Uses of Accounting Information and the Financial Statements Chapter 1 Uses of Accounting Information and the Financial Statements Copyright © Cengage Learning. All rights reserved.

Financial and Management Accounting Accounting’s role is divided into two categories: Management accounting Financial accounting The functions of both categories overlap. The primary difference between the two is the principal users of the information. Copyright © Cengage Learning. All rights reserved.

Management Accounting Provides internal decision makers who are charged with achieving the goals of profitability and liquidity with information about financing, investing, and operating activities. Used to report past performance and expected future performance. Copyright © Cengage Learning. All rights reserved.

Financial Accounting Generates reports and communicates them to external decision makers so they can evaluate how well the business has achieved its goals. Financial information of company is reported in the financial statements. Used to report directly on goals of profitability and liquidity. Copyright © Cengage Learning. All rights reserved.

Accounting Measurement Objective 3 Explain the importance of business transactions, money measure, and separate entity. Copyright © Cengage Learning. All rights reserved.

Accounting Measurement To make an accounting measurement, the accountant must answer four basic questions: What is measured? When should the measurement be made? What value should be placed on what is measured? How should what is measured be classified? Copyright © Cengage Learning. All rights reserved.

Business Transactions Economic events that affect the financial position of a business An exchange of value Purchase Sale Payment Collection Loan Events that have the same effect as an exchange of value (nonexchange transactions) Loss from fire, flood, theft Physical wear and tear on equipment Accumulation of interest Copyright © Cengage Learning. All rights reserved.

Money Measure Recording of all business transactions in terms of money. Money is only factor common to all business transactions. Basic unit of money determined by country in which business resides. Exchange rates used to translate transactions from one currency to the other. Copyright © Cengage Learning. All rights reserved.

Separate Entity A business is considered distinct from its Owner(s) Creditors Customers Its financial records and reports should refer only to its own financial affairs. Copyright © Cengage Learning. All rights reserved.

Financial Position and the Accounting Equation Objective 5 Define financial position, and state the accounting equation. Copyright © Cengage Learning. All rights reserved.

Accounting Equation Assets = Liabilities + Stockholders’ Equity The two sides of the equation must always stay in balance. Assets Economic resources owned by a company that are expected to benefit future operations Liabilities Present obligations of a business to pay cash, transfer assets, or provide services to other entities in the future Represent claims of creditors to the assets of the business Stockholder’s Equity Represents the claims of the owners of a corporation to the assets of the business Copyright © Cengage Learning. All rights reserved.

Stockholders’ Equity Contributed capital Retained earnings Amount invested in the business by the stockholders Retained earnings Stockholders’ equity that has been generated by operations and kept for use in the business Copyright © Cengage Learning. All rights reserved.

Financial Statements Objective 6 Identify the four basic financial statements. Copyright © Cengage Learning. All rights reserved.

Four Major Financial Statements Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Copyright © Cengage Learning. All rights reserved.

Income Statement Summarizes revenues earned and expenses incurred over an accounting period. Dated “For the Month Ended …” or “For the Year Ended …” Shows whether a company achieved its profitability goal. Copyright © Cengage Learning. All rights reserved.

Income Statement Date reflects revenues and expenses incurred over a period of time Net income figure used to prepare statement of retained earnings Copyright © Cengage Learning. All rights reserved.

Statement of Retained Earnings Shows changes in retained earnings over an accounting period Dated “For the Month Ended …” or “For the Year Ended…” Uses net income figure from income statement Retained Earnings end of period balance used to prepare balance sheet Copyright © Houghton Mifflin Company. All rights reserved. Copyright © Cengage Learning. All rights reserved.

Statement of Retained Earnings Net income figure comes from income statement Ending balance of retained earnings used to prepare the balance sheet Copyright © Cengage Learning. All rights reserved.

Balance Sheet Shows the financial position of a business on a certain date. Often called the statement of financial position. Presents view of business as holder of assets that are equal to the claims against those assets. Claims consist of the company’s liabilities and the stockholders’ equity. Copyright © Cengage Learning. All rights reserved.

Balance Sheet Date reflects account balances as of a certain date Ending balance of Retained Earnings comes from statement of retained earnings Copyright © Cengage Learning. All rights reserved.

Statement of Cash Flows Shows cash flows into and out of a business during an accounting period. Shows important investing and financing transactions of the period. Focuses on liquidity. Explains how the cash account changed during the period. Copyright © Cengage Learning. All rights reserved.

Statement of Cash Flows Begins with net income from income statement Cash at end of month should be the same as Cash account balance on balance sheet Copyright © Cengage Learning. All rights reserved.