1. 1 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

2. The Financial Statements Chapter 1 2 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

3. Explain why accounting is the language of business 3 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

4. The Language of Business Measures business activities Processes data into reports Communicates results ▫Produces financial statements 4 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

5. Flow of Accounting Information People make decisions Business transactions occur Companies report results 5 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

6. Users of Accounting Information Individuals Investors & Creditors Regulatory Bodies Nonprofit Organizations 6 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

7. Kinds of Accounting Financial Managerial Provides information for external users ▫Investors ▫Creditors ▫Government ▫The public Provides information for internal users – managers Includes: ▫Budgets ▫Forecasts 7 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

8. Organizing a Business ProprietorshipPartnershipLLCCorporation Owner(s)Proprietor -OnePartners – two or more MembersStockholders – usually many Personal liability of owner for business debts 8 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

9. Proprietorship Single owner Common business form for small retail stores and professional service providers Proprietor personally liable for business debts 9 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

10. Partnerships Two or more parties as co-owners Not a taxpaying entity ▫Income passes through to partners Governed by an agreement Mutual agency ▫Each partner can act on behalf of the entity Unlimited liability Involve risk ▫Limited liability partnerships lessen risk 10 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

11. Limited Liability Companies (LLC) One or many owners (members) Limited liability Like a partnership, not a taxpaying entity ▫Income flows through to members Popular form of business due to combination of tax status and limited liability 11 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

12. Corporations Owned by stockholders ▫Stock represents share of ownership Ability to raise large sums of capital Larger than proprietorship and partnerships Formed under state law ▫Legally distinct from its owners 12 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

13. Corporations (continued) Double taxation ▫Corporate income is taxed ▫Shareholders taxed on distributions of earnings (dividends) Stockholders elect Board of Directors ▫Set policy and appoint officers 13 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

14. Explain and apply the underlying concepts, assumptions, and principles 14 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

15. Conceptual Foundations Accounting’s objective Enhancing Qualitative Characteristics Fundamental Qualitative Characteristics Constraints 15 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

16. To provide financial information that is useful to existing investors, lenders, and other creditors in making decisions about providing resources to that entity Relevance Faithful representation ComparabilityVerifiabilityTimelinessUnderstandability Cost Financial Reporting Standards 16 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

17. Assumptions & Principles Entity assumptionContinuity (going- concern) assumptionHistorical cost principleStable monetary unit assumption 17 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

18. International Financial Reporting Standards (IFRS) Many countries have own versions of generally accepted accounting principles (GAAP) ▫Reports had to be restated to convert accounting data from one country to another IFRS developed and are used by most countries in the world ▫U.S. still follows own GAAP 18 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

19. International Financial Reporting Standards (IFRS) U.S. GAAP overseen by the Securities & Exchange Commission (SEC) ▫SEC tentatively set date for U.S. adoption of IFRS in 2015 ▫Will make it easier to compare financial statements across the world Most common accounting practices similar under both U.S. GAAP and IFRS 19 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

20. Apply the accounting equation to business organizations 20 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

21. Accounting Equation Elements Economic resources Product future benefit Assets Outsider claims Debts payable to others (creditors) Liabilities Insider claims Represents ownership by stockholders Owners’ equity 21 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

22. Assets Liabilities Owner’s equity Assets = Liabilities + Owner’s Equity 22 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

23. ASSETS LIABILITIES Cash Merchandise inventory Property, plant, and equipment Accounts payable Income taxes payable Long-term debt 23 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

24. Owners’ equity Stockholders’ equity ▫Paid-in capital ▫Retained earnings Assets Liabilities Owners’ Equity 24 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

25. Corporate Accounting Equation Assets Liabilities Stockholders’ equity Paid-in capital Retained earnings Amounts shareholders have invested Common stock Amounts earned and kept by business + 25 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

26. Retained Earnings Inflows of resources earned by delivering goods and services to customers Revenues Resource outflows from the cost of doing business Expenses Distributions of assets to stockholders (not an expense) Dividends 26 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

27. Retained earnings Revenues increase Expenses decrease Dividends decrease 27 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

28. Net Income Revenues Expenses Net Income If expenses exceed revenues A net loss results 28 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

29. Beginning Retained Earnings Net Income (Net Loss) Dividends Ending Retained Earnings Expenses Revenues minus equals Plus or minus minusequals 29 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

30. Exercise 1-17A Assets$280$430$170 Liabilities$300$170 AssetsLiabilitiesEquity 30 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

31. Exercise 1-17A Assets$280$430$170 $880 Liabilities $300$170 $470 AssetsLiabilitiesEquity $410 31 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

32. Evaluate business operations through the financial statements 32 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

33. The Financial Statements QuestionFinancial Statement Answer How well did the company perform during the year? Income statement Revenues -Expenses Net income or (net loss) Why did the company’s retained earnings change during the year? Statement of retained earnings Beginning retained earnings + Net Income (-Net Loss) -Dividends Ending retained earnings What is the company’s financial position at year- end? Balance sheetAssets = Liabilities + Owners’ equity How much cash did the company generate and spend during the year? Statement of cash flows Operating cash flows +/- Investing cash flows +/- Financing cash flows Increase(decrease) in cash 33 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

34. Income Statement Balance Sheet Statement of Cash Flows Statement of Retained Earnings 34 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

35. The Income Statement Also called the Statement of Operations Reports two main categories ▫Revenues and gains ▫Expenses and losses Shows the “bottom line” ▫Net income or net loss for the period Net income is the most important item in the financial statements 35 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

36. ABC Corporation Income Statement For the year ending December 31, 2012 Net sales $$,$$$ Other revenue $$,$$$ Total revenues $$,$$$ Cost of goods sold $$,$$$ Gross profit $$,$$$ Selling, general, and administrative expenses $$,$$$ Income from operations $$,$$$ Interest expense $$,$$$ Income before income taxes $$,$$$ Income tax expense $$,$$$ Net Income $$,$$$ 36 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

37. Statement of Retained Earnings Retained earnings is portion of net income company has kept Positive balance indicates revenues exceeded expenses Accumulated deficit indicates expenses have exceeded revenues Net income (or net loss) flows from the Income Statement to the Statement of Retained Earnings 37 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

38. ABC Corporation Statement of Retained Earnings For the year ending December 31, 2012 Retained earnings, December 31, 2011 $$,$$$ Plus: Net income $$,$$$ Less: Dividends $$,$$$ Retained earnings, December 31, 2012 $$,$$$ 38 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

39. The Balance Sheet Also called the Statement of Financial Position Reports ▫Assets ▫Liabilities ▫Stockholders’ equity 39 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

40. Assets on the Balance Sheet Current Long-term Expected to be converted to cash, sold or consumed in the next year or within the business’s operating cycle ▫Whichever is longer Include ▫Cash ▫Short-term investments ▫Accounts and notes receivable ▫Inventory ▫Prepaid expenses Will be held longer than one year Include ▫Property, plant, and equipment  Land  Buildings  Computers  Equipment ▫Intangibles ▫Long-term investments 40 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

41. Liabilities on the Balance Sheet Current Long-term Debts payable in the next year or within the business’s operating cycle Include ▫Accounts payable ▫Income taxes payable ▫Accrued expenses Debts payable more than one year from balance sheet date Include ▫Long-term notes payable ▫Bonds payable 41 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

42. Stockholders’ Equity on the Balance Sheet Represents stockholders’ ownership of the business assets Consists of: ▫Common stock ▫Additional paid-in capital ▫Retained earnings 42 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

43. 43 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

44. The Statement of Cash Flows Measures cash receipts and cash payments Fourth required financial statement Categorizes into three types of activities: ▫Operating ▫Investing ▫Financing 44 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

45. Cash Flow Categories OperatingInvestingFinancing 45 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

46. Exercise 1-20A (a)Common stock (b)Income tax payable (c)Dividends (d)Income tax expense (e)Ending balance of retained earnings (f)Total assets (g)Long-term debt (h)Revenue 46 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

47. Exercise 1-20A (i) Cash spent to acquire a building (j) Selling, general & administrative expenses (k) Adjustments to reconcile net income to net cash from operations (l) Ending cash balance (m) Current liabilities (n) Net income 47 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

48. Construct financial statements and analyze the relationships among them 48 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

49. Income Statement Reports revenue and expenses ▫These accounts are only reported on the Income Statement Shows net income or net loss ▫If revenues exceed expenses, company has net income ▫If expenses exceed revenues, company has net loss 49 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

50. Statement of Retained Earnings Opens with beginning retained earnings balance Adds net income (or net loss) ▫Flows from the Income Statement Subtracts dividends Reports ending retained earnings balance 50 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

51. Balance Sheet Reports assets, liabilities, and stockholders’ equity ▫These accounts only on the balance sheet Shows that assets equal sum of liabilities plus stockholders’ equity Reports retained earnings which comes from the statement of retained earnings 51 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

52. Statement of Cash Flows Reports cash flows from operating, investing, and financing activities ▫Results in an increase or decrease Shows whether cash increased or decreased during the year Reports ending cash as shown on the balance sheet 52 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

53. Relationships between Financial Statements Income Statement For the year ended December 31, 2012 Revenues $$$,$$$ Expenses ($$,$$$) Net income $$,$$$ Statement of Retained Earnings For the year ended December 31, 2012 Beginning retained earnings $$$,$$$ Net income $$,$$$ Cash dividends ($$,$$$) Ending retained earnings $$,$$$ 53 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

54. Statement of Retained Earnings For the year ended December 31, 2012 Beginning retained earnings $$$,$$$ Net income $$,$$$ Cash dividends ($$,$$$) Ending retained earnings $$,$$$ Balance Sheet December 31, 2012 Assets $$$,$$$ Liabilities $$$,$$$ Stockholders’ equity: Common stock $$$,$$$ Retained earnings $$$,$$$ Total liabilities and equity $$$,$$$ 54 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

55. Statement of Cash Flows For the year ended December 31, 2012 Cash flows from operating activities $$$,$$$ Cash flows from investing activities $$,$$$ Cash flows from financing activities $$,$$$ Net cash flows $$,$$$ Cash balance, December 31, 2011 $$,$$$ Cash balance, December 31, 2012 $$,$$$ Balance Sheet December 31, 2012 Assets $$$,$$$ Liabilities $$$,$$$ Stockholders’ equity: Common stock $$$,$$$ Retained earnings $$$,$$$ Total liabilities and equity $$$,$$$ Cash from the Asset section of the Balance Sheet equals ending Cash on the Statement of Cash Flows 55 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

56. Evaluating a Company Question/DecisionWhat to look for Can the company sell its products or services? Sales revenue Increasing or Decreasing? What are the main income measures to watch for trends? Gross profit Operating income and Net income What percentage of sales revenue ends up as profit? Divide net income by sales revenue Can the company collect its receivables? Compare change in receivables to change in sales Can the company pay its liabilities?Compare assets to liabilities Where is the company’s cash coming from? Observe the line items on the cash flow statement 56 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

57. Evaluate business decisions ethically 57 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

58. Influences on Business Decisions EconomicLegal Ethical 58 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

59. Decision Framework for Making Ethical Judgments What is the issue? Who are the stakeholders and what are the consequences of the decisions to each? Weigh the alternatives. Make the decision and be prepared to deal with the consequences. 59 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

60. 60 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

61. 61 Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.