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Unformatted text preview: Chapter 1 -- Introduction to Business Activities and Overview of Financial Statements and the Reporting Process FINANCIAL ACCOUNTING AN INTRODUCTION TO CONCEPTS, METHODS, AND USES 12th Edition Clyde P. Stickney and Roman L. Weil Learning Objectives 1. Develop a general understanding of four principal activities of business firms: (a) establishing goals and strategies, (b) obtaining financing, (c) making investments, and (d) conducting operations. 2. Develop an understanding of the purpose and content of the three principal financial statements that business firms prepare to measure and report the results of their business activities: (a) balance sheet, (b) income statement, and (c) statement of cash flows. Learning Objectives 1. Develop a sensitivity to financial reporting issues, including the following: (a) the potential conflict of interest between management’s self­interest for job security and career enhancement with its responsibility to shareholders, (b) the alternative approaches to establishing accounting measurement and reporting standards, and (c) the role of the independent audit of a firm’s financial statements. 2. Develop a sensitivity to ethical issues in financial reporting using a framework for thinking about ethical questions. Chapter Outline 1. Overview of business activities. 2. Principal financial statements. 3. Other items in financial reports 4. Financial reporting issues 5. Financial reporting process in the United States. Chapter Summary List Four Principal Activities of List Business Firms: Business 1. Establishing goals and strategies, 2. Obtaining financing, 3. Making investments, and 4. Conducting operations. Establishing Goals and Strategies Maximize return to shareholders Provide stimulating lifelong work for employees Contribute to and integrate with national goals and policies Considers competitors Consider barriers Consider demand Consider regulation Recognize management process not an individual process Obtaining Financing and Making Obtaining Investments Financing comes from two sources, owners or creditors Investments are made in the following: – Land, buildings, equipment – Patents, licenses, contractual rights – Stock and bonds of other organizations – Inventories – Accounts Receivable What are the Four Areas of What Conducting Operations? Conducting Overview of Business Activities Purpose and Content of the Three Purpose Principal Financial Statements: Principal a) b) c) d) Balance sheet, Income statement, Statement of cash flows, Notes to the financial statements, including various supporting schedules, e) Opinion of the independent certified public accountant. Review Balance Sheet Snap shot in time Asset, liabilities, owners’ equity Retained earnings Assets = Liabilities + Owners’ Equity Historical valuation Analysis of the balance sheet Balance Sheet Balance Snapshot of investing and financing activities at a moment in time. Basic Accounting Equation: Assets = Liabilities + Shareholders’ Equity which is the same idea as Investing = Financing Resources = Sources of Resources Liabilities = Claims on Resources Relationship between Balance Relationship Sheet and Income Statement The income statement links the balance sheet at the beginning of the period with the balance sheet at the end of the period. Retained Earnings is increased by net income and decreased by dividends. Income Statement Indicates earning or profit Reports amounts for a period of time Explain the following concepts – Typically one year – Revenue – Expenses How is classification accomplished? How is the income statement related to the balance sheet? Income Statement Income Results of the operating activities of a firm for a specific time period. Basic Income Equation: Net Income = Revenues ­ Expenses Revenues are the inflows of assets from selling goods and services. Expenses are the outflows of assets used in generating revenues. Income Statement Income Statement of Cash Flows Classification – Operations – Investing – Financing Discuss its relationship to the Balance Sheet. Who are Primary Participants in the Who Reporting Process? Reporting 1. Business firms and their managers 2. Accounting standards setting and regulatory bodies 3. Independent auditors 4. Security analysts and other users of financial statements Financial Reporting Issues a) The multiple uses of financial accounting reports b) The alternative approaches to establishing accounting measurement and reporting standards c) The role of the independent audit of a business firm’s financial statements d) The role of financial reporting in an efficient capital market Financial Reporting in the U.S. Financial Legal authority to set accounting standards lies with the Securities and Exchange Commission (SEC) The SEC looks to the Financial Accounting Standards Board (FASB), for leadership in establishing standards Pronouncements of the FASB are called Generally Accepted Accounting Standards (GAAP) Since 1973, the FASB has issued 135 statements and several conceptual papers Classification of Cash Flows Classification Operations: cash from customers less cash paid in carrying out the firm’s operating activities Investing: cash paid to acquire noncurrent assets less amounts from any sale of noncurrent assets Financing: cash from issues of long­ term debt or new capital less dividends Inflows and Outflows of Cash Other Items in Annual Reports & Other Financial Reporting Issues Financial Supporting schedules and notes Auditor’s opinion Users and uses of financial reports Authority for establishing acceptable accounting standards The role of an audit of a firm’s financial statements Efficiency of capital markets Auditor’s Opinion Firms whose common stock is publicly traded are required to get an opinion by an independent auditor who: 1. Assesses the effectiveness of the firm’s internal control system for measuring and reporting business transactions 2. Assesses whether the financial statements and notes present fairly a firm’s financial position, results of operations, and cash flows in accordance with generally accepted accounting principles The Opinion Letter The first paragraph indicates the financial statements covered by the opinion and that the responsibility for the statements rests with management. The second paragraph affirms that the auditor followed auditing standards and practices generally accepted by the accounting profession unless otherwise noted and described. The third paragraph has the auditor’s opinion­ ­ unqualified or qualified. Qualified opinions are either a disclaimer of opinion or an adverse opinion. The Four Participants in the The Financial Reporting Process. Financial 1. Business firms and their managers 2. Accounting standards setting and regulatory bodies 3. Independent auditors 4. Security analysts and other users of financial statements SEC Compilationof accounting rules, procedures and practices FASB Private sector body, for leadership in establishing accounting standards An agency of the federal government, that has the legal authority to set acceptable accounting methods and standards in the U.S. GAAP An International Perspective An The process of setting accounting standards vary widely around the world resulting in a diverse set of accounting principles. Globalization of economies has increased the need for comparable and understandable financial information. The International Accounting Standards Committee (IASC) issues recommendations for minimum standards. Chapter Summary Chapter This chapter provided a broad overview of business activities and how they are reflected in basic financial statements. The three basic financial statements were introduced. Further chapters examine the concepts and procedures that underlie each statement. Rapid Review - True or False The four principle business activities of a business firm are (a) establishing goals and strategies (c) making investments (b) obtaining financing (d) conducting operations An income statement provides information about a firm’s cash­generating ability. An income statement provides information about a firm’s profitability. Cash­generating ability information is provided by the Statement of Cash Flows. Most independent auditors’ opinions are unqualified. ...
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