Chapter The Mechanics of Financial Accounting Learning Objective List and explain the two criteria necessary for economic events to be directly recorded on the financial statements Economic Events Must Be: Relevant: Have economic significance including anything that affects its financial condition Objectively Measurable: Recorded in dollars as determined by parties with differing incentives If events are both Relevant and Objectively Measurable then the economic events are reflected in the financial statements of the entity Concept Practice 5 Learning Objective Describe the accounting equation and how it relates to each of the four financial statements The Mechanics of Financial Accounting The first step in the accounting process is transaction analysis This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Shareholders’ Equity An event for which the appropriate monetary measure can be derived is considered to be a objectively measured b economically viable c relevant d capitalized Exercise 4-2 a tabular analysis approach, analyze the transactions (Tabular Using analysis is on the next slide) that effects may be on both sides of the equation, in the same Note direction, or effects may be on one side of the equation with offsetting directions Exercise 4-2 Cash + A/R + Land = 30,000 = (20,000) = 9,000 = 8,000 (5,500) N/P + CC + RE 30,000 20,000 9,000 = (5,500) Exp = (500) Div (500) _ Rev 8,000 _ _ Tot 13,000 + 8,000 + 20,000 = = _ _ _ 9,000 + 30,000 + 2,000 10 Preparing Adjusting Journal Entries - P4-8 e AJE at 12/31 for interest owed to the bank on the notes payable Use Principal x Rate x Time to calculate the interest owed from July to Dec 31 (6 months): P x 10,000 x R x T 12 per year x 6/12 of a year Interest Expense Interest Payable 600 600 47 Preparing Adjusting Journal Entries - P4-8 f AJE at 12/31 for amount owed for advertising: Advertising Expense 28,000 Advertising Payable 28,000 g AJE at 12/31 for insurance used from 7/1 to 12/31: ($350 x 1/2 year) Insurance Expense Prepaid Insurance 175 175 48 Reporting Difficulties Faced by Multinational Companies Multinationals have a home in one country but operate, own subsidiaries, or raise capital in others Financials must be consolidated – data is in different ◦ Languages ◦ Currencies ◦ Using different accounting standards Conversion and consolidation ◦ Costly ◦ Time consuming 49 Adjusted Trial Balance The Adjusted Trial Balance reflects totals after the AJEs are posted to the general ledger The balance sheet accounts reflect the end-of-year balances, and the income statement accounts reflect the proper revenues and expense to be recognized for the year This list of accounts and amounts is used to prepare the balance sheet and income statement 50 Financial Statements •The financial statements for Kelly Supply (upcoming slides), and other examples in text, can be used as guidelines to prepare financial statements •The financials should be prepared in the following order: • Income Statement (I/S) • Statement of Stockholders’ Equity (SSE) • Balance Sheet (B/S) •Note that the statement of cash flow (SCF) is not prepared from the adjusted trial balance, but from a detailed analysis of the cash flow activities of the company (see appendix) 51 Financial Statements Comments on the preparation of financial statements from adjusted trial balance (ATB): • • • • • Revenue and expense balances from the ATB are carried to the income statement Net income is carried to the retained earnings column in the SSE Other activity, like dividends and issue of stock, are reflected in the SSE Ending balances in the SSE are carried to the stockholders’ equity section of the balance sheet Asset and liability balances from the ATB are carried to the balance sheet 52 Financial Statement Examples - Kelly Supply Figure 4-23 Financial Statements for Kelly Supply 53 Figure 4-23 Financial Statements for Kelly Supply 54 Figure 4-23 Financial Statements for Kelly Supply 55 Concept Practice Continued on next slide 56 Concept Practice - Continued 57 Learning Objective (Appendix 4A) Describe T-accounts 58 T-Account Analysis and the statement of Cash Flows *Appendix 4A Two methods are used to present the statement of cash flows—the direct method and the far more common indirect method The statement of cash flows can be prepared from two comparative year over year balance sheets, an income statement, and some additional information The approach involves T-account analysis 59 Figure 4A-5 Operating Section of the statement of cash flows – indirect method of presentation Figure 4A-4 Statement of cash flows – direct method of presentation 60 Wiley © 2017 61 .. .Chapter The Mechanics of Financial Accounting Learning Objective List and explain the two criteria necessary for economic events to be directly recorded on the financial statements... the financial statements of the entity Concept Practice 5 Learning Objective Describe the accounting equation and how it relates to each of the four financial statements The Mechanics of Financial. .. Financial Accounting The first step in the accounting process is transaction analysis This process examines relevant, objectively measurable economic events through their effect on the accounting