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Lecture Financial accounting (10th edition): Chapter 4 - Pratt, Peters

Chapter 4 - The mechanics of financial accounting. In this chapter students will be able to: List and explain the two criteria necessary for economic events to be directly recorded on the financial statements, describe the accounting equation and how it relates to each of the four financial statements. | 2 Chapter 4 The Mechanics of Financial Accounting 2 Learning Objective 1 List and explain the two criteria necessary for economic events to be directly recorded on the financial statements. 3 Economic Events Must Be: Relevant: Have economic significance including anything that affects its financial condition. Objectively Measurable: Recorded in dollars as determined by parties with differing incentives. If events are both Relevant and Objectively Measurable then the economic events are reflected in the financial statements of the entity. 4 5 Concept Practice 1 Learning Objective 2 Describe the accounting equation and how it relates to each of the four financial statements. 6 The Mechanics of Financial Accounting The first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Shareholders’ Equity 7 7 An event for which the appropriate . | 2 Chapter 4 The Mechanics of Financial Accounting 2 Learning Objective 1 List and explain the two criteria necessary for economic events to be directly recorded on the financial statements. 3 Economic Events Must Be: Relevant: Have economic significance including anything that affects its financial condition. Objectively Measurable: Recorded in dollars as determined by parties with differing incentives. If events are both Relevant and Objectively Measurable then the economic events are reflected in the financial statements of the entity. 4 5 Concept Practice 1 Learning Objective 2 Describe the accounting equation and how it relates to each of the four financial statements. 6 The Mechanics of Financial Accounting The first step in the accounting process is transaction analysis. This process examines relevant, objectively measurable economic events through their effect on the accounting equation: Assets = Liabilities + Shareholders’ Equity 7 7 An event for which the appropriate monetary measure can be derived is considered to be a. objectively measured b. economically viable c. relevant d. capitalized 8 8 Exercise 4-2 Using a tabular analysis approach, analyze the transactions. (Tabular analysis is on the next slide). Note that effects may be on both sides of the equation, in the same direction, or effects may be on one side of the equation with offsetting directions. 9 9 10 Exercise 4-2 Cash + A/R + Land = N/P + CC + RE 1. = 2. = 3. = 4. = 5. = 6. _ _ _ = _ _ _ 30,000 30,000 (20,000) 20,000 9,000 9,000 8,000 8,000 Rev. (5,500) (5,500) Exp. (500) (500) Div. Tot. 13,000 + 8,000 + 20,000 = 9,000 + 30,000 + 2,000 11 Exercise 4-3 Financial Statements Income Statement Revenues $8,000 Expenses 5,500 Net Income $2,500 Statement of Retained Earnings RE (beginning) $ 0 Add: Net Income 2,500 Less: Dividends (500) RE (ending) $2,000 12 Exercise 4-3 Financial Statements Balance Sheet Assets Cash $13,000 A/R 8,000 Land 20,000 Total $41,000 Liabilities .