Lecture Notes for Financial and Managerial Accounting, 8th Edition

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Financial and Managerial Accounting, 8thEdition1-1CHAPTER 1ACCOUNTING IN BUSINESSRelated Assignment MaterialsStudent Learning ObjectivesQuestionsQuickStudies*Exercises*Problems*AA and BTNConceptual objectives:C1. Explain the purpose andimportance of accounting1, 2, 4, 5,1-11-1, 1-4, 1-6BTN 1-4C2. Identify users and uses of, andopportunities, in accounting.3, 6, 7, 8, 9,10, 12, 231-21-2, 1-3, 1-4BTN 1-2,BTN 1-6C3. Explain whyethics are crucialto accounting.11, 141-31-4, 1-5BTN 1-1C4. Explain generally acceptedaccounting principles anddefine and apply severalaccounting principles.13, 14, 15,191-4, 1-5,1-61-6, 1-71-9, SPBTN 1-6C5.BIdentify and describe the threemajor activities oforganizations. (Appendix 1B)14, 16, 30,311-211-13, 1-14Analytical objectives:A1. Define and interpret theaccounting equation and eachof its components.17, 20, 241-7, 1-8,1-9, 1-171-8, 1-9,1-231-1, 1-2,1-8, 1-10AA 1-1,AA1-2,BTN 1-5A2. Compute and interpret returnon assets.281-161-14, 1-181-10, 1-11AA 1-1,AA1-2,AA1-3,BTN 1-5A3.AExplain the relation betweenreturn and risk. (Appendix 1A)291-12Procedural objectives:P1. Analyze business transactionsusing the accounting equation.181-10, 1-111-10, 1-11,1-12, 1-131-1, 1-2, 1-7,1-8, 1-9, SPBTN 5P2. Identify and prepare basicfinancial statements andexplain how they interrelate.21, 22, 23, 24,25, 26, 27, 32,331-12, 1-13,1-14, 1-151-15, 1-16,1-17, 1-18,1-19, 1-20,1-221-3, 1-4, 1-5,1-6, 1-7, 1-9*See additional information on next page that pertains to these quick studies, exercises,and problems.SP refers to the Serial ProblemAA refers toAccountingAnalysisBTN refers to Beyond theNumbersQuestions withGuided Examplevideos

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Financial and Managerial Accounting, 8thEdition1-2Additional Information on Related Assignment Material available inConnect®Available on the instructor’s course-specific website, Connect repeats all numerical Quick Studies, all Exercises, andProblem Set A.Connect also provides algorithmic versions for Quick Study, Exercises, and Problems. It allowsinstructors to monitor, promote, and assess student learning. It can be used in practice, homework, or exam mode.We have a variety of tools available to make updating your course as painless as possible. Our latest tool is the ConnectPre-Built Course Package. The package includes three toolsto get you started with Connect for the new edition. You canuse the pre-built course as is or customize it to meet your needs.Connect Pre-Built Course Package (formerly called Library course)•Connect course: Pre-built courses include reading, homework, and assessment for each chapter. Pre-built coursesare designed and created by a digital faculty consultant that uses the product in the course.•Key: a spreadsheet that lists all the assignments (organized by type and learning objective) and policy settings tomake it quick and easy to see what is included in the pre-built course.•Sample syllabi: customizable document that highlights the assignments and policy settings in the pre-built course.The Connect Orientation Videos provide an introduction for your students for using Connect to complete assignments tohelp get your students up and running in the system. There are videos covering:•End-of-Chapter Assignments•General Ledger•Concept Overview Videos•Excel Simulations•LearnSmart and SmartbookGeneral LedgerProblemsAssignable within Connect, General Ledger (GL) problems offer students the ability to see how transactions post from the generaljournal all the way through the financial statements. Critical thinking and analysis components are added to each GL problemtoensure understanding of the entire process.GL problems are auto-graded and provide instant feedback to the student.Excel SimulationsAssignable within Connect, ExcelSimulations allow students to practice their Excel skills—such as basic formulas and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled). ExcelSimulations are auto-graded and provide instant feedback to the student.LearnSmart/SmartbookAvailable within Connect,SmartBookmakes study time as productive and efficient as possible. SmartBook identifies and closesknowledge gaps through a continually adapting reading experience that provides personalized learning resources at the precisemoment of need. This ensures that every minute spent with SmartBook is returned to the student as the most value-added minutepossible. The result? More confidence, better grades, and greater success.ChapterVideosA growing number of students now learn accounting online. To aid instructors and studentscompleting theiraccounting courses inperson, fully online, and in hybrid formats, we offer a largeset of learning resourceincludingnearly 500 videos to ensure studentsuccess.There are alsoinstructor resources to add a personal touch to these learning aids.Need-to-KnowNeed-to-Know demonstrations are located at key junctures in each chapter. These demonstrationspose questions aboutthe material just presented—content that students“need to know”to learn accounting. Accompanyingsolutions walkstudents through key procedures and analysis necessary to be successful with homework and test materials.Need-to-

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Financial and Managerial Accounting, 8thEdition1-3Know demonstrations are supplemented with narrated, animated, step-by-step walk-through videos led by an instructorand available via Connect. Selectchapters also include Comprehensive Need-to-Knows that draw on materials from theentire chapter.LONeed-to-KnowTitleTimeC1, C21-1Accounting Users1:29C3, C41-2Accounting Guidance3:59A11-3Accounting Equation1:51P11-4Transaction Analysis3:11P21-5Financial Statements4:26Concept OverviewThe Concept Overview Videos(COV’s)provide engaging narratives of all chapterlearningobjectives in an assignableand interactive online format.The concept overview videos replacethe previous edition interactive presentations.Theyfollow the structure of the text andare organized to match the specific learning objectives withineach chapter. Theconcept overview videosprovide additional explanation and enhancement of material from the chapter, allowing studentstolearn, study, and practice with instant feedback, at their own pace.Each video is paired with a Knowledge Checkquestion.LOTitleTimeC1Explain the purpose and importance of accountingImportance of Accounting0:50Definition Importance of Accounting0:41Accounting Versus Recordkeeping0:58C2Identify users and uses of, and opportunities in,accounting.Information Users1:34Opportunities in Accounting0:45Public versus Private Accounting Opportunities in Accounting0:45Opportunities for in Accounting Professionals1:00C3Explain why ethics are crucial to accounting

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Financial and Managerial Accounting, 8thEdition1-4The Importance of Ethics0:45Ethical Decision Making0:55Sarbanes-Oxley Act1.44C4Explain generally accepted accounting principles and define and apply several accountingprinciplesGenerally Accepted Accounting Principles1:12International Standards and Convergence1:41Principles of Accounting1:44Assumptions and Constraints1:17Sarbanes-Oxley Act1:58C5Appendix 1B—Identify and describe the three major activities of organizationsBusiness Activities1:11A1Define and interpret the accounting equation and each of its componentsAccounting Equation1:02The Expanded Accounting Equation2:07A2Compute and interpret return on assetsFinancial Statement Analysis1:15Return on Assets2:11Return on Assets Illustration2:07A3Appendix 1A—Explain the relation between return and riskReturn and Risk1:04P1Analyze business transactions using the accounting equationTransaction Analysis0:52Illustration1:15Transaction Summary2:58P2Identify and prepare basic financial statements and explain how they interrelate

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Financial and Managerial Accounting, 8thEdition1-5Financial Statements0:17Income Statement0:42Statement of Retained Earnings1:46Balance Sheet1:38Statement of Cash Flows2:18Hints/Guided ExamplesThe Guided Examples in Connect provide a narrated, animated, step-by-step walk-through of select quick studies,exercises, and general ledger problems similar to those assigned. These short presentations can be turned on or off byinstructors and provide reinforcement when students need it most.Please note that they are labeled as “Hints” in Connectassignments.The animated PowerPoints without the video and audio functions for the Guided Examples are also availablein the Connect Instructor Library and Exercise Presentations.These are indicated in the Related Assignment Materialsgrid on page 1 in blue bold font.Synopsis of Chapter RevisionsUpdated opener—Apple and entrepreneurial assignment.Updated salary info for accountants.Revisedbusiness entity section along with adding LLC.Updated section on FASB objectives and accounting constraints.New layout for introducing the expanded accounting equation.New layout for introducing financial statements.Updated Apple numbers for NTK 1-5.New Cheat Sheet reinforces chapter content.Global View moved to text-end appendix—for all chapters.Sustainability section moved to text-end appendix—for all chapters.Updated return on assets analysis using Nike and Under Armour.Added a new Exercise assignment and Quick Study assignment.Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.Chapter OutlineI.Importance of Accounting—we live in the information age in which information, and its reliability,impacts the financial well-being of us all.Accountingis an information and measurement system that identifies, records, and communicates anorganization’s business activities.II.Users of Accounting Information–accounting is called the language of business because itcommunicates data the helps users make better decisions. People using accounting information aredivided into two groups:1.External Users—thosenotdirectly involved with running the company. Examples: shareholders(investors), lenders, directors, external auditors,nonmanagerial andnonexecutive employees,labor unions, regulators, voters, legislators, government officials, customers, suppliers, etc.

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Financial and Managerial Accounting, 8thEdition1-6a.Financial Accounting—area of accounting aimed at serving external users by providing themwithgeneral-purpose financial statements.2.Internal Users—those directly involved in managing and operating an organization.Internal usersinclude research and development, purchasing, human resource, production, distribution,marketing, and service managers.a.Managerial Accounting—area of accounting that serves the decision-making needs ofinternal users.b.Internal Reports—are designed for the special needs of internal users.3.Opportunities in Accounting—-four broad areas of opportunities are financial, managerial,taxation, and accounting-related.a.Private accounting, which are employees working for businesses,offers the mostopportunities.b.Public accounting offers the next largest number of opportunities.Opportunities includeauditing and taxation.c.Government (and not-for-profit) agencies, including business regulation and investigation oflaw violations, also offer opportunities.d.Accounting specialists include certified public accountants, CPAs. Certifications includecertified management accounting, CMA, and certified internal auditors, CIA. Specialistsinclude certified bookkeeper, CB, certified payroll professional, CPP, certified fraudexaminer, CFE, and certified forensic accountant, CrFA.III.Fundamentals of AccountingA.Ethics—A Key concept—Ethics are beliefs thatseparateright from wrong.1.Fraud Triangle: Ethics under Attack—model that asserts three factors must exist for a person tocommit fraud: opportunity, pressure, and rationalization.a.Internal Controls—procedures to protect company property and equipment and ensurereliable accounting reports, promote efficiency, and encourage adherence to companypolicies.b.Enforcing Ethics:Congress passed the Sarbanes-Oxley Act(SOX)and the Dodd-Frank WallStreet Reform and Consumer Protection Act to help enforce ethics at publicly tradedcompanies.IV.Generally Accepted Accounting Principles(GAAP)—concepts and rules that govern financialaccounting. The purpose of GAAP is to make information in accounting statements relevant, reliable,and comparable.A.The Financial Accounting Standards Board (FASB)is given the task of setting GAAP from theSecurities and Exchange Commission (SEC).The SEC oversees proper use of GAAP.B.International Standards—The International Accounting Standards Board (IASB) issues standards(International Financial Reporting Standards, or IFRS) that identify preferred accounting practicesin the global economy. IFRS are similar but sometimes different from U.S. GAAP.C.Conceptual Framework—FASBConceptual Frameworkconsists of:a.Objectives—to provide information useful to investors, creditors, and others.b.Qualitative Characteristics—to require information that is relevant, reliable, andcomparable.c.Elements—to define itemsinfinancial statements.d.Recognition and Measurement—to set criteria that an item must meet for it to be recognizedas an element; and how to measure that element.

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Financial and Managerial Accounting, 8thEdition1-7D.Principles,Assumptionsand Constraint—two types aregeneral principles(assumptions, concepts,and guidelines for preparing financial statements; stem from long-used accounting practices) andspecific principles(detailed rules used in reporting transactions and events).Accounting Principles—General principles consist of fourgeneralprinciples:a.Measurement principle (cost principle)—accounting information isbased on actual costsincurred in business transactions. Cost is measured on a cash or equal-to-cash basis.Information based on cost is considered objective.Objectivitymeans information issupported by independent, unbiased evidence.b.Revenue recognition principle—revenue is recognized (recorded) (1) when goods orservices are provided to customers and (2) at the amount expected to be received from thecustomer.c.Expense recognition principle (matching principle)—a company record expenses it incurredto generate revenues it reported.d.Full disclosure principle—a companyrecordsthe details behind financial statements thatwould impact users’ decisions;often in footnotes to the statements.Accounting Assumptions-a.Going-concern assumption—accounting information presumes that the business will continueoperating instead of being closed or sold.b.Monetary unit assumption—transactions and events are expressed in monetary, ormoney, units. Generally,this is the currency of the country in which it operates, buttoday some companies express reports in more than one monetary unit.c.Time period assumption—the life of the company can be divided into time periods, suchas months and years, and useful reports can be prepared for those periods.d.Business entity assumption—a business is accounted for separately from other businessentities and its owner. Necessary for good decisions.e.Exhibit 1.8:Types and Attributes of Businessesi.Sole proprietorshipis a business owned by one person that has unlimited liability. It isnot a separate legal entity. The owner has unlimited liability and is, therefore,personally liable for the business debts.ii.Partnershipis a business owned by two or more people, called partners, who aresubject to unlimited liability. The business is not subject to an income tax, but theowners are responsible for personal income tax on their individual share of the netincome of entity.iii.Limited Liability Company (LLC)is a business owned by one or more members. Itoffers limited liability to the members who are not personally liable for the debts ofthe LLC, and is a separate entity with the same rights andresponsibilities as a person.IV.Corporationis a business that is a separate legal entity whose owners are calledshareholders or stockholders. These owners have limited liability. The entity isresponsible for a business income tax, and the owners are responsible for personalincome tax on profits that are distributed to them in the form of dividends.f.Accounting Constraints-there are basic constraints on financial reporting.i.Thecost-benefitconstraintsaysthat informationdisclosed by the entity must havebenefitsto the user that aregreater than the costs of providing it.ii.Thematerialityconstraint is the ability of information toinfluence decisions.

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Financial and Managerial Accounting, 8thEdition1-8iii.Conservatismandindustry practicesare sometimes referred to as constraints as well.V.Business Transactions and AccountingA.Accounting Equation (Assets = Liabilities + Equity)—elements of the equation include:1. Assets—resources a company owns or controlsthat are expected to carry future benefits.Examples:cash,accounts receivable,supplies, equipment,and land).2.Liabilities—creditors’ claims on assets. These claims reflect obligations to transfer assets orprovide products or services to others.Examples: wages payable, accounts payable, notes payable,and taxes payable.3.Equity—owner’s claim on assets; assets minus liabilities. Also callednet assetsorresidualequity.Increasesin equity result fromowner investments andrevenues. Decreases results fromdividendsand expenses.Equity consists of:a.Common Stock—owner investments are inflows of cash and other net assets fromstockholders, which increase equity.b.Revenues—increase equity fromsales of productsandservices to customers. Revenuesincrease equity (via net income) and result from a company’s earnings activities.c.Dividends—outflows of cash and other assets tostockholders.d.Expenses—cost of assets or services used to earn revenuesExpensesdecrease equity.e.Expanded Accounting Equation:Assets = Liabilities +Owner, Capital–Owner, Withdrawals+ Revenues–Expenses. Netincome occurs when revenues exceed expenses. Net income increases equity. A net lossoccurs when expenses exceed revenues, which decreases equity.VI.Transaction Analysis—each transaction and event always leaves the equation in balance. (Assets =Liabilities + Equity)1.Investment by ownerin exchange for common stock:ASSET=LIABILITIES+EQUITY+ Cash+Common StockIncrease on both sides of equation keeps equation in balance.2.Purchase supplies for cash:ASSET=LIABILITIES+EQUITY+ Supplies−CashIncrease and decrease on one side of the equation keeps equation in balance.3.Purchase equipment for cash:ASSET=LIABILITIES+EQUITY+Equipment–CashIncrease and decrease on one side of the equation keeps equation in balance.4.Purchase supplies on credit:ASSET=LIABILITIES+EQUITY+ Supplies+ Accounts PayableIncrease on both sides of equation keeps equation in balance.5.Provide services for cash:ASSET=LIABILITIES+EQUITY+Cash+Revenue Earned

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Financial and Managerial Accounting, 8thEdition1-9Increase on both sides of equation keeps equation in balance.6,7. Payment of expenses in cash(salaries, rent, etc.):ASSET=LIABILITIES+EQUITY−Cash−(+ Expense)Decrease on both sides of equation keeps equation in balance.8.Provided services and facilities for credit:ASSET=LIABILITIES+EQUITY+Acct. Rec.+Revenue EarnedIncrease on both sides of equation keeps equation in balance.9.Receipt of cash from accounts receivable (customers paying on their accounts):ASSET=LIABILITIES+EQUITY+ Cash−Acct. RecIncrease and decrease on one side of the equation keeps equation in balance.10.Payment of accounts payable:ASSET=LIABILITIES+EQUITY− Cash−Accounts PayableDecrease on both sides of equation keeps equation in balance.11.Dividends paid to stockholder:ASSET=LIABILITIES+EQUITY− Cash− (+Dividends)Decrease on both sides of equation keeps equation in balance. (Note: sincedividendsare not expenses, they are not used in computing net income.)VII.Financial StatementsA.The fourfinancial statements and their purposes are:1.IncomeStatement—describes a company’s revenues and expenses along with theresulting net income or loss over a period of time. (Net income occurs when revenuesexceed expenses. Net loss occurs when expenses exceed revenues.)2.Statement ofRetained Earnings—explains changes in equity from net income (or loss),owner investments,anddividendsover a period of time.3.Balance Sheet—describes a company’s financial position (types and amounts of assets,liabilities, and equity) at a point in time.4.Statement of Cash Flows—identifies cash inflows (receipts) and cash outflows(payments) over a period of time.B.Statement Preparation from Transaction Analysis—prepared in the following order using theprocedureindicated below.1.Income Statement⎯information about revenues and expenses is conveniently taken fromthe owner's equity column. Total revenues minus total expenses equals net income orloss.Net income (or net loss) is transferred to the Statement of Owner’s Equity.2.Statement ofRetained Earnings⎯reportsequitychanges over the reporting period. Showsbeginningretained earnings balance, dividends andnet income,(or net loss)from theincome statement,.Endingretained earningsis added to Balance Sheet.3.Balance Sheet⎯shows the financial position as of the date of the statement. Includes the

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Financial and Managerial Accounting, 8thEdition1-10balance of eachasset,liabilityand theending retained earnings balance (note that this istaken from the statement of retained earnings), is listed along with common stock andadded to total liabilities to get total liabilities and equity. This total must agree with totalassets to prove the accounting equation. Either theaccount formor thereport formmaybe used to prepare the balance sheet.4.Statement of Cash Flows⎯the cash column must becarefully analyzed to organize andreport cash flows in categories of operating, investing, and financing. The net change incash is determined by combining the net cash flow in each of the three categories. Thischange is combined with the beginning cash. The resulting figure should be the endingcash that was shown on the balance sheet.VIII.Decision Analysis—Return on Assets (ROA)—a profitability measure. Also called Return onInvestment (ROI).A.Useful in evaluating management,analyzing and forecasting profits, and planning activities.B.The return on assets is calculated by dividing net income for a period by average total assets.(Average total assets is determined by adding the beginning and ending assets and dividing by 2.)C.As with all analysis tools, results should be compared to previous business results as well ascompetitor’s results and industry norms.IX.Return and Risk (Appendix 1A)A.Risk—the uncertainty about the return we will earn on an investment.B.The lower the risk, the lower the return.C.Higher risk implies higher, but riskier, returns.X.Business Activities (Appendix 1B)The accounting equation is derived from business activities.Three major business activities are:1.Financingactivities—activities that provide the means organizations use to pay for resources such asland, buildings, and equipment to carry out plans. Two types of financing are:a.Owner financing—refers to resources contributed by owner including incomeleft in theorganization.b.Nonowner (or creditor) financing—refers to resources loaned by creditors (lenders).2.Investing activities—are the acquiring and disposing of resources (assets) that an organization uses toacquire and sell its products or services.a.Investing (assets) is balanced by Financing (liabilities and equity). Operating activities arethe result of investing and financing.3.Operating activities—involve using resources to research, develop, purchase, produce, distribute, andmarket products and services.

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Financial and Managerial Accounting, 8thEdition2-1CHAPTER 2ACCOUNTING FOR BUSINESSTRANSACTIONSRelated Assignment MaterialsStudent Learning ObjectivesQuestionsQuickStudies*Exercises*Problems*AAandBTNConceptual objectives:C1. Explain the steps inprocessing transactions andthe role of sourcedocuments.3, 6, 92-12-12-6BTN 2-1,BTN2-2,BTN2-4,BTN2-7C2. Describe an account and itsuse in recordingtransactions.1, 2, 142-22-22-5BTN 2-2,BTN2-4C3. Describe aledger and achart of accounts.2-32-3, 2-162-1, 2-2, 2-3,2-4, 2-6, GL:2-4,2-5, 2-6, 2-7C4. Definedebitsandcreditsand explain double-entryaccounting.72-4, 2-5,2-102-42-1, 2-2, 2-3,GL: 2-4, 2-5, 2-6BTN 2-4Analytical objectives:A1. Analyze the impact oftransactions on accounts andfinancial statements..2-72-5, 2-6,2-9, 2-13,2-15, 2-202-1, 2-2, 2-3,2-4, 2-5, 2-6, SP,GL: 2-2, 2-4,2-5, 2-6, 2-7, 2-8AA 2-1,AA2-2,BTN 2-2,BTN2-3,BTN2-4,BTN2-5,BTN2-6A2. Compute the debt ratio anddescribe its use in analyzingfinancial condition.2-152-222-5AA 2-1,AA2-2,AA2-3, BTN: 2-5,BTN2-6Procedural objectives:P1. Record transactions in ajournal and post entries to aledger.4, 52-6, 2-112-7, 2-11,2-12, 2-14,2-19, 2-21,2-232-1, 2-2, 2-3,2-4, SP, GL: 2-1,2-3, 2-4, 2-5,2-6, 2-7, 2-8P2. Prepare and explain the useof a trial balance.82-82-8, 2-10,2-20, 2-212-1, 2-2, 2-3,2-4, 2-6, SP,GL: 2-4, 2-5,2-6, 2-7, 2-8P3. Prepare financial statementsfrom business transactions.10, 11, 12,13, 15, 16,17, 182-9, 2-12, 2-13, 2-142-16, 2-17,2-18, 2-192-7, ES-1,ES-2BTN 2-2,BTN2-5,BTM2-6*See additional information on next page that pertains to these quick studies, exercises, and problems.SP refers to the Serial ProblemAA refers to Accounting Analysis

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Financial and Managerial Accounting, 8thEdition2-2BTN refers to Beyond the NumbersGL refers toGeneral Ledger ProblemsQuestions with Guided ExamplevideosAdditional Information on Related Assignment MaterialSee Chapter 1 of the Instructor’s Resource Manual for more information on materials for this text availableinConnect.ConnectAvailable on the instructor’s course-specific website, Connect:•All numerical Quick Studies, all Exercises and Problems Set A.oConnect also provides algorithmic versions for Quick Study, Exercises, and Problems.•General Ledger Problems•Excel Simulations•LearnSmart/SmartBookHints/Guided ExamplesPlease notethat the Guided Examplesare labeled as “Hints” in Connect assignments. The animatedPowerPoints without the video and audio functions for the Guided Examples are also available in the ConnectInstructor Library and Exercise Presentations.These are indicated in the Related Assignment Materials gridon page 1 in blue bold font.Need-to-KnowVideosLONeed-to-KnowTitleTimeC1, C2, C32-1Classifying Accounts1:34C42-2Normal AccountBalance2:54P1, A12-3Recording Transactions1:54P22-4Preparing Trial Balance2:01Concept OverviewVideosEach video is paired with a Knowledge Check question.LOTitleTimeC1Explain the steps in processing transactions and the role ofsource documents.Source Documents0:58C2Describe an account and its use in recording transactions.Types of Accounts0:52Asset Accounts3:48Liability Accounts2:35Equity Accounts1:29Decision Insights0:14C3Describe aledger and a chart of accounts.Chart of Accounts1:45Ledger0:25C4Definedebitsandcreditsand explain double-entry accounting.T-accounts0:54

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Financial and Managerial Accounting, 8thEdition2-3Double-Entry Accounting0:47Normal Balance Rules1:33Normal Balance-Equity0:43A1Analyze the impact of transactions on accounts and financial statements.Receive Investment by Owner1:00Purchase Equipment for Cash0:46Purchase Supplies for Cash0:32Providing Services for Cash0:32Payment of Expense on Credit0:34Payment of Accounts Payable0:43A2Compute the debt ratio and describe its use in analyzing financial condition.Financial Statement Data1:25Debt Ratio1:13P1Record transactions in ajournal and post entries to a ledger.Accounting Process0:20Journalizing Transactions1:30Posting Journal Entries to Ledger Accounts: General Procedures1:37Post Entries to Ledger Accounts: Four step Process0:48P2Prepare and explain the use of a trial balance.Trial Balance1:33Trial Balance–Searching for Errors1:04P3Prepare financial statements from business transactions.Preparing Financial Statements2:01How Financial Statements Link1:10Synopsis of Chapter RevisionsNEW opener—Fitbit and entrepreneurial assignment.New visual for process to get from transactions to financial statements.New layout onfour types of accounts that determine equity.Improved presentation of “Double-Entry System” section.Updated Apple data for NTK 2-4.Updated debt ratio analysis using Costco and Walmart.New Cheat Sheet reinforces chapter content.Added four new Quick Studies.Added three new Exercises.Added new analysis assignments: Company Analysis, Comparative Analysis, and Global Analysis.

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Financial and Managerial Accounting, 8thEdition2-4Chapter OutlineI.Basis of Financial Statements—process to gofrom transactions and events to financial statementsincludes the following:1.Identify each transaction and event from source documents, which identify and describetransactions and events entering the accounting process.2.Analyze each transaction and event using the accounting equation.3.Record relevant transactions and events in a journal.4.Post journal information to ledger accounts.5.Prepare and analyze the trial balance and financial statements.A.SourceDocuments—identify and describe transactions and events entering the accounting system.II.The “Account” Underlying Financial StatementsAnaccountis a record of increases and decreases in a specific asset, liability, equity, revenue, orexpense. Account categories include:1.Assets—resources owned or controlled by a company that have future economic benefit. Examplesinclude Cash, Accounts Receivable, Note Receivable, Prepaid Expenses, Prepaid Insurance,Supplies, Store Supplies, Equipment, Buildings, and Land.a.Accounts Receivable—promises of payment from customers.b.Prepaid accounts—assets from prepayments of future expenses expected to be incurred infuture accounting periods.2.Liabilities—claims (by creditors) against assets, which means they are obligations to transferassets or provide products or services to others. Examples include Accounts Payable, NotePayable, Unearned Revenues, and Accrued Liabilities.a.Accounts Payable—promisesto pay later,usually arising from purchase of inventory or otherassets.b.Notes Payable—written promissory note to pay a future amount.c.Unearned revenue—revenue collected before it is earned/before services or goods areprovided.d.Accrued liabilities—amounts owed that are not yet paid.3.Equity—an owner’s claim on a company’s assets is calledequityorowner’sequity. ExamplesincludeCommon stock,Dividends(decreases equity), Revenuesfrom providing goods orservices; i.e., Sales, Fees Earned,(increasesequity), and Expenses from assets or services usedin operation; i.e., Supplies Expense,(decreasesequity).III.Ledger and Chart of Accounts1.Thegeneral ledgerorledger(referred to as thebooks) is a collection of all accounts and theirbalances for an accounting system.2.Thechart of accountsis a list of all accounts in the ledger with their identification numbers.IV.Double-EntryAccountingDouble-entry accounting demands the accounting equation remain in balance. This means that for eachtransaction (1) at least two accounts are involved with at least one debit and one credit and (2) totalamount debited must equal the total amount credited.A.Debits and Credit1.AT-accountrepresents a ledger account and is used to understand the effects of one or moretransactions. It is shaped like the letter T with the account title on top.

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Financial and Managerial Accounting, 8thEdition2-52.Theleftside of an account is called thedebitside. A debit is an entry on the left side of anaccount.3.Therightside of an account is called thecreditside. A credit is an entry on the right side of anaccount.4.Accounts areassignedbalance sidesbased on their classification or type.5.Toincreasean account, an amount is placed on thebalance side,and todecreasean account,the amount is placed on theside opposite its assigned balance side.6.Theaccount balanceis the difference between the total debits and the total credits recorded inthat account. When total debits exceed total credits, the account has adebit balance. When totalcredits exceed total debits,the account has acredit balance. When total debits equal totalcredits,the account has azero balance.B.Double-Entry System—requires that each transaction affect, and be recorded in, at least twoaccounts. The total debitsmust equal the total credits for each transaction.1.The assignment of balance sides (debit or credit) follows the accounting equation.a.Assetsare on theleft sideof the equation; therefore, the left, ordebit,side is the normalbalance for assets.b.Liabilities and equitiesare on theright side;therefore, the right, orcredit, side is thenormal balance for liabilities and equity.c.Dividends, revenues, and expensesreally are changes in equity, but it is necessary to set uptemporary accounts for each of these items to accumulate data for statements.Withdrawalsand expense accounts really represent decreases in equity; therefore, they are assigneddebit balances.Revenueaccounts really represent increases in equity; therefore, they areassigned credit balances.V.Analyzing and Processing TransactionsA.Journalizing andPosting TransactionsFour steps in processing transactions are as follows:1.Identify transactions and source documents.2.Analyze transactions using the accounting equation. Apply double-entry accounting todetermine account to be debited and credited.3.Record journal entry—recorded chronologically. (A journal gives us a complete record of eachtransaction in one place.)a.AGeneral Journalis the most flexible type of journal because it can be used to record anytype of transaction.b.When a transaction is recorded in the General Journal, it is called ajournal entry. A journalentry that affects more than two accounts is called a compound journal entry.c.Each journal entry must contain equal debits and credits.4. Post entry toledger—process of transferring entries from the journal to the ledger.a.Debits are posted as debit, and credits as credits to the accounts identified in the journalentry.b.Actual accounting systems usebalance column accountsrather than T-accounts in theledger.c.Abalance column accounthas debit and credit columns for recording entries and a thirdcolumn for showing the balance of the account after each entry is posted.Note: Refer to the 16 basic transactions in the textbook for an illustration of analyzing,journalizing, and posting.

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