Financial Accounting, Fifth Edition Introduction to Financial Statements Financial Accounting, Fifth Edition

Study Objectives 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. 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)

Forms of Business Organization Proprietorship Partnership Corporation Generally owned by one person. Often small service-type businesses Personally liable for debts of the business Tax advantages Owned by two or more persons. Often retail and service-type businesses Personally liable for debts of the business Tax advantages Ownership in shares of stock Separate legal entity organized under state corporation law No personal liability Easier to raise funds Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods SO 1 Describe the primary forms of business organization.

Users and Uses of Financial Information Internal Users IRS Management Investors Human Resources Labor Unions Common Questions Finance Creditors Marketing SEC Customers External Users SO 2 Identify the users and uses of accounting information.

Users and Uses of Financial Information Common Questions Asked? User 1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Which product line is most profitable? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its short-term debts? SO 2 Identify the users and uses of accounting information.

Users and Uses of Financial Information Ethics In Financial Reporting Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics. 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. SO 2 Identify the users and uses of accounting information.

Communicating with Users Companies prepare four financial statements from the summarized accounting data: Income Statement Balance Sheet Retained Earnings Statement Statement of Cash Flows SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Review Question Net income will result during a time period when: assets exceed liabilities. assets exceed revenues. expenses exceed revenues. revenues exceed expenses. SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Income Statement Illustration 1-5 Reports revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Retained Earnings Statement Income Statement Illustration 1-5 Illustration 1-6 Net income is needed to determine the ending balance in stockholder’s equity. SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Retained Earnings Statement Illustration 1-6 Statement indicates the reasons why retained earnings has increased or decreased during the period. SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Retained Earnings Statement Balance Sheet Illustration 1-8 Illustration 1-6 The ending balance in retained earnings is needed in preparing the balance sheet SO 4 Describe the content and purpose of each of the financial statements.

Communicating with Users Balance Sheet Reports the assets, liabilities, and stockholder’s equity at a specific date. Assets listed at the top, followed by liabilities and stockholder’s equity. Total assets must equal total liabilities and stockholder’s equity. Illustration 1-8 SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.

Communicating with Users Statement of Cash Flows Illustration 1-9 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? SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.

Communicating with Users Review Question Which of the following financial statements is prepared as of a specific date? Balance sheet. Income statement. Owner's equity statement. Statement of cash flows. SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.

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. SO 6 Describe the components that supplement the financial statements in an annual report.

Copyright “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”