1. 2 Introduction to Using Financial Accounting Information, 7/e
Statements and
the Annual Report 2
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning

2. Primary Objective of Financial Reporting
Provide information for decision making
Loan $$??
Extend credit $$??
Sell stocks or bonds??
Borrow $$??
Start new business??
Invest??
LO1 2 2

3. Secondary Objectives of Financial Reporting
Reflect the
company’s
resources
and claims to its
Reflect prospective
cash receipts to
investors and creditors
Reflect prospective
cash flows to
the company
Assets = Liabilities + OE 2 2

4. Qualitative Characteristics
Understandability –
Relevance –
Reliability –
To those willing to take
the time to understand it
Has capacity to
make a difference
Represents what
it purports
LO2 3 3 3

5. Qualitative Characteristics From one period to the next
Comparability
between companies
Consistency
From one period to the next 3 4 4

6. Qualitative Characteristics
Materiality
Will it make a difference
To the decision maker?
Conservatism
All else equal, choose
Least optimistic estimate 3 5 5

7. Basic Structure of a Classified Balance Sheet
Current assets
+ Noncurrent (long-term) assets
Total assets
Current liabilities
+ Noncurrent (long-term) liabilities
+ Stockholders’ equity
Total liabilities and stockholders’ equity
LO3 5 7 7

8. The Operating Cycle
Inventory
Cash
Accounts
Receivable 5 7 7

9. Of particular interest
Analysis of Liquidity
Of particular interest
to bankers and other
creditors
Ability of
company to
pay debts
as they
become due
Working
Capital
LO4 7 8 8

10. Single-Step Income Statement
Revenues $$
Less: expenses ($$)
Net income $$
LO5 16 16

11. Multiple-Step Income Statement
Sales
– Cost of Goods Sold
= Gross Profit
Operating expenses:
– General and
administrative expenses
– Selling expenses
= Income from operations
+/– Other revenues and expenses
= Income before taxes
– Income tax expense
= Net income
Four
important
subtotals 6 13 13

12. Analysis of Profitability
particular
interest
to current and
potential
investors
Profit
Margin %
LO6 14 14

13. Statement of Retained Earnings
Explains changes in the components of owners’ equity during a period
Net income (net loss) and Dividends
Provides an important link between the
income statement and the balance sheet
Statement of Retained Earnings
Beginning retained earnings
Add: Net income
Deduct: Dividends
Equal Ending retained earnings
LO7 19 19

14. Statement of Cash Flows
Basic Format of the
Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Reconciles change
in cash for
the period
LO8 20 20

15. Statement of Cash Flows
Basic Format for the
Statement of Cash Flows
Cash flows from operating activities: $$
Cash flows from investing activities:
Cash flows from financing activities:
Net increase in cash $$
Cash at beginning of year $$
Cash at end of year $$
Involves the purchase and sale
of products or services
Involves the acquisition and sale
of long-term or noncurrent assets
Involves the issuance and repayment
of long-term liabilities and stock 20 20

16. Other Elements of an Annual Report
Letter to stockholders
Description of company’s products and markets
Financial statements
Notes to financial statements
Report of independent accountants
Management discussion and analysis
Summary of significant accounting policies 21 21

17. End of Chapter 2