chapter1

chapter1 - 1 INTRODUCTION TO FINANCIAL STATEMENTS 1-1...

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Unformatted text preview: 1 INTRODUCTION TO FINANCIAL STATEMENTS 1-1 Accounting, Fourth Edition Study Objectives Study Objectives 1. 2. 3. 4. Describe the primary forms of business organization. Identify the users and uses of accounting information. Explain the three principal types of business activity. Describe the content and purpose of each of the financial statements. Explain the meaning of assets, liabilities, and stockholders' equity, and state the basic accounting equation. Describe the components that supplement the financial statements in an annual report. 5. 6. 1-2 Forms of Business Organization Forms of Business Organization Proprietorship Partnership Corporation Generally owned by one person Simple to establish Owner controlled Tax advantages Simple to establish Shared control Broader skills and resources Tax advantages Easier to transfer ownership Easier to raise funds No personal liability 1-3 SO 1 Describe the primary forms of business organization. Users and Uses of Financial Information Users and Uses of Financial Information What is Accounting? Accounting is the information system that identifies, records, and communicates the economic events of an organization to interested users. Users are: Internal Users External Users 1-4 SO 2 Identify the users and uses of accounting information. Users and Uses of Financial Information Users and Uses of Financial Information Who Uses Accounting Data Internal Users Human Resources Taxing Authorities External Users Labor Unions Finance Management Customers Creditors Marketing Regulatory Agencies Investors 1-5 SO 2 Identify the users and uses of accounting information. Users and Uses of Financial Information Users and Uses of Financial Information Questions Asked by Internal Users 1. Can we afford to give our employees a pay raise? 2. What price for our product will maximize net income? 3. Which product line is most profitable? 4. Is cash sufficient to pay dividends to the stockholders? User Human Resources Marketing Management Finance 1-6 SO 2 Identify the users and uses of accounting information. Users and Uses of Financial Information Users and Uses of Financial Information Questions Asked by External Users 1. Is the company earning satisfactory income? 2. How does Disney compare in size and profitability with Time Warner? 3. Will United Airlines be able to pay its debts as they come due? User Investors Investors Creditors 1-7 SO 2 Identify the users and uses of accounting information. Users and Uses of Financial Information Users and Uses of Financial Information Ethics In Financial Reporting United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting. Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passed Sarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior. 1-8 SO 2 Identify the users and uses of accounting information. Users and Uses of Financial Information Users and Uses of Financial Information Illustration 1-3 Steps in analyzing ethics cases 1-9 SO 2 Identify the users and uses of accounting information. Business Activities Business Activities All businesses are involved in three types of activity -- financing, investing, and operating. The accounting information system keeps track of the results of each of these business activities. 1-10 SO 3 Explain the three principal types of business activity. Business Activities Business Activities Financing Activities Two primary sources of outside funds are: 1. Borrowing money Amounts owed are called liabilities. Party to whom amounts are owed are creditors. Notes payable and bonds payable are different type of liabilities. 2. Issuing shares of stock for cash. 1-11 Payments to stockholders are called dividends. SO 3 Explain the three principal types of business activity. Business Activities Business Activities Investing Activities Purchase of resources a company needs in order to operate. Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets. 1-12 SO 3 Explain the three principal types of business activity. Business Activities Business Activities Operating Activities Once a business has the assets it needs, it can begin its operations. Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue). Inventory - Goods available for sale to customers. Accounts receivable - Right to receive money from a customer,in the future, as the result of a sale. 1-13 SO 3 Explain the three principal types of business activity. Business Activities Business Activities Operating Activities Expenses - cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense). Employees Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. Net income when revenues exceed expenses. Net loss when expenses exceed revenues. SO 3 Explain the three principal types of business activity. 1-14 Communicating with Users Communicating with Users Companies prepare four financial statements from the Companies prepare four financial statements from the summarized accounting data: summarized accounting data: Balance Sheet Income Statement Retained Earnings Statement Statement of Cash Flows 1-15 SO 4 Describe the content and purpose of each of the financial statements. Communicating with Users Communicating with Users Income Statement Illustration 1-4 Reports revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues. Past net income provides information for predicting future net income. 1-16 SO 4 Describe the content and purpose of each of the financial statements. Communicating with Users Communicating with Users Income Statement Illustration 1-4 Retained Earnings Statement Illustration 1-5 Net income is needed to determine the ending balance in retained earnings. 1-17 SO 4 Describe the content and purpose of each of the financial statements. Communicating with Users Communicating with Users Retained Earnings is the net income retained in the corporation. Statement shows amounts and causes of changes in retained earnings during the period. Time period is the same as that covered by the income statement. Retained Earnings Statement Illustration 1-5 1-18 Users can evaluate dividend and purpose of each of the financial statements. SO 4 Describe the content Communicating with Users Communicating with Users Retained Earnings Statement Balance Sheet Illustration 1-7 Ending balance in retained earnings is needed in preparing the balance sheet. 1-19 SO 4 Describe the content and purpose of each of the financial statements. Communicating with Users Communicating with Users Balance Sheet Illustration 1-7 Reports assets and claims to assets at a specific point in time. Assets = Liabilities + Stockholders' Equity. Lists assets first, followed by liabilities and stockholders' equity. 1-20 SO 5 Explain the meaning of assets, liabilities, and stockholders' equity, and state the basic accounting equation. Communicating with Users Communicating with Users Balance Sheet Illustration 1-7 Statement of Cash Flows Illustration 1-8 1-21 SO 5 Explain the meaning of assets, liabilities, and stockholders' equity, and state the basic accounting equation. Communicating with Users Communicating with Users Statement of Cash Flows Illustration 1-8 Answers: Where did cash come from during the period? How was cash used during the period? What was the change in the cash balance during the period? 1-22 SO 5 Explain the meaning of assets, liabilities, and stockholders' equity, and state the basic accounting equation. Other Elements of an Annual Report Other Elements of an Annual Report U.S. companies that are publicly traded must provide shareholders with an annual report. The annual report always includes: Financial statements. Management discussion and analysis. Notes to the financial statements. Independent auditor's report. 1-23 SO 6 Describe the components that supplement the financial statements in an annual report. Other Elements of an Annual Report Other Elements of an Annual Report Management's Report Management discussion and analysis (MD&A) covers the companies ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors. 1-24 SO 6 Describe the components that supplement the financial statements in an annual report. Other Elements of an Annual Report Other Elements of an Annual Report Management's Report Illustration 1-10 1-25 SO 6 Describe the components that supplement the financial statements in an annual report. Other Elements of an Annual Report Other Elements of an Annual Report Notes to the Financial Statements Clarify the financial statements. Provide additional detail. Notes are essential to understanding a company's operating performance and financial position. Illustration 1-11 1-26 SO 6 Describe the components that supplement the financial statements in an annual report. Other Elements of an Annual Report Other Elements of an Annual Report Auditor's Report Auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting standards. Illustration 1-12 1-27 SO 6 ...
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