1. Financial Accounting: Tools for Business Decision Making
Kimmel, Weygandt, Kieso, Trenholm
KIMMEL
Prepared by:
Barbara Trenholm
University of New Brunswick

2. Chapter 1 Introduction to Financial Statements
After studying Chapter 1, you should be able to:
Describe the primary forms of business organization.
Identify the users and uses of accounting.
Explain the three principal types of business activity.
Describe the content and purpose of each of the financial statements.

3. Chapter 1 Introduction to Financial Statements
After studying Chapter 1, you should be able to:
Explain the meaning of assets, liabilities, and shareholders’ equity and state the basic accounting equation.
Describe the components that supplement the financial statements in an annual report.
Explain the basic assumptions and principles underlying financial statements.

4. Forms of Business Organization
Illustration 1-1
Forms of Business Organization

5. Users of Financial Information
Internal Users
Managers plan, organize and run a business

6. Users of Financial Information
External Users
Investors
Creditors
Others
Taxing authorities
Regulatory agencies
Customers
Labour unions
Economic planners
Primary users

7. Accounting Equation
Assets = Liabilities + Shareholders’ Equity

8. Basic Terms Assets - resources owned by a business
Liabilities - obligations of the business
Shareholders’ equity
Share capital - representing the primary ownership interest in a corporation
Retained earnings – accumulated earnings of corporation that have not been distributed to shareholders

9. 3 Types of Business Activity
Financing
Investing
Operating

10. It takes money to make money!
Financing Activities
Borrowing money (debt)
Selling shares (equity)
It takes money to make money!

11. Investing Activities
Obtaining the resources or assets needed to operate the business for the long-run
Examples
Purchase or sale of investments
Purchase or sale of capital assets

12. Operating Activities
Operating activities are the main activities for which the organization is in business
Loblaw

13. Revenues Revenues arise from sale of a product or service
Revenues result in an inflow of assets

14. Expenses
Expenses are the costs of assets consumed or services used to generate revenues
Examples
Cost of sales
Store operating expenses
General and administrative expenses
Interest expense

15. (Net loss is the excess of expenses over revenues)
Net Earnings
Net earnings are the excess of revenue over expenses
Revenue $10,000 Less: Expenses 3,000 Net earnings $ 7,000
(Net loss is the excess of expenses over revenues)

16. Remember …
Remaining liquid and solvent is as important as making a profit because...
A company can survive without earnings, but it can’t survive very long without cash

17. Management Discussion and Analysis Auditor's Report
Elements of an
Management Discussion and Analysis
Auditor's Report
Financial Statements
Statement of Earnings
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Notes to Financial Statements

18. Management Discussion and Analysis
Covers three aspects of a company
Liquidity - ability to pay near-term obligations
Capital resources - ability to fund operations and expansions
Results of operations

19. Auditor’s Report
Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with generally accepted accounting principles (GAAP)

20. Financial Accounting Statements
Statement of Earnings
Reports the results of operations for a specific period of time
Statement of Retained Earnings
Reports the changes in retained earnings for a specific period of time
Balance Sheet
Reports the assets, liabilities, and shareholders’ equity as at a specific point in time
Statement of Cash Flows
Reports the cash receipts and payments for a specific period of time

21. Want to Practice?
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From Page 15

22. Notes to Financial Statements
Provide additional information not included in body of statements
Do not have to be numeric
Examples
Description of accounting policies or explanation of uncertainties and contingencies
Statistics and supporting details

23. Assumptions and Principles
Monetary unit
Economic entity
Time period
Going concern
Generally accepted accounting principles
Cost
Full disclosure

24. Monetary Unit Assumption
Illustration 1-10
Monetary Unit Assumption

25. Economic Entity Assumption
Illustration 1-10
Economic Entity Assumption

26. Time Period Assumption
Illustration 1-10

27. Going Concern Assumption
Illustration 1-10

28. Illustration 1-11
Cost Principle

29. Full Disclosure Principle
Illustration 1-11

30. Decision Checkpoints Are the company’s operations profitable?
What is the company’s policy toward dividends and growth?
Does the company rely primarily on debt or shareholders’ equity to finance its assets?
Does the company generate sufficient cash from operations to fund its investing activities?

31. COPYRIGHT
Copyright © 2001 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

32. Do It - Page 15

33. 1st - Statement of Earnings Head up the statement
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
1st - Statement of Earnings
Head up the statement
name of company
name of statement
period of time covered

34. CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
Revenues Service revenue $22,200
List the revenues

35. CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
List and total the expenses. Note that income tax is shown separately from other expenses

36. Subtract expenses from revenues to obtain net earnings (loss)
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800
Subtract expenses from revenues to obtain net earnings (loss)

37. 2nd – Statement of Retained Earnings Head up the statement
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
2nd – Statement of Retained Earnings
Head up the statement
name of company
name of statement
period of time covered (same period as statement of earnings)

38. CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
Retained earnings, January 1 $
Start with beginning retained earnings (same as ending retained earnings of prior period)

39. CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Add net earnings (subtract loss) from the current year (see Statement of Earnings)
Subtotal

40. Subtract current year’s dividends (if any) and total
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Less: Dividends
Retained earnings, December 31 $ 6,800
Subtract current year’s dividends (if any) and total

41. CSU CORPORATION Balance Sheet December 31, 2001
3rd – Balance Sheet
Head up the statement
name of company
name of statement
date (as at a specific point in time)

42. CSU CORPORATION Balance Sheet December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
List the assets and total

43. CSU CORPORATION Balance Sheet December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
List the liabilities and subtotal

44. CSU CORPORATION Balance Sheet December 31, 2001
List shareholders’ equity.
Subtotal
Add to liabilities, total

45. CSU CORPORATION Balance Sheet December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings ,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

46. Stop and Check
Total assets must equal total liabilities and shareholders’ equity

47. In what order are financial statements prepared? Presented?
WHY?

48. Net earnings is needed for the Statement of Retained Earnings
CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
Revenues Service revenue $22,200 Expenses Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800
Net earnings is needed for the
Statement of Retained Earnings

49. Ending retained earnings is needed for the Balance Sheet
CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001
Retained earnings, January 1 $
Add: Net earnings 6,800
6,800
Less: Dividends
Retained earnings, December 31 $ 6,800
Ending retained earnings is needed
for the Balance Sheet

50. CSU CORPORATION Balance Sheet December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings ,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

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