power points - CHAPTER 1 Financial Statements PURPOSE OF...

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CHAPTER 1 Financial Statements PURPOSE OF ACCOUNTING Help decision makers make better decisions DECISION MAKERS Company managers Board of directors Government agencies News reporters Customers Unions INFORMATION / DECISIONS Who are decision makers? What decisions need to be made? What information will help them? How can information be gathered? How do we measure? How can we communicate results? Cost/benefit of information? PROCESS OF ACCOUNTING Identify Measure Communicate Financial Information Decision Makers COMMUNICATE Financial statements primary means of communicating financial information Balance Sheet Income Statement Stakeholders
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FOR THIS CLASS Provide useful information to Investors Lenders INVESTOR PROFIT Two sources of gain Capital Gains Buy low Sell high Dividends INVESTOR QUESTIONS Current position of company Predict future performance Should I buy the stock? Should I sell the stock? LENDERS Lenders (creditors) lend money for a specific time, gain by charging interest Dana’s Diner Loan Interest Principal LENDOR PROFIT Two sources of gain Sell receivable at a profit Interest LENDOR QUESTIONS Current position of company Predict future performance How much interest earned? Will payments be made on time?
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ASSETS Things you own Provide a benefit in future Generate revenue in future CLAIMS ON ASSETS Liabilities Obligation to do something in future Usually an obligation to pay cash Owners’ equity (stockholders) Assets financed by stockholders Assets = Liabilities + Equity Creditors' Claims Owners' Claims Resources = + ACCOUNTING EQUATION ACCOUNTING EQUATION What do you own? = How are you financing it? What did you get? = How did you get it? Assets = Liabilities + Owners’ Equity Assets Investors (Equity) Retained Earnings (Equity) Creditors (Liabilities) SOURCES OF FINANCING PRACTICE QUESTIONS Question 1
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FOUR FINANCIAL STMTS Income Statement Balance Sheet Statement of Cash Flows Statement of Retained Earnings PERIODIC REPORTING Prepare financial statements at end of Quarter Year 2007 X INCOME STATEMENT Revenues and expenses Income Statement INCOME STATEMENT Revenues - Expenses Net Income How did the company perform this period? Calculation Question REVENUE Amount charged to customers for products sold or services performed Recorded when earned (even if cash has not received) REVENUE Always increases Asset (Cash or A/R) Always increases Equity (R/E) All revenues belong to owner
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EXPENSES Costs incurred to generate revenue Match expenses to revenues What were the costs we incurred to generate the revenues?
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