Ch01+-+Financial+Statements

Ch01+-+Financial+Statements - Chapter 1 Financial...

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Chapter 1 – Financial Statements and Business Decisions Understanding the business Accounting – Information for decision making The four basic financial statements The accounting rules and key players Types of business entities 1-1
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Understanding the Business 1-2
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Understanding the Business A business engages in three types of activities: Financing activities – borrowings from a bank or other lender or equity provided by owners to finance operating and investing activities. Investing activities – purchase and sale of long-term assets that a company uses to produce its product or deliver a service. Operating activities – operate the business to produce goods or services to generate a profit. 1-3
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Financing Activities – Two sources Creditors Creditors  lend money for a specific  period of time. e.g. Wells Fargo Bank Investors Investors or stockholders  buy  ownership in the company in the form  of stock. e.g. Individuals, Institutions (e.g.  Schwab Mutual Fund), Executives  (e.g. CEO) Capital Structure 1-4
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Financing – Investors Investors purchase stock (or ownership) in businesses hoping to gain in two ways: Sell ownership interest in the future for more than they paid. Receive a portion of the company’s earnings in cash ( dividends ). 1-5
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Financing – Investors 1-6
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Financing – Creditors Creditors lend money to a company for a specific length of time and earn revenue by charging interest on the money loaned. Loan Interest WELLS FARGO 1-7
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Investing Activities A company uses financing to invest in the business. What does a company like Abercrombie invest in? 1-8
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Operating Activities Companies either manufacture products from raw materials (manufacturer) or buy finished goods from suppliers (merchandiser) . Is Abercrombie a manufacturer or merchandiser ? Manufacturer Product Customer 1-9
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Accounting – Information for Decision Making 1-10
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Decision Makers – External 1-11 Creditors Suppliers/ Customers Lend money? Sell/purchase goods? Investors Decision Makers Decisions Information Buy or sell stock?
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Decision Makers – Internal 1-12 Managers Decision Makers Information Maximize profits Decisions
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Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities and with the results of their decisions. Flow of Accounting Information 1-13
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What is accounting? Internal users Business managers External users Investors and Creditors 1-14
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Four Basic Financial Statements 1-15
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Four Basic Financial Statements The annual report contains four basic financial statements that summarize the financial activities of a business: Income Statement Balance Sheet Statement of Cash Flows Statement of Stockholders’ Equity 1-16
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Four Basic Financial Statements Companies can generally prepare financial statements at anytime. December 2010
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Ch01+-+Financial+Statements - Chapter 1 Financial...

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