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  • Alright here we are we're going to jump right into in because today is a very important

  • 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

  • increases and decrease in that account correct? We did that in chapter one and of course we

  • could figure out the balance of that account what is the balance of that account? Three

  • two five oh I think you're right thirty two five oh yes. Ok that is an account going back

  • to this it's a record of increases and decreases in this case cash, but we could do that and

  • do that in every account now what it will and we'll come back to that in second, but

  • what is a general ledger? A general ledger is record containing all the accounts used

  • by a company if you look at exercise one eleven this is kind of an example at this point in

  • our learning of a general journal at least recording transactions in this way. But it

  • shows a lot of different accounts the increases and decreases and then it shows the ending

  • balance correct? Ok so that is kind of like a general ledger per say alright, now we're

  • going to learn a new way of recording business transaction were going to do a transformation

  • from the chapter one way to the new chapter two and beyond way. in a way chapter one is

  • kind of like the training wheels on a bicycle ok did anyone learn how to ride a bicycle

  • using training wheels? Well the training wheels kind of help you get the feeling on how a

  • bike should feel kind of lets you learn your balance how to turn but eventually what? Mom

  • or dad comes with a crescent wrench and they take the training wheels off right? now once

  • you learn how to ride a bike without the training wheels do you put the training wheels back

  • on no you never say I'm going to bike ride today just for old times' sake I think I'm

  • going to put those old training wheels back on no once you learned once you've taken them

  • off they're gone for good and that's the way you ride a bike from here on out so this is

  • what we're going to do the chapter one way was the training wheel method as far as recording

  • transaction. Chapter two I'm dad I got my crescent wrench we're taking the training

  • wheels off. Now I hope you understand the chapter one way if you don't what's going

  • to happen? you're going to fall down and scrape your knee aren't you? So you folks at home

  • if you don't understand chapter one and how to record transactions in those manner watch

  • those lectures again, but we're going to learn the chapter two way now. And this is the way

  • we'll do things. alright let's take a look back at that account that I wrote remember

  • that cash account that I wrote this is the chapter one way let me tweak this thing a

  • little bit lets ay you all understand this right? let's say I wrote it another way what

  • if I wrote it this way instead what if I decided to put the increase on the left side and decreases on the right side ok. What would

  • the balance the balance would still be thirty two fifty right? You understand how that moved

  • to this ok? So what if I would you allow me to do that instead of writing it like this

  • let me just put the increases for cash on the left side and the decreases on the right

  • side let me go ahead and draw a line down the middle of that ok. So I put the increases

  • of cash on the left side and the decreases on the right side why don't we just go ahead and make one

  • little bit more change here and let me get rid of the pluses and the minuses ok. Let's

  • just say I know the increases are going to go over here and the decreases are going to

  • go over here this is cash and the balance is still thirty two fifty right? Do you understand

  • the transition from here to here? Ok for those of you have had accounting in high school

  • or college or whatever do you know that we have now prepared what do you know what this

  • is? It's a T account and the reason we call it a T account is because it looks like a

  • T and this going to be a vital part of the chapter two way that you'll learn and use

  • from here on out. Now this is a t account because again this looks like a t the left

  • side of a T account is called the debit side and the right side of a T account is called

  • the credit side, are you with me? The left side of a t account is called the debit side

  • and the right side is called the credit side. And we abbreviate debit with DR and don't

  • ask me why I know it doesn't have and R but the way we abbreviate debit is DR and the

  • way we abbreviate credit is with CR ok. You with me? Let's take a look at this one more

  • time. This is the chapter one way and then we kind of did this transition right here