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Unformatted text preview: Introduction To Financial Accounting HKUST Chapter 1 Financial Statements and Business Decisions ACCT 101 Fall 2010 Professor Allen Huang Chapter One Slide 1 of 39 Class Objective Have a general idea about business operations Introduction To Financial Accounting HKUST Identify the players in the accounting communication process Identify the users of accounting information Be familiar with the four basic financial statements (the purpose, info content, structures, key elements, and the relation among them) Be introduced to the balance sheet equation, income statement equation, retained earnings equation and cash flow equation. Chapter One Slide 2 of 39 The Business Operations Introduction To Financial Accounting HKUST Manufacturers either make the parts needed to produce its products or buy the parts from suppliers. Manufacturer Final Product Customer Inputs Chapter One Value added Outputs Slide 3 of 39 The Business Operations Manufacturer Makes the products it sells p Introduction To Financial Accounting HKUST Service organization Provide service rather than selling products Merchandising business Buy goods, then sells them to customers Retail or wholesale Chapter One Slide 4 of 39 Overview of Business Activities Introduction To Financial Accounting HKUST Goals and Strategies Business Activities Operating Financing Investing Chapter One Slide 5 of 39 Understanding the Business The Players Introduction To Financial Accounting HKUST Managers may or may not be owners. Managers Creditors lend money for a specific period of time and gain by charging interest on the money they lend. Creditors C dit Investors buy ownership in the company in the form of stock. Investors Chapter One Slide 6 of 39 The Accounting System Introduction To Financial Accounting HKUST Accounting System Financial Accounting System Periodic financial statements and related disclosures Managerial Accounting System Detailed plans and continuous performance reports External Decision Makers Shareholders, creditors, suppliers, customers, etc. Internal Decision Makers Managers throughout the organization Chapter One Slide 7 of 39 External Uses of Financial Statements Introduction To Financial Accounting HKUST Marketing managers and credit managers use customers' financial statements to decide whether to extend credit. h th t t d dit Purchasing managers use suppliers' financial statements to decide whether suppliers have the resources to meet our demand for products. Employees' union and human resource managers use the company's financial statements as a basis for contract negotiations over pay rates. Chapter One Slide 8 of 39 Financial and Information Flows in a Capital Market Economy Household savings Investors Introduction To Financial Accounting HKUST Flow of capital Flow of information Financial Intermediaries Information Intermediaries Regulators of capital markets and k t d financial institutions Firms Management Auditors and Accounting regulators Chapter One Slide 9 of 39 The Four Basic Financial Statements Introduction To Financial Accounting HKUST Companies can prepare financial statements at the end of the year, quarter or month. 2010 X Financial statements prepared at the end of the fiscal year are called annual reports. Chapter One Slide 10 of 39 An Overview the Four Basic Financial Statements The financial position of an entity at y a given point in time Introduction To Financial Accounting HKUST The performance (change in the financial position) p ) of an entity during a given period Balance Sheet (Statement of Financial Position Income Statement Statement of Cash Flow Statement of Retain Earnings Chapter One Slide 11 of 39 1. Name of entity 2. Title of statement 3. Specific date 4. Unit of measure The Balance Sheet reports the financial position of an entity at a particular point in time. Chapter One MAX IDRIVE CORP. Introduction To Balance Sheet Financial Accounting HKUST At December 31, 2009 (in thousands of dollars) Assets Cash $ 4,895 Accounts receiv able 5,714 Inv entories 8,517 Plant and equipment 7,154 Land 981 Total assets $ 27,261 Liabilities and Stockholders' Equity Liabilities Accounts payable $ 7,156 Notes payable 9,000 Total li biliti T t l liabilities Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 16 156 16,156 $ 2,000 9,105 11,105 $ 27,261 Slide 12 of 39 Balance sheet equation Introduction To Financial Accounting HKUST Basic Accounting Equation Assets = Liabilities + Stockholders' Equity q y A = L + SE Economic resources = Sources of financing What you have = Where it came from A L = SE Golden rule! Must always balance! Net assets = Owners' equity or residual equity Chapter One Slide 13 of 39 Assets are economic resources owned by the d b th business as a result of past transactions. MAXIDRIVE CORP. Introduction To Balance Sheet Financial Accounting HKUST At December 31, 2009 (in thousands of dollars) Assets Cash $ 4,895 Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets $ 27,261 Liabilities and Stockholders' Equity Amount Liabilities of cash in the company's bank Cash accounts. Accounts payable Accounts Notes payable $ 7,156 Assets are listed by their ease of conversion into cash. Chapter One Amounts owed by customers from prior 9,000 receivable sales. Total liabilities $ 16,156 Parts and completed but unsold Stockholders' Equity Inventories Contributed capital $ 2,000 products. Retained earnings 9,105 Plant and Factories and production machinery. Total stockholders' equity 11,105 equipment Total liabilities and stockholders' equity $ 27,261 Land Land on which factories are built. Slide 14 of 39 Liabilities are debts or obligations of the business that result from past transactions. MAXIDRIVE CORP. Introduction To Balance Sheet Financial Accounting HKUST At December 31, 2009 (in thousands of dollars) Assets Cash $ 4,895 Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets $ 27,261 Liabilities and Stockholders' Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders' Equity $ 7,156 9,000 $ 16,156 $ 2,000 9,105 11,105 $ 27,261 Slide 15 of 39 Accounts Amounts owed to suppliers for prior Contributed capital payable purchases. Retained earnings Notes Amounts owed on written debt Total stockholders' equity payable contracts. Chapter One Total liabilities and stockholders' equity MAXIDRIVE CORP. Introduction To Balance Sheet Financial Accounting HKUST At December 31, 2009 (in thousands of dollars) Equity is the Assets amount of Cash $ 4,895 financing Accounts receivable 5,714 provided by Inventories 8,517 , owners of the Plant and equipment 7,154 Land 981 business and Total assets $ 27,261 earnings. Liabilities and Stockholders' Equity Liabilities Contributed Amounts invested in the business by capital Retained earnings Accounts payable stockholders. Notes payable Past earnings not distributed to Total liabilities stockholders. Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 7,156 9,000 $ 16,156 $ 2,000 9,105 11,105 $ 27,261 Slide 16 of 39 Chapter One Introduction To MAXIDRIVE CORP. Financial Accounting HKUST Income Statement For the Year Ended December 31, 2009 (in thousands of dollars) Revenues Sales revenue $ 37,436 1. Name of entity Expenses statement 2. Title of Cost of goods sold $ 26,980 3. Specific date (Unlike the balance sheet, this Selling, general and a specified period of time.) 3,624 statement covers administrative Research and development 1,982 4. Unit of measure Interest expense 450 Total expenses 33,036 Pretax income Income tax expense Net income Chapter One $ 4,400 1,100 $ 3,300 Slide 17 of 39 Financial The Income Statement reports theAccounting HKUST Income Statement revenues less expenses31, 2009 of the For the Year Ended December accountingof dollars) (in thousands period. MAXIDRIVE CORP. Introduction To Revenues R Sales revenue $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense - I t t 450 R E = NI Total expenses 33,036 Pretax income Income tax expense Net income Chapter One $ 4,400 1,100 $ 3,300 Slide 18 of 39 Introduction To MAXIDRIVE CORP. Financial Accounting HKUST Income Statement For the Year Ended December 31, 2009 (in thousands of dollars) Revenues Sales revenue $ 37,436 Expenses Revenues are earnings from the26,980 of goods sale Cost of goods sold $ or services to customers. Selling, general and administrative 3,624 Research and is recognized in the period in which 1,982 Revenue development Interest expenseservices are sold, not necessarily 450 goods and Total expenses in which cash is received. 33,036 the period Pretax income Income tax expense Net income Chapter One $ 4,400 1,100 $ 3,300 Slide 19 of 39 Introduction To MAXIDRIVE CORP. Financial Accounting Expenses are the dollar Statement resources used amount of HKUST Income up byFor the Year Ended December 31, 2009 the entity to earn revenues during a period. (in thousands of dollars) An expense is recognized in the period in which goods used Revenues and services are used, not necessarily R the Sales revenue period in which cash is paid. $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense I t t 450 Total expenses Pretax income Income tax expense Net income Chapter One 33,036 $ 4,400 1,100 $ 3,300 Slide 20 of 39 Introduction To Financial Accounting HKUST MAXIDRIVE CORP. Statement of Retained Earnings For Ending the = B i i RE + NI -31, id E di RE Year Ended December 31 2009 d Beginning Di Dividends (in thousands of dollars) Retained earnings, January 1, 2009 $ 6,805 Net income for 2009 3,300 Dividends for 2009 (1,000) Retained earnings, December 31, 2009 $ 9,105 The Statement of Retained Earnings reports the way that net income and the distribution of dividends affect the financial position of the company during a period. Chapter One Slide 21 of 39 Statement of Cash Flows Introduction To Financial Accounting HKUST Because revenues reported do not always equal cash collected. . . . . . and expenses reported do not always equal cash paid . . . net income is usually not equal y q to the change in cash for the period. Chapter One Slide 22 of 39 MAXIDRIVE CORP. Statement of Cash Flows For the Year Ended December 31, 2009 (in thousands of dollars) Introduction To Financial Accounting HKUST Cash flows from operating activities: $ 33,563 Cash collected from customers 1. N 1Cash paidof entity and employees Name to suppliers f tit (30,854) Cash paid statement (450) 2. Title of for interest Cash paid for taxes (1,190) 3. Specific date (Like theactivities statement and Net cash flow from operating income $ Cash statement of retained earnings, this flow from investing activities: Cash paid to purchase equipment $ (1,625) statement covers a specified Net cash flow from investing activities period of time.) Cash Unit from financing activities: 4. flow of measure Cash received from bank loan Cash paid for dividends Net cash flow from financing activities Net decrease in cash during the year Cash at beginning of the year Cash at end of the year Chapter One 1,069 (1,625) $ 1,400 (1,000) 400 $ $ (156) 5,051 4,895 Slide 23 of 39 Introduction To MAXIDRIVE CORP. The Statement of Cash Flows reports the inflowsAccounting Financial and Statement of Cash Flows HKUST outflows of cash during the period in the categories of For the Year Ended December 31, 2009 operating, investing, and financing. (in thousands of dollars) Cash flows from operating activities: Cash collected from customers Cash paid to suppliers and employees Cash paid for interest Cash paid for taxes Net cash flow from operating activities Cash flow from investing activities: Cash paid to purchase equipment Net cash flow from investing activities Cash flow from financing activities: Cash received from bank loan Cash paid for dividends Net cash flow from financing activities Net decrease in cash during the year Cash at beginning of the year Cash at end of the year Chapter One $ Change in Cash = CFO + CFI + CFF $ $ (1,625) (1,625) $ 1,400 (1,000) 400 $ $ (156) 5,051 4,895 Slide 24 of 39 33,563 (30,854) (450) (1,190) 1,069 MAXIDRIVE CORP. Statement of Cash Flows For the Year Ended December 31, 2009 (in thousands of dollars) Cash flows from operating activities: Cash collected from customers Cash paid to suppliers and employees Cash paid for interest Cash paid for taxes Net cash flow from operating activities Cash flow from investing activities: Cash paid to purchase equipment Net cash flow from investing activities Cash flow from financing activities: Cash received from bank loan Cash paid for dividends Net cash flow from financing activities Net decrease in cash during the year Cash at beginning of the year Cash at end of the year Chapter One Introduction To Financial Accounting HKUST $ 33,563 (30,854) (450) (1,190) $ 1,069 $ (1,625) (1,625) $ 1,400 (1,000) 400 $ $ (156) 5,051 4,895 Slide 25 of 39 Introduction To Relationship Among the Statements Financial Accounting HKUST MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 2009 (in thousands of dollars) Revenues Sales revenue Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense 450 Total expenses Pretax income Income tax expense Net income $ 37,436 Net income from the income statement increases ending retained earnings on the statement of retained earnings. 33,036 $ 4,400 1,100 $ 3 300 3,300 MAXIDRIVE CORP. g Statement of Retained Earnings For the Year Ended December 31, 2009 (in thousands of dollars) Retained earnings, January 1, 2009 $ 6,805 Net income for 2009 3,300 Dividends for 2009 (1,000) Retained earnings, December 31, 2009 $ 9,105 Chapter One Slide 26 of 39 Relationship Among the Statements MAXIDRIVE CORP. Balance Sheet At December 31, 2009 (in thousands of dollars) Assets Cash C h Accounts receivable Inventories Plant and equipment Land Total assets Liabilities and Stockholders' Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 2,000 9,105 11,105 $ 27,261 $ 7,156 9,000 $ 16 156 16,156 4,895 4 895 5,714 8,517 7,154 981 $ 27,261 $ Introduction To Financial Accounting HKUST Ending retained earnings from the statement of retained earnings is one of the components of stockholders' equity on the balance sheet. MAXIDRIVE CORP. State e t of eta ed a Statement o Retained Earnings gs For the Year Ended December 31, 2009 (in thousands of dollars) Retained earnings, January 1, 2009 $ 6,805 Net income for 2009 3,300 Dividends for 2009 (1,000) Retained earnings, December 31, 2009 $ 9,105 Slide 27 of 39 Chapter One Introduction To Relationship Among the Statements Financial Accounting HKUST MAXIDRIVE CORP. Balance Sheet At December 31, 2009 (in thousands of dollars) Assets Cash Accounts receivable Inventories Plant and equipment Land Total assets Liabilities and Stockholders' Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 2,000 9,105 11,105 $ 27,261 $ 7,156 9,000 $ 16,156 $ 4,895 5,714 8,517 7,154 981 $ 27,261 MAXIDRIVE CORP. Statement of Cash Flows For the Year Ended December 31, 2009 ( (in thousands of dollars) ) Cash flows from operating activities: Cash collected from customers Cash paid to suppliers and employees Cash paid for interest Cash paid for taxes Net cash flow from operating activities Cash flow from investing activities: Cash paid to purchase equipment Net cash flow from investing activities Cash flow from financing activities: Cash received from bank loan Cash paid for dividends Net cash flow from financing activities Net decrease in cash during the year Cash at beginning of the year Cash at end of the year $ $ $ 33,563 (30,854) (450) (1,190) $ 1,069 $ (1,625) (1,625) $ 1,400 (1,000) (1 000) 400 (156) 5,051 4,895 The change in cash on the statement of cash flows added to the beginning of the year balance in cash equals the ending balance in cash on the balance sheet. Chapter One Slide 28 of 39 Relationship Among the Statements B/S: Assets = Liabilities + Stockholders' Equity Introduction To Financial Accounting HKUST Cash Oth C h + Other assets = Li b + (Cont. C it l + R t i d Earnings) t Liab (C t Capital Retained E i ) Cash + Other Assets = Liab + (Cont.Capital + RE) SCF: CFO + CFI + CFF = Cash SRE: Beg. RE + NI Dividends = End. RE RE = NI Dividends I/S: Revenue Expense = Net Income Chapter One Slide 29 of 39 Footnotes Introduction To Financial Accounting HKUST Supplemental info about the financial conditional of a company without which the F/S cannot be fully understand. Three types of notes: Accounting Rules Details about a line on the F/S Items not listed on the statements. Chapter One Slide 30 of 39 Footnotes Introduction To Financial Accounting HKUST Chapter One Slide 31 of 39 Footnotes Introduction To Financial Accounting HKUST Chapter One Slide 32 of 39 Footnotes Introduction To Financial Accounting HKUST Chapter One Slide 33 of 39 Footnotes Introduction To Financial Accounting HKUST Chapter One Slide 34 of 39 Generally Accepted Accounting Principles GAAP Security Act of 1933, the Securities Exchange Act of 1934 Introduction To Financial Accounting HKUST (Government agency) SEC Completely independent (private sector) 3 from auditing firms 2 from corporations y 1 analyst 1 from academia 1929 Investors Managers Labor Union Politicians Corporations Auditors Banks ... Lobby FASB GAAP Chapter One Slide 35 of 39 Practice Problem Introduction To Financial Accounting HKUST P1-1: Prepare income statement, statement of retained earnings and balance sheet for Propane Company. At the end of the first year (December 31, 2009) of operation, the following financial data for the company are available: Account Name Cash Receivables from Customers (all considered collectible) Inventory of merchandise (based on physical count and priced at cost) Equipment owned, at cost less used portion Accounts payable owed to suppliers y payable for 2009 ( (owed to an employee who was away) p y y) Salary p y Total sales revenue Expenses, including the cost of the merchandises sold (excluding income tax) Income taxes expenses at 30% x pretax income, all paid during 2009 Contributed capital, 7,000 shares outstanding Dividends declared and paid during 2009 Amount $22,500 10,800 81,000 40,700 46,140 1,800 , 126,000 80,200 ? 87,000 12,000 Slide 36 of 39 Chapter One ...
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