Course Title: Financial Accounting

Course Code: ACT 101

Course Instructor: Fairose Farin

Chapter 1:Accounting in Action

PREVIEW OF CHAPTER
 CHAPTER

1 Accounting in Action
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1 Explain what accounting is.
2 Identify the users and uses of accounting.
3 Understand why ethics is a fundamental business concept.
4 Explain accounting standards and measurement principles.
5 Explain the monetary unit assumption and the economic entity assumption.
6 State the accounting equation, and define its components.
7 Analyze the effects of business transactions on the accounting equation.
8 Understand the five financial statements and how they are prepared.
 What Is Accounting?
❑ Accounting consists of three basic activities - identifies, records and
communicates the economic events of an organization to interested
users."Economic events" are real-world financial transactions or
occurrences that affect the company’s financial position (assets, liabilities,
equity, income, or expenses) — and are therefore recorded in the accounting
system.
❑ Accounting helps businesses to keep track of their income, expenses and
overall financial health.
❑ The main goal of financial accounting is to provide clear financial
information to the interested users to aid them in making good business
decisions.
 Understanding Accounting in Context of Unilever
● As a starting point to the accounting process, a company identifies the economic events
relevant to its business. Examples of economic events are the sale of food and snacks by
Unilever .
● Next , it records those events in order to provide a history of its financial activities.
Recording consists of keeping a systematic, chronological diary of events, measured in
monetary units.In recording, Unilever also classifies and summarizes economic events.
● Finally, Unilever communicates the collected information to interested users by means
of accounting reports. The most common of these reports are called financial
statements ( Income statement, Statement of Financial Position Etc.)
● A vital element in communicating economic events is the accountant’s ability to
analyze and interpret the reported information. Analysis involves use of ratios,
percentages, graphs, and charts to highlight significant financial trends and relationships.
Interpretation involves explaining the uses, meaning, and limitations of reported data.
 The Accounting Process

✔ Identify economic events

✔ Record data systematically
✔ Communicate via financial reports
 Who Uses Accounting Data?

❖ Internal Users: ❖ External Users:

✔ Internal users of accounting information ✔ External users of accounting information are
are individuals within an organization individuals or entities outside of a business
who use financial data for decision- who rely on financial data for decision-making.
making. ✔ They use this information to assess the
✔ This information is communicated through company's financial health, make investment
internal and management reports. decisions, evaluate creditworthiness, and
▪ Managers ensure compliance with regulations.
▪ HR Managerial ▪ Investors
Financial
▪ Marketing Accounting ▪ creditors, regulators
▪ tax authorities etc. Accounting
▪ Finance.
 Who Uses Accounting Data?

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask
 Who Uses Accounting Data?

EXTERNAL
USERS

Illustration 1-3
Questions that external users ask
 Accounting Standards

International Accounting ⮚ To ensure high-quality financial reporting, accountants

Standards Board (IASB) present financial statements in conformity with
http://www.iasb.org/
accounting standards that are issued by standard setting
bodies.

Financial Accounting ⮚ Presently, there are two primary accounting standard-

Standards Board (FASB) setting bodies—
http://www.fasb.org/
⮚ International Accounting Standards Board (IASB)
and Financial Accounting Standards Board (FASB).
 Accounting Standards

International Accounting Standards ⮚ More than 130 countries follow standards

Board (IASB) http://www.iasb.org/ referred to as International Financial Reporting
Standards (IFRS). IFRSs are determined by
International Financial
Reporting Standards the IASB.

⮚ Most companies in the United States follow

Financial Accounting
Standards Board (FASB) standards issued by the FASB, referred to as
http://www.fasb.org/ generally accepted accounting principles

Generally Accepted Accounting (GAAP).

Principles (GAAP)

LO 4
 Measurement Principles

❑ HISTORICAL COST PRINCIPLE (or cost principle)

✔ It dictates that companies record assets at their cost.

✔ For example, if Gazprom (RUS) purchases land for $300,000, the company
initially reports it in its accounting records at $300,000. But what does Gazprom
do if, by the end of the next year, the fair value of the land has increased to $
400,000?

❖ Under the historical cost principle, it continues to report the land at $300,000.
 Measurement Principles

❑ FAIR VALUE PRINCIPLE

✔ states that assets and liabilities should be reported at Fair Value . Fair value
means the current market price of an asset or liability — what it could be
sold or settled for today. Whereas the Historical cost is the original price paid
for it.

✔ Sometimes, fair value is more helpful than historical cost. For example, with
investments like stocks or bonds, it's easy to find their current market price, so
companies report them using fair value.
 Measurement Principles Cont.

When deciding which method to use (fair value or historical cost), companies think about two
things:

- Historical cost is based on real, documented prices (it's more "factual").

- Fair value is more current and may be more "relevant" for decision-making.

✔Although accounting rules (IFRS) allow companies to update the value of things like
buildings or equipment to fair value, most companies still stick with the original cost.

✔They only use fair value a lot when the asset is actively traded and market prices are easy
to find, like with investments.
 Assumptions

❑ MONETARY UNIT ASSUMPTION

✔ requires that companies include in the accounting records only transaction

data that can be expressed in terms of money. This assumption enables
accounting to quantify (measure) economic events.

✔ For example, the health of a company’s owner, the quality of service, and
the morale of employees are not included.
✔ The reason: Companies cannot quantify this information in money terms.
Though this information is important, companies record only events that
can be measured in money.
 Assumptions
❑ ECONOMIC ENTITY ASSUMPTION requires that activities of the entity be kept
separate and distinct from the activities of its owner and all other economic
entities.

✔ For an example - Sally Rider, owner of Sally’s Boutique, must keep her personal living
costs separate from the expenses of the boutique.

✔ Another example: If the owner of a small bakery uses business funds to pay for their
personal vacation, and this is recorded as a business expense, the bakery's profit will
appear lower than it actually is. This misleads investors or creditors about how
profitable or stable the business really is.

◆ Proprietorship

◆ Partnership Forms of Business

◆ Corporation Ownership
 Why it's important to ensure the Economic Entity
Assumption ?
1. Clear Financial Reporting -Without separating the business from its owners, it would be
impossible to determine the true financial performance and position of the business.Personal
transactions of owners could distort the business’s income, expenses, assets, and liabilities.
2. Legal & Tax Compliance -Many legal systems require businesses to keep records distinct
from personal finances for tax reporting and legal responsibility.Violating this can lead to
legal complications .
3. Decision Making- Investors, creditors, and management need accurate, unbiased information
to make informed decisions.Mixing personal and business finances reduces the usefulness of
financial statements for these stakeholders.
4. Auditing and Accountability-Auditors rely on the economic entity assumption when
verifying a company’s financial statements.
5. Consistency and Comparability-Allows businesses to be compared with one another. It
also ensures consistency over time for tracking business performance.
 Forms of Business Ownership

Proprietorship Partnership Corporation

◆ Owned by one ◆ Owned by two or more ◆ Ownership divided

person persons into shares
◆ Owner is often ◆ Often retail and ◆ Separate legal entity
manager/operator service-type businesses organized under
◆ Owner receives any ◆ Generally unlimited corporation law
profits, suffers any personal liability ◆ Limited liability
losses, and is ◆ Partnership agreement
personally liable for
all debts

LO 5
 The Basic Accounting Equation

Basic Accounting Equation

● Assets must equal the sum of liabilities and equity.
● Provides the underlying framework for recording and summarizing economic
events.
● The accounting equation applies to all economic entities regardless of size ,
nature of business or form of business organization.

Assets = Liabilities + Equity

LO 6
 Basic Accounting Equation

Assets = Liabilities + Equity

Assets
◆ Resources a business owns.
◆ Provide future services or benefits.
◆ Example: Cash, Inventory, Equipment etc.

LO 6
 Basic Accounting Equation

Assets = Liabilities + Equity

Liabilities
◆ Claims against assets (existing debts and obligations).
◆ Creditors (party to whom money is owed).
◆ Example: Accounts Payable, Notes Payable, Salaries and
Wages Payable etc.

LO 6
 Basic Accounting Equation

Assets = Liabilities + Equity

Equity
◆ Ownership claim on total assets.
◆ It is equal to total assets minus total liabilities. Here is why: The assets of a business
are claimed by either creditors or shareholders. To find out what belongs to
shareholders, we subtract creditors’ claims (the liabilities) from the assets. The
remainder is the shareholders’ claim on the assets—equity.
◆ Referred to as residual equity.
◆ Equity generally consists of (1)Share Capital—Ordinary and (2) Retained Earnings.
 Equity

● Share Capital—Ordinary
Investments by shareholders represent the total amount paid in
by shareholders for the ordinary shares they purchase.

Illustration 1-7
Increases and
decreases in equity

LO 6
 Equity

● Retained Earnings
Retained earnings is determined by three items: revenues,
expenses, and dividends.
Illustration 1-7
Increases and
decreases in equity

LO 6
 Stockholders’ Equity

✔ Revenues result from business activities entered into for the

purpose of earning income.
✔ Common sources of revenue are sales, fees, services,
commissions, interest, dividends, royalties, and rent. Illustration 1-7
Increases and
decreases in equity
 Stockholders’ Equity

✔ Expenses are the cost of assets consumed, or services used in the

process of earning revenue.
✔ Common expenses are- salaries expense, rent expense, utilities
expense, property tax expense etc. Illustration 1-7
Increases and
decreases in equity
 Stockholders’ Equity

✔ Dividends are the distribution of net income in terms of cash

or other assets to shareholders.They're not related to the
operations of the business, and they do not appear on the
income statement.
✔ Dividends reduce retained earnings. However, dividends are Illustration 1-7
Increases and
not expenses. decreases in equity
 > DO IT!
Classify the following items as issuance of stock, dividends, revenues, or
expenses. Then indicate whether each item increases or decreases stockholders’
equity.
Classification Effect on Equity
1. Rent Expense Expense
2. Service Revenue Revenue Decrease
3. Dividends Dividends Increase
4. Salaries and Wages Expense Expense Decrease
1. Rent Expense is an expense (E); it decreases equity. 2. Service Revenue is a revenue
(R); it increases equity. 3. Dividends is a distribution to shareholders
Decrease(D); it decreases
equity. 4. Salaries and Wages Expense is an expense (E); it decreases equity
 What is Transaction ?
▪ In accounting, a transaction is any business activity
that impacts a company's financial statements,
typically involving the exchange of money or
assets.
▪ These activities are documented to track
financial changes, like sales, purchases,
payments, and investments. Transactions are a
business’s economic events recorded by
accountants.
✔ May be external or internal.
✔ Not all activities represent transactions( must be an
activity that impacts a company's financial
statements).
✔ Each transaction has a dual effect on the
accounting equation.
 Transaction Analysis

Illustration: Are the following events recorded in the accounting

records?
Discuss product
Purchase
Event design with Pay rent
computer
potential customer

Criterion Is the financial position (assets, liabilities, or

stockholder’s equity) of the company changed?

Record/
Don’t Record
Illustration 1-8
Transaction-
identification process LO 7
 Transaction Analysis

Illustration 1-9
Expanded accounting equation

LO 7
 Transaction Analysis
TRANSACTION 1. INVESTMENT BY STOCKHOLDERS Ray and Barbara
Neal decide to start a smartphone app development company that they incorporate
as Softbyte SA.On September 1, 2017, they invest €15,000 cash in the business in
exchange for €15,000 of ordinary shares. The ordinary shares indicates the
ownership interest that the Neals have in Softbyte SA. This transaction results in an
equal increase in both assets and equity.
Illustration 1-10

Assets = Liabilities+ Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000

LO 7
 TRANSACTION 2. PURCHASE OF EQUIPMENT FOR CASH Softbyte SA
purchases computer equipment for €7,000 cash.
Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 3. PURCHASE OF SUPPLIES ON CREDIT Softbyte SA
purchases for €1,600 headsets and other accessories expected to last several months.
The supplier allows Softbyte to pay this bill in October.
Illustration 1-10 Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings

Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 4. SERVICES PERFORMED FOR CASH Softbyte SA
receives €1,200 cash from customers for app development services it has performed.
Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 5. PURCHASE OF ADVERTISING ON CREDIT Softbyte SA
receives a bill for €250 from the Programming News for advertising on its website
but postpones payment until a later date. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 6. SERVICES PROVIDED FOR CASH AND CREDIT.
Softbyte provides €3,500 of services. The company receives cash of €1,500 from
customers, and it bills the balance of €2,000 on account.
Illustration 1-10 Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings

Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
TRANSACTION 7. PAYMENT OF EXPENSES Softbyte SA pays the following
expenses in cash for September: office rent €600, salaries and wages of employees
€900, and utilities €200. Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 8. PAYMENT OF ACCOUNTS PAYABLE Softbyte SA pays
its €250 Programming News bill in cash. The company previously (in Transaction 5)
recorded the bill as an increase in Accounts Payable.
Illustration 1-10 Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings

Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
TRANSACTION 9. RECEIPT OF CASH ON ACCOUNT Softbyte SA receives
€600 in cash from customers who had been billed for services (in Transaction 6).
Illustration 1-10

Assets = Liabilities + Equity

Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
$8,050
+ $1,400+ $1,600 $7,000
+ $1,600 =$15,000 + $4,700 $1,950
+ $1,300
- -

LO 7
 TRANSACTION 10. DIVIDENDS The corporation pays a dividend of €1,300 in
cash to Ray and Barbara Neal, the shareholders of Softbyte SA.
Illustration 1-10
Assets = Liabilities + Equity
Trans- Accounts Accounts Share Retained Earnings
Cash + + Supplies +Equipment = + +
action Receivable Payable Capital Rev. – Exp. – Div.

1. +15,000 +15,000
2. -7,000 +7,000
3. +1,600 +1,600
4. +1,200 +1,200
5. +250 -250
6. +1,500 +2,000 +3,500
7. -1,700 -600
-900
-200
8. -250 -250
9. +600 -600
10. -1,300 -1,300
€8,050
+ €1,400+ €1,600 €7,000
+ €1,600 =€15,000 + €4,700 €1,950
+ €1,300
- -

€18,050 €18,050 LO 7
 Summary of Transactions

1. Each transaction must be analyzed in terms of its effect on:

a. The three components of the basic accounting equation.
b. Specific types (kinds) of items within each component.
2. The two sides of the equation must always be equal.
3. The Share Capital—Ordinary and Retained Earnings columns indicate the
causes of each change in the shareholders’ claim on assets.

LO 7
 DO IT! TRANSACTION ANALYSIS

Transactions made by Virmari & Co. SA, a public accounting firm, for the
month of August are shown below. Prepare a tabular analysis which shows the
effects of these transactions on the expanded accounting equation, similar to
that shown in Illustration 1-10.

1. The company issued ordinary shares for €25,000 cash.

2. The company purchased €7,000 of office equipment on credit.

3. The company received €8,000 cash in exchange for services performed.

4. The company paid €850 for this month’s rent.

5. The company paid a dividend of €1,000 in cash to shareholders.

LO 7
 > DO IT!

1. The company issued ordinary shares for €25,000 cash.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150
+ $7,000= $7,000 + $25,000+ $8,000
- $850
- $1,000

$18,050 $18,050
LO 7
 > DO IT!

2. The company purchased €7,000 of office equipment on credit.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150
+ $7,000= $7,000 + $25,000+ $8,000
- $850
- $1,000

$18,050 $18,050
LO 7
 > DO IT!

3. The company received €8,000 cash in exchange for services

performed.
Assets = Liabilities + Equity
Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150
+ $7,000= $7,000 + $25,000+ $8,000
- $850
- $1,000

$18,050 $18,050
LO 7
 > DO IT!

4. The company paid €850 for this month’s rent.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

$31,150
+ $7,000= $7,000 + $25,000+ $8,000
- $850
- $1,000

$18,050 $18,050
LO 7
 > DO IT!

5. The company paid a dividend of €1,000 in cash to shareholders.

Assets = Liabilities + Equity

Trans- Accounts Share Retained Earnings
Cash + Equipment = + +
action Payable Capital Rev. – Exp. – Div.
1. +25,000 +25,000

2. +7,000 +7,000

3. +8,000 +8,000

4. -850 -850

5. -1,000 -1,000

€31,150
+ €7,000= €7,000 + €25,000+ €8,000
- €850
- €1,000

€38,150 €38,150
LO 7
 Final Equation Check
Assets: €31,150 (Cash) + €7,000 (Equipment) = €38,150

Liabilities + Equity:
Liabilities: €7,000
Share Capital: €25,000
Revenues: €8,000
Expenses: –€850
Dividends: –€1,000
Total Equity = €25,000 + €8,000 – €850 – €1,000 = €31,150
Total Liabilities + Equity: €7,000 + €31,150 = €38,150
 FINANCIAL STATEMENTS

Companies prepare five financial statements :

Retained Statement of
Income
Earnings Financial
Statement
Statement Position

Comprehensive
Statement of
Income
Cash Flows
Statement
Video
 Income Statement

✔An income statement is a financial

statement that shows you the
company's income and expenditures.
✔It also shows whether a company is
making profit or loss for a given
period.
✔The income statement, along with
balance sheet and cash flow statement,
helps you understand the financial
health of your business.
 Illustration 1-10
Financial statements and
their interrelationships

Illustration 1-11
Financial statements and their interrelationships
LO 8
 LO 8
Illustration 1-11
 Balance sheet and
income statement are
needed to prepare
statement of cash
flows.

Illustration 1-11
Financial statements
and their
interrelationships

LO 8
 Income Statement

Key Notes:
◆ Reports the profitability of the company’s operations over a
specific period of time.
◆ Lists revenues first, followed by expenses.

◆ Shows net income (or net loss).

◆ Does not include investment and dividend transactions
between the shareholders and the business.

LO 8
 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.

LO 8
 Retained Earnings Statement

◆ Reports the changes in retained earnings for a specific period

of time.
◆ The time period is the same as that covered by the income
statement.
◆ Information provided indicates the reasons why retained
earnings increased or decreased during the period.

LO 8
 Statement of Financial Position

◆ Reports the assets, liabilities, and equity at a specific date.

◆ Lists assets at the top, followed by liabilities and equity.
◆ Total assets must equal total liabilities and equity.
◆ Is a snapshot of the company’s financial condition at a
specific moment in time (usually the month-end or year-
end).

LO 8
 Financial Statements

Review Question
The financial statement that reports assets, liabilities, and
equity is the:
a. income statement.
b. retained earnings statement.
c. statement of financial position.
d. statement of cash flows.

LO 8
 Statement of Cash Flows

◆ Information on the cash receipts and payments for a

specific period of time.
◆ Answers the following:

► Where did cash come from?

► What was cash used for? HELPFUL HINT

Investing activities
► What was the change in the pertain to investments
made by the company,
cash balance? not investments made
by the owners.

LO 8
 Comprehensive Income Statement

◆ Other comprehensive income items are not part of net

income.
◆ Reported either by
► Combining with income statement, or
► Separate statement.

Illustration 1-13
Comprehensive
income statement

LO 8
> DO IT!

Presented below is selected information related to Flanagan Group plc

at December 31, 2017. Flanagan reports financial information monthly.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(a) Determine the total assets of Flanagan at December 31, 2017.
(b) Determine the net income that Flanagan reported for December
2017.
(c) Determine the equity of Flanagan at December 31, 2017.

LO 8
> DO IT!

Presented below is selected information related to Flanagan Group plc

at December 31, 2017. Flanagan reports financial information monthly.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(a) Determine the total assets of Flanagan at December 31, 2017.
(b) Determine the net income that Flanagan reported for December
2017.
(c) Determine the equity of Flanagan at December 31, 2017.

LO 8
Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(a) Determine the total assets of Flanagan at December 31, 2017.

Equipment £10,000
Cash 8,000
Accounts Receivable 9,000
Total assets £27,000

LO 8
Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(b) Determine the net income reported for December 2017.
Revenues
Service revenue £36,000
Expenses
Rent expense £11,000
Salaries and wages expense 7,000
Utilities expense 4,000
Total expenses 22,000
Net income £14,000
LO 8
Information related to Flanagan Group plc at December 31, 2017.
Equipment £10,000 Utilities Expense £ 4,000
Cash 8,000 Accounts Receivable 9,000
Service Revenue 36,000 Salaries and Wages Expense 7,000
Rent Expense 11,000 Notes Payable 16,500
Accounts Payable 2,000 Dividends 5,000
(c) Determine the equity of Flanagan at December 31, 2017.

Total assets [as computed in (a)] £27,000

Less: Liabilities
Notes payable £16,500
Accounts payable 2,000 18,500
Equity £ 8,500

LO 8
APPENDIX 1A Accounting Career Opportunities
Learning
Public Accounting Objective 9
Explain the career
Careers in auditing, taxation, and opportunities in
management consulting serving accounting.
the general public.
Private Accounting
Governmental Accounting Careers in industry working in
Careers with the tax authorities, cost accounting, budgeting,
law enforcement agencies, and accounting information systems,
corporate regulators. and taxation.

Forensic Accounting
Uses accounting, auditing, and investigative skills to conduct
investigations into theft and fraud.

LO 9
 Assignment

◆ BE1-6, BE1-7, E1-6, E1-7

◆ P1-1A
 THANK YOU

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