lecture. So let's go right into it I know one the problems that I gave you was to finish

up the valentine hand out correct? Ok so let's go ahead and take a look at that the answer

to the income statement I believe we went over that in class, but let's take another

look at that. The answer to the income statement I believe we went over that in class but let's

take another look at it the answer to the valentine income statement is shown up there

we have our revenue our less our expenses and we have dated it properly or prepared

it in good form or prepared it in proper form. We have the name of the company, the name

of the statement and its dated correctly it says for the month ended eight thirty one

thirteen on the income statement correct? And that gives us in this case a net income

of seven thousand and forty and that flows down to the statement of equity right? Statement

of equity there's the net income right there. We have our beginning balance of capital which

is twenty eight thousand we add our net income though there were not any investments by the

owner in this period that's fine that's not always going to be the case. And then we deduct

the withdrawals that valentine made correct? Which is thirty five hundred that gives us

an ending balance of capital thirty one five forty once again it's prepared in proper form

the name of the company, the name of the statement and its dated properly for the month ended

eight thirty one thirteen the way this is dated will always be the same as the income

statement. Ok any question on the income statement or the statement of equity. Ok the ending

balance of capital is thirty one five forty and that flows over to our final statement

that were going to prepare which is the balance sheet correct? The balance sheet is dated

a little differently we don't say for the month ended we say just either at or as of

or just the date eight thirty twenty thirteen, because this is a snapshot right? We have

our assets our liabilities our equity total assets are thirty four oh twenty make sure

you label that we have our total liabilities and equity that also equal thirty four oh

twenty we want those number to be equal and we want to label that as well, and there's

that thirty one five forty that came over from the statement of equity. Kara? So accounts

receivable is an asset and accounts payable is always a liability. That's correct accounts

receivable is always an asset we're going to receive cash in the future and accounts

payable is a liability were going to have to pay in the future it debt ok. And where

did notice going back to the statement where's unearned revenue unearned revenues a liability

and it shows up with the other liabilities on the balance sheet right? Common mistake

on the test is people put unearned revenue where? Where do they put it mistakenly? On

the income statements actually they see revenues and they put it with the other revenues ok.

So unearned revenue is not a revenue it's a liability unearned revenue is a liability

alright? Alright that was a test question on past test so I guarantee you see something

like that one thing I hope you did is at the very beginning as I said before I hope when

you got this you went through these and put what financial statement it was going to go

on like that ok and then did you check them off as you used them as you put them on a

statement you can check them off that way at the very end you can make sure all of the

numbers have been put somewhere ok. So if you don't do it that way a lot of times people

forget to put in account ok. One last while I guarantee that will be on the test, but

some students will just absolutely get OCD in regards to I can't get it to balance they

know their balance sheet is supposed to be balanced I can't get it to balance and I have

student be very unwise and spend literally thirty minutes on the financial statements

on the test trying to get it to balance and then the rest of the test just sits there

and there are not going over it you see what I'm saying? Don't obsess over it if it doesn't

balance come back to it do the rest of the test and there is partial credit but don't

get so obsessed I have seen students leave three pages blank on their test, cause they're

like I couldn't get my balance sheet to balance no you can move on and you should've moved

on. You see what I'm saying? I believe I assigned quick study one six right quick study one

six ok so let's do that. Identify which accounting principle or assumption best describes each

of the following practices. Ok if fifty one thousand cash is paid to buy land the land

is reported on the sheet to be at fifty one thousand what would that be? The cost principle

we record things at cost. Not what we think it's worth or if somebody appraised no it's

what we paid for it cost. B Alyssa keys owns both sailing passions and dockside supplies

when preparing transactions for dockside Keys make sure that the expense transactions of

sailing passions are kept separately from dockside transactions and financial statements

what's that? Business entity the business entity principle states that we keep things

separate from each other we keep two businesses separate from each other we keep the business

separate from our personal records ok good. C in December two thousand ten ace landscaping

received a customer's order and cash prepayment to install sod at a new house that will not

be ready until march of oh eleven ace should record the revenue in march two thousand and

eleven not December two thousand ten what's that? Revenue recognition principle we record

revenue when it is earned when is it earned? When we have provided the product or the service.

Is that correct cool. I think the last one I assigned was exercise one eighteen is that

correct? Let's talk real quick about this I wanted you to read about this each chapter

will have a statistic each chapter has a statistic or a ratio at the end that they want you to

become familiar with it. Anybody here play baseball anybody ever played baseball well

baseball has a lot of statistics and ratios that they figure out right? Batting average

ERA all those sort of things slugging percentage correct? Those are different ways of measuring

baseball players or team's right? And you can measure one player against another player

or you can measure one player this year as compared to last year, and these are just

different ways of analyzing well there's different ways of measuring companies and analyzing

on companies as well. One of those ways is the return on assets now the return on assets

is calculated by taking the net income divided by the average of total assets and in this

case they tell us in exercise one eighteen that Geneva group reports net income of twenty

thousand for oh eleven at the beginning of two thousand and a eleven they had a hundred

thousand in assets by the end of two thousand and eleven assets had grown to one fifty what

is Geneva group's two thousand elevens return on assets how would you assess its performance

if competitors average a ten percent return on assets? Well we take that net income of

twenty thousand divided by the average total assets which in this case one hundred and

twenty five thousand twenty divided by one twenty five is sixteen percent right? Now

these ratios don't mean anything in themselves we have to compare it to something it's like

if you ever go to the doctor, and they give you a score like a cholesterol score your

cholesterol score is seventy four ok is that good or is that bad? We don't know the number

in itself we don't know ok. So in this case what do we compare this to well they tell

us that competitors average a ten percent return on assets so I would say looking at

this ratio alone its above it and thus as far as that ratio by itself it's pretty good

thing isn't it? Now we have to look at other ratios right just like when you go to the

doctor you can't just go get one thing one part of yourself analyzed and ignore everything

else right? But and you also have to make sure like in this case we prepared this ROA

to its competitor that's a good comparison right? But you wouldn't compare the return

on assets of a steel manufacturing firm with the return on assets with the law consulting

firm that's apples to oranges so you want to make sure it's an industry comparison,

or a competitor comparison or you're comparing it to that same firm at a different period

in time. You with me? I don't hammer on the ratios I usually have one multiple choice

question on the test about it. It's not that it's not important it's extremely important

and as a matter of fact I just helped lead this seminar where were trying to train people

in the banking industry how to best use ratio analysis assessing if they should companies

loans. Financial statement analysis and ratio analysis is an extremely useful skill and

so but were just going in this class just kind of introduce these things you'll see

these terms in other classes that you take. I think that's it for the homework alright

this is an important lecture and I'm glad you're here we are going to go to chapter

two which analyzing and recording transactions. I hope you all have your PowerPoint's and

for you at home you should print those off the angel website it's under the lessons tab

you should have the PowerPoint's for each chapter you should have those when you watch

the lecture it makes everything a lot easier. Alright chapter two analyzing and recording

transactions now let's just do a little review here we have lots of transaction that occur

in a business some are external transaction they occur between us and an outside party

and some are internal they occur within the organization. We know that an asset has to

equals liabilities plus owner's equity correct? I've hammered that in set in a different way

if we figure out the ending balances of all the assets accounts they have to equal the

sum of the ending balances of the liability and the equity accounts don't they? That always,

always, always has to stay equal assets have to equal liabilities plus the equity. We talked

about our assets and I believe the assets on your screen here I think we've talked about

all of them whoops that should be up there but you can figure that out. I believe we've

talked about all these except maybe prepaid accounts, prepaid accounts are like prepaid

rent let's say for my business I didn't just pay September's rent but I went ahead and

paid September, October, November, December. Well that's like I paid the rent early didn't

I? well that's an asset that's prepaid rent something else in your own life that is a

prepaid asset is your insurance your car insurance you have to pay for your insurance before

you actually use it as an asset as a matter of fact if you cancel your policy they send

you some money so that would be prepaid insurance. So any sort of prepaid item in business is

an asset ok. Our liabilities we talked about accounts payable notes payable we talked about

unearned revenue is a liability not a revenue but unearned revenue is a liability now what's

this thing called a accrued liabilities well that's kind of a title for a lot of different

types of accounts and well talk a little bit more about this in chapter three but this

is like your salaries payable, your wages payable, your interest payable, taxes payable

those sort of things so those are liabilities as well. And of course we talked about our

equity account we talked about what makes it increase what makes it decrease we talked

about how revenues and owners investments of assets into the company makes it increase

expenses and withdrawals by the owner out of the business makes it decrease. Once again

assets always have to equal liabilities plus owner's equity and then we expanded that accounting

equation didn't we? Recognizing that these things owner's withdrawals and expenses since

those actually make equity go down as owner's withdrawal and as expenses increase equity

actually decreases. You with me? Now let's go through his and this make not make a lot

of sense but were going to go through it again at the end of the chapter and it will make

more sense. What were going to do is were going to analyze transactions and events from

something called source documents what are source documents? Source documents are those

pieces of paper or like electronic emails, pdfs or whatever that are generated when you

do transactions, source documents are those things that are generated when you do transactions.

For example let's say that you go buy a computer at best buy ok well if you go buy a computer

at best buy they're going to give you an invoice right? That invoice is a source document let's

say you get paid well what are they going to give you? There are going to give you a

check and they're going to usually give you a pay check stub right? Ok let's say you go

pay a parking ticket well when you pay that parking ticket they're probably going to give

you a receipt right? To say you paid for that parking ticket correct, right? Let's say that

you get a bank statement you have a checking account and so you get a bank statement each

month that's a source document right? And that will show different things that you have

done throughout month. So all these pieces of paper that are generated and they're not

always paper anymore but a lot of them are electronic these are evidence that transaction

occurred and we can go back to them if needed. But source documents what we do is we analyze

the transactions events from these source documents then we're going to record these

transaction in what we call a journal alright. Then we are going to post the journal to the

ledger accounts and then we are going to learn about preparing and analyzing something called

a trial balance. Now again this doesn't all make sense right now there's a lot of terms

we didn't discussed but this is where were going with this chapter alright. Let's talk

about what an account is? An account is a record of increases and decreases in a specific

asset, liability, equity, revenue, or an expense item. For example going to the Elmo we kept

track of for instance cash and we would say cash increased by three thousand dollars right?

and then cash increased by five hundred dollars right then cash let's say it decreased by

three hundred and then it went up by let's say it went up by two fifty and then let's

say it went down by two hundred right? But that is an account and we're recording the