1/10/2013 8:39:00 PM The University of Texas at Austin McCombs School of Business, Business Foundations Program ACC 310F: Foundations

of Accounting Class Notes Chapter 1 (pages 2-8), Chapter 2 and Chapter 3 (pages 74-79) Accounting is the process of identifying, measuring and communicating economic information about an organization for the purpose of making decisions and informed judgments. Key Terms Assets: anything a company owns Liabilities: anything a company owes Owners Equity: amount that owners have invested in a company, also called NET ASSETS Revenues: value of anything sold Expenses: value of consumption Accounting Cycle Transactions: exchange between two parties Bookkeeping (ch. 4) Horizontal Model Financial Statements Income Statement: statement of earnings, or profit and loss statement, or statement of operations Balance Sheet: also called statement of financial position Statement of Owners Equity Statement of Cash Flows

Financial Statements
The Hershey Company Consolidated Balance Sheets in thousands of dollars for years ended Dec. 31, Assets Cash and cash equivalents Accounts receivable Inventory Property, plant and equipment (net) Other assets Total Assets Liabilities and Owners' Equity Accounts payable Other short-term debt Long-term liabilities Total Liabilities Owners' Equity Capital Retained earnings Other Total Owner's Equity Total Liabilities and Owners' Equity 2011 693,686 399,499 648,953 1,559,717 1,110,344 4,412,199 420,017 753,758 2,365,776 3,539,551 850,718 4,699,597 (4,677,667) 872,648 4,412,199 2010 884,642 390,061 533,622 1,437,702 1,026,705 4,272,732 410,655 888,190 2,036,286 3,335,131 794,766 4,374,718 (4,231,883) 937,601 4,272,732

liability = debts Accounts receivable: represent

amounts due from customers who have purchased merchandise on credit and who have agreed to pay within a specified period or when billed

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The Hershey Company Consolidated Statements of Income in thousands of dollars for years ended Dec. 31, Revenues Expenses Cost of goods sold Selling, general and administrative Interest Tax expense Other expense (Benefit) Net Income (profit) 2011 6,080,788 3,548,896 1,477,750 92,183 333,883 (886) 628,962 2010 5,671,009 3,255,801 1,426,477 96,434 299,065 83,433 509,799 2009 5,298,668 3,245,531 1,208,672 90,459 235,137 82,875 435,994

The Hershey Company Statement of Changes in Owners' Equity in thousands of dollars for years ended Dec. 31, Capital Beginning retained earnings Net income Dividends Ending retained earnings Other Total Owners' Equity 2011 850,718 4,374,718 628,962 304,083 4,699,597 (4,677,667) 872,648 2010 794,766 4,148,353 509,799 283,434 4,374,718 (4,231,883) 937,601

Dividends: company pays money back to owners (almost the opposite of capital)
The Hershey Company Statement of Cash Flows in thousands of dollars for years ended Dec. 31, Cash provided (used) by Operating activities Investing activities Financing activities Net change in cash 580,867 (333,005) (438,818) (190,956) 901,423 (199,286) (71,100) 631,037 2011 2010

Financing activities: stock, dividends More information on Hersheys financial statements is available at:
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http://www.thehersheycompany.com/investors/financial-reports.aspx

Financial Statement Relationships

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Horizontal Model and Financial Statements for Your Virtual Business (i.e. Lemonade Tycoon)

Assets
Cash 280 -11.6 268.4 Inventory 11.6 11.6

= Liabilities + Owners' Equity

Capital 280

Revenues

Expenses

280

3:30 Section Balance Sheet at end of Day 0 Assets Cash Inventory Total Assets Liabilities Owners' Equity Capital Total Liab. & Equity 268.40 11.60 280.00 0.00

_____ Section Income Statement for Day 1 Revenues Less Expenses COGS-used COGS-lost Net Income 280.00 280.00 7.00

_____ Section Balance Sheet at end of Day 1 Assets Cash Inventory Total Assets Liabilities 275.40 8.11 283.51 0.00

2.77 -0.72

3.51

Owners' Equity Capital Retained Earnings Total Liab. & Equity

280.00 3.51 283.51

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Users and Uses of Accounting Information Managers : set prices, manage costs, manage daily operations Investors: invest, hold or sell shares Creditors: lend money or sell on credit Employees: long-term prospects, benefits

Others (SEC, customers)

Return on Investment used to compare Net income / Average total assets o Like GPA o Hershey 2011: 628962 / ((4412199 + 4272732)/2) = 14.5% Lemonade o .4856 o -.17566 o 2.569

Accounting Concepts and Principles Transactions Unit of measure Cost principle: what its actually worth? Objectivity

Bookkeeping Accounting period Matching revenue and expense Revenue recognition

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Accrual concept

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Financial Statements Consistency Full disclosure Materiality: accuracy, estimation Conservatism

Limitations of Financial Statements No qualitative variables Generally, no current market values or replacement costs Use of estimates Comparability

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Practice Problems (Answers will be posted in the Course Documents section of Blackboard) From the textbook, you should work Exercise 2.3, Problem 2.13 (a) and Problem 2.15. The practice problems below may also be worked on during class. Use the information below to prepare an Income Statement and Balance Sheet for the ABC Company.
ABC, Inc. Accounting Report

Accounts payable Administrative expenses Paid in capital Building Cash Cost of goods sold Accounts receivable Retained earnings, Dec. 31st Inventory Notes payable Revenues

5,000 10,000 10,000 45,000 10,000 50,000 25,000 48,000 10,000 27,000 80,000

The data below is related to the XYZ Company; calculate the missing values.
XYZ, Inc. Income Statement Revenues Cost of Goods Sold Administrative Expenses Net Income 80,000 (a) 10,000 (b) Balance Sheet Assets Cash Accounts Receivable Inventory Equipment Building Total Assets Liabilities and Owner's Equity Accounts Payable Notes Payable Capital Retained Earnings Total Liabilities and Owner's Equity

Statement of Owner's Equity Capital 10,000 Beginning Retained Earnings Net Income Dividends Ending Retained Earnings Total Owner's Equity 0 (c) 5,000 23,000 33,000

4,000 1,000 8,000 10,000 42,000 65,000

5,000 27,000 10,000 (d) (e)

Practice Problem 3: check Blackboard later

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common stock -> from investors Assets = Liabilities + Owners equity Net assets = Owner equity

Income Statement Revenue Expenses Expenses o Cost of goods sold

Statement of Changes in Owners Equity Mainly made up of paid-in capital and retained earnings Net income -Dividends (paid to owners)

Balance Sheet Assets o Cash, accounts receivable, inventory Liabilities and Owners Equity o Accounts payable and notes payable o Retained earnings, capital Cash flow

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