Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso CHAPTER 1 Prepared by Ellen L. Sweatt Georgia Perimeter College

AN INTRODUCTION TO FINANCIAL STATMENTS Chapter 1 AN INTRODUCTION TO FINANCIAL STATMENTS

Forms of Business Organization 11 1 Forms of Business Organization Sole proprietorship Partnership Corporation

Sole Proprietorship Business owned by one person Simple to establish Owner controlled Tax advantages Owner personally liable Financing difficult

Partnership Two or more owners Simple to establish Shared control Broader skills & resources Tax advantages Personal liability

Corporation Separate legal entity owned by stockholders Easy to transfer ownership Greater capital raising potential Lower legal liability Unfavorable tax treatment

Users of Financial Information Internal 11 2 Users of Financial Information Internal Managers who plan, organize and run a business Marketing managers Production supervisors Finance directors Company officers

Users of Financial Information External Investors Creditors Others Regulatory agencies Tax authorities Customers Labor Unions Economic planners

Types of Business Activity 11 3 Types of Business Activity Financing Investing Operating

Financing Activities Borrowing creates liabilities Bank loans Debt securities Goods on credit or payables Selling stock creates stockholders’ equity

Investing Activities Obtaining resources or assets to operate the business Land Buildings Vehicles Computers Furniture Equipment

Operating Activities Revenues are the increases in assets resulting from the sale of a product or service Expenses are the cost of assets consumed or services used in generating revenue. If revenue > expense = Net Income If revenue < expense = Net Loss!

Four Financial Statements Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows

Income Statement Reports operating success or failure for a period. Summarizes revenues and expenses for period: month, quarter, year. If revenue > expense = Net Income.

Do this statement first! Income Statement Do this statement first!

Retained Earnings Statement Shows changes in retained earnings for period: month, quarter, year Beginning balance Add Net Income from income statement. Deduct Dividends Ending balance

Retained Earnings Statement Do this statement second!

Do E1-5

Balance Sheet Reports assets and claims to assets. Claims of creditors, liabilities. Claims of owners, stockholders’ equity. Assets = Liabilities + Stockholders’ Equity Specific date – one point in time!

From Retained Earnings Statement Balance Sheet From Retained Earnings Statement

Statement of Cash Flows Provides information about cash receipts and cash payments Summarizes for period: month, quarter, year. Cash effects of operating, investing, and financing activities.

Statement of Cash Flows.. Agrees with Balance Sheet

Assets 5 Resources owned by the business Cash Accounts receivable 11 5 Assets Resources owned by the business Cash Accounts receivable Inventories Furniture and fixtures Equipment Supplies

Liabilities Obligations or debts of business Notes payable Accounts payable Interest payable Salaries payable Unearned revenue

Stockholders’ Equity Ownership claims on assets Paid-in capital Common stock Retained earnings

Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity

Do E1-9

Supplements to the Financial Statements in an Annual Report 11 6 Supplements to the Financial Statements in an Annual Report Management Discussion and Analysis Notes to Financial Statements Auditor’s report

Management’s Discussion and Analysis covers three items: Liquidity Capital resources Results of operations

Notes to Financial Statements Explanatory notes and supplementary schedules Clarifies information in financial statements Expands with additional detail Describes accounting policies Explains uncertainties and contingencies

Auditor’s Report Certified Public Accountant – CPA Auditor (CPA) conducts independent examination of financial statements Fair representation? Follow generally accepted accounting principles (GAAP)? Unqualified opinion

Do E1-1

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