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ch01jr4thed for students - Tools for Business Decision...

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Unformatted text preview: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso Financial Accounting: CHAPTER 1 AN INTRODUCTION TO FINANCIAL STATMENTS 1 Chapter 1 Introduction to Financial Statements Always bring the following "tools" to class: Your text book. The Tootsie Roll financial statements. (They can be obtained on the web.) The power point slides (or whatever note taking material you prefer). 2 1 11 Forms of Business Organization Sole proprietorship Partnership Corporation used in this text. 3 2 Users of Financial Information Internal 11 Managers who plan, organize and run a business Internal Users Ask? 4 Users of Financial Information External Investors Creditors Others Regulatory agencies Tax authorities Customers Labor Unions Economic planners 5 Users of Financial Information External Users Ask? 6 3 11 Types of Business Activity Financing debt or equity Investing resources to operate Operating buy/sell goods/services 7 Financing Activities Borrowing $ creates liabilities Selling stock for $ creates stockholders' equity 8 Investing Activities Obtaining resources or assets to operate the business Land Buildings Vehicles Computers Furniture Equipment Patent Copyright 9 Operating Activities Primary activity of business Selling goods Providing services Manufacturing Cost of Sales Advertising Paying employees Paying utilities 10 Revenues are the increases in assets resulting from the sale of a product or service Expenses are the cost of assets consumed or services used (decreases in assets) in generating revenue. If revenue > expense = Net Income If revenue < expense = Net Loss! Operating Activities 11 Review Which is not one of the three forms of business organization? a. Sole proprietorship. b. Creditorship. c. Partnership. d. Corporation. 12 Review Which is an advantage of corporations relative to partnerships and sole proprietorships? a. Lower taxes. b. Harder to transfer ownership c. Reduced legal liability for investors. d. Most common form of business organization. 13 Review Which is not one of the three primary business activities? a. Financing. b. Operating. c. Advertising. d. Investing. 14 Content and Purpose of Financial Statements Accountants communicate with users through four financial statements and the footnotes. Four Financial Statements Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows 15 Income Statement Do this statement first! 16 Retained Earnings Statement Do this statement second! 17 An Unclassified Balance Sheet From Retained Earnings Statement 18 Statement of Cash Flows.. Agrees with Balance Sheet 19 Articulating Financial Statements 20 5 11 Assets Resources owned or controlled by the business, for example, Cash Accounts receivable Inventories Supplies Furniture and fixtures Equipment 21 Liabilities Obligations or debts of business, for example Notes payable Accounts payable Interest payable Salaries payable Unearned revenue Can also be thought of as creditors' claims on assets 22 Stockholders' Equity Ownership claims on assets Paidin (or contributed) capital Retained earnings Common stock 23 Basic Accounting Equation Assets = Liabilities + Stockholders' Equity 24 Review Which of the following is not a correct representation of the accounting equation? a. Assets = Liabilities + Stockholders' Equity b. Assets Liabilities = Stockholders' Equity c. Assets + Stockholders' Equity = Liabilities d. Assets Stockholders' Equity = Liabilities 25 Review Using the accounting equation, answer the following question. If Liabilities = $10,000 and Stockholders' Equity = $20,000 Then Assets = $30,000 $30,000 = $10,000 + $20,000 26 Review Using the accounting equation, answer the following question. If Assets = $75,000 And Liabilities = $35,000 Then Stockholders' Equity = $40,000 $75,000 = $35,000 + $40,000 27 6 11 Supplements to the Financial Statements in an Annual Report Management Discussion and Analysis Notes to Financial Statements Auditor's report 28 Management's Discussion and Analysis covers three items: 1. 2. 3. Liquidity Capital resources Results of operations 29 Management's Discussion and Analysis 30 Notes to Financial Statements Explanatory notes and supplementary schedules Clarifies information in financial statements Expands with additional detail Describes accounting policies Explains uncertainties and contingencies 31 Notes to Financial Statements 32 Auditor's Report Certified Public Accountant CPA Auditor (CPA) conducts independent examination of financial statements Fair representation? Follow generally accepted accounting principles (GAAP)? Unqualified opinion 33 Auditor's Report 34 Do It Problem: CSU Corporation Service revenue Accounts receivable Accounts payable Building rental expense Notes payable Common stock Retained earnings Equipment Insurance expense Supplies Supplies expense Cash Dividends $17,000 $4,000 $2,000 $9,000 $5,000 $10,000 ? $16,000 $1,000 $1,800 $200 $1,400 $600 CSU begins on Jan. 1, 2007 For year ended Dec. 31, 2007, prepare Income statement Retained earnings statement Balance sheet 35 Do It Problem: CSU Corporation Service revenue Accounts receivable Accounts payable Building rental expense Notes payable Common stock Retained earnings Equipment Insurance expense Supplies Supplies expense Cash Dividends $17,000 $4,000 $2,000 $9,000 $5,000 $10,000 ? $16,000 $1,000 $1,800 $200 $1,400 $600 Action step 1: Report the revenues & expenses for a period of time, Income Statement 36 Do It Problem: CSU Corporation Service revenue Accounts receivable Accounts payable Building rental expense Notes payable Common stock Retained earnings Equipment Insurance expense Supplies Supplies expense Cash Dividends $17,000 $4,000 $2,000 $9,000 $5,000 $10,000 ? $16,000 $1,000 $1,800 $200 $1,400 $600 Action step 1: Report the revenues & expenses for a period of time, Income Statement 37 Do It Problem: CSU Corporation Create the heading Name of the company CSU Corporation Name of the Income Statement statement For the Year Ended December 31, 2007 Period of time 38 Do It Problem: CSU Corporation Do It Problem: CSU Corporation CSU Corporation Income Statement For the Year Ended December 31, 2007 Revenues Service revenue $17,000 List the revenues Use dollar signs to denote U.S. currency 39 Do It Problem: CSU Corporation CSU Corporation Income Statement For the Year Ended December 31, 2007 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 ________ Supplies expense 200 Total expenses 10,200 List the expenses & underline sub-totals Do It Problem: CSU Corporation CSU Corporation Income Statement For the Year Ended December 31, 2007 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 ________ ________ Total expenses 10,200 Net Income $ 6,800 ________ ________ Calculate net income: revenues - expenses Do It Problem: CSU Corporation Service revenue Accounts receivable Accounts payable Building rental expense Notes payable Common stock Retained earnings Equipment Insurance expense Supplies Supplies expense Cash Dividends $17,000 $4,000 $2,000 $9,000 $5,000 $10,000 ? $16,000 $1,000 $1,800 $200 $1,400 $600 Action step 2: Show amounts and causes of changes in retained earnings Use Net Income from Income Statement Dividends 42 Do It Problem: CSU Corporation CSU Corporation Retained Earnings Statement For the Year Ended December 31, 2007 Retained earnings, January 1 Add: Net income Less: Dividends Retained earnings, Dec. 31 $ 0 6,800 6,800 ________ 600 $ 6,200 43 Do It Problem: CSU Corporation Service revenue Accounts receivable Accounts payable Building rental expense Notes payable Common stock Retained earnings Equipment Insurance expense Supplies Supplies expense Cash Dividends $17,000 $4,000 $2,000 $9,000 $5,000 $10,000 $6,200 $16,000 $1,000 $1,800 $200 $1,400 $600 Action step 3: Present assets and claims to those assets at a specific point in time on the Balance Sheet Use $6,200 Retained earnings from 44 previous 45 ...
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