2. 1 Financial Accounting: Tools for Business Decision Making, 3rd Ed. Kimmel, Weygandt, Kieso ELS

3. 2 Chapter 1 `

4. 3 After studying Chapter 1, you should be able to: zDescribe the primary forms of business organization. zIdentify the users and uses of accounting information. zExplain the three principal types of business activity. zDescribe the content and purpose of each of the financial statements. Chapter 1 Introduction to Financial Statements

5. 4 After studying Chapter 1, you should be able to: zExplain the meaning of assets, liabilities, and stockholders’ equity and state the basic accounting equation. zDescribe the components that supplement the financial statements in an annual report. zExplain the basic assumptions and principles underlying financial statements.

6. 5 A Few Financial Scandals in 2002... zEnron zXerox zQwest zGlobal Crossing zWorldCom.

7. 6 What You Will Learn This Term... è Basics about financial reporting to make financial decisions as an investor or manager. è Basic tools used to evaluate financial reports.

8. 7 Forms of Business Organizations zSole Proprietorship - owned by one person zPartnership - owned by more than one person zCorporation - organized as a separate legal entity and owned by stockholders

9. 8 Forms of Business Organizations

10. 9 Users of Financial Information zInternal Users - managers plan, organize and run a business. zExternal Users - yInvestors yCreditors yOthers xTaxing authorities xRegulatory agencies xCustomers xLabor unions xEconomic planners

11. 10 Questions Asked by Internal Users zIs cash sufficient to pay bills? zWhat is the cost of manufacturing each unit of product? zCan we afford to give employee pay raises this year? zWhat product line is most profitable?

12. 11 zIs the company earning satisfactory income? zHow does the company compare in size and profitability with competitors? zWill the company be able to pay its debts when they become due? Questions Asked by External Users

13. 12 Ethics in Financial Reporting zRecognize an ethical situation and the ethical issues involved. zIdentify and analyze the principal elements of the situation. zIdentify the alternatives and weight the impact of each alternative on various stakeholders.

14. 13 3 Types of Business Activity zFinancing zInvesting zOperating

15. 14 Financing Activities It Takes MONEY to Make MONEY!

16. 15 Two Ways of Outside Financing of a Corporation zBorrowing money (liabilities) zIssuing shares of stock in exchange for cash

17. 16 Basic Terms zAssets - resources owned by a business zLiabilities - debts and obligations of the business - represents claims of creditors on the assets of the business zCommon stock - stock representing the primary ownership interest in a corporation

18. 17 Investing Activities Obtaining the Resources or Assets needed to operate the business Examples of assets... zCash zAccounts Receivable zInventory zBuildings, Equipment, Furniture

19. 18 Investing Activities - Examples zPurchase or sale of computers, delivery trucks, furniture, buildings zPurchase or sale of investments

20. 19 Investing Candy

21. 20 Operating activities are the main activities for which the organization is in business. Candy

22. 21 What Are Revenues? Revenues are the assets that result from sale of a product or service.

23. 22 Examples of Revenues Taxi Company - sells services Theatre - sells services & products Retail Store - sells products

24. 23 Expenses are the costs of assets consumed or services used to generate revenues. Examples... What Are Expenses? zCost of sales zStore operating expenses zGeneral and administrative expenses  Interest expense

25. 24 Examples of Expenses zTaxi Company - gasoline, maintenance, insurance zTheatre - salaries, supplies, film rental, concessions to resale zRetail Store - utilities, taxes, rent, supplies, salaries

26. 25 Net Income zNet Income is the excess of revenues over expenses. Revenue$10,000 Expenses 3,000 Net income $ 7,000

27. 26 Financial Accounting Statements zIncome Statement - reports the results of operations for a specific period of time zRetained Earnings Statement - reports the changes in retained earnings for a specific period of time zBalance Sheet - reports the assets, liabilities, and stockholders’ equity at a specific date zStatement of Cash Flows - reports the cash receipts and payments for a specific period of time

28. 27 Want to Practice? Click HERE to Solve Click HERE to Solve DO IT DO IT From Page 18 From Page 18

29. 28 Remember... Remaining Liquid and Solvent is as important as making a profit because...

30. 29 A Company Can Survive a Long Time Without Profits... but It Can’t Survive Very Long Without CASH!

31. 30 zFinancial Statements yIncome Statement yStatement of Retained Earnings yBalance Sheet yStatement of Cash Flows zManagement Discussion and Analysis zNotes to Financial Statements zAuditor's Report Elements of an

32. 31 Management Discussion and Analysis Covers three aspects of a company: yliquidity - ability to pay near-term obligations ycapital resources - ability to fund operations and expansions yresults of operations

33. 32 Notes to Financial Statements zProvide additional information not included in body of statements zDoes not have to be numeric zExamples: yDescription of accounting policies or explanation of uncertainties and contingencies yStatistics and voluminous details

34. 33 Auditor's Report zAuditor, a professional accountant who conducts an independent examination of the financial accounting data presented by a company. zAuditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.

35. 34 Monetary Unit Assumption

36. 35 Economic Entity Assumption

37. 36 Time Period Assumption

38. 37 Going Concern Assumption

39. 38 Cost Principle

40. 39 Full Disclosure Principle Illustration 1-14

41. 40 CSU CORPORATION Income Statement For the Year Ended December 31, 2004 1st- head up the statement name of company name of statement period of time covered

42. 41 Revenues Service revenue $17,000 CSU CORPORATION Income Statement For the Year Ended December 31, 2004 2nd - List the revenues

43. 42 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses10,200 CSU CORPORATION Income Statement For the Year Ended December 31, 2004 3rd - List and total the expenses

44. 43 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses10,200 Net Income $ 6,800 CSU CORPORATION Income Statement For the Year Ended December 31, 2004 4th - Subtract expenses from revenues to obtain net income.

45. 44 CSU CORPORATION Retained Earnings Statement For the Year Ended December 31, 2004 1st- head up the statement name of company name of statement period of time covered

46. 45 CSU CORPORATION Retained Earnings Statement For the Year Ended December 31, 2004 Retained earnings, January 1$ 0 2nd - Start with beginning retained earnings

47. 46 CSU CORPORATION Retained Earnings Statement For the Year Ended December 31, 2004 Retained earnings, January 1$ 0 Add: Net Income6,800 6,800 3rd - Add net income from the current year - subtotal

48. 47 CSU CORPORATION Retained Earnings Statement For the Year Ended December 31, 2004 Retained earnings, January 1$ 0 Add: Net Income 6,800 6,800 Less: Dividends 600 Retained earnings, December 31$ 6,200 4th - Subtract current year’s dividends and total

49. 48 CSU CORPORATION Balance Sheet December 31, 2004 1st - head up the statement name of company name of statement date

50. 49 CSU CORPORATION Balance Sheet December 31, 2004 Assets Cash$ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 2nd - list the assets and total

51. 50 CSU CORPORATION Balance Sheet December 31, 2004 Assets Cash$ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Stockholders’ Equity Liabilities Notes payable$ 5,000 Accounts payable 2,000 Total liabilities 7,000 3rd - list the liabilities and sub-total

52. 51 CSU CORPORATION Balance Sheet December 31, 2004 4th - list stockholders’ equity subtotal. Add to liabilities, Total

53. 52 CSU CORPORATION Balance Sheet December 31, 2004 Assets Cash$ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Stockholders’ Equity Liabilities Notes payable$ 5,000 Accounts payable 2`,000 Total liabilities 7,000 Stockholders’ equity Common stock 10,000 Retained earnings 6,200 Total Stockholders’ equity 16,200 Total liabilities and stockholders’ equity$23,200

54. 53 If total assets and total liabilities and stockholders’ equity equal… double underline.

55. 54 CSU CORPORATION Balance Sheet December 31, 2004 Assets Cash$ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Stockholders’ Equity Liabilities Notes payable$ 5,000 Accounts payable 2,000 Total liabilities 7,000 Stockholders’ equity Common stock 10,000 Retained earnings 6,200 Total Stockholders’ equity 16,200 Total liabilities and stockholders’ equity $23,200

56. 55 In what order are financial statements prepared? WHY?

57. 56 Revenues Service revenue $17,000 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses10,200 Net Income $ 6,800 CSU CORPORATION Income Statement For the Year Ended December 31, 2004 Net Income is needed for the Statement of Retained Earnings.

58. 57 CSU CORPORATION Retained Earnings Statement For the Year Ended December 31, 2004 Retained earnings, January 1$ 0 Add: Net Income6,800 6,800 Less: Dividends 600 Retained earnings, December 31$ 6,200 Ending Retained Earnings is needed for the balance sheet.

59. 58 CSU CORPORATION Balance Sheet December 31, 2004 Assets Cash$ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Stockholders’ Equity Liabilities Accounts payable$ 2,000 Notes payable 5,000 Total liabilities 7,000 Stockholders’ equity Common stock 10,000 Retained earnings 6,200 Total Stockholders’ equity 16,200 Total liabilities and stockholders’ equity$23,200

60. 59 Accounting Equation Assets = Liabilities + Stockholders’ Equity

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