation has the following costs and fair values for its investments classified as trading securities:
VALUATION OF TRADING SECURITIES
Pace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $7,000 greater than total cost ($140,000).
Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared
VALUATION OF TRADING SECURITIES
A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the total fair value of the securities.
The adjusting entry for Pace Corporation is:
7,000
Unrealized gain
7,000
Market Adjustment- trading
Dec
31
CR
DR
Accounts
Date
VALUATION OF TRADING SECURITIES
The fair value of the securities is the amount reported on the balance sheet
The unrealized gain is reported on the income statement in the Other Revenues and Gains section
The unrealized loss is reported on the income statement in the Other Expenses and Losses section
VALUATION OF AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are held with the intention of selling them in the near future.
Available-for-sale securities are reported at fair value
The changes are reported as unrealized gains or losses since the securities have not been sold.
The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value
(9,537)
284,000
293,537
Total
(19,600)
180,400
200,000
Stock
10,063
103,600
93,537
Bonds
Unearned gain (loss )
Fair value
Cost
Investment
Available-for-sale Securities , Dec 31, 2002
Elbert Corporation has an unrealized loss of $9,537 because total fair value ($284,000) is $9,537 less than total cost ($293,537).
Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared
A valuation allowance account, Market Adjustment - Available-for-Sale, is used to record the difference between the total cost and the total fair value of the securities.
The adjusting entry for Elbert Corporation is:
9,537
Market Adjustment- Available-
for –sale
9,537
Unrealized loss
Dec
31
CR
DR
Accounts
Date
The fair value of the securities is the amount reported on the balance sheet.
The unrealized gain or loss is reported as a separate component of stockholders’ equity.
UNREALIZED LOSS IN STOCKHOLDERS’ EQUITY SECTION
4,400, 000
total stockholders’ equity
(100,000)
Less: unrealized loss on available-for-sale
4,500,000
total
1,500,000
Retained earnings
3,000,000
Common stock
Stockholders’ equity
NONOPERATING ITEMS RELATED TO INVESTMENTS
Temporary investments are listed immediately below cash in the current asset section of the balance sheet due to their liquidity
Temporary investments are reported at fair value.
Long-term investments are typically reported in a separate section of the balance sheet immediately below current assets
NONOPERATING ITEMS RELATED TO INVESTMENTS
In the income statement, the items below are reported in the non-operating section:
Unrealized gain
Gain on sale of investment
Unrealized loss
Dividend revenue
Loss of sale of investment
Interest revenue
Other expenses and losses
Other revenues and gains
Homework
E13-1, E13-2
P13-3A
CHAPTER 12
CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, DIVIDENDS, AND RETAINED EARNINGS
Study Objectives
Identify the major characteristics of a corporation
Record the issuance of common stock
Explain the accounting for treasury stock
Differentiate preferred stock from common stock.
Prepare the entries for cash dividends
Prepare and analyze stockholders’ equity section
THE CORPORATE FORM OF ORGANIZATION 公司类型
Two common bases that are used to classify corporations are by purpose目的 and ownership所有权
A corporation may be organized for the purpose of making a profit盈利, or it may be nonprofit非盈利
THE CORPORATE FORM OF ORGANIZATION 公司类型
Classification by ownership distinguishes between publicly held and privately held corporations.
A publicly held corporation公众持股公司 may have thousands of stockholders and its stock is traded regularly on a national securities market
A privately held corporation私人持股公司 (or closely held corporation) usually has only a few stockholders and does not offer its stock for sale to the general public.
CHARACTERISTICS OF A CORPORATION 公司的特征
A number of characteristics distinguish a corporation from proprietorships and partnerships
Separate legal existence独立法人 – As an entity separate and distinct from its owners, the corporation acts under its own name rather than in the name of its stockholders
Limited liability of stockholders股东的有限责任 – Since a corporation is a separate legal entity, creditors ordinarily have recourse only to corporate assets to satisfy their claims.
CHARACTERISTICS OF A CORPORATION 公司的特征
Transferable ownership rights所有权的可转让性 – Ownership of a corporation is shown in shares of capital stock, which are transferable units.
Ability to acquire capital获得资本的能力 – It is relatively easy for a corporation to obtain capital through the issuance of stock
Continuous life 持续的时间 – The life of a corporation is stated in its charter; it may be perpetual or it may be limited to a specific number of years.
CHARACTERISTICS OF A CORPORATION 公司的特征
Corporate management公司管理 – Although stockholders legally own the corporation, they manage the corporation indirectly through a board of directors they elect.
Government regulations 政府管制 – A corporation is subject to numerous state and federal regulations
Additional taxes 附加的税收 – Corporations, unlike proprietorships and partnerships, must pay federal and state income taxes as a separate legal entity
CORPORATION ORGANIZATION CHART公司组织结构
stockholders
Board of
director
VP
personnel
VP
production
VP
finance
VP
marketing
Corporate
secretary
Controller
Treasurer
president
ADVANTAGES AND DISADVANTAGES OF A CORPORATION 公司的优点和缺点
professional managers
Continuous life
Ability to acquire capital
Additional taxes
Transferable ownership rights
Government regulations
Limited ownership
separation of ownership and management
Separate legal existence
Disadvantages
Advantages
FORMING A CORPORATION 建立公司
The corporation, once it receives its charter from the state of incorporation, must establish by-laws for conducting its affairs.
Regardless of the number of states in which a corporation has operating divisions, it is incorporated in only one state公司只能在一个州登记注册.
FORMING A CORPORATION 建立公司
Costs incurred in the formation of a corporation are called organization costs筹建费用
Organization costs include legal and state fees and promotional expenditures involved in the organization of the business
Organization costs are expensed as incurred
CORPORATE CAPITAL 公司资本
Owners’ equity in a corporation is identified as stockholders’ equity, shareholders’ equity股东权益, or corporate capital公司资本
The stockholders’ equity section of a corporation’s balance sheet consists of:
paid-in (contributed) capital投入资本
retained earnings 留存收益 (earned capital).
OWNERSHIP RIGHTS OF STOCKHOLDERS 股东的所有权
To vote in election for board of directors at annual meeting. To vote on actions that require stockholder approval
To share the corporate earnings through receipt of dividends
Dividends
OWNERSHIP RIGHTS OF STOCKHOLDERS 股东的所有权
To keep same percentage ownership when new shares of stock are issued .
To share in assets upon liquidation 清算(破产), in proportion to their holdings. Called a residual claim because owners are paid with assets remaining after all claims have been paid
CORPORATE CAPITAL
When a corporation has only one class of stock, it is identified as common stock普通股
A printed or engraved form known as a stock certificate股票 serves as proof of stock ownership
The amount of stock that a corporation is authorized to sell is indicated in its charter公司章程
The total amount of authorized stock at the time of incorporation usually anticipates both initial and subsequent capital needs of a company
CORPORATE CAPITAL
A corporation must choose whether to issue common stock directly to investors or indirectly through an investment banking firm 投资银行(brokerage house经纪行) that specializes in informing prospective investors about securities
The investment banking firm may agree to underwrite认购 an entire indirect stock issue
CORPORATE CAPITAL
Under such an arrangement, the investment banker buys the stock from the corporation at a stipulated price and resells the shares to investors
The prices set by the marketplace determine a stock’s market value市场价值 and tend to follow the trend of a company’s earnings and dividends.
CORPORATE CAPITAL
Capital stock that has been assigned a value per share in the corporate charter is par value stock 有面值股票
Par value面值 is not indicative of the worth or market value of the stock, but does represent the legal capital per share每股法定资本 that must be retained in the business for the protection of corporate creditors.
CORPORATE CAPITAL
No-par value stock无面值股票 is capital stock that has not been assigned a value in the corporate charter
In many states the board of directors董事会 is permitted to assign a stated value 约定的价值 to the no-par shares, which becomes the legal capital per share
ACCOUNTING FOR COMMON STOCK ISSUES 普通股发行的会计处理
The primary objectives in accounting for the issuance of common stock are to
identify the specific sources of paid-in capital and
maintain the distinction between paid-in capital and retained earnings
(to record issuance of 1000 shares of $1 per share )
1000
Common Stock
1000
Cash
CR
DR
Accounts
Hydro-Slide, Inc. issues 1,000 shares of $1 par value common stock at par for cash. The entry to record this transaction is:
Hydro-Slide, Inc. issues an additional 1,000 shares of the $1 par value common stock for cash at $5 per share. The entry to record this transaction is:
(to record issuance of 1000 shares of $5 per share )
4000
Paid-in capital in excess of par value
1000
Common stock
5000
Cash
CR
DR
Accounts
STOCKHOLDERS’ EQUITY – PAID-IN CAPITAL IN EXCESS OF PAR VALUE
The total paid-in capital from these two transactions is $6,000, and the legal capital is $2,000. If Hydro-Slide, Inc. has retained earnings of $27,000, the stockholders’ equity section is as follows:
Stockholders’ equity
Paid-in capital Common stock $ 2,000 Paid-in capital in excess of par value 4,000 Total paid-in capital 6,000
Retained earnings 27,000
Total stockholders’ equity $ 33,000
ACCOUNTING FOR COMMON STOCK ISSUES
When no-par common stock has a stated value, the entries are similar to those for par value stock
The stated value represents legal capital and therefore is credited to Common Stock
When the selling price of no-par stock exceeds stated value, the excess is credited to Paid-in Capital in Excess of Stated Value
(to record issuance of 5000 shares )
15,000
Paid-in capital in excess of par value
25,000
Common stock
40,000
Cash
CR
DR
Accounts
Hydro-Slide, Inc. issues 5,000 shares of $5 stated value no-par stock at $8 per share for cash. The entry is:
ACCOUNTING FOR COMMON STOCK ISSUES
Paid-in Capital in Excess of Stated Value is reported as part of paid-in capital in the stockholders’ equity section
When no-par stock does not have a stated value, the entire proceeds from the issue become legal capital and are credited to Common Stock
(to record issuance of 5000 shares of $8 per share )
40,000
Common Stock
40,000
Cash
CR
DR
Accounts
If Hydro-Slide does not assign a stated value to its no-par stock, the issuance of the 5,000 shares at $8 per share for cash is recorded as follows:
ACCOUNTING FOR COMMON STOCK ISSUES
Stock may be issued for services or for non-cash assets
A question arises in such cases as to the cost that should be recognized in the exchange transaction
To comply with the cost principle in a non-cash transaction, cost is the cash equivalent price.
Thus, cost is either the fair market value of the consideration given up or the fair market value of the consideration received, whichever is more clearly determinable
ACCOUNTING FOR COMMON STOCK ISSUES
The attorneys for The Jordan Company agrees to accept 4,000 shares of $1 par value common stock in payment of their bill of $5,000 for services performed in helping the company to incorporate. There is no established market price for the stock at the time of the exchange. Since the market value of the consideration received, $5,000 is more clearly evident, the appropriate entry is:
1,000
Paid-in capital in excess of par value
4,000
Common stock
5,000
Organization costs
CR
DR
Accounts
ACCOUNTING FOR COMMON STOCK ISSUES
Athletic Research Inc. is a publicly held corporation whose $5 par value stock is actively traded at $8 per share. The company issues 10,000 shares of stock to acquire land recently advertised for sale at $90,000. On the basis of these facts the market price of the consideration given is the most clearly evident value. The par or stated value of the stock is never a factor in determining the cost of the assets received. The entry is:
30,000
Paid-in capital in excess of par value
50,000
Common stock
80,000
Land
CR
DR
Accounts
ACCOUNTING FOR TREASURY STOCK
库藏股票
Treasury stock库藏股票 is a corporation’s own stock that has been issued, fully paid for, and reacquired by the corporation but not retired.
A corporation may acquire treasury stock for the reasons listed below
Reissue the shares to officers and employees under bonus and stock compensation plans
Increase trading of the company’s stock in the securities market in the hopes of enhancing its market value
ACCOUNTING FOR TREASURY STOCK
库藏股票
Have additional shares available for use in the acquisition of other companies
Reduce the number of shares outstanding and thereby increase earnings per share (EPS 每股收益).
To avoid a takeover 收购
STOCKHOLDERS’ EQUITY WITH NO TREASURY STOCK
On January 1, 2002, the stockholders’ equity section of Mead, Inc. has 100,000 shares of $5 par value common stock outstanding (all issued at par value) and Retained Earnings of $200,000
Stockholders’ equity
Paid-in capital Common stock, $5 par value,100,000 shares issued and outstanding $ 500,000
Retained earnings 200,000
Total stockholders’ equity 700,000
ACCOUNTING FOR TREASURY STOCK
The cost method is normally used in accounting for treasury stock
Under the cost method, Treasury Stock is debited at the price paid to reacquire the shares, and
the same amount is credited to Treasury Stock when the shares are sold.
On February 1, 2002, Mead acquires 4,000 shares of its stock at $8 per share. Treasury Stock is debited for the cost of the shares purchased. The entry is as follows:
(to record purchase of 4000 shares at $8 per share )
32,000
Cash
32,000
Treasury Stock
Feb 1
CR
DR
Accounts
Date
STOCKHOLDERS’ EQUITY WITH TREASURY STOCK
Treasury Stock is deducted from total paid-in capital and retained earnings in the stockholders’ equity section.
Both the number of shares issued (100,000) and the number of shares in the treasury (4,000) are disclosed. The difference is the number of shares of outstanding stock (96,000).
The term outstanding stock流通股 means the number of shares of issued stock that are being held by stockholders.
Stockholders’ equity
Paid-in capital Common stock, $5 par value, 100,000 shares issued and 96,000 shares outstanding $ 500,000
Retained earnings 200,000 Total paid-in capital and retained earnings 700,000
Less: Treasury stock (4,000 shares) 32,000
Total stockholders’ equity $ 668,000
The stockholders’ equity section of Mead, Inc., after purchase of treasury stock, is as follow
ACCOUNTING FOR TREASURY STOCK
Treasury stock is usually sold or retired and the accounting for its sale is different when it is sold above cost than when it is sold below cost
If the selling price of the treasury shares is equal to cost, the sale of the shares is recorded with a debit to Cash and a credit to Treasury Stock
8,000
Treasury stock
8,000
Cash
July 1
CR
DR
Accounts
Date
ACCOUNTING FOR TREASURY STOCK
When the selling price of the shares is greater than cost, the difference is credited to Paid-in Capital from Treasury Stock
Assume that $1,000 shares of treasury stock of Mead, Inc. previously acquired for $8 per share, are sold at $10 per share on July 1. The entry is:
2,000
Paid-in capital from treasury
stock
8,000
Treasury stock
10,000
Cash
July 1
CR
DR
Accounts
Date
ACCOUNTING FOR TREASURY STOCK
The $2,000 credit in the July 1 entry is not made to Gain on Sale of Treasury Stock for two reasons:
Gains on sales occur when assets are sold and treasury stock is not an asset
A corporation does not realize a gain or suffer a loss from stock transactions with its own stockholders
ACCOUNTING FOR TREASURY STOCK
Paid-in capital arising from the sale of treasury stock should therefore not be included in the measurement of net income
Paid-in Capital from Treasury Stock is listed separately on the balance sheet as part of paid-in capital
ACCOUNTING FOR TREASURY STOCK
When treasury stock is sold below its cost, the excess of cost over selling price is usually debited to Paid-in Capital from Treasury Stock
If Mead, Inc. sells an additional 800 shares of treasury stock on October 1 at $7 per share, the entry is:
6400
Treasury stock
800
Paid-in capital from treasury stock
5600
Cash
Oct 1
CR
DR
Accounts
Date
TREASURY STOCK ACCOUNTS
Observe from the two sales entries that
Treasury Stock is credited at cost for each entry,
Paid-in Capital from Treasury Stock is used for the difference between the cost and the resale price of the shares, and
The original paid-in capital account, Common Stock, again is not affected.
TREASURY STOCK ACCOUNTS
After posting the July 1 and October 1 entries, the treasury stock accounts will show the following balances on October 1:
Treasury Stock
Feb 1 32,000
July 1 8,000
Oct 1 6,400
Oct 1 17,600
Paid-in capital from Treasury Stock
Oct 1 800
July 1 2,000
Oct 1 1200
ACCOUNTING FOR TREASURY STOCK
When the credit balance in Paid-in Capital from Treasury Stock is eliminated, any additional excess of cost over selling price is debited to Retained Earnings.
ACCOUNTING FOR TREASURY STOCK
Mead, Inc. sells its remaining 2,200 shares at $7 per share on December 1
The excess of cost over selling price is $2,200 [2,200 X ($8 – $7)]. In this case, $1,200 of the excess is debited to Paid-in Capital from Treasury Stock and the remaining $1,000 is debited to Retained Earnings. The entry is:
1000
Retained Earnings
Dec 1
17600
Treasury stock
1200
Paid-in capital from treasury stock
15400
Cash
CR
DR
Accounts
Date
PREFERRED STOCK 优先股
Preferred stock has contractual provisions that give it a preference over common stock in certain areas
Preferred stockholders have a priority as to
dividends and
assets in the event of liquidation
PREFERRED STOCK 优先股
They usually do not have voting rights. When a corporation has more than one class of stock, each capital account title should identify the stock to which it relates
Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. The entry to record the issuance is:
20,000
Paid-in capital in excess of par
value – preferred stock
Oct 1
100,000
Preferred stock
120,000
Cash
CR
DR
Accounts
Date
COMPUTATION OF TOTAL DIVIDENDS TO PREFERRED STOCK
Preferred stockholders have the right to share in the distribution of corporate income before common stockholders
Preferred stock contracts often contain a cumulative dividend feature累计股利 – which means that preferred stockholders must be paid both current-year dividends and any unpaid prior-year dividends before common stockholders receive dividends
COMPUTATION OF TOTAL DIVIDENDS TO PREFERRED STOCK
Cumulative preferred dividends not declared in a given period are called dividends in arrears.
Scientific Leasing has 5,000 shares of 7%, $100 par value cumulative preferred stock outstanding, and the annual dividend is $35,000 (5,000 X $7 per share).
If dividends are 2 years in arrears, preferred stockholders are entitled to receive the following dividends in the current year:
DIVIDENDS 股利
A dividend is distribution by a corporation to its stockholders on a pro rata (equal) basis.
A cash dividend现金股利 is a pro rata distribution of cash to stockholders.
For a cash dividend to occur, a corporation must have:
retained earnings
adequate cash, and
declared dividends 宣布派息
ENTRIES FOR CASH DIVIDENDS
Three dates are important in connection with dividends:
the declaration date宣布日
the record date登记日, and
the payment date支付日
Accounting entries are required on two of the dates – the declaration date and the payment date. On the declaration date, the board of directors formally declares the cash dividend and announces it to the stockholders
ENTRIES FOR CASH DIVIDENDS
An entry is required to recognize the decrease in retained earnings and the increase in the liability – Dividends Payable
On December 31, 2002, the directors of Media General declare a $.50 per share cash dividend on 100,000 shares of $10 par value common stock
The dividend is $50,000 (100,000 X $.50), and the entry to record the declaration:
50000
Dividends Payable
50000
Retained Earnings
Dec 31
CR
DR
Accounts
Date
ENTRIES FOR CASH DIVIDENDS
Preferred stock has priority over common stock in regard to dividends. Cash dividends must be paid to preferred stockholders before common stockholders are paid any dividends
IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2002
ENTRIES FOR CASH DIVIDENDS
The dividend per share for preferred stock is $8 ($100 par value X 8%), and the required annual dividend for preferred stock is $8,000 (1,000 X $8).
The directors declare a $6,000 cash dividend on December 31, 2002
The total dividend amount goes to the preferred stockholders in this case due to their dividend preference. The entry to record the dividend declaration is:
6,000
Dividends Payable
6,000
Retained Earnings
Dec 31
CR
DR
Accounts
Date
ALLOCATING DIVIDENDS TO PREFERRED AND COMMON STOCK
Since the preferred stock is cumulative, dividends of $2 per share are in arrears on preferred stock for 2002 and must be paid before any future dividends can be paid on common stock. On December 31, 2003, IBR declares a $50,000 cash dividend. The allocation of the dividend to the two classes of stock shown above. The entry to record the declaration of the dividend is:
50,000
Dividends Payable
50,000
Retained Earnings
Dec 31
CR
DR
Accounts
Date
ALLOCATING DIVIDENDS TO PREFERRED AND COMMON STOCK
RETAINED EARNINGS AND CASH BALANCES
Retained earnings is net income that is retained in the business
The balance in retained earnings is part of the stockholders’ claim on the total assets of the corporation
The relationship of cash to retained earnings is shown below (all figures in millions).
117
(882)
168
7,941
The Home Depot
729
5,952
Sears, Roebuck Co.
$414
$12,281
Walt Disney Co.
Cash
(millions )
Retained earnings
(millions )
Company
STOCKHOLDERS’ EQUITY WITH DEFICIT
Net losses净损失 are debited to Retained Earnings, not to paid-in capital accounts
To do so would destroy the distinction between paid-in capital and earned capital.
A debit balance in retained earnings is identified as a deficit and is reported as a deduction in the stockholders’ equity section, as shown below
Total stockholder’s equity 750,000
Retained earnings (50,000)
common stock 800,000
Paid-in Capital
Stockholder’s Equity
RETAINED EARNINGS RESTRICTIONS 留存收益限制
In some cases, there may be retained earnings restrictions that make a portion of the balance currently unavailable for dividends.
Restrictions result from one or more of the following causes:
Legal restrictions法律的限制. Many states require a corporation to restrict retained earnings for the cost of treasury stock purchased which serves to keep intact the corporation’s legal capital that is temporarily being held as treasury stock
RETAINED EARNINGS RESTRICTIONS 留存收益限制
Contractual restrictions合约限制. Long-term debt contracts may impose a restriction on retained earnings as a condition for the loan.
Voluntary restrictions自愿限制. The board of directors of a corporation may voluntarily create retained earnings restrictions for specific purposes
DISCLOSURE OF RESTRICTION 限制的披露
Retained earnings restrictions are generally disclosed in the notes to the financial statements.
Pratt & Lambert, a leading producer of architectural finishes (paint), has the following note in a recent financial statement:
PRIOR PERIOD ADJUSTMENTS
以前年度调整
The correction of an error in previously issued financial statements is known as a prior period adjustment
The correction is made directly to Retained Earnings because the effect is now in this account;
the net income for the prior period has been recorded in retained earnings through the journalizing and posting of closing entries
PRIOR PERIOD ADJUSTMENTS
以前年度调整
General Microwave discovers in 2002 that it understated depreciation expense in 2001 by $300,000 as a result of computational errors.
These errors overstated net income for 2001, and the current balance in retained earnings is also overstated.
The entry for the prior period adjustment, assuming all tax effects are ignored, is as follows:
300,000
Accumulated
depreciation
300,000
Retained earnings
Dec 31
CR
DR
Accounts
Date
STATEMENT PRESENTATION OF PRIOR PERIOD ADJUSTMENTS
Prior period adjustments are reported in the retained earnings statement
They are added to (or deducted from) the beginning retained earnings balance to show the adjusted beginning balance.
General Microwave has a beginning balance of $800,000 in retained earnings and the prior period adjustment is reported as follows:
Balance, Jan 1, as adjusted $500,000
Correction for overstatement of net income in prior period
($300,000)
Balance, Jan 1, as reported $800,000
Retained Earnings Statement
DEBITS AND CREDITS TO RETAINED EARNINGS
The retained earnings statement留存收益表 shows the changes in retained earnings during the year.
The statement is prepared from the Retained Earnings account.
Transactions and events that affect retained earnings are tabulated in account form as shown below.
4. Some disposal of treasury stock
3. Cash and stock dividend
2. Prior period adjustments for understatement of net income
2. Prior period adjustments for overstatement of net income
1. Net income
1. net loss
Credit
Debit
Retained Earnings
1,160,000
Balance, Dec 31,
(300,000)
Less: cash dividends
360,000
Add: net income
1,100,000
Balance, Jan 1, as adjusted
50,000
Correction for understatement of net income in prior period
1,050,000
Balance, Jan 1, as reported
For the year ended December 31, 2002
Retained Earnings Statement
GA Company
STOCKHOLDERS’ EQUITY PRESENTATION AND ANALYSIS
Two classifications of paid-in capital are recognized:
Capital stock – which consists of preferred and common stock
Additional paid-in capital – which includes the excess of amounts paid in over par or stated value and paid-in capital from treasury stock.
PUBLISHED STOCKHOLDERS’ EQUITY SECTION
In published annual reports, sub-classifications within the stockholders’ equity section are seldom presented
The individual sources of additional paid-in capital are often combined and reported as a single amount as shown below:
RETURN ON COMMON STOCKHOLDERS’ EQUITY RATIO
A popular ratio that measures profitability from the common stockholder’s point of view is return on common stockholders’ equity (ROE 股东权益报酬率)
This ratio shows the amount of net income dollars earned for each dollar invested by the owners.
It is calculated by dividing net income by average stockholders’ equity
RETURN ON COMMON STOCKHOLDERS’ EQUITY RATIO
If Lands’ End beginning of the year and end of year common stockholders’ equity were $ and $, net income was $ million, and no preferred stock was outstanding, the return on common stockholders’ equity ratio is:
($ + $) ($ - $0) ÷ ——————————— =11% 2
Net Income
Preferred Dividends
Average Common Stockholders’ Equity
Return on Common Stockholders’ Equity
Homework
E12-1, E12-2
P12-1A
CHAPTER 13
INVESTMENTS
投资
Study Objectives
Discuss why corporations invest in debt and stock securities
Explain the accounting for debt investments
Explain the accounting for stock investments
Distinguish between short-term and long-term investments
TEMPORARY INVESTMENTS
短期投资 AND THE OPERATING CYCLE
At the end of their operating cycles, many companies may have temporarily idle cash on hand pending the start of the next operating cycle
Until the cash is needed in operations, these companies may invest the excess funds to earn interest and dividends
The relationship of temporary investments to the operating cycle is depicted below
Cash
Accounts
receivable
inventory
Temporary
Investment
(capital
Market )
sell
invest
WHY CORPORATIONS INVEST
stocks
To meet strategic goals
Banking bonds
To generate earnings
Government bonds
To house excess cash until needed
Example
Reason
TEMPORARY AND LONG-TERM INVESTMENTS
Temporary investments 短期投资 are securities, held by a company, that are
readily marketable and
intended to be converted into cash within the next year or operating cycle, whichever is longer
Investments that do not meet both criteria are classified as long-term investments 长期投资
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES AT ACQUISITION
Debt investments 债券投资 are investments in government and corporation bonds. In accounting for debt investments, entries are required to record
Acquisition
interest revenue, and
sale.
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES AT ACQUISITION
At acquisition – the cost principle applies, and cost includes all expenditures necessary to acquire these investments
Kuhl Corporation acquires 50 Doan Inc. 12%, 10-year, $1,000 bonds on January 1, 2002, for $54,000, including brokerage fees of $1,000. The entry to record the investment is:
54,000
Cash
54,000
Debt investments
Jan
1
CR
DR
Accounts
Date
The bonds pay $3,000 interest on July 1 and January 1 ($50,000 X 12% X ½). The July 1 entry is:
3,000
Interest revenue
3,000
Cash
July
1
CR
DR
Accounts
Date
It is necessary to accrue $3,000 interest earned since July 1 at year-end. The December 31 entry is:
3,000
Interest revenue
3,000
Interest receivable
Dec
31
CR
DR
Accounts
Date
3,000
Interest receivable
3,000
Cash
Jan
1
CR
DR
Accounts
Date
ACCOUNTING FOR DEBT INVESTMENTS ENTRIES FOR SALE OF BONDS
Any difference between the net proceeds (sales price less brokerage fees) from the sale of bonds and the cost of the bonds is recorded as a gain or loss.
Kuhl Corporation receives net proceeds of $58,000 on the sale of the Doan Inc. bonds on January 1, 2003, after receiving the interest due. Since the securities cost $54,000, a gain of $4,000 has been realized. The entry to record the sale is:
54,000
Debt investment
4,000
Gain on the sale of debt
investment
58,000
Cash
Jan
1
CR
DR
Accounts
Date
ACCOUNTING GUIDELINES FOR STOCK INVESTMENTS 股票投资
Stock investments are investments in the capital stock of corporations.
Under the different situation, the accounting treatment will be different.
Consolidated financial statement
合并财务报表
Controlling
More than 50%
Equity method
权益法
Significant
Between 20% and 50%
Cost method
成本法
Insignificant
Less than 20%
Accounting
guidelines
Presumed influence on investee
Investor’s ownership interest in investee’s common stock
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS LESS THAN 20%
In accounting for stock investments of less than 20%, the cost method is used.
The investment is recorded at cost
revenue is recognized only when cash dividends are received.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS LESS THAN 20%
On July 1, 2002, Sanchez Corporation acquires 1,000 shares (10% ownership) of Beal Corporation common stock at $40 per share plus brokerage fees of $500. The entry for the purchase is:
40,500
Cash
40,500
Stock investment
July
1
CR
DR
Accounts
Date
Entries are required for any cash dividends received during the time the stock is held. If a $2 per share dividend is received by Sanchez Corporation on December 31 the entry is:
2,000
Dividend revenue
2,000
Cash
Dec
31
CR
DR
Accounts
Date
Dividend Revenue is reported under Other Revenue and Gains in the income statement.
When stock is sold, the difference between the net proceeds from the sale and the cost of the stock is recognized as a gain or loss.
Sanchez Corporation receives net proceeds of $39,500 on the sale of its Beal Corporation common stock on February 10, 2003. Because the stock cost $40,500, a loss of $1,000 has been incurred. The entry to record the sale is:
1,000
Loss on sale of stock investment
40,500
Stock investment
39,500
Cash
Feb
10
CR
DR
Accounts
Date
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
When an investor owns between 20% and 50% of the common stock of a corporation, it is usually presumed that the investor has significant influence over the financial and operating activities of the investee
Subsequently, the investor should record its share of the net income of the investee in the year when it is earned.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
Under the equity method, the investment in common stock is initially recorded at cost;
the investment account is adjusted annually to show the investor’s equity in the investee.
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS BETWEEN 20% AND 50%
Each year, the investor:
debits the investment account and credits revenue for its share of the investee’s net income and
credits dividends received to the investment account
Milar Corporation acquires 30% of the common stock of Beck Company for $120,000 on January 1, 2002. The entry to record this transaction is:
120,000
Cash
120,000
Stock investment
Jan
1
CR
DR
Accounts
Date
Beck reports 2002 net income of $100,000 and declares and pays a $40,000 cash dividend
Milar is required to record:
its share of Beck’s net income, $30,000 (30% X $100,000) and
the reduction in the investment account for the dividends received, $12,000 ($40,000 X 30%).
The entries are:
30,000
Revenue from investment
30,000
Stock investment
Dec
31
CR
DR
Accounts
Date
12,000
Stock investment
12,000
Cash
Jan
1
CR
DR
Accounts
Date
INVESTMENT AND REVENUE ACCOUNTS
AFTER POSTING
Dec 31 $12,000
Jan 1 $120,000
Dec 31 $30,000
Dec 31 $138,000
Stock Investment
Dec 31 $30,000
Revenue from stock Investment
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS OF MORE THAN 50%
A company that owns more than 50% of the common stock of another entity is known as a parent company母公司
The entity whose stock is owned by the parent company is called the subsidiary (affiliated) company子公司
ACCOUNTING FOR STOCK INVESTMENTS HOLDINGS OF MORE THAN 50%
The parent company is perceived to have a controlling interest控制性利益 in the subsidiary due to its stock ownership
When one company owns more than 50% of the common stock of another company, consolidated financial statements合并报表 are usually prepared.
VALUATION GUIDELINES 估价指南
Fair value公允价值 is the amount for which a security could be sold in a normal market and offers the best approach at investment valuation since it represents the expected cash realizable value of the securities.
VALUATION AND REPORTING OF INVESTMENTS
For purposes of valuation and reporting at a financial statement date, debt and stock investments are classified into the following three categories of securities:
Trading securities交易性金融资产 - held with the intention of selling them in a short period of time (generally less than a month).
VALUATION AND REPORTING OF INVESTMENTS
Available-for-sale securities可供销售证券 - may be sold in the future.
Held-to-maturity securities持有到期证券 - debt securities that the investor has the intent and ability to hold to maturity。
VALUATION OF TRADING SECURITIES
Trading securities are reported at fair value, and changes from cost are reported as part of net income
The changes are reported as unrealized gains or losses since the securities have not been sold
The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value
7,000
147,000
140,000
Total
9,000
99,000
90,000
Stock
(2,000)
48,000
50,000
Bonds
Unearned gain (loss )
Fair value
Cost
Investment
Trade Securities , Dec 31, 2002
Pace Corporation has the following costs and fair values for its investments classified as trading securities:
VALUATION OF TRADING SECURITIES
Pace Corporation has an unrealized gain of $7,000 because total fair value ($147,000) is $7,000 greater than total cost ($140,000).
Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared
VALUATION OF TRADING SECURITIES
A valuation allowance account, Market Adjustment - Trading, is used to record the difference between the total cost and the total fair value of the securities.
The adjusting entry for Pace Corporation is:
7,000
Unrealized gain
7,000
Market Adjustment- trading
Dec
31
CR
DR
Accounts
Date
VALUATION OF TRADING SECURITIES
The fair value of the securities is the amount reported on the balance sheet
The unrealized gain is reported on the income statement in the Other Revenues and Gains section
The unrealized loss is reported on the income statement in the Other Expenses and Losses section
VALUATION OF AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are held with the intention of selling them in the near future.
Available-for-sale securities are reported at fair value
The changes are reported as unrealized gains or losses since the securities have not been sold.
The unrealized gain or loss is the difference between the total cost of the securities in the category and their total fair value
(9,537)
284,000
293,537
Total
(19,600)
180,400
200,000
Stock
10,063
103,600
93,537
Bonds
Unearned gain (loss )
Fair value
Cost
Investment
Available-for-sale Securities , Dec 31, 2002
Elbert Corporation has an unrealized loss of $9,537 because total fair value ($284,000) is $9,537 less than total cost ($293,537).
Fair value and the unrealized gain or loss are recorded through an adjusting entry at the time financial statements are prepared
A valuation allowance account, Market Adjustment - Available-for-Sale, is used to record the difference between the total cost and the total fair value of the securities.
The adjusting entry for Elbert Corporation is:
9,537
Market Adjustment- Available-
for –sale
9,537
Unrealized loss
Dec
31
CR
DR
Accounts
Date
The fair value of the securities is the amount reported on the balance sheet.
The unrealized gain or loss is reported as a separate component of stockholders’ equity.
UNREALIZED LOSS IN STOCKHOLDERS’ EQUITY SECTION
4,400, 000
total stockholders’ equity
(100,000)
Less: unrealized loss on available-for-sale
4,500,000
total
1,500,000
Retained earnings
3,000,000
Common stock
Stockholders’ equity
NONOPERATING ITEMS RELATED TO INVESTMENTS
Temporary investments are listed immediately below cash in the current asset section of the balance sheet due to their liquidity
Temporary investments are reported at fair value.
Long-term investments are typically reported in a separate section of the balance sheet immediately below current assets
NONOPERATING ITEMS RELATED TO INVESTMENTS
In the income statement, the items below are reported in the non-operating section:
Unrealized gain
Gain on sale of investment
Unrealized loss
Dividend revenue
Loss of sale of investment
Interest revenue
Other expenses and losses
Other revenues and gains
Homework
E13-1, E13-2
P13-3A
CHAPTER 14
THE STATEMENT OF CASH FLOWS
现金流量表
Study Objectives
the primary purpose of the statement of cash flows
Distinguish among operating, investing, and financing activities
Prepare a statement of cash flows using the indirect method
Prepare a statement of cash flows using the direct method
Analyze the statement of cash flows
PURPOSE OF THE STATEMENT OF CASH FLOWS
The primary purpose of the statement of cash flows (SCF) is to provide information about the cash receipts and cash payments of an entity during a period
A secondary objective is to provide information about the
operating经营,
investing投资,
financing 筹资 activities of an entity during a period
PURPOSE OF THE STATEMENT OF CASH FLOWS
It provides answers to the following simple, but important, questions about the enterprise
Where did the cash come from during the period
What was the cash used for during the period
What was the change in the cash balance during the period
MEANING OF CASH FLOWS 现金流量
The SCF is usually prepared using cash and cash equivalents as its basis
Cash equivalents 现金等价物 are short-term, highly liquid investments that are both
readily convertible to known amounts of cash, and
so near to their maturity that their market value is relatively insensitive to changes in interest rates
CLASSIFICATION OF CASH FLOWS 现金流量的分类
Operating activities 经营活动 include the cash effects of transactions that create revenues and expenses and thus enter into the determination of net income
CLASSIFICATION OF CASH FLOWS 现金流量的分类
Investing activities 投资活动 include
acquiring and disposing of investments and productive long-lived assets,
lending money and collecting the loans.
CLASSIFICATION OF CASH FLOWS 现金流量的分类
Financing activities 筹资活动 include
obtaining cash from issuing debt and repaying the amounts borrowed,
obtaining cash from stockholders and providing them with a return on their investment
CLASSIFICATION OF CASH FLOWS
operating activities involve income determination (income statement) items
investing activities involve cash flows resulting from changes in investments and long-term asset items, and
financing activities involve cash flows resulting from changes in long-term liability and stockholders’ equity items.
other expenses
to lend for interest
to government for tax
to employees for work
to suppliers for inventory
Cash Outflows:
Interest and dividends received
From sale of goods
Cash Inflows:
Cash flows from Operating activities
from collection of principals on loan to
other entities
to make loan to others
to purchase debt or equity securities of
other entities
to purchase fixed assets
Cash Outflows:
from sale of debt or equity securities of
other entities
From sale of fixed assets
Cash Inflows:
Cash flows from Investing activities
to redeem long-term debt
dividends to stockholders
Cash Outflows:
from issue of debt
From issue of equity
Cash Inflows:
Cash flows from Financing activities
SIGNIFICANT NONCASH ACTIVITIES 显著的非现金活动
Not all of a company’s significant activities involve cash
Examples of significant non-cash activities are:
Issuance of common stock to purchase assets
Conversion of bonds into common stock
Issuance of debt to purchase assets
Exchange of plant assets
SIGNIFICANT NONCASH ACTIVITIES 显著的非现金活动
Significant financing and investing activities that do not affect cash are not reported in the body of the SCF
Such activities are reported in either
a separate schedule at the bottom of the SCF or
in a separate note or supplementary schedule to the financial statements
FORMAT OF STATEMENT OF CASH FLOWS 现金流量表的格式
The 3 activities previously discussed – operating, investing, and financing – plus the significant non-cash investing and financing activities constitute the general format of the SCF, an example of which is shown below
×
Cash at ending of period
Non-cash investing and financing activities
×
Cash at beginning of period
×
Net Increase (decrease ) in cash
×
Cash flows from financing activities
×
Cash flows from investing activities
×
Cash flows from operating activities
For the year ended Dec 31, 2002
Statement of Cash Flows
ABC Company
USEFULNESS OF THE STATEMENT OF CASH FLOWS
The information in the SCF should help investors, creditors and others assess various aspects of the firm’s financial position:
The entity’s ability to generate future cash flows
The entity’s ability to pay dividends and meet obligations
The reasons for the difference between net income and net cash provided (used) by operating activities
The cash investing and financing transactions during the period
USAGE OF INDIRECT AND DIRECT METHODS 直接法与间接法
In order to determine net cash provided/used by operating activities, the operating activities section of the SCF must be converted from accrual basis to cash basis.
This conversion may be accomplished by
the indirect method or
the direct method.
USAGE OF INDIRECT AND DIRECT METHODS 直接法与间接法
The indirect method is used extensively in practice, as shown below.
The indirect is favored by companies for 2 reasons:
it is easier to prepare and
it focuses on the differences between net income and net cash flow from operating activities.
USAGE OF INDIRECT AND DIRECT METHODS 直接法与间接法
% Indirect Method
% Direct Method
34,000
Cash at ending of period
0
Cash at beginning of period
34,000
Net increase in cash
(15,000)
payment of cash dividend
50,000
Issuance of common stock
Cash flows from financing activities
(10,000)
Net cash provided by investing activities
(10,000)
Purchase of equipment
Cash flows from investing activities
9,000
Net cash provided by operating activities
4,000
increase in accounts payable
(30,000)
Increase in Accounts receivable
Adjustment to net income:
35,000
Net Income
Cash flows from operating activities
34,000
Cash at ending of period
0
Cash at beginning of period
34,000
Net increase in cash
(15,000)
payment of cash dividend
50,000
Issuance of common stock
Cash flows from financing activities
(10,000)
Net cash provided by investing activities
(10,000)
Purchase of equipment
Cash flows from investing activities
9,000
Net cash provided by operating activities
(48,000)
Cash payments for tax
(158,000)
Cash payments for expenses
(550,000)
Cash payments to suppliers
765,000
Cash receipts from customer
$2,799 + $1,753 $1,291 ÷ ———————— = . 57:1 2
CURRENT CASH DEBT COVERAGE RATIO 现金流动负债比率
Net Cash Provided by Operating Activities
Average Current Liabilities
Current Cash Debt Coverage Ratio
CASH RETURN ON SALES RATIO 销售现金回报率
The cash return on sales ratio is the cash based ratio that is the counterpart of the profit margin percentage. This ratio is calculated by dividing net sales into net cash provided by operating activities. The current return on sales ratio for the Gap, Inc. is calculated below.
$1,291 ÷ $13,673 = %
CASH RETURN ON SALES RATIO 销售现金回报率
Net Cash Provided by Operating Activities
Net Sales
Cash Return on Sales
CASH DEBT COVERAGE RATIO 现金负债比率
The cash basis measure of solvency is the cash debt coverage ratio – the ratio of net cash provided by operating activities to average total liabilities. This ratio demonstrates a company’s ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets it employs. The cash debt coverage ratio for the Gap, Inc. is calculated below.
$4,085 + $2,956 $1,291 ÷ ———————— = .40:1 times 2
CASH DEBT COVERAGE RATIO 现金负债比率
Net Cash Provided by Operating Activities
Average Total Liabilities
Current Cash Debt Coverage Ratio
CHAPTER 15
FINANCIAL STATEMENT ANALYSIS 财务报告分析
Study Objectives
Discuss the need for comparative analysis
Identify the tools of financial statement analysis
Explain and apply horizontal analysis
Describe and apply vertical analysis
Identify and compute ratios and describe their purpose and use in analyzing a firm’s liquidity, profitability, and solvency
BASICS OF FINANCIAL STATEMENT ANALYSIS 财务报表分析
Analyzing financial statements involves Three characteristics of a company:
liquidity流动性
profitability盈利性
solvency偿付能力
Every item reported in a financial statement has significance
BASICS OF FINANCIAL STATEMENT ANALYSIS 财务报表分析
In order to obtain information as to whether the amount
represents an increase over prior years or
is adequate in relation to the company’s need for cash,
the amount of cash must be compared with other financial statement data
BASICS OF FINANCIAL STATEMENT ANALYSIS 财务报表分析
Comparisons can be made on several difference bases – three are illustrated in this chapter:
intra-company basis
industry averages, and
inter-company basis
TOOLS OF FINANCIAL STATEMENT ANALYSIS
Three commonly used tools are utilized to evaluate the significance of financial statement data
Horizontal analysis 横向分析 (trend analysis) is a technique for evaluating a series of financial statement data over a period of time
TOOLS OF FINANCIAL STATEMENT ANALYSIS
Vertical analysis 纵向分析 is a technique for evaluating financial statement data that expresses each item in a financial statement in terms of a percent of a base amount
Ratio analysis比率分析 expresses the relationship among selected items of financial statement data
TOOLS OF FINANCIAL STATEMENT ANALYSIS
The purpose of horizontal analysis is to determine the increase or decrease that has taken place, expressed as either an amount or a percentage
The recent net sales figures of Sears, Roebuck and Co. are shown above. Given that 1996 is the base year, we can measure all percentage increases or decreases from this base period amount as shown below.
%
%
109%
%
100%
40,937
39,484
39,953
39,837
36,662
2000
1999
1998
1997
1996
RATIO ANALYSIS 比率分析
Ratio analysis expresses the relationship among selected items of financial statement data.
A ratio expresses the mathematical relationship between one quantity and another
A single ratio by itself is not very meaningful, in the upcoming illustrations we will use:
RATIO ANALYSIS 比率分析
Intra-company comparisons 公司自身比较 covering two years for the Quality Department Store
Industry average comparisons行业比较 based on median ratios for department stores
Inter-company comparisons不同公司之间比较 based on Sears, Roebuck and Co. as Quality Department Store’s principal competitor
FINANCIAL RATIO CLASSIFICATION
Liquidity Ratios 流动性比率: Measures of short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash
Profitability Ratios 盈利比率: Measures of the income or operating success of an enterprise for a given period of time
Solvency Ratios 偿付能力比率: Measures of the ability of the enterprise to survive over a long period of time
CURRENT RATIO 流动比率
The current ratio (working capital ratio) is a widely used measure for evaluating a company’s liquidity and short-term debt-paying ability
It is calculated by dividing current assets by current liabilities and is a more dependable indicator of liquidity than working capital
The current ratios for Quality Department Store and comparative data are shown below.
CURRENT ASSETS CURRENT RATIO = ——————————— CURRENT LIABILITIES
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
CURRENT ASSETS OF QUALITY DEPARTMENT STORE
2000
1999
Current assets
Cash
$ 100,000
$ 155,000
Temporary invest.
20,000
70,000
Receivables (net)
230,000
180,000
Inventory
620,000
500,000
Prepaid expenses
50,000
40,000
Total current assets
$ 1,020,000
$ 945,000
ACID-TEST RATIO 酸性比率
The acid-test ratio (quick ratio) is a measure of a company’s short-term liquidity and is calculated by dividing the sum of cash, marketable securities, and net receivables by current liabilities.
The acid-test ratios for Quality Department Store and comparative data are shown below
CASH + MARKETABLE SECURITIES + RECEIVABLES (NET) ACID-TEST RATIO = ———————————————————————————— CURRENT LIABILITIES
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
CURRENT CASH DEBT COVERAGE RATIO
The current cash debt coverage ratio usually provides a superior representation of liquidity since it uses not cash provided by operating activities rather than a balance at a point in time.
Quality Department Store’s current cash debt coverage ratios for 2000 and 1999 are calculated below.
CURRENT CASH DEBT NET CASH PROVIDED BY OPERATING ACTIVITIES COVERAGE RATIO = ———————————————————————— AVERAGE CURRENT LIABILITIES
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
RECEIVABLES TURNOVER 应收账款周转率
The receivables turnover ratio is used to assess the liquidity of the receivables. It measures the number of times, on average, receivables are collected during the period.
The ratio is calculated by dividing net credit sales by average net receivables during the year.
The receivables turnover ratio and comparative data for Quality Department Store for 2000 and 1999 are calculated below
NET CREDIT SALES RECEIVABLES TURNOVER = ——————————————— AVERAGE NET RECEIVABLES
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
INVENTORY TURNOVER 存货周转率
The inventory turnover ratio measures the number of times, on average, the inventory is sold during the period – which measures the liquidity of the inventory
It is calculated by dividing cost of goods sold by average inventory during the year
The inventory turnover ratio and comparative data for Quality Department Store for 2000 and 1999 are calculated below
COST OF GOODS SOLD INVENTORY TURNOVER = ———————————— AVERAGE INVENTORY
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
PROFIT MARGIN RATIO 利润率
The profit margin ratio is a measure of the percentage of each dollar of sales that results in net income
It is calculated by dividing net income by net sales for the period
The profit margin ratios and comparative data for Quality Department Store for 2000 and 1999 are calculated below
NET INCOME PROFIT MARGIN ON SALES = —————— NET SALES
%
%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
CASH RETURN ON SALES RATIO
The cash basis counterpart of the profit margin ratio is the cash return on sales ratio which uses net cash provided by operating activities as the numerator and net sales as the denominator
Using net cash provided by operating activities of $404,000 in 2000 and $340,000 in 1999
Quality Department Store’s cash return on sales ratios are calculated and evaluated below
NET CASH PROVIDED BY OPERATING ACTIVITIES CASH RETURN ON SALES RATIO = ————————————————————————— NET SALES
%
%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
ASSET TURNOVER 资产周转率
The asset turnover ratio measures how efficiently a company uses its asset to generate sales
It is determined by dividing net sales by average assets for the period
Quality Department Store’s cash return on sales ratios are calculated and evaluated below
NET SALES ASSET TURNOVER = ————————— AVERAGE ASSETS
times
Sears, Roebuck and Co.
Industry average
times
1999
2000
Quality Department Store
RETURN ON ASSETS 资产报酬率
An overall measure of profitability is the return on assets ratio
It is calculated by dividing net income by average assets for the period
Quality Department Store’s return on assets ratios for 2000 and 1999 are calculated and evaluated below
NET INCOME RETURN ON ASSETS = ————————— AVERAGE ASSETS
%
%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
RETURN ON COMMON STOCKHOLDERS’ EQUITY 权益报酬率
A ratio that measures profitability from the viewpoint of the common stockholder is return on common stockholders’ equity
It is calculated by dividing net income by average common stockholders’ equity for the period
Quality Department Store’s return on common stockholders’ equity for 2000 and 1999 are calculated and evaluated below
RETURN ON COMMON NET INCOME STOCKHOLDERS’ EQUITY = ——————————————————————— AVERAGE COMMON STOCKHOLDERS’ EQUITY
%
%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
EARNINGS PER SHARE 每股收益
Earnings per share (EPS) of common stock is a measure of net income earned on each share of common stock
It is calculated by dividing net income by the number of weighted average common shares outstanding during the year
Quality Department Store’s EPS for 2000 and 1999 are calculated and evaluated below
EARNINGS NET INCOME PER SHARE = ———————————————————————————— WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
$
$
1999
2000
Quality Department Store
PRICE-EARNINGS RATIO 市盈率
The price-earnings (PE) ratio measures the ratio of the market price of each share of common stock to the earnings per share
It is calculated by dividing the market price per share of common stock by earnings per share
Quality Department Store’s PE ratios for 2000 and 1999 are calculated and evaluated below
MARKET PRICE PER SHARE OF COMMON STOCK PRICE-EARNINGS RATIO = ————————————————————————— EARNINGS PER SHARE
22
33
Sears, Roebuck and Co.
Industry average
1999
2000
Quality Department Store
PAYOUT RATIO 股利支付率
The payout ratio measures the percentage of earnings distributed in the form of cash dividends
It is calculated by dividing cash dividends by net income
Quality Department Store’s payout ratios for 2000and 1999 are calculated and evaluated below
CASH DIVIDENDS PAYOUT RATIO = ————————— NET INCOME
%
%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
DEBT TO TOTAL ASSETS 资产负债率
The debt to total assets ratio measures the percentage of total assets provided by creditors, indicating the degree of leveraging.
It is calculated by dividing total debt by total assets.
Quality Department Store’s total debt to total assets ratios for 2000 and 1999 are calculated and evaluated below.
TOTAL DEBT DEBT TO TOTAL ASSETS = ———————— TOTAL ASSETS
%
42%
Sears, Roebuck and Co.
Industry average
%
%
1999
2000
Quality Department Store
TIMES INTEREST EARNED 利息获利倍数
The times interest earned ratio provides an indication of the company’s ability to meet interest payments as they come due.
It is calculated by dividing income before income taxes and interest expense by interest expense.
Quality Department Store’s times interest earned ratios for 2000 and 1999 are calculated and evaluated below.
TIMES INTEREST INCOME BEFORE INCOME TAXES AND INTEREST EXPENSE EARNED = ————————————————————————————— INTEREST EXPENSE
times
times
Sears, Roebuck and Co.
Industry average
13 times
1999
2000
Quality Department Store
CASH DEBT COVERAGE RATIO
The ratio of net cash provided by operating activities to average total liabilities is the cash debt coverage ratio and is a measure of solvency.
Quality Department Store’s cash debt coverage ratios for 2000 and 1999 are calculated and evaluated below.
NET CASH PROVIDED BY OPERATING ACTIVITIES CASH DEBT COVERAGE RATIO = ————————————————————————— AVERAGE TOTAL LIABILITIES
times
times
Sears, Roebuck and Co.
Industry average
times
times
1999
2000
Quality Department Store
EARNING POWER AND IRREGULAR ITEMS 正常收益项目与非正常收益项目
For users of financial statements to determine earning power获利能力 or regular income, the irregular items are separately identified on the income statement
Three types of irregular items are reported
Discontinued operations 停业
Extraordinary items 非常项目
Changes in accounting principle会计政策变化
DISCONTINUED OPERATIONS
Discontinued operations constitutes the disposal of a significant segment部门 of a business
The income (loss) from discontinued operations consists of
the income (loss) from operations and
the gain (loss) on disposal of the segment
STATEMENT PRESENTATION OF DISCONTINUED OPERATIONS
Acro Energy Inc. has revenues of $ million and expenses of $ million from continuing operations in 2002. The company therefore has income before income taxes of $800,000.
The company discontinued and sold its unprofitable chemical division during 2002. The 2002 loss from chemical operations was $140,000 , and the loss on disposal of the chemical division was $70,000.
350,000
Net income
(210,000)
Less: loss from Discontinued operation
$560,000
Income from operations
Partial Income Statement
EXTRAORDINARY ITEMS 非常项目
Extraordinary items are events and transactions that meet two conditions: they are
unusual in nature and
infrequent in occurrence
Extraordinary items are reported net of taxes in a separate section of the income statement immediately below discontinued operations
EXAMPLES OF EXTRAORDINARY items
Effect of major casualties (acts of God )
Property takeover by a foreign government
Effects of newly enacted law
Destruction of property by fire
350,000
Income before extraordinary item
(49,000)
Less: extraordinary item
301,000
Net income
(210,000)
Less: loss from Discontinued operation
$560,000
Income from operations
Partial Income Statement
CHANGE IN ACCOUNTING PRINCIPLE 会计原则变化
To make them comparable, financial statements are expected to be prepared on a basis consistent with that used in the preceding period
A change in accounting principle occurs when the principle used in the current year is different from the one used in the preceding year
CHANGE IN ACCOUNTING PRINCIPLE
会计原则变化
A change is permitted when
management can show that the new principle is preferable to the old principle and
the effects of the change are clearly disclosed in the income statement
CHANGE IN ACCOUNTING PRINCIPLE
When a change in accounting principle has occurred
the new principle should be used in reporting the results of operations of the current year and
the cumulative effect累计效应 of the change on all prior year income statements should be disclosed net of applicable income taxes in a special section immediately preceding net income
STATEMENT PRESENTATION OF CHANGE IN ACCOUNTING PRINCIPLE
At the beginning of 2002, Acro Energy Inc. changes from the straight-line method of depreciation to the declining-balance method for equipment purchased on January 1, 1999.
Assuming a 30% income tax rate the net of income tax effect of the change is $16,800 ($24,000 X 70%).
$284,200
Net income
(16,800)
cumulative effect of change in
accounting principle
(49,000)
Less: extraordinary item
$350,000
Income before extraordinary item and cumulative effect of change in accounting principle
Partial Income statement
For the year ended at Dec 31, 2002
LIMITATIONS OF FINANCIAL ANALYSIS 财务分析的限制
You should be aware of some of the limitations of the three analytical tools illustrated in the chapter and of the financial statements on which they are based
Estimates 估计: Financial statements contain numerous estimates; to the extent that these estimates are inaccurate, the financial ratios and percentages are inaccurate
LIMITATIONS OF FINANCIAL ANALYSIS 财务分析的限制
Cost: Traditional financial statements are based on cost and are not adjusted for price-level changes. Comparisons of unadjusted financial data from different periods may be rendered invalid by significant inflation or deflation.
LIMITATIONS OF FINANCIAL ANALYSIS 财务分析的限制
Alternative Accounting Methods不同的会计方法: Variations among companies in the application of GAAP may hamper comparability. Although differences in accounting methods might be detectable from reading the notes to the financial statements, adjusting the financial data to compensate for the different methods is difficult, if not impossible, in some cases.
LIMITATIONS OF FINANCIAL ANALYSIS 财务分析的限制
Atypical Data非典型的数据: Fiscal year-end data may not be typical of the financial condition during the year. Firms often establish a fiscal year-end that coincides with the low point in operating activity or in inventory levels.
Thus, certain account balances may not be representative of the account balances during the year
LIMITATIONS OF FINANCIAL ANALYSIS 财务分析的限制
Diversification of Firms公司的多元化: Diversification in American industry also restricts the usefulness of financial analysis. Many firms today are too diversified to be classified by industry, while others appear to be comparable when they are not
Homework
E15-7, E15-9
P15-2A
All professions have regulations. Accounting is no different. The major organizations that influence the profession are shown here. In the public sector, the Securities and Exchange Commission (SEC) requires companies to have their financial statements audited by independent accountants. In the private sector, the FASB determines how accounting is practiced in the United States, which is put forth in generally accepted accounting principles, called GAAP. The American Institute of Certified Public Accountants and the Institute of Management Accountants in the private sector work closely with both the SEC and the FASB.
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