The Financial Statements Chapter 1 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-1 Prologue: Accounting's Role in Business Good managers plan for the future. They develop a budget. A budget is a formal plan stated in monetary terms. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-2 Prologue: Accounting's Role in Business Accounting helps banks decide to whom they will lend money. Accounting provides information that helps investors pick stocks. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-3 Prologue: Accounting's Role in Business Budgeting Information systems design Cost accounting Internal auditing 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-4 Prologue: Accounting's Role in Business Consulting Assurance services including auditing Tax accounting 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-5 Accounting Positions within Organizations Partner Chief Executive Officer or Major Operating Executive Manager Chief Financial Officer, Controller, or Treasurer Senior Accountant Staff Accountant 1-6 Senior Accountant Staff Accountant 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Learning Objective 1 Use accounting vocabulary for decision making. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-7 Accounting The Language of Business Accounting is the information system that... measures business activities, processes data into reports, and communicates results to decision makers. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-8 The Flow of Accounting Information 1. People make decisions. 2. Business transactions occur. 3. Businesses prepare reports to show the results of their operations. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1-9 Who Uses Accounting Information? Individuals Government regulatory agencies Businesses Investors and creditors Taxing authorities Nonprofit organizations 1 - 10 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Financial and Management Accounting External Users Internal Users 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 11 Ethics in Accounting and Business Standards of professional conduct for accountants AICPA's Code of Professional Conduct 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 12 How to Organize a Business Proprietorships Partnerships Corporations 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 13 Learning Objective 2 Analyze a business using accounting concepts and principles. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 14 How to Do Accounting: Principles and Concepts Accountants follow professional guidelines. The rules that govern accounting are called GAAP (generally accepted accounting principles). 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 15 Key Accounting Organizations Public Sector (SEC) Private Sector (AICPA) GAAP Private Sector (FASB) 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 16 The Entity Concept An accounting entity is an organization that stands apart as a separate economic unit. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 17 The Reliability Principle (1) are verifiable and (2) can be confirmed by an independent observer. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 18 The Cost Principle Assets and services acquired should be recorded at their actual (historical) cost. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 19 The Going-Concern Concept The entity will continue to operate in the future. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 20 The Stable-Monetary-Unit Concept The dollar's purchasing power is relatively stable. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 21 Learning Objective 3 Use the accounting equation to describe an organization. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 22 The Accounting Equation Assets are the economic resources of a business that are expected to produce a benefit in the future. Liabilities are &quot;outsider claims,&quot; or economic obligations payable to outsiders. Owners' equity represents the &quot;insider claims&quot; of a business. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 23 The Accounting Equation 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 24 The Accounting Equation Assets Liabilities Owners' Equity Assets = Liabilities + Owners' Equity 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 25 The Accounting Equation For a corporation, stockholders' equity is divided into two main categories. Paid-in capital Retained earnings Assets = Liabilities + Stockholders' equity Assets = Liabilities + Paid-in capital + Retained earnings 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 26 The Accounting Equation Paid-in capital is the amount invested in the corporation by its owners. The basic component of paid-in capital is common stock. Retained earnings is the amount earned by income-producing activities and kept for use in the business. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 27 The Accounting Equation Revenues are increases in retained earnings from delivering goods or services to customers. Expenses are decreases in retained earnings that result from operations. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 28 Components of Retained Earnings Revenues for the period Expenses for the period Start of = the period Beginning Net income + balance of (or Net loss) or retained for the earnings period End of the period Ending balance of retained earnings 1 - 29 Dividends for the period = 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Learning Objective 4 Examine a company's operating performance, financial position, and cash flows. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 30 The Financial Statements The financial statements are a picture of the company in financial terms. Each financial statement relates to a specific date or covers a particular period. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 31 Information Reported on the Financial Statements Question Answer Financial Statement 1. How well did the Revenues company perform Income Expenses (or operate) during statement Net income (Net loss) the period? 2. Why did the company's Statement Beg. retained earnings retained earnings of + Net income (or Net loss) change during the retained Ending retained earnings period? earnings 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 32 Information Reported on the Financial Statements Question 3. What is the company's financial position at the end of the period? Answer Assets = Liabilities + Owners' equity Financial Statement Balance sheet 4. How much cash did the company generate and spend during the period? Statement Operating cash flows of Investing cash flows cash Financing cash flows flows Increase or decrease in cash 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 33 Fossil, Inc. Consolidated Statement of Income Amounts in millions Net sales revenue Cost of goods sold Gross profit Operating expenses: Selling and distribution expense General and administrative expense Total operating expenses Operating income Years Ended December 31, 2001 2000 $546 $504 274 248 272 256 150 45 195 77 126 36 162 94 1 - 34 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Fossil, Inc. Consolidated Statement of Income Amounts in millions Operating income Other revenue (expense): Write-off of investment Other income (expense) net Income before income tax Income tax expense Net income Years Ended December 31, 2001 2000 77 94 (5) 1 73 29 $ 44 1 95 39 $ 56 1 - 35 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren The Income Statement: Measuring Operating Performance The income statement, statement of operations, or statement of earnings reports the company's revenues, expenses, and net income or net loss for the period. Comprehensive income includes net income from the income statement plus additional items which do not affect net income. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 36 Fossil, Inc. Consolidated Statement of Retained Earnings Amounts in millions Retained earnings: Balance, beginning of year Net earnings for the year Less: Cash dividends declared Balance, end of year Years Ended December 31, 2001 2000 $208 44 (0) $252 $152 56 (0) $208 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 37 Fossil, Inc. Consolidated Balance Sheet Amounts in millions Assets: Current assets: Cash and cash equivalents Short-term investments Accounts receivable Inventories Prepaid expenses Total current assets Investments Property, plant, and equipment, net Intangible and other assets Total assets December 31, 2001 2000 $ 68 5 74 104 19 $270 1 90 20 $381 $ 80 11 63 81 18 $253 6 42 7 $308 1 - 38 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Fossil, Inc. Consolidated Balance Sheet Amounts in millions Liabilities: Current liabilities: Notes payable, short-term Accounts payable Advertising payable Compensation (salary) payable Other accrued expenses payable Income taxes payable Total current liabilities Long-term liabilities Total liabilities December 31, 2001 2000 $ 16 21 15 8 28 18 $106 11 $117 $ 5 19 14 6 19 20 $ 83 4 $ 87 1 - 39 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Fossil, Inc. Consolidated Balance Sheet Amounts in millions Stockholders' equity: Common stock Retained earnings Other equity Total stockholders' equity December 31, 2001 2000 $ 16 252 (4) $264 $ 15 208 (2) $221 Total liabilities and stockholders' equity $381 $308 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 40 Fossil, Inc. Consolidated Balance Sheet 2001 Total assets = Total liabilities Current $106 Long-term 11 Total liabilities + Total stockholders' equity Total liabilities and stockholders' equity $381 Must equal 117 264 $381 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 41 The Statement of Cash Flows The statement of cash flows reports the company's cash inflows and outflows from operating, investing, and financing activities. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 42 Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Operating activities: Net income Adjustments to reconcile net income to net cash from operating activities Net cash provided by operating activities $44 5 $49 $56 (16) $40 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 43 Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Investing activities: Business acquisitions $(16) Additions to property, plant, and equipment (56) Sale of investments 6 Other investing activities (2) Net cash used for investing activities $(68) (2) (20) (2) $(24) 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 44 Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Financing activities: Issuance of common stock Purchase and retirement of common stock Issuance of notes payable (borrowing) Other financing activities Net cash provided by financing activities $3 (4) 9 (1) $7 $ 1 (28) $(27) 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 45 Fossil, Inc. Statement of Cash Flows Amounts in millions December 31, 2001 2000 Net increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year $(12) 80 $ 68 $(11) 91 $ 80 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 46 Learning Objective 5 Explain the relationships among the financial statements. 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 47 Relationships Among the Financial Statements Income Statement Year Ended December 31, 2003 Revenues $700,000 Expenses 670,000 Net income $ 30,000 Statement of Retained Earnings Year Ended December 31, 2003 Beginning retained earnings $180,000 Net income 30,000 Cash dividends (10,000) Ending retained earnings $200,000 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 48 Relationships Among the Financial Statements Balance Sheet December 31, 2003 Assets Cash All other assets Total assets Liabilities Total liabilities Stockholders' equity Common stock Retained earnings Other equity Total liabilities and stockholders' equity $ 25,000 275,000 $300,000 $120,000 40,000 200,000 (60,000) $300,000 1 - 49 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren Relationships Among the Financial Statements Statement of Cash Flows Year Ended December 31, 2003 Net cash provided by operating operations $ 90,000 Net cash used for investing activities (110,000) Net cash provided by financing activities 40,000 Net increase in cash 20,000 Beginning cash balance 5,000 Ending cash balance $ 25,000 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 50 End of Chapter 1 2004 Prentice Hall Business Publishing <a href="/keyword/financial-accounting/" >financial accounting</a> , 5/e Harrison/Horngren 1 - 51