ch01 Fundamental of Financial Accounting by Edmonds (4th Edition)
ch01 Fundamental of Financial Accounting by Edmonds (4th Edition)
ch01 Fundamental of Financial Accounting by Edmonds (4th Edition)
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
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McGraw-Hill the Inc., 2003
1- 12
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.
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1- 19
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