Chapter 1 – Accounting The Link Between Business and Accounting

Learning Objectives Define accounting, why important? Users of accounting Financial Statement standards Four Financial Statements Analysis! Risks! How to Control!

Let’s talk about Apples… No, Not that kind….. Apple Computer!

How do they do it?

The Operating Cycle for Apple…

Accounting is the process of  Identifying  Measuring and  Communicating Financial Information to various users, both inside and outside of the company Much of this information is communicated with Financial Statements

The Basic Financial Statements  Balance Sheet  Income Statement  Statement of Changes in Owners’ Equity  Statement of Cash Flows The Financial Statements are based on a broad set of guidelines called Generally Accepted Accounting Principles (GAAP)

Setting the Guidelines for Financial Reporting

Internal Users use Managerial Accounting Statements Who are the internal users? What information do they look for??

External Users use Financial Accounting Who are the external users? What information do they look for??

Business—what type? Dim sum!

An EXERCISE...

The Balance Sheet Describes the financial position of a company at a specific point in time Three Components of the Balance Sheet  Assets  Liabilities  Owners’ Equity

Assets  Things of Value, resources  Owned by the Company  As a result of past transactions  Will be used to generate future revenues

Liabilities  Amounts the business owes to creditors  Claims against the Assets

Owners’ Equity  Amounts the business owes to its owners  Residual claim against the Assets  After the creditors’ claims have been satisfied Assets - Liabilities = Owners’ Equity

Want more Equity? You’ll need to….. Invest More – Increases the Contributed Capital portion of Equity Earn More – Running a successful business increases the Retained Earnings portion of Equity

The Accounting Equation Assets = Liabilities + Owners’ Equity States that all of the assets of the business are claimed by the creditors and/or the owners This is where the Algebra comes in 

Apple’s Balance Sheet

The Accounting Equation Is also called the Balance Sheet Equation

The Balance Sheet

Total Assets of $8,050 $2,974 of the Assets are claimed by the creditors $5,076 of the Assets are claimed by the shareholders

The owners invested $2,514M And the investment has grown to $5,076M Think of it as an investment….

But the Balance Sheet doesn’t tell the whole story…. The Balance Sheet describes what we have But not how we got it!

Introducing…..The Income Statement What do you think THIS statement is?

The Income Statement tells how the company’s performance changed the net assets…. Revenues are transactions which resulted in an inflow of net assets Expenses are transactions which resulted in an outflow of net assets

Revenues The Amount Earned from Sales or Services During the time period described at the top of the Income Statement

Expenses The Costs incurred to generate Revenues During the time period described at the top of the Income Statement

The Bottom Line If Revenues Exceed Expenses in the current period, it’s called “Net Income” If Expenses Exceed Revenues in the current period, it’s called “Net Loss”

Think of it as a Business Sink! Net Income means that Assets are flowing into the Business (Revenues) Faster than they’re flowing out of the business (Expenses) The Asset Level in the Sink is Rising!

Net Loss Net Loss means that the assets are flowing out of the business (Expenses) Faster than they’re flowing into the business (Revenues) The Asset Level in the Sink is Dropping!

To Whom do these new Assets belong? To the Stockholders! Their Claim against the assets of the Corporation has increased by $276 Million These assets will be retained by the corporation until they are returned to the stockholders as dividends

This can be seen on the Statement of Retained Earnings The “Bottom Line” from the Income Statement Is transferred to the Statement of Retained Earnings

Similarly….. The Ending Retained Earnings balance from the Statement of R/E Is transferred to the Balance Sheet

The Statement of Cash Flows Takes a more limited, but very important look, at a single asset… Cash!

The Statement of Cash Flows Categorizes Cash Inflows and Outflows during a specific period of time into three categories: Operating Investing Financing

Operating Activities Cash Receipts and Cash Disbursements As a result of day-to- day operation of the business

Investing Activities Cash Receipts and Cash Disbursements From the purchases and sales of long- term assets

Financing Activities Cash Receipts and Cash Disbursements From the company’s funding sources – its long-term creditors and stockholders Cash collected from the issuance of stock or long- term liabilities Cash dividends paid, or payments to retire long- term debt

Statement of Cash Flows

Financial Statement Analysis  Is the process of analyzing the information in the four financial statements and the notes to the financial statements  To evaluate past performance and  Predict future performance

Risk and Rewards  Every business takes risks.  It is important to be able to identify and evaluate the risks  Controls must be implemented to minimize the risks and  Improve the opportunity for rewards

End – Chapter 1

The Process of ….  Getting Cash  Using Cash to purchase inputs  Changing those inputs into products or services, and  Providing the product or service to customers and eventually getting cash back Is Called an Operating Cycle

Managerial Accounting is concerned with satisfying the needs of internal users Internal Users Managers Internal Auditors Production Supervisors Sales and Marketing

Financial Accounting is concerned with satisfying the needs of External Users External Users GovernmentCreditors Potential Investors Vendors, Customers and Employees

If you’ve ever applied for a loan… You’ve already prepared a Balance Sheet! The bank asks you for a listing of all of your assets And a listing of all of your liabilities The difference between these amounts is your net worth, or Equity!

Your Personal Balance Sheet

Examples of Assets Cash Short-Term Investments Accounts Receivable Supplies Land Equipment

Examples of Liabilities Accounts Payable Wages Payable Notes Payable

Stockholders’ Equity The claims by the stockholders result from Contributed Capital – assets stockholders contributed in exchange for shares of stock Retained Earnings – cumulative profitability of the corporation in excess of dividends