1. Accounting, Fifth Edition1
INTRODUCTION
TO FINANCIAL
STATEMENTS
Accounting, Fifth Edition

2. Classify each item as an: asset liability common stock revenue
expense.
Cost of renting property.
Truck purchased.
Notes payable.
Issuance of ownership shares.
Amount earned from providing service.
Amounts owed to suppliers.
LO 3 Explain the three principal types of business activity.

3. Learning Objectives
After studying this chapter, you should be able to:
Describe the primary forms of business organization.
Identify the users and uses of accounting information.
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.
Ethics in accounting.

4. Forms of Business Organization
LO 1 Describe the primary forms of business organization.

5. Users and Uses of Financial Information
Internal Users
Illustration 1-1
Questions that internal users ask
LO 2

7. Users and Uses of Financial Information
External Users
Illustration 1-2
Questions that external users ask
LO 2

8. = + Liabilities Equity Assets Accounting Equation Liabilities & Equity
The basic accounting equation states that assets are equal to liabilities plus equity of a company. The equation makes sense because in a general way it states that assets must be equal to the claims against those assets. If you have an asset we can have two broad categories of claims against that asset. First, we may have claims by creditors for liabilities. Finally, after all creditor claims are satisfied, the residual owners, and stockholders, have a claim on those assets.
Assets

9. Resources owned or controlled by a company
Assets – What you OWN
Cash
Accounts RECEIVABLE
Notes RECEIVABLE
Resources owned or controlled by a company
Land
Prepaid Expenses
Assets may be viewed as resources owned or controlled by a company. They include such items as cash, accounts receivable (amounts owed to the company by customers), land, building and equipment, and supplies.
Buildings
Store Supplies
Equipment

10. Creditors’ claims on assets
Liabilities – What you OWE
Accounts PAYABLE
Notes PAYABLE
Creditors’ claims on assets
Liabilities represent the claims of creditors on the entity’s assets. Liabilities include accounts payable (amounts we owe to creditors for assets purchased on account), notes payable, taxes payable, and wages payable (amounts we owe to our employees at the end of the accounting period).
Wages PAYABLE
Taxes PAYABLE

11. Shareholders’ Equity – Owners’ Claim to Assets
*Investments by the shareholders
*Amounts earned from the sale of products or services
Sales
Revenue
Interest Income
Rent Revenue
**Amounts spent to generate revenues
Salaries Exp
Rent Exp
Interest Exp
Utilities Exp
**Returns made to shareholders
Here is a breakdown of the equity section of the of the accounting equation to show the mathematical signs we will be using to keep track of investments by owners, common stock, payments to owners (dividends), revenues and expenses. Notice that revenues increase equity and expenses reduce equity.
Increases Equity
** Decreases Equity

12. to help users make better decisions.
Why Accounting is Important
is a
system that
Accounting
Identifies
Records
GAAP
information
that is
Relevant
Communicates
Accounting is the process of identifying, recording and communicating information that is relevant, reliable, and comparable. The goal of the accounting process is to provide helpful information to users of financial information. Quality information may help users reach more informed decisions.
Reliable
to help users make better decisions.
Comparable

13. WHAT IS GAAP?
Generally accepted accounting principles (GAAP) are  accounting principles, standards and procedures that companies must follow when they compile their financial statements.
GAAP standards are set by the Financial Accounting Standards Board
Goal is to provide ‘uniformity’ in financial reporting to allow for comparability/consistnacy
GAAP vs IFRS
Does GAAP mean that financial statements cannot be distorted? Why or why not?
Accounting is the process of identifying, recording and communicating information that is relevant, reliable, and comparable. The goal of the accounting process is to provide helpful information to users of financial information. Quality information may help users reach more informed decisions.

14. Communicating with Users
Companies prepare four financial statements from the summarized accounting data:
1) Income Statement*
(Revenues – Expenses = Net Income)
2) Retained Earnings Statement* (Income – Dividends)
3) Balance Sheet**
(Assets, Liabilities & Equity)
Statement of Cash Flows*
(Cash)
(Ch 12)
* Represents a period of time (i.e. Jan 1 –Dec 31)
** Represents a single point of time (i.e Dec 31)
LO 4 Describe the content and purpose of each of the financial statements.

15. Income Statement Was I profitable?
Illustration 1-4
LO 4 Describe the content and purpose of each of the financial statements.

16. Accounting Equation & Fin’l Statements
Illustration 3-2
Expanded accounting equation
Income Statement
Was I profitable?
LO 1 Analyze the effect of business transactions on the basic accounting equation.

17. Account Identification & Income Statement Practice Problem
Ex 1-8, p 31
Tips to solve:
Label each account as one of the following:
Assets – what is OWNED
Liabilities – what is OWED
Equity –
Common stock – investments by shareholders
Dividends – investment returns to shareholders
Revenue – amounts earned from the sale of product or services
Expense – amounts spent to generate revenue

18. Retained Earnings Statement
Statement shows amounts and causes of changes in retained earnings during the period.
Time period is the same as that covered by the income statement.
Users can evaluate dividend payment practices.
Illustration 1-5
Helpful Hint The heading of this statement identifies the company, the type of statement, and the time period covered by the statement.
LO 4 Describe the content and purpose of each of the financial statements.

19. Accounting Equation & Fin’l Statements
Illustration 3-2
Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions on the basic accounting equation.

20. Communicating with Users
2) Retained Earnings Statement
1) Income Statement
Illustration 1-4
Illustration 1-5
Net income is needed to determine the ending balance in retained earnings.
LO 4 Describe the content and purpose of each of the financial statements.

21. Balance Sheet – Financially Healthy?
Reports assets and claims to assets at a specific point in time.
Assets = Liabilities + Stockholders’ Equity.
Lists assets first, followed by liabilities and stockholders’ equity.
Illustration 1-7
Helpful Hint The heading of a balance sheet must identify the company, the statement, and the date.
LO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.

22. Accounting Equation & Fin’l Stmts
Balance Sheet – Financially Healthy?
Illustration 3-2
Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions on the basic accounting equation.

23. Communicating with Users
Retained Earnings Statement
Balance Sheet
Ending balance in retained earnings is needed in preparing the balance sheet.
LO 4 Describe the content and purpose of each of the financial statements.

24. Retained Earnings & Balance Sheet
Practice Problem
Ex 1-10, p 32
Tips to solve:
Mark each account listed as an asset, liability, common stock, revenue or expense.
After identifying each account, indicate whether that account belongs on the Income Statement, Retained Earnings Statement or Balance Sheet.
Complete the Retained Earnings Statement and Balance Sheet according to the examples provided.

25. 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.
Auditor's report.
LO 6 Describe the components that supplement the financial statements in an annual report.

26. Other Elements of an Annual Report
Management Discussion and Analysis
Management discussion and analysis (MD&A) covers the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.
Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors.
LO 6 Describe the components that supplement the financial statements in an annual report.

27. Other Elements of an Annual Report
Notes to the Financial Statements
Clarify the financial statements.
Provide additional detail.
Notes are essential to understanding a company’s operating performance and financial position.
Illustration 1-11
LO 6

28. Other Elements of an Annual Report
Auditor’s Report
Auditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.
Illustration 1-12
LO 6

29. Users and Uses of Financial Information
Ethics In Financial Reporting
United States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.
Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Limits to consulting fees charged by audit firms
Management representation requirements
Effective financial reporting depends on sound ethical behavior.
Accounting has fundamental principles but involves judgment
LO 2 Identify the users and uses of accounting information.

30. Ethics Users and Uses of Financial Information
Ethics In Financial Reporting
Ethics
Beliefs that distinguish right from wrong
Accepted standards of good and bad behavior
Ethical behavior is the cornerstone of the accounting profession. Recently, we have seen many corporate scandals involving individuals who acted in an unethical, and often times illegal, way.
Ethics is the belief system that permits us to distinguish right from wrong. It is something that we develop over our lifetimes and serves to help us identify good and bad behavior. Congress passed the Sarbanes-Oxley Act, also known as SOX, to help curb financial abuses at companies that issue their stock to the public. The desired results include more transparency, accountability, and truthfulness in reporting transactions.

31. Guidelines to Ethical Decisions
Identify ethical concerns
Analyze options
Make ethical decision
You have faced ethical situations in school and will face similar situations at work. We should be capable of identifying ethical concerns and analyzing our options, that is, what is the right and wrong thing to do. Making an ethical decision means we choose the best option available under the circumstances.
Consider all good and bad consequences.
Use personal ethics to recognize ethical concern.
Choose best option after weighing all consequences.

32. What is Ethics? https://www.youtube.com/watch?v=vAuv0HujFbc
Ethical behavior is the cornerstone of the accounting profession. Recently, we have seen many corporate scandals involving individuals who acted in an unethical, and often times illegal, way.
Ethics is the belief system that permits us to distinguish right from wrong. It is something that we develop over our lifetimes and serves to help us identify good and bad behavior. Congress passed the Sarbanes-Oxley Act, also known as SOX, to help curb financial abuses at companies that issue their stock to the public. The desired results include more transparency, accountability, and truthfulness in reporting transactions.