Accounting and Financial

Reporting

Dr. Mohamed Khodair

Faculty of commerce-Ain Shams University
Email: [email protected]
m
Chapter
Mobile: 01067597779
1-1
 Total grade 100
30 Participation 30 Midterm Exam 40 Final Exam

10 attendance 20 activities & Assignment

Chapter
1-2
 Chapter 1: Accounting in Action
Chapter 2: The Recording Process
Chapter 4: Classified Balance Sheet
Chapter 5: Multiple income statement
Chapter 6: Inventories
Chapter 9: Accounting for Receivables
Chapter 10: Plant Assets

Chapter
1-3
 CH1
Accounting in Action

Chapter
1-4
 What is Accounting?

Chapter
1-5
Accounting is an information system that:

Identifies
Records
Communicates

the economic events of an organization to

interested users.
Chapter
1-6
 Three Activities:

) are
A AP nts.
(G eve
l es i c
ri n cip onom
i n g p
rt ec
unt o rep o
cco t
t ed a how
c c ep icate
a d
ra lly hat in
ne t
Ge dards
n
sta
Chapter
1-7
by : Graphs, Charts, Ratios
 Who Uses Accounting Data?
Internal Users Tax
authority
External
Users
Management
Investors

Human
Resources Labor
Unions

Finance Creditors

Marketing Customers

Chapter
1-8
 Accounting Assumptions

Monetary Unit Economic Entity

Chapter
1-9
 Monetary Unit

Only transactions that

can be expressed in
terms of money be Economic Entity
included in the
accounting records. Activities of the entity be kept
separate and distinct from:
a.The activities of its owners,
and
b. all other economic entities.
Chapter
1-10
 Forms of Business Ownership

Proprietorship Partnership Corporation

Owned by only one person.

Example:
small retail stores.
The owner is liable for the debts of
the business.

Chapter
1-11
 Forms of Business Ownership

Proprietorship Partnership Corporation

Owned by one
person Owned by two or more persons.
(proprietor).
Example: small
retail stores.
Example:
Distinct from the
owner. professional organizations (attorneys),
The owner is liable
for the debts of the Partners are personally liable for the
business.
debts of the business.

Chapter
1-12
 Forms of Business Ownership

Proprietorship Partnership Corporation

Owned by one person Owned by two or more

(proprietor). persons (partners). Owned by many investors
Example: small retail
stores.
Example: professional
organizations
(stockholders, shareholders)
Distinct from the (attorneys),
owner. Distinct from the An indefinite life (open ended),
The owner is liable for personal affairs of each
the debts of the
business.
partner,
Partners are personally
Stockholders have limited
. liable for the debts of
the business.
liability for corporate debts.

Chapter
1-13
 Review Questions
1.Owners of business firms are the only people who need accounting
information
2. Transactions that can be measured in dollars and cents are recorded in the
financial information system.
3. Accounting information is used only by external users with a financial
interest in a business enterprise
4. Financial statements are the major means of communicating accounting
information to interested parties.
5. The economic entity assumption requires that the activities of an entity be kept
separate and distinct from the activities of its owner and all other economic
entities.
6. The monetary unit assumption states that transactions that can be measured in

terms of money should be recorded in the accounting records.

7. The study of accounting is not useful for a business career unless your career
objective is to become an accountant
Chapter
1-14
 Multiple Choice Questions
1- A business organized as a separate legal entity having
ownership divided into shares of stock is a ……
a. proprietorship.
b. partnership.
c. corporation
d. sole proprietorship.
2- Accountants refer to an economic event as a
a. transaction
b. purchase.
c. sale.
d. change in ownership.
Chapter
1-15
 3. The starting point of the accounting process is
a. communicating information to users.
b. identifying economic events
c. recording economic events.
d. None of these answers are correct.
4. The accounting process involves all of the following except
a. identifying economic transactions that are relevant to the
business.
b. communicating financial information to users by preparing
financial reports.
c. recording nonquantifiable economic events
d. analyzing and interpreting financial reports.
5. The accounting process is correctly sequenced as
a. identification, communication, recording.
b. recording, communication, identification.
c. communication, recording, identification.
d.Chapter
identification, recording, communication
1-16
6. Which of the following would not be considered an internal
user of accounting data for the LMN Company?
a. President of the company.
b. Production manager.
c. Merchandise inventory clerk.
d. President of the employees' labor union

7. GAAP stands for

a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

Chapter
1-17
 The Basic Accounting Equation

Assets (A) = Liabilities(L) + Owner’s Equity(O.E)

Uses of Funds The sources of funds

Assets (A)
Resources owned by a business.
Provide future service or benefits.
Ex: Cash, Accounts Receivable (A/R),
Chapter
Equipment, Buildings, ….etc.
1-18
 Liabilities
Claims of creditors against assets,
Existing debts and obligations.
Ex:
Accounts payable,
Notes payable,
Loan, etc.

Chapter
1-19
 Owner’s Equity

Claims of owners’ against assets.

There are four subdivisions of owner's equity:

owner's equity =
Capital - Drawings + Revenues -Expenses

Chapter
1-20
 Basic Equation:
Assets = Liabilities + Owner’s Equity

Expanded Basic Equation:

Assets = Liabilities + Capital – Drawings + Revenues – Expenses

Chapter
1-21
 Revenues

Result from:
 sale of merchandise,
 provision of services,
 rental of property, or
 lending money.

Chapter
1-22
 Expenses
Ex:

Electricity expense,
salaries expense,
advertising expense,
supplies expense,
utility expense,
rent expense.

Chapter
1-23
B.E. 1-5 P.30
Indicate whether each of the following items is an asset
:(A), liability (L), or part of owner’s equity (OE)
Accounts receivables )a(
Salaries and wages payable )b(
Equipment )c(
Supplies )d(
Owner’s capital )e(
Notes payable )f(
Chapter
1-24
B.E. 1-1 P.30
Presented below is the basic accounting equation
. Determine the missing amounts

Assets = Liabilities + Owner’s Equity

)a $90,000 $50,000 ?
)b ? $40,000 $70,000
)c $94,000 ? $53,000

Chapter
1-25
B.E. 1-3 P.30
At the beginning of the year, Danks company had total
assets of $800,000 and total liabilities of $300,000. Answer
:the following questions
If total assets increased $150,000 during the year and )a(
total liabilities decreased $80,000, what is the amount
?of owner’s equity at the end of the year )730,000(

Chapter
1-26
(b) During the year, total liabilities increased $100,000
and owner’s equity decreased $70,000. what is the
amount of total assets at the end of the year? (830,000)
(c) If total assets decreased $80,000 and owner’s equity
increased $120,000 during the year, what is the
amount of total liabilities at the end of the year ?
(100,000)

Chapter
1-27
 B.E. 1-4 P.30
Use the expanded accounting equation to answer each of
:the following questions
The liabilities of Falk company are $ 90,000 . Owner’s )a(
;capital account is $150,000; drawings are $40,000
revenues $450,000 and expenses $320,000. what is the
? amount of Falk Company’s total assets

Chapter
1-28
 .The total assets of pierogi company are $57,000 )b(
Owner’s capital account is $25,000 drawings are
revenues $52,000 and expenses $35,000. what is $7,000
? the amount of the company’s total liabilities
The total assets of Yanko Co. are $600,000 and its )c(
.liabilities are equal to two-third of its total assets
?What is the amount of Yanko Co.’s owner’s equity

Chapter
1-29
 Using The Basic Accounting Equation

Transactions:
Are the economic events recorded by accountants.
May be external or internal.
Each transaction has a dual (Two sided) effect
on the accounting equation.
The accounting equation has to stay in balance.
Chapter
1-30
 In Transaction Analysis

Ask your self:

What accounts are affected?
What families do these accounts belong to
(A, L, or OE)?

Which of the accounts is increasing (+) or

decreasing (-)?
Chapter
1-31
Q1:
Analyze the transactions of a business organized as a proprietorship described below and indicate
their effect on the basic accounting equation. Use a plus sign (+) to indicate an increase and a
minus sign (–) to indicate a decrease.
Assets =Liabilities+Owner's Equity

1. Received cash for services rendered. + +

2. Purchased office equipment on credit.

3. Paid employees' salaries.

4. Received cash from customer in payment

on account.
5. Paid telephone bill for the month.

6. Paid for office equipment purchased in

transaction 2.
7. Purchased office supplies on credit.

Chapter 8. Owner withdrew cash for personal

1-32
expenses.
 Transaction Analysis

Chapter
1-33 LO 7
 Transactions Analysis (P. 15)
Transaction (1). Investment By Owner.
Amr decides to open a computer programming service
named Compu-Shop. On September 1, he invests
$15,000 cash in the business.
BANK

Compu-
shopoftbyte

Chapter
1-34
What is the effect of this transaction on the basic
equation?

•Increase in the Asset, cash by $15,000, and

•Increase in the Owner’s equity, Amr, Capital by
$15,000.

Chapter
1-35
Chapter
1-36
Transaction (2).

Compu-Shop purchases computer equipment for

$7,000 cash.

•Increasein the Asset Equipment by $7,000, and

•Decrease in the Asset Cash by $7,000.

Chapter
1-37
Chapter
1-38
Transaction (3).

Compu-Shop purchases supplies expected to last

for several months for $1,600 from Acme Supply
Company.
Purchase on credit

•Increase in the Asset Supplies by $1,600, and

•Increase in the Liability Accounts payable (A/P)

Chapter
1-39
by $1,600.
Chapter
1-40
Transaction (4).

Compu-Shop receives $1,200 cash from customers

for programming services it has provided.

Transaction analysis:

Increase in the asset cash by $1,200

Increase in the Owner’s equity service revenue

by $1,200
Chapter
1-41
Chapter
1-42
Transaction (5).

Compu-Shop receives a bill for $250 from the Daily

News for advertising but postpones payment until a
later date.
Transaction analysis:

Increase in the liability A/P by $250

Decrease in the Owner’s equity
Advertising Exp.
by $250
Chapter
1-43
Chapter
1-44
Transaction (6).

Compu-Shop provides $3,500 of programming

services for customers. The company receives cash of
$1,500 from customers, and it bills the balance of
$2,000 on account.

Chapter
1-45
Chapter
1-46
Transaction (7).
Compu-Shop pays the following Expenses in cash
for September: store rent $600, salaries of employees
$900, and utilities $200.

Transaction analysis:

Cash by $1,700
Decrease in the asset (600 + 900 + 200)

Decrease in the Owner’s equity

rent expense, salaries
expense, and utilities
Chapter
1-47 expense
Chapter
1-48
Transaction (8).

Compu-Shop pays its $250 Daily News bill in

cash.

Transaction analysis:

Decrease in the asset Cash by $ 250

Accounts
Decrease in the liability
Payable by $250.
Chapter
1-49
Chapter
1-50
Transaction (9).

Compu-Shop receives $600 in cash from

customers who had been billed for services [in
Transaction (6)].
Transaction analysis:

Increase in the asset Cash by $ 600

Accounts receivable
Decrease in the asset by $600.
Chapter
1-51
Chapter
1-52
Transaction (10).

Amr withdraws $1,300 in cash from the business

for his personal use.

Transaction analysis:

Decrease in the asset Cash by $ 1,300

Decrease in owners’ equity

Amr Drawings
by $1,300
Chapter
1-53
Chapter
1-54
 Summary of Transactions

Chapter
1-55
 E1-6 P. 30
Selected transactions for Lawn Care Company are listed
below.
1- Made cash investment to start business.
2- Paid monthly rent.
3- Purchased equipment on account.
4- Billed customers for services performed.
5- Withdrew cash for owner's personal use.
6- Incurred advertising expense on account.
Instructions:
List the numbers of the above transactions and describe the
effect of each transaction on assets, liabilities, and owner's
equity.
Chapter For example,
1-56
(1) Increase in assets and increase in owner's equity.
 Financial Statements
Companies prepare four financial statements from
the summarized accounting data:

Owner’s
Income Balance Statement of
Equity
Statement Sheet Cash Flows
Statement

The result is: The result is: Reports the

net income or Ending balance assets, Liabilities,
net loss of owner’s and Owner’s
Chapter
1-57 equity equity
•Income Statement
Reports the revenues and expenses for a specific
period of time.
The result is :
Net income (revenues > expenses). Or
Net loss (expenses > revenues).

Chapter
1-58
•Owner’s Equity Statement
Summarizes the changes in owner’s equity
for a specific period of time.

The result is the ending balance in

owner’s equity.

Chapter
1-59
The Ending balance in owner’s equity=
Beg. balance + Additional investment +
Net income - Drawings.

OR:
The Ending balance in owner’s equity=
Beg. balance + Additional investment +
Revenues – Expenses - Drawings.

Chapter
1-60
•Balance Sheet
Reports assets, liabilities, and owner’s
equity at a specific date

•Statement of Cash Flows

Summarizes information about cash
inflows (receipts) and outflows
(payments) for a specific period of time.
Chapter
1-61
Q:
Indicate in the space provided by each item whether it would appear on
the Income Statement (IS), Balance Sheet (BS), or Owner's Equity
Statement (OE):

a. Service Revenue g. Accounts

Receivable

b. Utilities Expense h. Owner's

Capital (ending)

c. Cash i. Equipment

d. Accounts Payable j. Advertising

Expense

e. Supplies k. Owner's Drawing

f. Salaries and Wages Expense l. Notes Payable

Chapter
1-62
P1-3A
On May Ahmed Started his business by investing $40,000
cash. Following are the information relates to Ahmed Co.
for May 2012:

Cash 3,400 $ Notes Payable $30,000

Accounts Receivable 4,900 Rent expense 1,200

Equipment 64,000 Maintenance expense 400

Service revenue 8,100 .Gasoline Exp 2,500

Advertising expense 600 .Insurance Exp 400

Accounts Payable 800

Chapter
1-63
Ahmed withdrew $1,500 in cash.
Instructions:
prepare an income statement and an owner's equity statement for
the month of May and a balance sheet at May 31.

Chapter
1-64
 E1-12 P. 32
The following information relates to Jake Peavy Co. for
the year 2012:

Owner's capital, January 1, 2012 48,000 $ Advertising expense $1,800

Owner's drawings during 2012 6,000 Rent expense 10,400

Service revenue 63,600 Utilities expense 3,100

Salaries and wages expense 29,500

Instructions:
After analyzing the data, prepare an income statement and an
owner's equity statement for the year ending December 31, 2012?

Chapter
1-65
 E1-6 P. 30
Selected transactions for Linebrink Lawn Care Company are
listed below.
1- Made cash investment to start business.
2- Paid monthly rent.
3- Purchased equipment on account.
4- Billed customers for services performed.
5- Withdrew cash for owner's personal use.
6- Received cash from customers billed in (4)
7- Incurred advertising expense on account.
8- Purchased additional equipment for cash.
9- Received cash from customers when service was
performed.
Chapter
1-66
Instructions:
List the numbers of the above transactions and describe the
effect of each transaction on assets, liabilities, and owner's
equity.

For example,
(1) Increase in assets and increase in owner's equity.

Chapter
1-67
 Financial Statements

Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

Chapter
1-68 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Income Statement

Reports the revenues and expenses for a specific period of time.

Net income – revenues exceed expenses. Illustration 1-9
Financial statements and
Net loss – expenses exceed revenues. their interrelationships

Chapter
1-69 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Net income is needed to determine the
ending balance in owner’s equity.

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-70
 Financial Statements Owner’s Equity Statement

Statement indicates the reasons Illustration 1-9

Financial statements and
why owner’s equity has increased or their interrelationships

decreased during the period.

Chapter
1-71 SO 8 Understand the four financial statements and how they are prepared.
Financial
Statements

The ending
balance in
owner’s equity
is needed in
preparing the
balance sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-72
 Financial Statements Balance Sheet

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-73 SO 8 Understand the four financial statements and how they are prepared.
 Financial
Statements

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-74
 Financial Statements

Statement of Cash Flows

Information for a specific period of time.

Answers the following:

1. Where did cash come from?
2. What was cash used for?
3. What was the change in the cash balance?

Chapter
1-75 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements Statement of Cash Flows

Illustration 1-9
Financial statements and
their interrelationships

Chapter
1-76 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.

Chapter
1-77 SO 8 Understand the four financial statements and how they are prepared.
 Financial Statements

Discussion Question
Q1-19: “A company’s net income appears directly on
the income statement and the owner’s equity
statement, and it is included indirectly in the
company’s balance sheet.” Do you agree? Explain.

See notes page for discussion

Chapter
1-78 SO 8 Understand the four financial statements and how they are prepared.
 Accounting Career Opportunities

Public Accounting
Careers in auditing and taxation serving the general public.

Private Accounting
Careers in industry working in cost accounting, budgeting,
accounting information systems, and taxation.

Opportunities in Government
Careers with the IRS, the FBI, the SEC, and in public
colleges and universities.

Forensic Accounting
Careers with insurance companies and law offices to conduct
investigations into theft and fraud.
Chapter
1-79 SO 9 Explain the career opportunities in accounting.
 Copyright

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information contained herein.

Chapter
1-80
Q1:
Indicate which of these items is an asset (A), liability
(L) or owner’s equity (OE) account.
_______ (1) Supplies
_______ (2) Klein, Drawing
_______ (3) Building
_______ (4) Note Payable
_______ (5) Taxes Payable

Chapter
1-81
 1. Accounts receivable
2. Accounts payable
3. Bonds, Capital
4. Office supplies
5. Utilities expense
6. Cash
7. Equipment

Chapter
1-82
Q2:
Determine the missing items.
Assets = Liabilities + Owner’s Equity
$75,000 $52,000 (a)
(b) $28,000 $34,000
$84,000 (c) $55,000

a. $23,000
b. $62,000
c. $29,000
Chapter
1-83
Q3:
Balance sheet amounts as of December 31,
2008 for Lesley’s Tutoring Service are
listed below.
Prepare a balance sheet in good form.
Accounts Payable $ 200
Accounts Receivable 1,000
Cash 500
Lesley, Capital ?
Chapter
1-84
Q4:
Use the following information to calculate for the year
ended December 31, 2008 (a) net income (net loss),
(b) ending owner’s equity, and (c) total assets.
Supplies $ 1,000 Revenues $23,000
Operating expenses 12,000 Cash 15,000
Accounts payable 9,000 Drawings 1,000
Accounts receivable 3,000 Notes payable 1,000
Beginning Capital 5,000 Equipment 6,000

(a) $11,000 (b) $3,000 (c) $25,000

Chapter
1-85