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ACCOUNTING
PRINCIPLES
CHE40: Engineering Economy
Engr. Elisa G. Eleazar
Outline
Accounting Fundamentals
Accounts
Financial Statements
Financial Ratios
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Learning Objectives
Identify and classify the different
accounts.
Prepare financial reports.
Calculate financial ratios.
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Accounting Fundamentals
Accounting Procedure
recording of financial events related to the
investment
determination of financial performance
Objectives of Accounting Procedure
to determine the cost of products or services
to provide a rational basis for pricing goods or
services
to provide means for controlling expenditures
to provide information on which operating
decisions may be based and the results evaluated
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Accounts
Asset Accounts Liability Accounts Owners Equity
Accounts
Cash Short-term debt Capital stock
Receivables Payables Retained earnings
Inventories Long-term debt
Equipment
Buildings
Land
Supplies
Prepaid Expenses
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Accounts
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Assets - things of monetary value that the
organization possesses
Current Assets assets that may
reasonably be expected to be realized
within a year through normal operations
Cash any
medium of
exchange that a
bank will accept
at face value
Accounts
Receivables
claims against
debtors
Prepaid Expenses
supplies on hand
and advance
payments of
expenses
Plant/Fixed
Assets of
a permanent
or relatively
fixed nature
Accounts
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Liabilities debts owed to
outsiders
Current Liabilities
due within a short time
(usually one year)
Long-term / Fixed
Liabilities not due for a
comparatively long time
Accounts
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Capital owners
equity in the
business
Revenue gross
increase in capital
due to business
activities
Expenses costs
consumed in the
process
Financial Statements
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Cash Flow Statement
shows the cash
transactions of an
enterprise for a given
period of time
Income Statement
shows the profits or
losses of an enterprise
for a given period of
time
Statement of Retained
Earnings identifies
changes in retained
earnings from one
accounting period to the
next
Balance Sheet shows
the financial position or
condition of an
enterprise as of a given
date
Financial Statements
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Source/Author: David M. Cottrel
Balance Sheet 12/31/X0
Cash $ 80,000
Other 4,550,000
Total $4,630,000
Liabilities $2,970,000
Cap. Stock 900,000
R/E 760,000
Total $4,630,000
Revenues $12,443,000
Expenses 11,578,400
Net Income $ 864,600
Income Statement
Cash $ 110,000
Other 4,975,000
Total $5,085,000
Liabilities $2,860,400
Stock 1,000,000
R/E 1,224,600
Total $5,085,000
Cash Flow Statement
Cash--Op. Act. $ 973,000
Cash--Inv. Act. (1,188,900)
Cash--Fin. Act. 245,000
Net Increase $ 30,000
Beg. Cash 80,000
End. Cash $ 110,000
Statement of
Retained Earnings
R/E 12/31/X0 $ 760,000
Net Income 864,600
Dividends (400,000)
R/E 12/31/X1 $1,224,600
Balance Sheet 12/31/X1
Financial Statements
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Presented are the amounts of Servpro Corporations assets and
liabilities during the end of the current year, and of its revenues
and expenses for the year ended. Servpro had capital stock of
$350,000 and retained earnings of $250,000 at the beginning of
the current year. During the current year, the corporation paid
cash dividends of $150,000.
Accounts Payable $145,000
Accounts Receivable 224,200
Advertising Expense 57,600
Cash 112,900
Insurance Expense 7,500
Land 520,000
Miscellaneous Expense 31,500
Notes Payable 75,000
Prepaid Insurance 3,750
Financial Statements
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Rent Expense $111,000
Salaries Payable 10,000
Salary Expense 402,000
Sales 1,054,950
Supplies 24,150
Supplies Expense 18,350
Taxes Expense 105,400
Utilities Expense 116,600
Prepare the financial statements for Servpro Corporation.
Financial Statements
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Elizabeth Jarme established a sole proprietorship to be known as
Jarme Decorators, on August 16 of the current year. During the
remainder of the month she completed the following business
transactions.
a) Transferred cash from a personal bank account to an
account to be used for the business, $30,000
b) Paid rent, $2,250
c) Purchased supplies for cash, $1,250
d) Purchased office equipment on account, $4,000
e) Purchased a used truck for $25,000, paying $10,000 cash
and giving a note payable for the remainder
f) Received cash for job completed, $3,375
g) Paid wages, $2,000
h) Paid premiums on property and casualty insurance, $1,875
i) Paid creditor, $4,000
Financial Statements
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j) Purchased supplies on account, $475
k) Recorded sales on account and sent invoices to
customers, $22,750
l) Received an invoice for truck expenses, $675
m) Received cash for job completed; this sale had not
been recorded previously, $3,600
n) Paid utilities expense, $1,290
o) Paid miscellaneous expense, $310
p) Received cash from customers on account, $12,500
q) Paid wages, $2,375
r) Withdrew cash fro personal use, $5,000
Prepare the financial statements for Jarme Decorators.
Financial Statements
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Young Dry Cleaners is owned and operated by R.C. Young.
The actual work of dry cleaning is done by another
company at wholesale rates. The assets and liabilities of
the business on April 1 of the current year are as follows:
Cash $28,000
Accounts receivable $9,000
Supplies $2,200
Land $75,000
Accounts payable $10,400
Business transactions during April are summarized on the
next slide. Prepare the financial statements for Young Dry
Cleaners.
Financial Statements
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a) Paid rent for the month - $7,000
b) Received cash from customers for sales - $37,500
c) Paid creditors on account - $9,600
d) Purchased supplies on account - $1,750
e) Charged customers for dry cleaning sales on
account - $18,250
f) Received monthly invoice for dry cleaning expense
on account - $19,150
g) Received cash from customers on account -
$15,950
h) Determined the cost of supplies used - $950
i) Paid wages - $9,900; truck expense - $3,350;
utilities - $1,750; miscellaneous expense - $1,900
Financial Statements
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Presented below are the amounts (in $) of Lane
Corporations assets and liabilities on January 31, 2009.
Lane Corporation had a retained earnings of $150,000 at
the beginning of the cycle.
Accounts Payable 12,050
Accounts Receivable 194,850
Cash 104,200
Supplies 12,250
Land 375,000
Prepaid Insurance 14,500
Notes Payable 50,000
Financial Statements
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Business transactions from February 1, 2009 to January 31,
2010 are summarized below:
a. Paid advertising expenses on account 36,250
b. Received cash from customers 972,250
c. Paid creditors (operational) 6,050
d. Charged customers for service on account 98,500
e. Paid cash for miscellaneous expenses 24,800
f. Received cash from customers account 94,850
g. Paid the following expenses
i. Salary 401,000
ii. Rent 14,500
iii. Taxes 12,300
iv. Utilities 56,200
Financial Statements
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h. Determined cost of supplies used 8,400
i. Paid notes (investment) 50,000
j. Insurance that Expired 6,500
k. Paid dividends 200,000
Financial Ratios
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Ratio Interpretation Calculation
Liquidity
Ratios
ability to meet
current
obligations
ability to meet
current
obligations using
readily
convertible
assets
s liabilitie current
assets current
Ratio Current
s liabilitie current
assets quick
Ratio Test Acid
s inventorie assets current assets quick *
Financial Ratios
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Ratio Interpretation Calculation
Solvency /
Leverage
Ratios
ability to meet
long run
obligations; how
the organization
is financed and
the associated
risk
Equities Total
s Liabilitie Total
Ratio Equity to Debt
Assets Total
s Liabilitie Total
Ratio Assets to Debt
Financial Ratios
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Ratio Interpretation Calculation
Asset
Managem
ent /
Activity
Ratio
efficiency in
using assets to
generate
revenues
Assets Total
Sales
Ratio Turnover Assets
Assets Total
Equity Total
Ratio Equity
Financial Ratios
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Ratio Interpretation Calculation
Profitability
Ratios
rate of profit
sales
income net
Sales on turn Re
equity total
income net
Equity on turn Re
Outline
Accounting Fundamentals
Accounts
Financial Statements
Financial Ratios
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References
Sullivan, W., Wicks, E. and Luxhoj, J.,
Engineering Economy, 12
th
ed, USA:
Pearson Education, Inc., 2003
Blank, L. and Tarquin, A., Engineering
Economy, 4
th
ed, Singapore: McGraw-
Hill Book Co, 1998
Eschenbach, T., Engineering Economy
Applying Theory to Practice, USA: 1995
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Outline
Accounting Fundamentals
Accounts
Financial Statements
Financial Ratios
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ACCOUNTING
PRINCIPLES
CHE40: Engineering Economy
Engr. Elisa G. Eleazar