1. Uses of Accounting Information and the Financial Statements
Chapter 1
Uses of Accounting Information and the Financial Statements
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2. 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.
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3. 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.
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4. 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.
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5. Accounting Measurement
Objective 3
Explain the importance of business transactions, money measure, and separate entity.
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6. 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?
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7. 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
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8. 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.
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9. 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.
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10. Financial Position and the Accounting Equation
Objective 5
Define financial position, and state the accounting equation.
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11. 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
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12. 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
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13. Financial Statements Objective 6
Identify the four basic financial statements.
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14. Four Major Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
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15. 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.
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16. Income Statement
Date reflects revenues and expenses incurred over a period of time
Net income figure used to prepare statement of retained earnings
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17. 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
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18. Statement of Retained Earnings
Net income figure comes from income statement
Ending balance of retained earnings used to prepare the balance sheet
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19. 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.
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20. Balance Sheet Date reflects account balances as of a certain date
Ending balance of Retained Earnings comes from statement of retained earnings
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21. 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.
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22. 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
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