Professional Documents
Culture Documents
Financial Accounting
Concepts
Fourth Edition
by
Edmonds, McNair, Milam, Olds
PowerPoint® presentation by
J. Lawrence Bergin
Winona State University
1- 2
Chapter 1
Elements
of
Financial Statements
What is accounting?
● The language of business
Common Retained
Assets = Liabilities + Stock + Earnings
● Retained Earnings:
● Retained Earnings:
The Net Income [Earnings] kept
[Retained] in the business since its
beginning.
It is the total of all net income (minus all losses)
and minus all dividends since the
McGraw-Hill/Irwin © The start of Companies,
McGraw-Hill the Inc., 2003
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Transaction Analysis
● What is a transaction?
▲ a business event involving a transfer of
something of value between entities
● What is transaction analysis?
▲ determining the effect of a business event on
the financial statements
● Where do you start?
▲ First, determine the transaction’s effects on
the accounting equation.
▲ Second, determine the effects on other
financial statements.
Assets = Claims
Four Types of Transactions
that keep the equation in
● balance
Asset Source Transactions--an
Transactions asset increases
and a corresponding claims account increases
● Asset Use Transactions--an
Transactions asset decreases
and a corresponding claims account decreases
● Asset Exchange Transactions--one
Transactions asset
increases and another asset decreases
Introducing the
Horizontal Financial Statements Model
The horizontal model is a
teaching/learning tool used to show
the impact a transaction has on the
three basic financial statements
(Balance Sheet, Income Statement and
Statement of Cash Flows).
Kleen Sweep,
Inc.
Following are six
transactions of
Kleen Sweep, Inc.,
a company that
provides janitorial
services for local
businesses.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003
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Kleen Sweep,
Inc.
1. Kleen Sweep was formed on Jan. 1, 2004 by issuing
Common Stock in exchange for $2,000 cash.
● The company provided services to customers for $500
cash.
● The company incurred $300 of expenses which were
paid in cash.
● The company purchased Land by paying $1,500 cash.
● The company borrowed $1,000 cash from the bank
by issuing a Note Payable on Dec. 31st.
● The company pays a $50 cash dividend to the
company’s owners (the stockholders).
Revenue
Date line must specify:
• the length of time covered by the statement, and
• -the
Expenses
period’s ending date.
Net income
Revenue $ 500
- Expenses 300
Liabilities
Note payable $
Stockholders’ Equity
Common Stock $
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $
Stockholders’ Equity
Common Stock $
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $
Stockholders’ Equity
Common Stock $
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $ 1,000
Stockholders’ Equity
Common Stock $
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $ 1,000
Stockholders’ Equity
Common Stock $ 2,000
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $ 1,000
Stockholders’ Equity
Common Stock $ 2,000
Retained Earnings 150
Total Stockholders’ Equity 2,150
Total Liabilities and Stockholders’ Equity $
Liabilities
Note payable $ 1,000
Stockholders’ Equity
Common Stock $ 2,000
Retained Earnings 150
Total Stockholders’ Equity 2,150
Total Liabilities and Stockholders’ Equity $ 3,150
What are
Consolidated
Financial Statements?
Financial Statements that show the
combined results of a “Parent”
company and all the “subsidiary”
companies in which the parent has a
“controlling interest” (usually more
than 50% ownership).
Many of the “real world” financial
statements you look at in this course
will be consolidated statements.
Price-Earnings Ratio
This ratio is used by analysts to evaluate
the future prospects of a company.
● The higher the PE ratio, the more
optimistic investors are about a
company’s future.
Selling price of one share of stock
Earnings per share*
Percentage Change
The percentage change in any two numbers can be
calculated by dividing the DIFFERENCE between the
two numbers by the base year amount.
Wow!
You have learned a
lot in only one
chapter!!
Chapter 1
The
End
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2003