01-Accounting Principles CHE40

01
ACCOUNTING PRINCIPLES
CHE40: Engineering Economy
Accounting Fundamentals
Accounts
Financial Statements
Financial Ratios
Accounting Principles
2
Outline
Identify and classify the different accounts.
Prepare financial reports.
Calculate financial ratios.
3
Learning Objectives
Accounting Procedure
recording of financial events related to the
investment
determination of financial performance
Objectives of Accounting Procedure

to determine the cost of products or services
to provide a rational basis for pricing goods or
services
to provide means for controlling expenditures
to provide information on which operating
decisions may be based and the results
evaluated 4
Asset Accounts = Liability Accounts + Owners Equity
Accounts
Cash Short-term debt Capital stock
Receivables Payables Retained earnings
Inventories Long-term debt
Equipment
Buildings
Land
Supplies
Prepaid Expenses
Accounts and Accounting Equation

Assets - things of monetary value that the
organization possesses
Current Assets assets that may reasonably
be expected to be realized within a year Plant/Fixed
through normal operations Assets of a
permanent
Cash any Accounts Prepaid Expenses or relatively
medium of Receivables supplies on hand
exchange that a and advance fixed nature
claims against
bank will accept payments of
at face value debtors expenses
Accounts - Assets
Liabilities debts owed to
outsiders
Current Liabilities Long-term / Fixed

due within a short time Liabilities not due for a
(usually one year) comparatively long time
7
Accounts - Liabilities
Revenue gross
Capital owners
increase in capital
equity in the
due to business
business
activities
Expenses costs
consumed in the
process
Accounts - Equity
Cash Flow Statement Income Statement
shows the cash shows the profits or losses
transactions of an of an enterprise for a
enterprise for a given given period of time
period of time
Statement of Retained Balance Sheet shows

Earnings identifies the financial position or
changes in retained
earnings from one condition of an
accounting period to the enterprise as of a given
next date
Proprietorship form Partnership form of
of a business business organization
organization wherein a group of
conducted by an proprietors have
individual banded together
Corporation form
of business
organization used by
most large businesses
10
Business Organizations
Proprietorship
Easiest way to start a business
Does not require formal prerequisites to
beginning operations
Owner is her or her own boss!!!
Disadvantage: owners personal assets can
be claimed by business creditors in case of
debt
Disadvantage: difficulty of raising money
needed to provide capital base
11
Business Organization
Partnership
Still possesses the unlimited liability
characteristic of the proprietorship
BUT several partners mean increased
ability of firm to raise capital!!!
Income earned from partnership activities is
taxed at individual partner level
Partnership itself is not a tax-paying entity
12
Corporation
Owners of the corporation are called
stockholders
Stockholders invest funds and receive shares of
stock as evidence of ownership
Stockholders liability is limited to the amount
invested
Creditors cannot seek recovery of losses from
personal assets of stockholders
Stockholders can change his level of ownership
in the company
A corporation is formed by having a charter
and by-laws prepared and registered at the
Securities and Exchange Commission
(SEC) 13
Cash Flow Statement
Cash--Op. Act. $ 973,000
Cash--Inv. Act. (1,188,900)
Cash--Fin. Act. 245,000
Net Increase $ 30,000
Beg. Cash 80,000
End. Cash $ 110,000
Balance Sheet 12/31/X0 Balance Sheet 12/31/X1

Income Statement
Cash $ 80,000
Revenues $12,443,000 Cash $ 110,000
Other 4,550,000
Expenses 11,578,400 Other 4,975,000
Total $4,630,000
Net Income $ 864,600 Total $5,085,000
Liabilities $2,970,000
Liabilities $2,860,400
Cap. Stock 900,000
Statement of Stock 1,000,000
R/E 760,000 Retained Earnings R/E 1,224,600
Total $4,630,000
R/E 12/31/X0 $ 760,000 Total $5,085,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/X1 $1,224,600
Source/Author: David M. Cottrel
14
Ratio Interpretation Calculation
ability to meet current assets
Liquidity Current Ratio
current
Ratios current liabilitie s
obligations
ability to meet
current Acid Test Ratio
quick assets
obligations using current liabilitie s
readily convertible
assets
* quick assets current assets inventories
15
Financial Ratios
ability to meet
long run
Solvency /
obligations; how Total Liabilitie s
Leverage Debt to Equity Ratio
the organization is Total Equities
Ratios
financed and the
associated risk
Total Liabilitie s
Debt to Assets Ratio
Total Assets
16
Financial Ratios
Asset
efficiency in using Sales
Manageme
assets to generate Assets Turnover Ratio Total Assets
nt / Activity
revenues
Ratio
Total Equity
Equity Ratio
Total Assets
17
Financial Ratios
Profitability net income

rate of profit Re turn on Sales
Ratios sales
net income
Re turn on Equity
total equity
18
Financial Ratios
COST ACCOUNTING
Phase of accounting that is of particular
importance in engineering economic
analysis
Concerned principally with decision
making and control in a firm
Source of much of cost data needed in
making engineering economy studies
19
Cost Accounting
MODERN COST ACCOUNTING OBJECTIVES
Determination of the actual cost of products or
services
Provision of rational basis for pricing of goods
or services
Provision of a means for allocating and
controlling expenditures
Provision of information on which operating
decisions may be based and by means of which
operating decisions may be evaluated
20
Cost Accounting
COST ACCOUNTING EXAMPLE
Direct materials Selling expenses
Direct labor JOBS Finished Cost of

Total expenses
(work in goods goods
progress) inventory sold
Factory overhead Administrative
expenses
21
Cost Accounting
Identify and classify the different accounts.
Prepare financial reports.
Calculate financial ratios.
22
Learning Objectives
Accounts
Financial Ratios
23
Outline
Sullivan,W., Wicks, E. and Luxhoj, J.,
Engineering Economy, 12th ed, USA:
Pearson Education, Inc., 2003
Blank,L. and Tarquin, A., Engineering
Cost Concepts and Design Economics

Economy, 4th ed, Singapore: McGraw-Hill
Book Co, 1998
Eschenbach, T., Engineering Economy

Applying Theory to Practice, USA: 1995
24
References
Young Dry Cleaners is owned and operated by R.C. Young. The
actual work of dry cleaning is done by another company at
wholesale rates. The assets and liabilities of the business on April
1 of the current year are as follows:
Cash $28,000
Accounts receivable $9,000
Supplies $2,200
Land $75,000
Accounts payable $10,400
Business transactions during April are summarized on the next

slide. Prepare the financial statements for Young Dry Cleaners.
25
a) Paid rent for the month - $7,000
b) Received cash from customers for sales - $37,500
c) Paid creditors on account - $9,600
d) Purchased supplies on account - $1,750
e) Charged customers for dry cleaning sales on account -
$18,250
f) Received monthly invoice for dry cleaning expense on
account - $19,150
g) Received cash from customers on account - $15,950
h) Determined the cost of supplies used - $950
i) Paid wages - $9,900; truck expense - $3,350; utilities -
$1,750; miscellaneous expense - $1,900
26
Presented below are the amounts (in $) of Lane Corporations
assets and liabilities on January 31, 2009. Lane Corporation had
a retained earnings of $150,000 at the beginning of the cycle.
Accounts Payable 12,050

Accounts Receivable 194,850
Cash 104,200
Supplies 12,250
Land 375,000
Prepaid Insurance 14,500
Notes Payable 50,000
27
Business transactions from February 1, 2009 to January 31, 2010
are summarized below:
a. Paid advertising expenses on account 36,250
b. Received cash from customers 972,250
c. Paid creditors (operational) 6,050
d. Charged customers for service on account 98,500
e. Paid cash for miscellaneous expenses 24,800
f. Received cash from customers account 94,850
g. Paid the following expenses
i. Salary 401,000
ii. Rent 14,500
iii. Taxes 12,300
iv. Utilities 56,200 28
h. Determined cost of supplies used 8,400
i. Paid notes (investment) 50,000
j. Insurance that Expired 6,500
k. Paid dividends 200,000
29
Presented are the amounts of Servpro Corporations assets and
liabilities during the end of the current year, and of its revenues and
expenses for the year ended. Servpro had capital stock of $350,000
and retained earnings of $250,000 at the beginning of the current
year. During the current year, the corporation paid cash dividends of
$150,000.
a) Accounts Payable $145,000
b) Accounts Receivable 224,200
c) Advertising Expense 57,600
d) Cash 112,900
e) Insurance Expense 7,500
f) Land 520,000
g) Miscellaneous Expense 31,500
h) Notes Payable 75,000
30
i) Prepaid Insurance 3,750
j) Rent Expense $111,000
k) Salaries Payable 10,000
l) Salary Expense 402,000
m) Sales 1,054,950
n) Supplies 24,150
o) Supplies Expense 18,350
p) Taxes Expense 105,400
q) Utilities Expense 116,600
Prepare the financial statements for Servpro Corporation.
31
Elizabeth Jarme established a sole proprietorship to be known as
Jarme Decorators, on August 16 of the current year. During the
remainder of the month she completed the following business
transactions.
a) Transferred cash from a personal bank account to an account
to be used for the business, $30,000
b) Paid rent, $2,250
c) Purchased supplies for cash, $1,250
d) Purchased office equipment on account, $4,000
e) Purchased a used truck for $25,000, paying $10,000 cash and
giving a note payable for the remainder
f) Received cash for job completed, $3,375
g) Paid wages, $2,000
h) Paid premiums on property and casualty insurance, $1,875
32
i) Paid creditor, $4,000
j) Purchased supplies on account, $475
k) Recorded sales on account and sent invoices to
customers, $22,750
l) Received an invoice for truck expenses, $675
m) Received cash for job completed; this sale had not been
recorded previously, $3,600
n) Paid utilities expense, $1,290
o) Paid miscellaneous expense, $310
p) Received cash from customers on account, $12,500
q) Paid wages, $2,375
r) Withdrew cash fro personal use, $5,000
Prepare the financial statements for Jarme Decorators. 33
ACCOUNTING PRINCIPLES
CHE40: Engineering Economy

01-Accounting Principles CHE40

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01

Objectives of Accounting Procedure

Accounts and Accounting Equation

Current Liabilities Long-term / Fixed

Statement of Retained Balance Sheet shows

Balance Sheet 12/31/X0 Balance Sheet 12/31/X1

Profitability net income

Direct materials Selling expenses

Direct labor JOBS Finished Cost of

Blank,L. and Tarquin, A., Engineering

Cost Concepts and Design Economics

Eschenbach, T., Engineering Economy

Business transactions during April are summarized on the next

Accounts Payable 12,050

Prepare the financial statements for Jarme Decorators. 33

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