Hello here we are again.
We are in the fifth lecture I think if you count the intro one.
Moving right along I want you to notice that we are really kind of just building we just
continue to build our foundations right.
One of the first things we learned is the accounting equation what makes equity goes
up and what makes equity goes down right.
And then we started learning transaction analysis and now last lecture we started talking about
creating the financial statements.
Mainly the income statement stamen of equity balance sheet correct so we're just building
on each other right?
The next lecture this is a good one too but the next one is a very important lecture so
be make sure you are here for my face to facers and for you at home make sure watch that whole
thing you might even want to watch it more than once, because we going to do some major
stuff in lecture number six.
But let's take care of lecture number five first alright so let's go through the homework
real quick now one homework that I don't believe I had got to last time was exercise one eight
is that correct exercise one eight I had not got to.
Let me get a piece of paper out here so let's go through exercise one eight real quick.
This kind of test our knowledge of the accounting equation.
Ok office mart has assets equal to a hundred and twenty three thousand and liabilities
equal to fifty three thousand at year end.
What is the total equity of office mart at year end what do you think?
Seventy thousand now that one wasn't too tough was it?
Now the next two and I think I kind of alluded to this last lecture.
We want to focus on the accounting equation assets equals liabilities plus owners' equity
correct.
And we know that needs to be true at the beginning of the year at the ending of the year so let's
read exercise one eight B and let's kind of put in the information as we read it.
At the beginning of the year Logan's company assets are two hundred thousand so let's put
two hundred thousand in there and its equity is one fifty correct.
Well we know liabilities don't we?
What are the liabilities fifty ok?
During the year assets increase seventy thousand so there must be two seventy at the end and
liabilities increased by thirty thousand so liabilities go up by thirty thousand is that
correct?
Fifty plus thirty is eighty so we now know owner's equity because that has to equal that
plus that correct?
So what is owner's equity one ninety so does that equal that plus that yup does that equal
that plus that yup does that plus that equal that does that plus that equal that and how
much did owners' equity increase by then?
Plus forty thousand does that equal that plus that it's like a puzzle isn't it?
Ok has to work like this has to work like this it's like a Sudoku puzzle right?
Jake you can do these on a date with your date you can do this all Friday night this
would be fun wouldn't it?
Do puzzles together counting puzzles that be great ok so.
Questions on that one?
Ok let's do another one let me see if I have another piece of paper here.
Let see if I can just lay that over.
At the beginning of the year were on C on exercise one eight C at the beginning of the
year carrot companies liabilities equal sixty thousand during the year assets increased
by eighty thousand and at year end the assets equal one eight thousand right?
Ok well let's start filling in what we know what plus eighty equals one eighty this is
a hundred right?
Well that equals that plus what forty ok let's see what else they tell us liabilities decrease
by ten thousand dollars during the year correct?
So liabilities go down by ten thousand so sixty minus ten equals what fifty?
So what does owner's equity have to equal one hundred and thirty forty plus what equals
one thirty ninety ok well does equal negative ten and ninety yeah it does doesn't it?
Ok see how those work ok I usually have one or two of those on the tests to see if you
really understand Kara?
So instead of putting an actual minus sign you'll actually do brackets?
Yeah, yeah, yeah I will do both so a lot of times I will use the brackets to indicate
minus or deducted from cool?
That is exercise one eight ok.
Ok let's take a look then at quick study one twelve quick study one twelve okey doke now
I will have a test question like this I guarantee I think another skill we want to have is to
look at a account and know what financial statement it goes on to look at an account
and look on what financial statement it goes on.
Matter of fact when students come into my office regardless of their accounting class
they're taking.
I always like to do things to kind of assess to see how strong their foundation is in accounting
and the first thing and one of the first thing I'll ask of this let me give you some accounts
tell me what financial statement they're on and if they don't know how to do this then
I know we have work to do.
This is one of those fundament things that you want to have ok.
Quick study one twelve indicate which financial statement will appear income statement, balance
sheet, statement of owner's equity, or the statement of cash flows not real concerned
about the statement of cash flows, because you're not going to prepare in this class
I want you to know it exists but that's about it.
Ok assets go on what?
Assets on the balance sheet.
On quick study one twelve revenues goes on what?
income statement what does the liabilities go on?
Balance sheet equipment goes on the balance sheet.
Withdrawals?
Statements of owner's equity, statement of owner's equity for withdrawals.
Expenses goes on the income statement.
Total liabilities and equity balance sheet.
Cash from operating activities actually goes on the cash flow statement I don't expect
you to know that.
The net increase and the decrease in cash also goes on the cash flow statement I'm not
so concerned that you know about that ok.
What if one of the choices would've been ending balance of owner's capital what would the
answer be?
Ending balance of owner's capital actually there's two of them right?
It's the last line of your statement of equity and then it also flows over to the balance
sheet.
So the ending balance of owner's capital actually shows up on two financial statements.
Statement of equity and the balance sheet remember how these things flow income statement,
statement of equity, balance sheet have to prepare them in that order, and that's what
we're going to do now right.
How did you guys do on exercise one fourteen one fifteen one sixteen cool?
Here's what I want to do this is kind of a simplified this is probably
the most simplest example that you'll do and I'll tell you why here in a second.
But here is why here's kind of the process I encourage students to utilize when they
have a problem like this.
Is to go through each of these items or accounts before you start doing the financial statements
and decide what financial statement they go on.
So let's take a look here cash is on the balance sheet is that correct?
as is accounts receivable supplies land office equipment accounts payable all of those or
on that balance sheet correct?
Now see they made it easy for you because they kind of grouped everything together.
We're start working on one today that's not as easy, but they grouped everything together
as far as what financial statement it goes on.
Now owner's investment and let's assume that those were made on the second or the third
of October that would go on what?
Statement of owner's equity what about the cash withdrawals by owner?
Statement of owner's equity correct?
Consulting fees earned that's another sort of terms for revenues that goes on the income
statement as does renting expense, salaries expense, telephone expense, miscellaneous
expense those all go on the income statement ok.
Now as we prepare those financial statements which one are we going to start with?
The income statement and as you utilize these or as you put these on one of the financial
statements put a little check number or circle the account that you know it ended up somewhere.
So let's take a look at exercise one fourteen the answer ok.
Alright ok so were going to use which ones on the income statement?
That one that one that one that one and that one correct?
And the income statement looks like this ok.
That's what the income statement looks like I'm going to make some comments in but I first
want you to take a look at it see if you're numbers are right.
Ok let me make some comments about it first of all its prepared in proper form or good
form isn't it.
You have the name of the company the name of the statement and it's dated properly don't
just put October thirty one put for the month ended October thirty one now they didn't give
us a year or you would have put that as well.
Now they have their revenues and then they have their expenses common question is well
what if my expenses are in a different order that's completely fine you know they obviously
did this from largest expense down to smallest expense which is a common way you'll see an
income statement but you can do it you can list those however you want ok.
Now I want to make sure I want to make sure that you listed those expenses I don't want
to just see that for your income statement those number right there no I want the details
as far as what those expenses are that gives the reader a lot more information so they
can make their decisions correct?
Alright any questions on that yours might look a little different like I said that's
ok any question on that?
Kind of a rule of thumb is often you'll put a dollar sign at the very top and a dollar
sign at the very bottom ok, but you don't have to put dollar signs everywhere here they
did because it was the top of this column ok.
Any questions on the income statement?
Ok now let's take a look at the statement of equity let's see if we can get them both
on here.
Ok and where do we get that net income?
It flows down doesn't it; it flows down from the statement of equity which is why we have
to prepare them in this order.
Ok alright the beginning balance of capital was zero we added investments by owner of
seventy four thousand which was made on either October second or October third I can't remember
on which I told you we add the net income you know this subtotal right here I think
is kind of not a real worthwhile subtotal if you didn't have that that's fine then you
deduct your withdrawals by the owner and you get in king capital at October thirty first
is this prepared in proper form or in good form yes name of the statement name of the
company and its dated properly it will always be dated the same way between the statement
of equity and the income statement.
Ok so is there any questions on that any question on those like I said I promise you you'll
be doing this on tests ok on the first test which is over chapters on and two.
Ok what's the next one we prepare the balance sheet, and what's the ending balance of capital
its seventy five seven fifty if you look over here right.
The ending balance is seventy five seven fifty right here at the bottom and that's going
to flow over to your balance sheet.
There it is right there whoops let me get it straight first there it is right there
ok take a look at that I'll let you check your number right there then I'll have some
comment about it.
Ok first thing you look at with a balance sheet is you want to make sure it balances
do the total assets equal total liabilities plus the equity?
Yes now make sure you total those and make sure you label them I don't like numbers that
don't have a label next to them especially the one at the very bottom so make sure you
say total assets eighty three two fifty total liabilities and equity eight three two fifty.
Is it prepared in proper form or good form yes the name of the company the name of the
statement and its dated properly now this one is dated you can either say as of October
thirty first or just October thirty first but do not say for the month ending October
thirty first a balance sheet is a snap shot in time correct?
So we want to make sure that it's dated correctly to reflect that.
What happens if your balance sheet doesn't t balance?
You did a booboo made a mistake right?
Now when you guys take the test and when I ask you to prepare these three financial statements
I've had students go absolutely bananas because their balance sheet did not balance.
I'm a pretty nice guy I mean if you prepared it if you did a pretty good job and you maybe
just made a math error along the way but it's prepared neatly and you did most things correct
you're going to get partial credit but please don't be like some students in the past I've
had had students pend thirty minutes on their financial statements on their test because
they could not because they were getting a little obsessive it doesn't balance and so
they were neglecting the rest of their tests and because they spent thirty minutes I've
got to find why it didn't balance right relax breath deep do the best job you can do the
rest of your test if you got time you can come look for it again, but there is partial
credit here ok, because a lot of times my students will on the test they'll thumb back
and do the problems first the financial statements they'll do that first before they do any of
the multiple choice or anything else.
Any questions on that?
Great.
I believe that was all the homework I assigned is that correct?
Ok so were going to talk about a few other things today and then were going to do a little
bit of work here in class on some things today, but one thing I want to go back through today
is remember when and we talked about the revenue recognition principle ok.
Let's take a look at the screen real quick ok that we talked about there's principles
and assumptions of accounting for which all the rules are built upon correct?
And we talked about the revenue recognition principle which is very important just to
reiterate we recognize revenue when it is earned when is it earned?
When the product or service has been delivered to the customer not necessarily when the cash
changes hand correct?
So let's just do a quick example and I want to introduce you to a new account.
Let's say our buddy Jake here let's go back to the example let's say he's the guy who
mows my lawn let's say that I actually let's say
yeah let's look at the perspective of Jake not from me but the perspective of Jake and
his accounting books.
So let's say hey can you mow my lawn next week and he says yeah that's nice and its
fifty dollars right to mow my loan and he goes yeah that's right let me give you the
fifty dollars now but you don't need to mow it till like next Thursday he says that's
fine I don't know if I'm going to see you next week so let me just give you the fifty
now so I give him the fifty dollar bill.
Well on Jakes accounting records and if we were doing the transaction analysis how would
we record that?
Well I'll show you we would say we would say cash for Jake went up by fifty and then we
would have an account called unearned revenue that will also go up by fifty and unearned
revenue is a liability.
Sometimes people think that unearned revenue is an revenue because it has the word revenue
in it but its not.
Unearned revenue is a liability account and thus it goes with the other liabilities on
which financial statement where do liabilities go balance sheet unearned revenues is a liability
and it goes the balance sheet so taking a look back at this Jake when I give you fifty
dollars and you're keeping track of this in your records your cash goes up by fifty an
your unearned revenue goes up by fifty.
Well Thursday comes and you mow my lawn well a transaction that you will make at that point
is your revenue will go up by fifty dollars as soon as you're done mowing my lawn.
And unearned revenue that liability now goes down because you satisfied that.
Does that make sense?
And of course me as the customer I don't know your making this entry I really don't care,
but for your books taking one more look at this when you got the cash, cash went up by
fifty unearned revenue a liability when you provided the service unearned revenue went
down a liability was decreased and revenue you can book it as revenue at that point cool.
Ok let's talk about these other principles what about the cost principle?
Well the cost principle is this that means that you base your accounting information
on actual costs because that is objective let me give you an example.
Marlin let's say that you had a business and you bought a used truck for it off of Craig's
list and I said how much did you buy the truck for and you say I bought it for eight thousand
dollars cash and I said eight thousand cash is what you paid for it that's good deal.
And you say here's the beautiful part Dave I took it to my brother who works at a used
car lot he knows cars he knows what they're worth he knows trucks he knows what's they're
worth he said this thing is worth at least thirteen thousand I got a deal you know I
looked it up on the bluebook value it said it's twelve thousand nine hundred and I got
it for eight I got a deal on this thing, this thing is worth five thousand more than what
I paid for it ok well that's all good and fine but when you record that in your books
it goes on your books at eight thousand, because that's what you paid for it and if I look
at your cancelled check it's going to say eight thousand dollars right?
We can't just put assets on what we feel like their worth because that would be pretty easy
to distort wouldn't it right?
Ok so we put what we paid for it that's the cost principle I don't want to focus too much
on this one this is more of a chapter three principle concept but this talks about how
we're going to match the expenses to the revenues that they help generate let's just wait till
chapter three to talk about matching principle I won't be asking that on the first test.
What about the full disclosure principle a company is required to report the details
behind the financial statements that would impact the decisions of the user I want to
show you something here if you turn in the very, very back of your book you're going
to see a real life financial report you're not going to be able to see the details, but
if you look in the very back of your book its pages like A two A three A four this is
a exact photo copy of annual report of this company this is a real life company Research
in Motion I think they do like cell phones and stuff ok.
Well as you thumb through it you're going to see on page A five the balance sheet you're
going to see the statement of operations which is a nice way to say the income statement
there's a statement of equity on page A seven here's the statement of cash flows I talked
about that one now you can kind of thumb through that at home I know you can't see the details
either on the screen here in class or on your monitor but the next thing that they have
is they have notes and notes and notes they talk about their inventory they talk about
their fixed assets they talk about their investments they have some other little reports and schedules
here to kind of support things ok they have a lot of different notes and stuff don't they?
Well those are called the notes to the financial statements alright now the matter of fact
let's say you're considering investing in a company and you get an annual report and
if you're in a business class you might have to analyze a real life company someday and
you might have to go obtain an annual report I actually say before you look at the financial
statements look through those notes look through the notes that I showed you.
It will talk about things about here's what are company does, this is what we sell, this
is where are markets are located geographically; these are some major changes that happened
this year.
And then they will talk about some of their different accounts then go look at those financial
statements and it makes a lot more sense right?
Cause you got some context to put it in does that make sense?
But going to this financial statement I'm sorry these ah going to the principle the
full disclosure principle that just states that a company is required to report those
details ok there not the financial statement themselves but their the notes to the financial
statements.
Does that make sense?
Ok let's go to the next page of principles there's also something called a going concerned
assumption now this the assumption that the business is going to continue operating.
As oppose to being liquidated or closed or sold in the near term now if you did think
it was going to be closed or liquidated in the short term it would have to say so prominently
in the notes that I just showed you.
That's pretty important isn't it?
Ok but if you don't see that you can assume it's going to continue going on.
Marlin?
Good question great question the ones that you saw are annual ok but most companies prepare
monthlies for their own use but the annual report is obviously just twelve months good
question.
Any other questions?
Great question that was obviously a large company wasn't it?
And large you asked if all companies have to do this or just large ones.
All companies do now you can even here's the deal if you are a publicly traded company
like Research in Motion that's their annual report they send that to the shareholders
or if you're thinking about investing in it they'll send it to you.
But you can be a small company like let's go back to Jake let's say he has a landscaping
business.
Well you're not publicly traded you're not buying stock their not following you on CNN
financial right?
But let's say that you have a loan with the bank a bank helped you start your business
by giving you a loan a lot of times one of the requirements of that loan is that you
have to provide periodic financial statements either every quarter or every year and when
you give those yes you have to have the notes behind them as well it may look as colorful
it may not look as slick, it may not have pretty pictures, but you have to prepare the
same thing.
Now if you're just a business on your own lets say Jessica owns her own business no
bank has given her money you know it's just her.
She'll probably want to prepare those financial statements and she'll probably have to have
stuff like that for tax purposes, but then the requirements are a little bit less ok.
So but yeah when I was an external auditor I would help do those financial statements
and help write those notes and a lot of those things so good question.
Any other questions?
Ok let's hit on these last ones real quick the monetary unit assumption.
This is the assumption that says transactions and stuff will be reflected in monetary units.
So if it's the United States it will be the U.S dollar if it's in Europe it will be the
euro, if it's in Japan it will be the yen.
Your financial statements will be in some sort of monetary unit that goes without saying.
What about the business entity assumption?
That states a business is accounted for separately from other businesses entities including its
owner.
So Jake your landscaping business that you have it keep track of it separately from your
personal life and I think we talked about that in a previous lecture don't comingle
don't comingle your records don't comingle your check books you want to keep track of
it separately and if you have one or more businesses you want to keep track of those
separately from each other it's is own business entity.
Make sense?
It's a big mess if you get it all mixed up ok.
And then the last thing is the time period assumption.
That states that the life of a company can be divided into time periods such as months
or years or quarters and all those sort of things we can kind of divide things up properly,
and we'll talk more about that in chapter three, but that's the time period assumption
ok any questions on that?
Yes Kara "On the business entity part of it lets say your business checking accounts low
and you transfer money from like your personal what would that be considered and how would
you pay would you have to pay yourself back?"
That's a good question what you're saying if your business is low on cash, but you've
got some personal money you want to put it into it that's just another investment by
the owner into the business you know that investment by the owner is one of those things
that increases owner's capital or equity that can happen not just at the very beginning
of the business but at any time and you could treat that as one or two ways but your probably
going to treat that as an investment by the owner into the business and then of course
you can withdraw if you start getting a lot of cash in there you can withdraw cash from
the business then it will decrease capital and equity so ok.
Good alright let me look over my notes real quick see if we gone over what I want to get
through.
Alright what I am going to do now is.
I am going to Jake will you do me a favor and hand one of these out to each person here
we are going to work on something this is a financial preparation I'm going to put it
on the screen for you.
This is for valentine tree trimming valentine tree trimming and what I want you to do is
prepare the three financial statements for valentine tree trimming ok.
Now let me give you a few check figures on this we're going to start on it during class,
but I don't think well have time to do the whole thing, but let me give you some check
figure the net income is going to be seven thousand and forty dollars ok.
The ending capital on the statement of equity is going to be thirty five forty and on the
balance sheet the total assets will be thirty four oh twenty.
Those are all dollar figures ok now you're going to notice something different on this
valentine tree trimming take a look at the list of accounts what is different?
What's different about my list of accounts?
"They're all mixed up."
Yeah its alphabetical I didn't group them all together by what statement they go on
ok like the book did I just gave them to you in alphabetical order so you really need to
go through you really need to go through first and decide what financial statement it goes
on.
And then look now don't get started yet guys and then as you use these accounts put a check
mark by it or I guarantee it you're going to miss one so circle it or put a check mark
as you do it ok.
Now you folks at home while watching this you have this work sheet ok this in the lessons
tab underneath the chapter under chapter one you'll see valentine tree trimming its called
something like that so you to print these things out and have them ready for class.
Cause were going to work on this in class a little bit while that snazzy jazzy JCCC
music plays, and you folks at home work on it as well lets at least get through the income
statement.
Any question before we turn the music on and turn the audio off?
Any questions?
Ok the first thing you want to do is go through that list of accounts decide what statement
it goes on and then start preparing your income statement then your statement of equity and
then your balance sheet.
This is a passed test question this exact question was on a test so this is going to
be a good indicator on what you need to do on the exam.
So let's play that snazzy jazzy music and let's go ahead and work on this for a while.
Wait question before we go "is unearned revenue on the income statement or is that a liability"
unearned is that account that we just talked about and what is that account is unearned
revenue?
It's a liability it goes on the balance sheet, but where do people always make the mistake
on the test and put it on they put it on they put it as a revenue in the income statement.
Unearned revenue is a liability ok?
Any other questions?
Ok let's start to work on that.
Music (39:00-47:25) ok a couple people ask some good questions as they were working on
it, and I'll answer those ok.
Ok let's just look at the incomes statement let's just look at the incomes statement and
you can do the rest for homework.
Here's the income statement can you guys see that alright?
You got your revenues minus your expenses equal a net income of seven thousand forty
right?
Did I prepare this in good form or proper form yes now did you guys did you guys circle
these or check them off as you were using them?
Do that I promise if you don't do that you're going to forget to put an account on a financial
statement.
So the first thing that you should do is decide what statement these things go on and then
circle them or check them off as you go use them ok.
Now somebody asked on this one they didn't see and investment by owner there's not always
going to be investment by owner every month, but the top lining of statement of equity
will be that balance of capital ok will be that balance of capital at seventy one thirteen
of twenty eight thousand.
So what I want you to do is there any other questions about this?
About the income statement?
Kara?
On the directions it just says August two thousand thirteen should we put just that
or should we put the difference?
That's a good question a lot of times things will be stated like that its understood it
said august thirty one two thousand thirteen so if you didn't that's fine but I said for
the month ended august thirty one good point.
Any other question?
Let me give you your homework here is the homework I want you to do I want you to finish
the valentine hand out I want you to do quick study one point six and then I want you to
read about return on assets ROA its on page twenty two and twenty three in your book and
do exercise one eighteen ok each chapter has a ratio at the end of it and well talk about
those make sure for next lecture which is a very important lecture you have your PowerPoint's
for chapter two ok.
That you have your PowerPoint's for chapter two is everybody here signed up for connect
ok good are you folks at home signed up for connect yet.
Because next class period were going to talk a little bit more about the connect assignments.
Alright any questions?
Got your homework?
Good class period next class period is a real important one well see you bye-bye.