Post on 20-Dec-2015
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Analyzing and Recording Transactions
Chapter
22
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Learning objectiveLearning objective Explain the steps in processing transactions. Describe source documents and their purpose. Describe an account and its use in recording
transactions. Define debits and credits and explain their role in
double-entry accounting. Analyze business transactions using the
accounting equation. Analyze the impact of transactions on accounts. Identify and prepare basic financial statements
and explain how they interpret
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Analyzing and Recording ProcessAnalyzing and Recording Process
Transactions: Exchanges of economic consideration between two parties.
External Transactions occur between the
organization and an outside party.
Internal Transactions occur within the
organization.
Events refer to those happenings that affect an entity’s accounting equation and can be reliably measured.
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Learning objectiveLearning objective
Describe source documents and their purpose.
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Source documentsSource documents
Source documents identify and describe transactions and events entering the accounting process.
They are the sources of accounting information.
Source documents obtained from outside the organization, provide objective and reliable evidence about transactions and events and their amount.
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Sales Tickets
Bank Statement
Purchase Orders
Checks
Source DocumentsSource DocumentsBills from Suppliers
Employee EarningsRecord
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Learning objectiveLearning objective
Describe an account and its use in recording transactions.
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An account is a record of
increases and decreases in a specific asset, liability, equity,
revenue, or expense item.
An account is a record of
increases and decreases in a specific asset, liability, equity,
revenue, or expense item.
The Account and its AnalysisThe Account and its Analysis
The general ledger is a record
containing all accounts used by
the company.
The general ledger is a record
containing all accounts used by
the company.
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LandLand
EquipmentEquipment
BuildingsBuildings
CashCash
Notes Receivabl
e
Notes Receivabl
e
SuppliesSupplies
Prepaid AccountsPrepaid
Accounts
Accounts ReceivableAccounts
Receivable
AssetAccounts
AssetAccounts
Asset AccountsAsset Accounts
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Asset accountAsset account
Cash: reflects a company’s cash balance. Account receivable: held by a seller and refer
to promises of payment from customers to sellers. → credit sales or sales on account
Note receivable: a written promise of another entity to pay a definite sum of money on a specified future date to the holder of the note.
Prepaid account: represent prepayments of future expenses. (ex. prepaid insurance)
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Asset accountAsset account
Supplies: belong to asset until they are used. When they are used, their costs are transferred from the asset accounts to expense accounts.
Equipment: When it is used and gets worn down its cost is gradually reported as an expense (called depreciation).
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Accrued LiabilitiesAccrued
LiabilitiesUnearned RevenuesUnearned Revenues
Notes PayableNotes
PayableAccounts Payable
Accounts Payable
LiabilityAccountsLiability
Accounts
Liability AccountsLiability Accounts
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Liability accountsLiability accounts
Accounts payable: oral or implied promises to pay later, commonly arise from purchases of merchandise.
Note payable: a formal promise, usually denoted by the signing of a promissory note, to pay a future amount.
Accrued liabilities: They are amounts owed that are not yet paid (ex. Wages payable, taxes payable).
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Liability accountsLiability accounts
Unearned revenue: a liability that is settled in the future when a company delivers its products or services. When customers pay in advance for products or services (before revenue is earned), the revenue recognition principle requires that the seller consider this payment as unearned revenue (ex. Unearned ticket revenue).
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EquityAccounts
EquityAccounts
RevenuesRevenues
Owner’s Capital
Owner’s Capital
Owner’s Withdrawals
Owner’s Withdrawals
ExpensesExpenses
Equity AccountsEquity Accounts
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Equity AccountsEquity Accounts
Owner’s Capital
Owner’s Capital
Owner’s Withdrawals
Owner’s Withdrawals RevenuesRevenues ExpensesExpenses
+ +– –
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Equity accountsEquity accounts
Revenues: gross increase in equity from a company’s earnings activities.
Expenses: the cost of assets or services used to earn revenue. Expenses decrease owner’s equity.
Owner investments: the amounts an owner puts into the company.
Owner withdrawals: the amounts take away from the company for personal use.
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Learning objectiveLearning objective
Define debits and credits and explain their role in double-entry accounting.
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A T-account represents an account and is a tool used to understand the effects of one or more
transactions.
Debits and Credits ( 借 & 貸 )Debits and Credits ( 借 & 貸 )
(Left side) (Right side)Debit Credit
T- Account
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LiabilitiesLiabilities EquityEquityAssetsAssets = +
Double-Entry AccountingDouble-Entry Accounting
Debit Credit Debit Credit Debit Credit
ASSETS
+ - + -
LIABILITIES
- + - +
EQUITIES
- + - +Normal Balance
Normal Balance
Nomal Balance
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RevenuesRevenues ExpensesExpensesOwner’s Capital
Owner’s Capital
Owner’s Withdrawals
Owner’s Withdrawals
__ ++ __
Debit Credit
Capital
- + - + Debit Credit
Withdrawals
+ - + - Debit Credit
Expenses
+ - + -Debit Credit
Revenues
- + - +
Double-Entry AccountingDouble-Entry Accounting
EquityEquity
Exh.3.8
Normal Balance
Normal Balance
Normal Balance
Normal Balance
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Double-Entry AccountingDouble-Entry Accounting
When there is a debited account, there must be a credited account.
The total amount debited must be equal to the total amount credited for each transaction.
The left side is the normal balance side for assets, and the right side is the normal balance side for liabilities and equity.
有借必有貸,借貸必相等。
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Double-Entry AccountingDouble-Entry Accounting
An account balance is the difference between the increases and decreases in an account.
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Analyzing and Recording ProcessAnalyzing and Recording Process
Step 1: Analyze transactions and source
documents.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Step 2: Apply double-entry accounting
(Left side) (Right side)Debit Credit
T- Account
ACCOUNT NAME: ACCOUNT No.
Date Description PR Debit Credit Balance
Step 4: Post entry to ledger Step 3: Record journal entry
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Dollar amount of debits and credits
Dollar amount of debits and credits
Journalizing TransactionsJournalizing Transactions
Transaction Date
Transaction Date
Transaction explanation
Transaction explanation
Titles of Affected Accounts
Titles of Affected Accounts
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General journal (普通日記賬 )General journal (普通日記賬 )
General journal is used to record any transaction and includes the following information about each transaction: (1) date of transaction; (2) titles of affected accounts; (3) dollar amount of each debit and credit, and (4) explanation of the transaction.
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T-accounts are useful illustrations, but balance column ledger accounts are used in practice.
Balance Column AccountBalance Column Account
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11 Identify the account.
Posting Journal EntriesPosting Journal Entries
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22 Enter the date.
Posting Journal EntriesPosting Journal Entries
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33Enter the amount and description.
Posting Journal EntriesPosting Journal Entries
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44Enter the journal reference.
Posting Journal EntriesPosting Journal Entries
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55
Compute the balance.
Posting Journal EntriesPosting Journal Entries
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Enter the ledger reference. 66
Posting Journal EntriesPosting Journal Entries
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Analyzing Transactions – An IllustrationAnalyzing Transactions – An Illustration
Analysis:
(1) Cash 101 30,000 C. Taylor, Capital 301 30,000
Double entry:
(1) 30,000Cash 101
(1) 30,000C. Taylor, Capital 301
Posting:
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Learning objectiveLearning objective
Analyze business transactions using the accounting equation.
Analyze the impact of transactions on accounts.
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The accounting equation must remain in balance after each transaction.
LiabilitiesLiabilities EquityEquityAssetsAssets = +
Transaction Analysis EquationTransaction Analysis Equation
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The accounts involved are:
(1) Cash (asset)
(2) Taylor, Capital (equity)
Chuck Taylor, the owner, contributed $30,000 cash to start the business,
FastForward.
Transaction Analysis (1)Transaction Analysis (1)
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Transaction Analysis (1) Transaction Analysis (1)
Chuck Taylor, the owner, contributed $30,000 cash to start the business.
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Transaction Analysis (1)Transaction Analysis (1)
(1) 30,000Cash 101
(1) 30,000C. Taylor, Capital 301
Dr. Cash 30,000
Cr. C. Taylor, Capital 30,000
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The accounts involved are:
(1) Cash (asset)
(2) Supplies (asset)
Transaction Analysis (2)Transaction Analysis (2)
FastForward purchased supplies paying $2,500 cash.
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Transaction Analysis (2)Transaction Analysis (2)
Purchased supplies paying $2,500 cash.
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Transaction Analysis (2)Transaction Analysis (2)
(2) 2,500Supplies 126
(1) 30,000 (2) 2,500Cash 101
Dr. Supplies 2,500
Cr. Cash 2,500
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The accounts involved are:
(1) Cash (asset)
(2) Equipment (asset)
Transaction Analysis (3) Transaction Analysis (3)
FastForward purchased equipment for testing athletic shoes for $26,000 cash.
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Transaction Analysis (3)Transaction Analysis (3)
Purchased equipment for $26,000 cash.
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Transaction Analysis (3)Transaction Analysis (3)
(1) 30,000 (2) 2,500(3) 26,000
Cash(3) 26,000
Equipment 167 101
Dr. Equipment 26,000
Cr. Cash 26,000
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The accounts involved are:
(1) Supplies (asset)
(2) Accounts Payable (liability)
Transaction Analysis (4)Transaction Analysis (4)
FastForward purchased Supplies of $7,100 on credit from CalTech.
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Transaction Analysis (4)Transaction Analysis (4)
Purchased Supplies of $7100 on credit.
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Transaction Analysis (4)Transaction Analysis (4)
(2) 26,000(4) 7,100
Supplies 126
(4) 7,100Accounts Payable 201
Dr. Supplies 7,100
Cr. Accounts Payable 7,100
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The accounts involved are:
(1) Cash (asset)
(2) Revenues (equity)
Transaction Analysis (5)Transaction Analysis (5)
FastForward earned revenues of $4,200 from consulting with clients about test results on
athletic shoes.
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Transaction Analysis (5)Transaction Analysis (5)
Earned revenues of $4,200.
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Transaction Analysis (5)Transaction Analysis (5)
(1) 30,000 (2) 2,500(5) 4,200 (3) 26,000
Cash
(5) 4,200Consulting Revenue 403 101
Cr. Cash 4,200
Dr. Consulting revenue 4,200
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Transaction AnalysisTransaction Analysis
The balances so far appear below. Note that the Balance Sheet Equation is still in balance.
Now let’s look at some other transactions.
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The accounts involved are:
(1) Cash (asset)
(2) Expense (equity)
Transaction Analysis (6)(7)Transaction Analysis (6)(7)Paid $1000 rent to the landlord of the building where the store is located, and paid biweekly
$700 salary to employee.
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Transaction Analysis (6)(7)Transaction Analysis (6)(7)
Remember that the balance in the rent and salaries expense accounts actually
increases.
But, equity actually decreases because expenses reduce equity.
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Transaction Analysis (6) (7)Transaction Analysis (6) (7)Paid $1000 rent to the landlord and biweekly $700 salary to employee.
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Transaction Analysis (6) (7)Transaction Analysis (6) (7)
Remember that expenses decrease equity.
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Transaction Analysis (6) (7)Transaction Analysis (6) (7)
(1) 30,000 (2) 2,500(5) 4,200 (3) 26,000
(6) 1,000
Cash
(6) 1000Rent Expense 640
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Transaction Analysis (6) (7)Transaction Analysis (6) (7)
(1) 30,000 (2) 2,500(2) 4,200 (3) 26,000
(6) 1,000 (7) 700
Cash
(7) 700Salaries Expense
Dr. Rent Expense 1,000
Dr. Salaries Expense 700
Cr. Cash 1,700
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Transaction Analysis (8)Transaction Analysis (8)
Provided services of $1600 and rent its test facilities for $300. The cash will be received in the future.
The accounts involved are:
(1) Accounts Receivable (asset)
(2) Revenue (equity)
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Transaction Analysis (8)Transaction Analysis (8)
Provided services of $1600 and rent its test facilities for $300.
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Transaction Analysis (8)Transaction Analysis (8)
(8) 1,900Accounts Receivable
(5) 4,200(8) 1,600
Consulting Revenue
(8) 300Rental Revenue
Dr. Accounts Receivable 1,900
Cr. Consulting Revenue 1,600
Cr. Rental Revenue 300
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Transaction Analysis (9)Transaction Analysis (9)
The client in transaction 8 paid $1900 to FastForward 10 days later.
The accounts involved are:(1) Cash (asset) (2) Accounts Receivable (asset)
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Transaction Analysis (9)Transaction Analysis (9)
The client in transaction 8 paid $1900 to Fastforward.
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Transaction Analysis (9)Transaction Analysis (9)
(1) 30,000 (2) 2,500(2) 4,200 (3) 26,000(9) 1,900 (6) 1,000
(7) 700
Cash
(8) 1,900 (9) 1,900Accounts Receivale
Dr. Cash 1,900
Cr. Accounts Receivable 1,900
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Transaction Analysis (10)Transaction Analysis (10)
Paid $900 cash as partial payment for its earlier $7100 purchase of supplies, leaving $6200 unpaid.
The accounts involved are:(1) Cash (asset) (2) Accounts Payable (liability)
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Transaction Analysis (10)Transaction Analysis (10)
Paid $900 cash as partial payment for its earlier purchase on credit.
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Transaction Analysis (10)Transaction Analysis (10)
(10) 900 (4) 7,100Accounts Payable
(1) 30,000 (2) 2,500(2) 4,200 (3) 26,000(9) 1,900 (6) 1,000
(7) 700 (10) 900
Cash
Dr. Accounts Payable 900
Cr. Cash 900
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The accounts involved are:
(1) Cash (asset)
(2) Taylor, Withdrawals (equity)
Transaction Analysis (11)Transaction Analysis (11)Taylor withdrew $600 from the
business for personal use.
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Transaction Analysis (11)Transaction Analysis (11)
Remember that the balance in the Taylor, Withdrawals account actually increases.
But, equity actually decreases because withdrawals reduce equity.
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Transaction Analysis (11)Transaction Analysis (11)
Taylor withdrew $600 from the business for personal use.
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Transaction Analysis (11)Transaction Analysis (11)
Remember that withdrawals decrease equity.
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Transaction Analysis (11)Transaction Analysis (11)
(11) 600Taylor, Withdrawals
(1) 30,000 (2) 2,500(2) 4,200 (3) 26,000(9) 1,900 (6) 1,000
(7) 700 (10) 900 (11) 600
Cash
Dr. Taylor, Withdrawals 600
Cr. Cash 600
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Ending Balance = Beginning Balance + Total Increase – Total Decrease
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Ending balance = Beginning balance + total debits – total creditsEnding balance = Beginning balance + total debits – total credits
(1) 30,000 (2) 2,500(2) 4,200 (3) 26,000(9) 1,900 (6) 1,000
(7) 700 (10) 900 (11) 600
Total Debits 36,100 Total Credits 31,700Ending Balance 4,400
Cash
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Ending balance = Beginning balance + total credits – total debitsEnding balance = Beginning balance + total credits – total debits
(10) 900 (4) 7,100Balance 6200
Accounts Payable
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After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.
After processing its remaining transactions for December, FastForward’s Trial Balance is prepared.
Debits CreditsCash 4,400$ Accounts receivable - Supplies Prepaid Insurance 2,400 Equipment 26,000 Accounts payable 6,200$ Unearned consulting revenue 3,000 C. Taylor, Capital 30,000 C. Taylor, Withdrawals 600 Consulting revenue 5,800 Rental revenue 300 Salaries expense 1,400 Rent expense 1,000 Utilities expense 230 Total 45,300$ 45,300$
FastForwardTrial Balance
December 31, 2004
The trial balance lists all account balances in the general ledger.
If the books are in balance, the total
debits will equal the total credits.
The trial balance lists all account balances in the general ledger.
If the books are in balance, the total
debits will equal the total credits.
9,270
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Searching for and Correcting ErrorsSearching for and Correcting Errors
If the trial balance does not balance, the error(s) must be found and corrected.
Make sure the trial balance columns are correctly added.Make sure the trial balance columns are correctly added.
Make sure account balances are correctly entered into the ledger.
Make sure account balances are correctly entered into the ledger.
See if debit or credit accounts are mistakenly placed on the trial balance.
See if debit or credit accounts are mistakenly placed on the trial balance.
Recompute each account balance in the ledger.Recompute each account balance in the ledger.
Verify that each journal entry is posted correctly.Verify that each journal entry is posted correctly.
Verify that each original journal entry has equal debits and credits.
Verify that each original journal entry has equal debits and credits.
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Using a Trial Balance to Prepare Financial StatementsUsing a Trial Balance to Prepare Financial Statements
Income Statement of Cash Flows
Income Statement
Statement of Owner’s Equity
Beginning Balance Sheet
Ending Balance Sheet
Period of TimePoint inTime
Point inTime
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Learning objectiveLearning objective
Identify and prepare basic financial statements and explain how they
interpret.
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Financial StatementsFinancial StatementsLet’s prepare the Financial Statements
reflecting the transactions we have recorded.
1. Income Statement
2. Statement of Owner’s Equity
3. Balance Sheet
4. Statement of Cash Flows
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Financial StatementsFinancial Statements
Income Statement: revenues and expenses together with the how much profit the firm makes.
Statement of Owner’s Equity: reports information how equity changes over the reporting period.
Balance Sheet: a company’s financial position at a point of time.
Statement of cash flows: cash receipts and cash payments over a period of time.
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Net income is the difference between
Revenues and Expenses.
The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings
activities.
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The net income of $4,400 increases
Scott’s capital by $4,400.
The Statement of Owner’s Equity
explains changes in equity from net
income (or net loss) and from
owner investments and withdrawals for
a period of time.
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The Balance Sheet describes a company’s
financial position at a point in time.
The Balance Sheet describes a company’s
financial position at a point in time.
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The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.
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Net income ÷ Average total assets
ROA is viewed as an indicator of operating
efficiency.
ROA is viewed as an indicator of operating
efficiency.
Return on Assets (ROA)Return on Assets (ROA)
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ROA of mobile phone service companies in HKROA of mobile phone service companies in HK
SUNDAY: 0.34% SMARTONE: 9.92% Hutchison Telecommunications: 0.18% PEOPLES: 15.47% City Telecom: 2.94%
- Which company is better?
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o Describes the relationship between the amounts of the company’s liabilities and assets.
o Helps to assess the risk that a company will fail to pay its debts.
Debt RatioDebt Ratio
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Review of Chap 2Review of Chap 2
Identify asset accounts, liability accounts and equity accounts.
Know the meaning of double-entry accounting and how to do journals and post journal entries correctly.
Prepare trial balance and use a trial balance to prepare income statement, statement of owner’s equity and balance sheet statement.
ROA and debt ratio.
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Homework of chapter 2Homework of chapter 2
Ex 2-1, 2-3, 2-4, 2-19 Problem 2-1A, 2-4A Due on June 12 (Monday)
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End of Chapter 2End of Chapter 2