Chapter 1 Introduction to Financial Statements

LO1 Identify the forms of business organizations and the users of accounting information

Ways Businesses are Organized:

What is Accounting Information?

The objective of accounting information is

____________________________________________________________________________.

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Who might the users be? What questions might they (or you!) want
answered?

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How do Accountants communicate financial information to the users???
LO3 Describe the 4 financial statements and how they are prepared

Review the 2 financial statements for the 2 companies I’ve provided.

Ask yourself – based on this information, which company would you rather be involved with (as
an employee or investor).
Why did you choose that? (NO WRONG ANSWERS HERE!)

Some observations:

1. Notes about the Income Statement: (See handout as well)

Also called the _____________________________ or _________________________
We always produce the Income Statement __________________. (I’ll show you why in a
minute.)

“Cheat sheet” for the Income Statement is:

What kind of user uses this information and why?

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2. Notes about the Statement of Retained Earnings:
What does “retained”
We always produce this statement __________________________. mean?
Format of the statement:

My Brownie Company
Statement of Retained Earnings
For the Month ended ___________
Beginning Retained Earnings (_____________) $
Add: ______________
Less: ______________
Ending Retained Earnings (__________________) $

Cheat sheet so far:

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Review
If I bring in more sales from customers, how does that impact net income?
If I pay more in salaries, how does that impact net income?
If I pay more in advertising how does that impact net income?
If I pay more in dividends, how does that impact net income?

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3. Notes about the Balance Sheet

Total __________________________ EQUALS Total_________________________________

EVERY SINGLE TIME
This is called the Accounting Equation

What do these terms mean?

On the left side:
Assets – resources owned by the business.
What assets does My Brownie Company have?
____________________________________________
______________________________________________________________________________
_____
Can you think of other assets a company might have? ________________
What is the difference between Supplies and Inventory? ________________________________
On the right side:
Who has a claim to those assets? If the business shut down today, what would happen to the
assets?
______________________________________________________________________________
______________________________________________________________________________
_______
Two categories of “Claims to the assets”
1. Liabilities – represents who the organization OWES money to. Those are called creditors.
2. Stockholders’ Equity – represents the amount of the claims the owners have a right to.

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The stock accounts measure how much owners (stockholders) paid to the company to buy the
stock.
Can this number be negative do you think? _________________________________________
Who do you think should get all of the “retained earnings” the company has amassed?
__________________

Financial statement “cheat sheet” so far:

There are TWO items here that appear on 2 financial statements. Notice that everything else only
appears on ONE financial statement.

Exercise:
Item Which Financial Statement does it appear on?
Cash
Stockholders’ Equity
Dividends
Expenses
Net income
Supplies
Retained Earnings
Advertising expense
Utilities expense
Asset
Inventory
Cost of goods sold
Retained earnings, beginning
Common Stock
Payroll expense
Revenues
Liabilities

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Some other items and format that you will find for the Balance Sheet (new ones in italics):

My Brownie Company
Balance Sheet
As of 12/31/2024

Assets
Cash $2,500
Accounts Receivable 1,000
Inventory 1,500
Supplies 500
Equipment 3,000
Trademark 1,500
Total Assets $10,000

Total Liabilities and Stockholders’ Equity

Liabilities
Accounts Payable 1,000
Short-term loan payable 2,500
Notes payable 1,500
Total liabilities 5,000

Stockholders’ Equity
Common stock 2,000
Retained earnings ?
Total stockholders’ equity ?

Total liabilities and SHE $10,000

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COMPREHENSIVE EXAMPLE
Using this information, we need to put together the first 3 financial statements.

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Elements of an Annual Report
• Management Discussion and Analysis

• Notes to the financial statements

• Auditor’s report

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Note the interrelationship among the statements
What is the Accounting Equation?

4. Statement of Cash Flows

This statement summarizes cash going in and out of the company.
If I pay employees, is that a cash inflow or outflow for the company?
______________________________
If I receive cash from customers, is that a cash inflow or outflow for the company?
____________
We summarize this in a statement:

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Review Topics

12
Math Review

Our company has the following employees:

1/1/24 10 employees
12/31/24 14 employees
What is the average number of employees in 2024? __________________________________
How many employees does our company have on 1/1/25 (assuming no other info is given)?
_____

Our company has the following employees:

12/31/24 14 employees
12/31/25 20 employees
What is the average number of employees in 2025?

How many months are in the following periods?

1/1/24 – 9/30/24 ____________________
1/31/24 – 7/31/24 ___________________
8/1/24 – 6/31/24 ____________________

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Chapter 3 The Accounting Information System
LO1 Discuss financial reporting concepts

Standard setters:
US governmental body that oversees US financial markets and accounting standard-setters
____________________________________________
Who sets the U.S. accounting standards? _________________________________________
Who sets auditing standards? ____________________________________________
Who sets international accounting standards? ________________________________

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 *Need to know all
underlined words
Qualities of ______________ Information

Characteristics
Assumptions

Relevant Faithful
representation Monetary Unit

Predictive/ Complete
confirmatory
Economic entity
Neutral

Periodicity
Material

Free from material Going concern

error

Enhancing Qualities
Principles

Comparability Measurement

Historical cost
Consistency
Fair value
Verifiable
Full disclosure
Timely

Understandability

Cost constraint

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LO2 Analyze the effect of business transactions on the basic accounting equation.
***Important***
Review:

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What does an expense do to Net income?
What does a revenue do to Net income?
What does an expense do to Retained earnings?
What does an expense do to SHE?
What does a revenue do to SHE?
What does a dividend do to Net income?
What does a dividend do to SHE?

Discussion about revenues and expenses.

What is revenue?
What is an expense?

In accounting for corporations, we use the ACCRUAL method of accounting. This means we
record revenues when they are earned and expenses when they are incurred.

For example, say you babysat for a family on Saturday night and earned $100. When do we
record that as revenue?
What if we got paid on Friday night (ahead of time)?
What if we got paid on Saturday night (on the night of)?
What if we got paid on Sunday morning (after the fact)?

The same thing holds for expenses. Say your neighbor mowed your grass on Sunday afternoon
and you agreed to pay him $75. When do we record this is an expense?
What if we paid him on Saturday (before the fact)?
What if we paid him Sunday afternoon?
What if we paid him Monday night?

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Analyzing Transactions

Steps we will follow:

1. Determine if any of the components of the accounting equation are affected by the
transaction.
2. Figure out what amounts and accounts are impacted.
3. Make sure the accounting equation remains in balance.
4. If there is a Cash Flow element, we will also fill that in to the left.

Transactions:

1.The firm sells $10,000 of stock to shareholders for cash.

2.We borrow $5,000 cash by signing a note.

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3. Purchase Equipment for $5,000 cash

4. Received $1,200 cash from a customer in advance of services performed.

5. Received $10,000 cash from a customer for services performed.

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6. Paid rent of $900 for the month.

7. Purchase a one-year insurance policy for $600.

8. Purchase supplies on account for $2,500.

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9. Hire a new employee.

10. Pay dividend of $500.

11. Pay $4,000 in wages to employees.

If we add up all of these transactions, we get the following:

Summary of transactions:

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We can now use this information to create the first 3 financial statements:

Sierra Corporation
Income Statement
For the year ended 12/31/27

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 Sierra Corporation
____________________
_____________

Sierra Corporation
____________________
_____________

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Practice:

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Chapter 4 Accrual Accounting Concepts
LO 1 Explain the accrual basis of accounting and the reasons for adjustments

Notice that we have been making financial statements that have a date on them.
Which statement(s) cover a period of time? _________________________________
Which statement(s) are as of a point in time? __________________________________
Can you remember from the previous chapter why we break a firm’s lifespan into smaller
segments like years or quarters?
________________________________________________________________________

Because we separate the lifespan into different periods, we have to know which period a
transaction belongs in.
Remember the concept of _______________________________________.
When do we record revenues?
On the day we provide the good or service OR the day we receive the cash?
Even though accountants record the transactions that occur, when it’s time to make a financial

statement (when?_____________________________________________), there are

ADJUSTMENTS that need to be made due to accrual accounting.

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LO 2 Prepare adjustments for deferrals

1. Prepaid Expenses
A. We buy a truck on 1/1/2024 for $10,000 cash. We expect it to last us 5 years.

Analyze this transaction.

A = L + SHE

*When we buy something that is going to last more than one accounting period, it is recorded as
an asset. The definition of an asset is something that we own that helps us generate future
revenue.

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Now, it’s time to generate financial statements as 12/31/24. We need to make an ADJUSTMENT
to reflect the fact that we’ve used up a portion of the truck.

A = L + SHE

B. We buy a year’s worth of supplies on 10/31/24 for $2400 cash.

Analyze the transaction on 10/31/24.

A = L + SHE

At the end of the year, we see we only have $600 worth of supplies remaining. Do we need to
make an adjustment at the end of the period?

A = L + SHE

C. We buy an insurance policy that covers us for 2 years. The policy is issued on 11/30/24
and we paid $4,800/

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Analyze the transaction on 11/30/24.

A = L + SHE

Do we need to make an adjustment on 12/31/24 when it’s time to make financial statements?

A = L + SHE

2. Unearned Revenues
A. We sell web storage for $100/ month to a customer who prepays for a year at a time. They
write us a check on 4/1/24 for one year’s worth of service beginning on 6/1/24.

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Analyze the transaction.

A = L + SHE

Do we need to make an adjustment on 12/31/24?

A = L + SHE

To summarize:

We covered adjustments for deferrals (cash changes hands before the revenue is earned or
expense is incurred.)

What is the year end adjustment for type 1 – prepaid expenses?

Three common types of prepaid expenses are purchases of long term assets (like equipment),
supplies, and insurance.

What is the year end adjustment for type 2 – unearned revenue?

Notice that both adjustments affect a _____________________________________ account

and a ___________________________ account.

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32
MATH REVIEW/ CONCEPT CLARIFICATION

Let’s make sure that we understand how to calculate how interest is calculated.

1. A company borrows $1,000 at 10% for 1 year. How much does the firm have to pay

back?

2. A company borrows $1,000 at 8% for 1 year on 6/1/2024. How much does the firm owe

in interest on 12/31/24?

3. A firm borrows $1,000 on a 3 month note at 5% interest on 11/1/24. How much has the

borrowing company accrued in interest as of 12/31/24?

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LO 3 Prepare adjustments for accruals

1. Accrued Revenues
We lent $1,000 using a note payable on 6/30/24. The terms of the loan are 12 months at 6%
interest.
Analyze the transaction on 6/30/24.
A = L + SHE

Do we need to make an adjustment at year end?

A = L + SHE

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 2. Accrued expenses
A. We borrowed $10,000 from the bank on 7/31/24. The terms were 9 months at 7%
interest.
Analyze the transaction on 7/31/24.
A = L + SHE

Do we need to make an adjustment at the year end?

A = L + SHE

B. We pay our employees a total of $10,000 each Friday. They earn $2,000 per day in total
and we pay them each Friday afternoon. This year, 12/31/24 falls on a Tuesday.

Do we need to make an adjustment at year end?

A = L + SHE

To summarize accrual adjustments:

The adjustment at year end for accrued revenue is:

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The adjustment at year end for accrued expenses is:

Notice that each one involves a _________________ and ________________ account.

LO 4 Prepare financial statements from adjusted amounts

When preparing the financial statements, make sure you use the ADJUSTED amounts, otherwise
your accounts will be wrong!

For example, let’s say you forget to make the adjusting entry above for Salaries Payable.

Will Salary Expense be too low or too high?

Will Salary Payable be too low or too high?

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37
Review

What is the account term used to reflect when the business uses up the following resources?
Supplies?
Prepaid insurance?
A vehicle?

What is the other side of these adjusting entries?

Receivable goes up
Unearned revenue goes down
Expenses goes up (This has 2 answers)
Asset goes down

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Chapter 6 Merchandising Operations and the Multiple-Step Income Statement
LO1 Describe inventory systems and record purchase under a perpetual inventory system

Ch. 6 & 7 are related to companies that sell products. Record-keeping is very important. Need to
keep track of all of the products!

We will focus on merchandisers (companies that sell products that they’ve purchased from
another company). What merchandising companies do you buy from regularly?
_____________________

Accounts we will be using Classification

Inventory
Cash
Accounts payable
Sales revenue
Accounts receivable
Cost of goods sold
Sales Returns and Allowances
Sales Discounts
Freight-Out

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Let’s first focus on how we record purchases of inventory:
1. We purchased $1,000 worth of Legos for cash (in order to resell them).
2. We purchased $500 worth of Legos on account (in order to resell them).

Shipping terms
**Whoever legally owns the inventory while it is in transit pays the shipping costs**

FOB _____________________________________________
The word on the line tells you when the legal ownership changes hands.

FOB Destination: __________________________ pays shipping

FOB Shipping point: ________________________pays shipping

What do we do with that added cost of shipping?

If the buyer pays for shipping, it gets added to the cost of _____________________.
If the seller pays for shipping, it is an ______________________________ (part of the regular
cost of doing business to generate revenue).
In this class, we assume all freight costs are paid in CASH to a third party.

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Example:

Purchase returns and Allowances

As in the above example, if the purchaser returns merchandise, just reverse the purchase entry
for the amount returned.

If the purchaser agrees to keep “off” merchandise (called an _______________), you would do
the following:

Purchase Discounts
Do you think sellers of merchandise prefer to get paid slowly or quickly?
To motivate buyers to pay quickly, sellers may offer a purchase discount to the buyer.

Terms:
“net 30” - ________________________________________________________________
2/10, net 30 - ______________________________________________________________
1/10, net 30 - ______________________________________________________________

Keep in mind that if the purchaser of the inventory takes the discount, are they paying more or
less for the inventory?
Then, the discount will _____________________________ their inventory costs.

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If the sales price of the inventory is $100 and we take advantage of 2/10 net 30, how much will
we end up paying? ______________________________ What if we don’t pay in time to get the
discount, how much will we pay? ________________________________________________

Example:

LO2 Record sales under a perpetual inventory system

Now, let’s turn around and sell that product. Do we want to sell it for more or less than we
purchased it for? _______________________________________________________________

Perpetual inventory system – we record 2 parts of every inventory sale (4 accounts are impacted)

Let’s say that we previously purchased $1,500 worth of Legos (see previous page in notes). We
now sell those Legos for 2,750 on account.

How much profit did we make?

Another example:

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Sales returns and allowances
A buyer may return goods they have purchased from us or we may provide them an
_________________ and let them keep the goods.
Since a return is the opposite of the sale, it is ALMOST a complete reversal of the original sales
entry.

Let’s say Ellis returns the whole purchase in the example above.

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LO3 Prepare a multi-step income statement

What we learned before: A better way for companies with inventory:

Single-step Income Statement Multi-step Income Statement

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45
LO4 Compute and analyze gross profit rate and profit margin

Gross Profit Rate =

Profit Margin =

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Chapter 7 Reporting and Analyzing Inventory and Receivables
LO2 Apply inventory cost flow methods and discuss their financial effects (no detailed examples
of specific identification)

*First, know that all costs associated with getting inventory ready to sell get included in
Inventory account.
If I buy inventory from a supplier and I pay to have the goods shipped in, what is that cost
called? _________________
Would that mean it was sold FOB Shipping Point or Destination?
What if I pay to have a used piece of equipment refurbished before I sell it and it costs me $140
cash?

What if I have a car fixed before I start to use it to deliver my goods?

Let’s say I sell used Nintendo Switch machines and these are the records I have for this year:
Date Description Number of Cost per unit Total
units (unit cost)
1/1/24 Beginning balance 6 $75 $450
2/1/24 Purchase 2 $80 $160
3/1/24 Purchase 4 $70 $280
4/1/24 Sold 3 ? ?

How many units did I start the year with?

What amount would have been shown on my Balance Sheet for Inventory account?
How many units did I buy during the year?
How many units did I have available to sell at some point during the year?
How many units did I sell during the year?
How many units do I have left at the end of the year?

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Notice that:

Number of units at beginning + Purchased units – Sold units = Units sold

Need to figure out what the cost of those units remaining is. To do that, we need to decide on the
cost flow method we will use. (We get to decide, but we have to stick with it once we decide.)

Cost flow Methods:

1. ______________________________

2. __________________________________

3. ____________________________________

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 A. FIFO (____________________, _________________________)

Under this method, which units did we sell?

What was the cost of those units?
Then, we can use the formula to figure out the cost of the units we have left.

B. LIFO (_________________________, ______________________________)

Under this method, which units did we sell?

What was the cost of those units?
What was the cost of the units we have left?

C. Average cost method ___________________________________________

Under this method, we just figure out the total cost of the units available to sell, divide by the
total number of units available to sell and use that number as our unit cost.

Under this method, what was the cost of the units we sold?
What was the cost of the units we have left?

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Also, calculate gross profit for each method assuming we sell all units for $50 per unit.
Date Description # of units Unit cost Total

a) FIFO

b) LIFO

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 c) Average cost

Observations:
Is this company experiencing an increase or decrease in the cost of inventory?
Which method provides the highest level of sales revenue?
Which method provides the highest level of cost of goods sold?
Which method provides the highest level of net income/ gross profit?

LO3 Explain how companies recognize and value receivables

Why do companies allow their customers to buy “on credit”?

Types of receivables:
Accounts receivable: _______________________________________________
Notes receivable: __________________________________________________
Other receivables: _________________________________________________

When will A/R show up on the books?

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Allowance Method for uncollectible accounts
Some customers will not pay their bills.
New account:
Allowance for doubtful accounts (contra asset)
1. Sell $40,000 of services on account on 12/1/24
2. We collect $400 on 12/14/24.
3. At the end of the year (when it’s time to make financial statements), we will estimate
how much of the A/R we expect to receive. We make an adjustment such that NET
ACCOUNTS RECEIVABLE reflects how much we expect to receive.
4. 2025 rolls around and one of our customers tells us that they can’t pay their $100 bill. We
need to WRITE OFF their account.

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How do we estimate how much of our A/R we expect to collect?

Based on _______________________, we assign each of these time frames a % of how much

we expect to collect of that debt.

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Summary:

1. Record sale on account.

2. Record returns of sales on account.
3. Collect cash on accounts receivable.
4. Estimate uncollectible accounts.
5. Record write-offs.

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LO4 Explain the statement presentation and analysis of inventory
Where do we find Inventory on the financial statements?
Where do we find Cost of Goods Sold on the financial statements?

Using Ratios:
1. Inventory turnover:

2. Days in inventory:

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Chapter 8 Reporting and Analyzing Long-lived Assets

LO1 Explain the accounting for plant asset expenditures

Also called _____________________________,
______________________________________, _______________
Where do we find these on the financial statements? __________________________
So, when we pay money for these, does it impact net income? _______________________
4 main types:

2 general types of costs associated with these assets.

Costs to get the asset ready for its intended Other (i.e., maintenance costs)
purpose.

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Which kind of cost will reduce net income?
If a company is not meeting its net income goals, how might they account for expenditures
related to PPE?
______________________________________________________________________________

Explain how each cost will impact the financial statements.

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LO2 Apply depreciation methods to plant assets
Depreciation - ______________________________________________________________

It’s similar in concept to using up a prepaid asset.

Terms:
Accumulated depreciation – _______________________________________________

Book Value (or net book value) - ____________________________________________

Depreciable cost - ________________________________________________________

How does depreciation impact the financial statements?

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Does depreciation increase or decrease or have no impact on net income?
We only depreciate 3 of the 4 types of long-lived assets. Why?

Q: How do you think we should split up the cost of a long-lived asset?

In order to calculate the most common method of depreciation, we need 3 pieces of information:
1.
2.
3.

Methods:
1. Straight line method
2. Declining balance
3. Units of activity

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Learning Straight line method:
Each full year is the same:

How would the above affect the financial statements?

Declining balance method

Which method provides for more depreciation expense over the life of the asset?

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Which method provides for higher net income in the early years of the asset’s life?

Units of activity method

We need one more piece of info: ___________________________________

Example from book:

If we have an asset that has a depreciable base of $12,000, calculate annual depreciation if we
use the truck for the following number of miles:

Which method provides the highest amount of total depreciation?

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Impairments:

LO3 Plant Asset disposals

What do you think we do when a company sells or retires a long-lived asset?

(Where do we find the long-lived asset on the financial statements? Should it still be there if we
get rid of the asset?)

Steps to take:
1. Record any depreciation for any part of the year that we held the asset.
2. Remove both the asset and any accumulated depreciation from the books.
3. The net is a gain or loss.

Example:

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LO4 Basic issues related to reporting intangible assets
Assets that you can’t see but which last over a relatively long period of time.

Types:
1. Patents –

**Only the cost to ____________________ is included in the asset account.

2. Copyrights –

**Only the cost to _______________________ is included in the asset account.

3. Trademarks and trade names –

**Only the following costs are included in the asset account ____________________________.

4. Franchises –

**Only the cost to ________________________________ is included in asset account.

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 5. Goodwill -

If the asset has a definite (not indefinite life), you can generally depreciate it. However, we use
the term __________________ when referring to “depreciation” of an intangible asset.

Research and Development costs are DIFFERENT!

LO5 How long-lived assets are reported and analyzed

Presentation:

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Analysis:
1. Return on Assets

2. Asset Turnover

3. Profit Margin

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67
 This chapter deals with
“right hand side” of the
Chapter 9 Reporting and Analyzing Liabilities and Stockholders’ Equity balance sheet.

LO1 Explain how to account for current liabilities

Current liabilities -
_____________________________________________________________________________
______________________________________________________________________________

Accounts payable (A/P) and Notes payable (N/P) example:

1. We buy supplies on account on 1/1/25 for $100 and we are given 90 days to pay.
2. 4/2/25 rolls around and we can’t afford to pay yet. Vendor says they will extend the debt
for 6 months but will charge 10% interest. (Exchange A/P for a Note Payable)
3. 10/1/25 we pay off the debt.

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Unearned revenue example:
You buy a UNCC season football ticket for $200 cash on July 15, 2024. The first game is
against James Madison on 8/31. There are 6 home games. Let’s assume 3 occur from 8/31 –
9/30/24 and 3 occur from 10/1 – 11/30/24. How does UNCC account for this in their accounting
records if they needed to create financial statements at the end of September and at the end of
December.

July 15, 2024

September 30, 2024

December 31, 2024

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70
LO2 Explain how to account for bonds
Selling bonds is another way companies generate cash to run the business.
Similar to selling stock - _________________________________________________.
Different from selling stock - _____________________________________________________.
Bonds generally pay an interest rate as STATED on the bond. This is called the STATED rate.
3 different types of bond issuances:
1. When the market rate of interest = stated rate of interest, this is called Issuing Bonds at
_________________________________. Also called Issuing at __________________.

_______________ is the amount of principal due at maturity date.

Maturity date is the date the final payment is due to investor.
___________________ is the amount of interest the bond pays.
Bonds are usually issued in _______________ increments.

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1/1/25: our company issued $100,000 bonds with a stated rate of 5% and a term of 5 years at
Face Value. Interest to be paid on 1/1 each year.
12/31/25: we need to accrue the amount of interest we owe (is this a long term or short term
liability?).
1/1/26: record the payment of interest.
12/31/26:
1/1/27:

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2. When the market rate of interest > stated rate of interest, will investors buy our bond?

In this case, we sell (issue) the bond at ______________________________________.

When we sell at a discount, we sell the bond at some percentage less than 100% of face value.
Example:
1/1/25: our company issued $100,000 of bonds with a stated rate of 5% and a term of 5 years at
96. Interest to be paid on 1/1 each year.

12/31/25: we need to accrue the amount of interest we owe (is this a long term or short term
liability?).

1/1/26: record the payment of interest.

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3. When the market rate of interest < stated rate of interest, will investors buy our bond?

In this case, we sell (issue) the bond at ______________________________________.

When we sell at a premium, we sell the bond at some percentage greater than 100% of face
value.
Example:
1/1/25: our company issued $100,000 of bonds with a stated rate of 5% and a term of 5 years at
102. Interest to be paid on 1/1 each year.

12/31/25: we need to accrue the amount of interest we owe (is this a long term or short term
liability?).
1/1/26: record the payment of interest.

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LO3 Explain how to account for the issuance of common and preferred stock and treasury stock
Terms:
Publicly held versus privately held organizations

“Authorized” shares – the number of shares a corp may sell according to its articles of
incorporation.

“Issued” shares – the number of shares the corp. _______________________________.

“Treasury” stock – the shares the corp. ___________________________________________

“Par value” versus “no par value” stock - ___________________________________________

“Classes of stock” - _______________________ and __________________________________

Common stock rights -

_____________________________________________________________________________

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Preferred stock rights -
_____________________________________________________________________________

Accounting for Stock Issuance:

ABC Co. sold 100 shares of $10 par common stock for $2,500 cash.

ABC Co. sold 100 shares of no par common stock for $2,500 cash.

LO4 Explain how to account for cash dividends

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Never “have” to be paid!
Not paid on ________________________________.
Generally need to have enough _______________________________________________.
Cash needed.
Sticky!
3 dates associated with cash dividends.
Example:
6/1/25, ABC Co. declares a dividend of $250,000 to shareholders of record on 12/31/25, payable
on 2/1/26.

6/1/25 is the ___________________________ date. You will record a

_______________________ on this date.

12/31/25 is the date of ___________________________. No accounting entry on this date. This

is the date where the owners who are entitled to a dividend are identified.

2/1/26 is the ______________________ date. Record payment on this date.

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Preferred Dividends:
May have a right to cumulative dividend.
If a dividend is declared, preferred shareholders may receive any “back” dividends before
common shareholders receive any.

LO5 Discuss how stockholders’ equity is reported and analyzed

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Chapter 19 Statement of Cash Flows
LO 1 Discuss the usefulness and format of the statement of cash flows

Classifies cash flow into categories:

1. Operating activities:

2. Investing activities:

3. Financing activities:

Helps to show how long-term assets were paid for.

Compare cash flows to net income.
Helps users see if the company has enough cash to pay employees and bills.
Helps predict future cash flows.

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LO 2 Preparing the Statement of Cash Flows – Indirect Method
*This is the only method we will learn
Recipe Card:

1. Calculate cash flows from operating activities:

Net income (from _______________)

+ non-cash expenses (depreciation is the big one)
+ losses from investing or financing activities
+ changes to current liabilities
- changes to current assets
= Cash flows from operating activities

2. Calculate cash flows from investing activities:

Subtract cash paid to purchase long term assets
Add cash received on sale of long term assets
= Cash flows from investing activities

3. Calculate cash flows from financing activities:

Add cash received from sale of stock or issuance of bonds

Subtract cash paid as dividends or repayment of bonds

= Cash flows from financing activities

Add up the total cash flows from each of the three activities to get total cash flows
+ Beginning cash
= Ending cash

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Let’s do an example to explain why the formula works.

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LO 3 Analyzing the Statement of Cash Flows

Free cash flow =

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 Welcome to Managerial Accounting!

Chapter 11 Managerial Accounting

LO1 Identify the features of managerial accounting and the functions of management
Managerial Financial
Prepare what?

Who is it for?

Follow certain rules?

Focus on what point in time?

Required?

Reporting focus?

Checked?

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What does management do?

Definition
1. Planning

2. Directing

3. Controlling

Organizational Structure

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LO2 Describe the classes of manufacturing costs and the differences between product and period
costs

Manufacturing Costs Non-Manufacturing Costs

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LO 3 Demonstrate how to compute cost of goods manufactured and prepare financial statements
for a manufacturer

Balance Sheet
Merchandiser Manufacturer

When does Inventory become an expense?

Remember the equation:

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Beginning + Purchases – Ending = Sold

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Chapter 13 Cost-Volume-Profit

LO1 Explain variable, fixed, and mixed costs and the relevant range
Some costs change as the activity of the business changes (number of units or services sold) and
some do not.

Brownie/Pizza business:
Which costs change (in total) as the activity (units sold) changes?

Which costs do not?

Total variable costs Total fixed costs

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Relevant range -

Mixed costs

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LO 3 Prepare a CVP income statement to determine contribution margin

Business opportunity – what is the breakeven point?

Can you figure it out?

Contribution Format Income Statement Remember

Traditional I/S?

Each Total Total

Unit Contribution Margin (CM) =

______________________________________________________________________________

Equations
Net Operating Income (NOI) =

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Assumptions
Unless told otherwise, _______________________________________________ are unchanged.
Also, we assume all costs can be ___________________________________________.
Sales mix __________________________________.

Contribution Margin Ratio

Each % of sales
S 40
-V 10
=CM 30
-F
=NOI

For every $1 in sales revenue, ______________goes to CM which we use

to pay _________________________ and then
_______________________________.
Example
We expect to sell 50 rocks this month. What is our expected NOI?

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LO 4 Compute the breakeven point using 3 2 approaches

Breakeven

Each Total %
Sales (S) 40
-Variable costs (V) 10
=Contribution Margin (CM) 30
-Fixed Costs (F) -600
=Net Operating Income (NOI)

Using CM$/ unit:

Using CM%:

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LO 5 Determine the sales required to earn target net income and
determine the margin of safety

We don’t generally want to achieve ZERO NOI. Let’s set a “Target Profit” of $2,700
using our Base Case information.

Each Total %
Sales (S) 40
-Variable costs (V) 10
=Contribution Margin (CM) 30
-Fixed Costs (F) -600
=Net Operating Income (NOI)

Margin of Safety
The difference between the ___________________________________________ and the
_________________.
Do we generally want the MOS to be higher or lower?

Equations:
MOS $ = Total budgeted or actual sales – B/E Sales
MOS % = MOS$ / Total budgeted or actual sales $

What is our MOS and MOS % when we use the budgeted sales from our
Target Profit example?

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Chapter 15 Budgetary Planning
LO 1 State the essentials of effective budgeting and the components of the master budget
Why should we have a budget?

What period should a budget cover?

What are some things we should consider when forecasting sales?

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LO 2 Prepare budgets for sales, production, and direct materials.

Step 1: Prepare a Sales Budget

Facts: We expect to sell 200 brownies in the first quarter at a price of $5.00/ brownie. We expect
the sales volume to increase by 50 brownies per quarter.

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

Step 2: Prepare the Production Budget

How many units do we need to produce each period to meet our sales needs?
***You don’t want to start any quarter with 0 inventory. Why?
Simple example:
We expect to sell 50 widgets this quarter.
We expect to sell 100 widgets next quarter. We don’t want to start the next quarter with 0 units,
but instead want to start with 10% of next quarter’s expected sales.
How many widgets do we want to make this quarter (assuming we are a new business and started
this quarter with 0 units.)

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To continue with the brownie example, say we want to end each quarter with 5% of the next
quarter’s expected sales units.

Qtr Qtr Qtr Qtr

1 2 3 4 Year

To be clear – the production

budget tells us how many
__________________________
we need to make for the period.
This differs from the next budget
(raw materials budget).

Step 3: Prepare the Direct Materials Budget

Now we need to know how much flour, chocolate, butter, etc., we need to buy to meet the
production requirements.
Let’s focus on the butter. If we know that each brownie needs .25 cups of butter, we need to
know how many cups of butter we will need and how much we expect that butter to cost.
Do you think we want to start the next quarter with 0 cups of butter?
Let’s say we always want to start the next quarter with 20% of the next quarter’s butter needs.
Also assume butter costs $5.00/cup.
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

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LO 3 Prepare budget for direct labor (only)

What two numbers do you multiply together to find out your gross pay?

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Year

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LO 4 Prepare a cash budget
In general:
Beginning cash
+ Receipts (
-Disbursements (
=Predicted ending cash

To determine cash receipts, we need to estimate how much cash we need to collect from our
customers each month.
2 things to keep in mind: We assume that we only collect cash _____________ the sale (assume
no prepaid sales) and that credit sales will be paid for in later months.
Example: Our sales are generally made up of 60% credit sales and 40% cash sales. We generally
collect 50% of our credit sales in the month following the sale, 30% in the second month
following the sale, and the final 20% in the third month following the sale.
If we sell $1,000 of goods in April, when do we expect to collect the cash related to those sales?

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