2-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University...
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PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud
Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,
the Star Logo, and South-Western are trademarks used herein under license.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
Task Force Image Gallery clip art included in this electronic presentation is used with the
permission of NVTech Inc.
F1322Business Business ActivitiesActivities— — The Source of The Source of Accounting Accounting InformationInformation
Financial AccountingA Bridge to Decision MakingA Bridge to Decision Making
Ingram and Albright
6th edition
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Once you have completed this
chapter, you should be able to—
Once you have completed this
chapter, you should be able to—
ObjectivesObjectivesObjectivesObjectives
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2. Demonstrate how accounting measures and records business activities.
3. Identify investing activities and explain why they are important to a business.
4. Identify operating activities and explain how they create profits for a company.
ObjectivesObjectivesObjectivesObjectives
ContinuedContinuedContinuedContinued
1. Identify financing activities and explain why they are important to a business.
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5. Describe how financial reports summarize business activities and provide information for business decisions.
ObjectivesObjectivesObjectivesObjectives
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11ObjectiveObjectiveObjectiveObjective
Identify financing activities and explain why they are important to a business.
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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
A business is an organization that exists for
the purpose of making a profit for its owners.
A business is an organization that exists for
the purpose of making a profit for its owners.
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A contribution by owners to a business, along with any profits
that are kept in the business, is known as
owners’ equity.
A contribution by owners to a business, along with any profits
that are kept in the business, is known as
owners’ equity.
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
The amount a company borrows is the
principal of a loan. Interest is the cost of borrowing and is paid to creditors in addition
to the repayment of principal.
The amount a company borrows is the
principal of a loan. Interest is the cost of borrowing and is paid to creditors in addition
to the repayment of principal.
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Financing from Owners and Creditors
Exhibit 1Exhibit 1Exhibit 1Exhibit 1
Favorite
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22Demonstrate how accounting measures and records business activities.
ObjectiveObjectiveObjectiveObjective
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An account is a record of the increases and decreases in the
dollar amount associated with a specific resource or activity.
An account is a record of the increases and decreases in the
dollar amount associated with a specific resource or activity.
Accounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business Activities
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Accounting transactions are descriptions of business
activities (or events) that are measured in dollar values and
recorded in accounts.
Accounting transactions are descriptions of business
activities (or events) that are measured in dollar values and
recorded in accounts.
Accounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business ActivitiesAccounting for Business Activities
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AssetsAssets =Resources
controlled by the business
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
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AssetsAssets = LiabilitiesLiabilities Owners’ Equity
Owners’ Equity+
The claims of creditors to a company’s resources
Owners’ claims on the company’s
assets
The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
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Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
On January 2, 2007, Favorite Cookie Company received
$10,000 from the company’s owners. On January 3, 2007, the company received $8,000
from the bank.
On January 2, 2007, Favorite Cookie Company received
$10,000 from the company’s owners. On January 3, 2007, the company received $8,000
from the bank.
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 0 = 0 + 0
1/2 Cash 10,000Contributed Capital 10,000
1/3 Cash 8,000Notes payable 8,000Ending Amounts 18,000 = 8,000 + 10,000
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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Cash refers to financial resources in the form of coins and currency,
bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and
obligations of a company.
Cash refers to financial resources in the form of coins and currency,
bank deposits, and short-term investments that can be converted easily into currency and that can be used to pay for resources and
obligations of a company.
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
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Contributed capital is an owners’ equity account and
identifies amounts contributed to a company by its owners.
Contributed capital is an owners’ equity account and
identifies amounts contributed to a company by its owners.
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
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Notes payable is a liability account used to identify amounts a company owes to creditors with
whom a formal agreement, or note, has been signed.
Notes payable is a liability account used to identify amounts a company owes to creditors with
whom a formal agreement, or note, has been signed.
Financing ActivitiesFinancing ActivitiesFinancing ActivitiesFinancing Activities
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33Identify investing activities and explain why they are important to a business.
ObjectiveObjectiveObjectiveObjective
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Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
Investing activities involve the acquisition or disposal
of long-term resources used by a business.
Investing activities involve the acquisition or disposal
of long-term resources used by a business.
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Investing in Long-Term ResourcesExhibit 4Exhibit 4Exhibit 4Exhibit 4
Favorite
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On January 5, Favorite Cookie Company paid $6,000 for
office equipment. On January 6, the company bought a
delivery van for $25,000. It paid $3,000 in cash and financed the remaining
$22,000 of the purchase price with a note payable.
On January 5, Favorite Cookie Company paid $6,000 for
office equipment. On January 6, the company bought a
delivery van for $25,000. It paid $3,000 in cash and financed the remaining
$22,000 of the purchase price with a note payable.
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000
Cash –6,000 1/6 Equipment 25,000
Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
On January 5, one asset increased (Equipment) and another asset decreased
(Cash) by the same amount, so the accounting equation remained unchanged.
On January 5, one asset increased (Equipment) and another asset decreased
(Cash) by the same amount, so the accounting equation remained unchanged.
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000
Cash –6,000 1/6 Equipment 25,000
Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
On January 6, the company acquired a delivery van for $25,000.
On January 6, the company acquired a delivery van for $25,000.
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000
Cash –6,000 1/6 Equipment 25,000
Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
The company paid $3,000 in cash.The company paid $3,000 in cash.
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000
Cash –6,000 1/6 Equipment 25,000
Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
The balance of $22,000 was financed by issuing a note payable.
The balance of $22,000 was financed by issuing a note payable.
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts 18,000 = 8,000 + 10,000 1/5 Equipment 6,000
Cash –6,000 1/6 Equipment 25,000
Cash –3,000Notes Payable 22,000Ending Amounts 40,000 = 30,000 + 10,000
Investing ActivitiesInvesting ActivitiesInvesting ActivitiesInvesting Activities
Exhibit 3Exhibit 3Exhibit 3Exhibit 3
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44Identify operating activities and explain how they create profits for a company.
ObjectiveObjectiveObjectiveObjective
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Operating activities are those activities necessary to acquire and sell goods
and services.
Operating activities are those activities necessary to acquire and sell goods
and services.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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Revenue is the amount a company expects to receive
when it sells goods or services.
Revenue is the amount a company expects to receive
when it sells goods or services.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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Expense is the amount of resources consumed in the process of acquiring and
selling goods and services.
Expense is the amount of resources consumed in the process of acquiring and
selling goods and services.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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Purchase of Goods for SaleExhibit 6Exhibit 6Exhibit 6Exhibit 6
Favorite
FragileFragileFragileFragile
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Merchandise inventory is an asset
account and identifies the cost of goods a
company has purchased that are
available for sale to customers.
Merchandise inventory is an asset
account and identifies the cost of goods a
company has purchased that are
available for sale to customers.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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On January 7, Favorite Cookie
Company purchased cookies from the bakery at a cost of $7,200.
On January 7, Favorite Cookie
Company purchased cookies from the bakery at a cost of $7,200.
Favorite Cookie Co.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 7,200
Cash –7,200Ending Amounts 40,000 = 30,000 + 10,000
The company now has goods costing $7,200 for sale.
The company now has goods costing $7,200 for sale.
Exhibit 6Exhibit 6Exhibit 6Exhibit 6
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 7,200
Cash –7,200Ending Amounts 40,000 = 30,000 + 10,000
The firm spent cash to acquire the merchandise.The firm spent cash to
acquire the merchandise.
Exhibit 6Exhibit 6Exhibit 6Exhibit 6
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETSASSETS == LIABILITIESLIABILITIES ++OWNERS’ OWNERS’ EQUITYEQUITYDate Accounts
Beginning Amounts40,000 = 30,000 + 10,000Jan. 7 Merchandise Inven. 7,200
Cash –7,200Ending Amounts 40,000 = 30,000 + 10,000
The ending amount of assets remains the same.
The ending amount of assets remains the same.
Exhibit 6Exhibit 6Exhibit 6Exhibit 6
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Selling Goods to CustomersExhibit 8Exhibit 8Exhibit 8Exhibit 8
Favorite
FragileFragileFragileFragile
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Favorite Cookie Company sells 380 boxes of cookies
(cost to purchase = $6,080) to the store
January for $11,400, receiving cash.
Favorite Cookie Company sells 380 boxes of cookies
(cost to purchase = $6,080) to the store
January for $11,400, receiving cash.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts
1/31Cash 11,400Sales Revenue 11,400
1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +31,120 = 30,000 + 10,000 + 5,320
CashOther Assets
ContributedCapital
RetainedEarnings
Sold 380 boxes of cookies at $30 each. Cash increases $11,400.
Sold 380 boxes of cookies at $30 each. Cash increases $11,400.
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
Beginning Amounts 1,800 +38,200 30,000 10,000
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts
1/31Cash 11,400Sales Revenue 11,400
1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +32,120 = 30,000 + 10,000 + 3,220
CashOther Assets
ContributedCapital
RetainedEarnings
Beginning Amounts 1,800 +38,200 30,000 10,000
Revenue from sales increases Retained Earnings by $11,400.Revenue from sales increases
Retained Earnings by $11,400.
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts
1/31Cash 11,400Sales Revenue 11,400
1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +32,120 = 30,000 + 10,000 + 5,320
CashOther Assets
ContributedCapital
RetainedEarnings
Beginning Amounts 1,800 +38,200 30,000 10,000A second entry is required to record the cost of $6,080…
A second entry is required to record the cost of $6,080…
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts
1/31Cash 11,400Sales Revenue 11,400
1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +32,120 = 30,000 + 10,000 + 5,320
CashOther Assets
ContributedCapital
RetainedEarnings
Beginning Amounts 1,800 +38,200 30,000 10,000…and a reduction in the amount of inventory.
…and a reduction in the amount of inventory.
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts
1/31Cash 11,400Sales Revenue 11,400
1/31Cost of Goods Sold –6,080Merchan. Inventory –6,080Ending Amounts 13,200 +32,120 = 30,000 + 10,000 + 5,320
CashOther Assets
ContributedCapital
RetainedEarnings
Beginning Amounts 1,800 +38,200 30,000 10,000
Exhibit 9Exhibit 9Exhibit 9Exhibit 9
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
Cost of Goods Sold identifies the cost to the company of goods
transferred to customers.
Cost of Goods Sold identifies the cost to the company of goods
transferred to customers.
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On January 6, paid $300 for supplies used during January.On January 6, paid $300 for
supplies used during January.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/6 Supplies Expense –300Cash –300
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
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Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
NOTICERevenues increase owners’ equity. Expenses decrease owners’ equity.
NOTICERevenues increase owners’ equity. Expenses decrease owners’ equity.
NOTICENOTICE
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2-49
On January 8, paid $600 for rent for January.
On January 8, paid $600 for rent for January.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
1/8 Rent Expense –600Cash –600
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2-50
On January 31, paid $1,000 for wages for January.
On January 31, paid $1,000 for wages for January.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
1/31Wages Expense –1,000Cash –1,000
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On January 31, paid $200 for utilities for January.
On January 31, paid $200 for utilities for January.
Operating ActivitiesOperating ActivitiesOperating ActivitiesOperating Activities
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/31Utilities Expense –200Cash –200
Exhibit 10Exhibit 10Exhibit 10Exhibit 10
Ending Amounts 11,100 +32,120 = 30,000 + 10,000 + 3,220
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
Click the button to skip this exercise.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
June 1 $15,000 of merchandise inventory was purchased for cash.
If you experience trouble making the button work, type 66 and press “Enter.”
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 1
Press “Enter” or click left mouse key for solution.
MerchandiseInventory 15,000
Cash –15,000
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 15 Sold merchandise for $60,000 cash. The merchandise had cost Popovich $28,000.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 15 Cash 60,000Sales
Revenue 60,000Cost of Goods
Sold -28,000MerchandiseInventory -28,000
Press “Enter” or click left mouse key for solution.
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 23 Borrowed $250,000 from the bank.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 23 Cash 250,000Bank Loan 250,000
Press “Enter” or click left mouse key for solution.
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 25 Paid $2,000 for supplies used in June.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 25 SuppliesExpense -2,000
Cash -2,000
Press “Enter” or click left mouse key for solution.
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 28 June wages of $5,000 were paid.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 25 WagesExpense –5,000
Cash –5,000
Press “Enter” or click left mouse key for solution.
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 30 $100,000 of equipment was purchased for cash.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 30 Equipment 100,000Cash –100,000
Press “Enter” or click left mouse key for solution.
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
June 30 Paid $6,000 for utilities consumed in June.
Popovich Company had the following transaction during June. Indicate the amount of cash, other
assets, liabilities, and/or owners’ equity that would result from the following transaction by completing the table in the next slide.
ContinuedContinuedContinuedContinued
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Exercise 2-4Exercise 2-4Exercise 2-4Exercise 2-4
ASSETS = LIAB. + OWNERS EQ.
Date Accounts Cash OA Cont. Cap. RE Beg. Amts. 40,000 60,000 30,000 50,000 20,000
June 30 UtilitiesExpense –6,000
Cash –6,000
Press “Enter” or click left mouse key for solution.
End. Amts. 222,000 147,000 280,000 50,000 39,000
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2-66
55Describe how financial reports summarize business activities and provide information for business decisions.
ObjectiveObjectiveObjectiveObjective
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Financial statements are reports that summarize the
results of a company’s accounting transactions for
a fiscal period.
Financial statements are reports that summarize the
results of a company’s accounting transactions for
a fiscal period.
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The income statement reports revenues and expenses for a fiscal period as a means of
determining how well a company has performed in
creating profit for its owners.
The income statement reports revenues and expenses for a fiscal period as a means of
determining how well a company has performed in
creating profit for its owners.
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AccountAccountJanuary 31 January 31
BalanceBalanceAssets:
Cash
11,100Merchandise inventory
1,120Equipment
31,000Liabilities:
Notes Payable
30,000Owners’ Equity:
Contributed Capital
10,000Sales Revenue
11,400Cost of Goods Sold
(6,080)Wages Expense
(1,000)Rent Expense
(600)Supplies Expense
(300)Utilities Expense
(200)
$7,200 $7,200 – $6,080– $6,080$7,200 $7,200 – $6,080– $6,080
Exhibit 12Exhibit 12
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AccountAccountJanuary 31 January 31
BalanceBalanceAssets:
Cash
11,100Merchandise inventory
1,120Equipment
31,000Liabilities:
Notes Payable
30,000Owners’ Equity:
Contributed Capital
10,000Sales Revenue
11,400Cost of Goods Sold
(6,080)Wages Expense
(1,000)Rent Expense
(600)Supplies Expense
(300)Utilities Expense
(200)
$6,000 $6,000 + $25,000+ $25,000$6,000 $6,000 + $25,000+ $25,000
Exhibit 12Exhibit 12
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2-71
AccountAccountJanuary 31 January 31
BalanceBalanceAssets:
Cash
11,100Merchandise inventory
1,120Equipment
31,000Liabilities:
Notes Payable
30,000Owners’ Equity:
Contributed Capital
10,000Sales Revenue
11,400Cost of Goods Sold
(6,080)Wages Expense
(1,000)Rent Expense
(600)Supplies Expense
(300)Utilities Expense
(200)
$8,000 +$8,000 + $22,000 $22,000$8,000 +$8,000 + $22,000 $22,000
Exhibit 12Exhibit 12
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Favorite Cookie CompanyIncome Statement
For the Month Ended January 31, 2007
Sales revenue $11,400Cost of goods sold (6,080)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 3,220
AccountAccount January 31 Balance
Owners’ Equity:
Contributed Capital 10,000
Sales Revenue 11,400
Cost of Goods Sold (6,080)
Wages Expense (1,000)
Rent Expense (600)
Supplies Expense (300)
Utilities Expense (200)
Exhibit 13Exhibit 13Exhibit 13Exhibit 13
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A fiscal period is the time period
for which a company reports
its financial activities.
Favorite Cookie CompanyIncome Statement
For the Month Ended January 31, 2007
Sales revenue $11,400Cost of goods sold (6,080)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 3,220
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Net income is the amount of profit earned by a business during a fiscal period.
Favorite Cookie CompanyIncome Statement
For the Month Ended January 31, 2007
Sales revenue $11,400Cost of goods sold (6,080)Wages expense (1,000)Rent expense (600)Supplies expense (300)Utilities expense (200)Net income $ 3,220
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A balance sheet identifies a company’s assets and claims to those assets by creditors
and owners at a specific date.
A balance sheet identifies a company’s assets and claims to those assets by creditors
and owners at a specific date.
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Favorite Cookie CompanyBalance Sheet
At January 31, 2007
Assets:Cash $11,100Merchandise inventory 1,120Equipment 31,000
Total assets $43,220Liabilities and Owners’ Equity
Notes payable $30,000Contributed capital 10,000Retained earnings 3,220
Total liabilities and owners’ equity $43,220
equal
Exhibit 14Exhibit 14Exhibit 14Exhibit 14
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The statement of cash flows reports events that affected a
company’s cash account during a fiscal period.
The statement of cash flows reports events that affected a
company’s cash account during a fiscal period.
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Favorite Cookie CompanyStatement of Cash Flows
For the Month Ended January 31, 2007
Operating ActivitiesReceived from customers $11,400Paid for merchandise (7,200)Paid for wages (1,000)Paid for rent (600)Paid for supplies (300)Paid for utilities (200)Net cash flow from operating activities $ 2,100
Investing ActivitiesPaid for equipment (31,000)ContinuedContinuedContinuedContinued
Exhibit 15Exhibit 15Exhibit 15Exhibit 15
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Carried forward $(28,900)Financing Activities
Received from creditors $30,000Received from owners 10,000Net cash flow from financing activities 40,000
Net cash flow for January 11,100Cash balance, January 1 0Cash balance, January 31 $ 11,100
The statement of cash flows is useful for identifying how much cash a company has,
where that cash came from, and how the company used its cash during a fiscal period.
The statement of cash flows is useful for identifying how much cash a company has,
where that cash came from, and how the company used its cash during a fiscal period.
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Exercise 2-17Exercise 2-17Exercise 2-17Exercise 2-17
Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears.
Wages expenseCost of goods soldSales revenueMerchandise inventoryNet incomeRetained earnings
Income statementIncome statementIncome statementBalance sheetIncome statementBalance sheet
Press “Enter” or click left mouse button for solutions.
ContinuedContinuedContinuedContinued
Click the button to skip this exercise.If you experience trouble making the button work, type 82 and press “Enter.”
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Exercise 2-17Exercise 2-17Exercise 2-17Exercise 2-17
Listed below and on the next slide are typical accounts or titles that appear on financial statements. For each item, identify the financial statement(s) on which it appears.
Contributed capitalRent expenseCashNotes payable
Balance sheetIncome statementBal. sheet & SCFlowsBalance sheet
Press “Enter” or click left mouse button for solutions.
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2-82
What role does accounting play What role does accounting play in an organization’s in an organization’s
transformation process?transformation process?
What role does accounting play What role does accounting play in an organization’s in an organization’s
transformation process?transformation process?
Accounting is an information system for the measurement and reporting of the
transformation of resources into goods and services and the sale or transfer of these goods
and services to customers.
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Assets $40,000
+11,400 -8,180$43,220
ProfitRevenues $11,400Expenses -8,180Net Income $ 3,220
Liabilities $30,000 Owners’ Equity: Contributed Capital 10,000 Retained Earnings 3,220
$43,220 Exhibit 16Exhibit 16Exhibit 16Exhibit 16
Reporting the Transformation ProcessReporting the Transformation ProcessReporting the Transformation ProcessReporting the Transformation Process
1
2
3
4
5
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2-84
Financial AnalysisFinancial AnalysisFinancial AnalysisFinancial Analysis
Return on assets (ROA) is the ratio of net income
to total assets.
Return on assets (ROA) is the ratio of net income
to total assets.
Net Income
Total AssetsROA =
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Financial AnalysisFinancial AnalysisFinancial AnalysisFinancial Analysis
Net Income
Total AssetsROA =
For Favorite Cookie Company at January 31, 2007,
ROA is 7.5 percent.
For Favorite Cookie Company at January 31, 2007,
ROA is 7.5 percent.
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Financial AnalysisFinancial AnalysisFinancial AnalysisFinancial Analysis
Net Income
Total Assets
$3,220
$43,220= 7.5%
For Favorite Cookie Company at January 31, 2007,
ROA is 7.5 percent.
For Favorite Cookie Company at January 31, 2007,
ROA is 7.5 percent.
ROA =
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Business Activities
OperatingInvesting
Financing
Business Activities
OperatingInvesting
Financing
Accounting MeasuringRecordingReportingAnalyzing
Accounting MeasuringRecordingReportingAnalyzing
Business Decisions
Business Decisions
Actions Based on Business Decisions
A Model of the Accounting Process
Exhibit 17Exhibit 17Exhibit 17Exhibit 17
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THE ENDTHE END
CCHAPTERHAPTER 2 2
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