Unformatted text preview: Tools for Business Decision Making, 4th Edition
Kimmel Weygandt Kieso Financial Accounting: CHAPTER 1
Prepared by Ellen L. Sweatt Georgia Perimeter College 1 1
11 Forms of Business Organization Sole proprietorship Partnership Corporation 2 Sole Proprietorship Business owned by one person Simple to establish Owner controlled Tax advantages Owner personally liable Financing difficult
3 Partnership Two or more owners Simple to establish Shared control Broader skills & resources Tax advantages Personal liability
4 Corporation Separate legal entity owned by stockholders Easy to transfer ownership Greater capital raising potential Lower legal liability Unfavorable tax treatment
11 Users of Financial Information Internal Managers who plan, organize and run a business Marketing managers Production supervisors Finance directors Company officers 6 Users of Financial Information External Investors Creditors Others Regulatory agencies Tax authorities Customers Labor Unions Economic planners
11 Types of Business Activity Financing Investing Operating
8 Financing Activities Borrowing creates liabilities Bank loans Debt securities Goods on credit or payables Selling stock creates stockholders' equity 9 Investing Activities Obtaining resources or assets to operate the business Land Buildings Vehicles Computers Furniture Equipment 10 Operating Activities Primary activity of business Selling goods Providing services Manufacturing Cost of Sales Advertising Paying employees Paying utilities 11 Operating Activities 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 in generating revenue. If revenue > expense = Net Income If revenue < expense = Net Loss!
11 Content and Purpose of Financial Statements Accountants communicate with users through four financial statements 13 Four Financial Statements Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows
14 Income Statement Reports operating success or failure for a period. Summarizes revenues and expenses for period: month, quarter, year. If revenue > expense = Net Income.
15 Income Statement Do this statement first! 16 Retained Earnings Statement Shows changes in retained earnings for period: month, quarter, year Beginning balance Add Net Income from income statement. Deduct Dividends Ending balance
17 Retained Earnings Statement Do this statement second! 18 Balance Sheet Reports assets and claims to assets. Claims of creditors, liabilities. Claims of owners, stockholders' equity. Assets = Liabilities + Stockholders' Equity Specific date one point in time!
19 Balance Sheet From Retained Earnings Statement
20 Statement of Cash Flows Provides information about cash receipts and cash payments Summarizes for period: month, quarter, year. Cash effects of operating, investing, and financing activities.
21 Statement of Cash Flows Where did the cash come from? How was cash used during the period? What was the change in the cash balance during the period? A company cannot survive without cash! 22 Statement of Cash Flows.. Agrees with Balance Sheet 23 5
11 Assets Resources owned by the business Cash Accounts receivable Inventories Furniture and fixtures Equipment Supplies 24 Liabilities Obligations or debts of business Notes payable Accounts payable Interest payable Salaries payable Unearned revenue 25 Stockholders' Equity Ownership claims on assets Paidin capital Retained earnings Common stock 26 Basic Accounting Equation
Assets = Liabilities + Stockholders' Equity 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 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 30 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
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