Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 2 Basic Accounting Concepts 71

operating income decreased from 21.2% to 19.8% of sales. Other income and expense

remained approximately the same, while income taxes decreased from 6.7% to 6.2% of

sales. Overall, operating costs increased as a percent of sales with a slight offset in

taxes, causing net income as a percent of sales to decline.

Describe the basic elements of a financial accounting
system.The basic elements of a financial accounting
system include (1) a set of rules for determining what,
when, and the amount that should be recorded for economic
events, (2) a framework for facilitating preparation of
financial statements, and (3) one or more controls to determine
whether errors may have arisen in the recording process.

Analyze, record, and summarize transactions for a
corporation’s first period of operations.Using the
integrated financial statement framework, September
transactions for Family Health Care are recorded and
summarized in Exhibit 2.

Prepare financial statements for a corporation’s first
period of operations.The financial statements for
Family Health Care for September, its first period of opera-
tions, are shown in Exhibit 4.

Analyze, record, and summarize transactions for

a corporation’s second period of operations.Using

the accounting equation as a basic framework, October

transactions for Family Health Care are recorded and

summarized in Exhibit 6. The financial statements for

Family Health Care for October, its second period of

operations, are shown in Exhibit 7.

Prepare financial statements for a corporation’s

second period of operations.The financial statements

for Family Health Care for October, its second period of

operations, are shown in Exhibit 7.

Describe and illustrate how vertical analysis can be

used to analyze and evaluate a company’s performance.

Vertical analysis is a method of analyzing comparative

financial statements in which percentages are computed for

each item within a statement to a total within the statement.

In vertical analysis of the balance sheet, each asset item is

stated as a percent of the total assets. Each liability and

stockholders’equity item is stated as a percent of total

liabilities and stockholders’ equity. In vertical analysis of

the income statement, each item is stated as a percent of sales.

SUMMARY OF LEARNING GOALS

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GLOSSARY

Financial accounting systemA system that includes (1)
a set of rules for determining what, when, and the amount
that should be recorded for economic events, (2) a framework
for facilitating preparation of financial statements, and (3) one
or more controls to determine whether errors may have arisen
in the recording process.

Transaction An economic event that under generally

accepted accounting principles affects an element of the

accounting equation and, therefore, must be recorded.

Vertical analysis A method of analyzing comparative

financial statements in which percentages are computed for

each item within a statement to a total within the statement.

ILLUSTRATIVE ACCOUNTING APPLICATION PROBLEM

Beth Sumner established an insurance agency on April 1, 2007, and completed the following

transactions during April:

a. Opened a business bank account in the name of Sumner Insurance, Inc., with a deposit of

$15,000 in exchange for capital stock.

b. Borrowed $8,000 by issuing a note payable.

c. Received cash from fees earned, $11,500.

d. Paid rent on office and equipment for the month, $3,500.

e. Paid automobile expenses for month, $650, and miscellaneous expenses, $300.

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