1. Financial Accounting: Tools for Business Decision Making Prepared by: Dr. Jessica J. Frazier and Philip Li Eastern Kentucky University Kimmel, Weygandt, Kieso

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

3. CHAPTER 1 Introduction to Financial Statements After reading 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.

4. FORMS OF BUSINESS ORGANIZATION zSole proprietorship zPartnership zCorporation

5. Sole Proprietorship zA business owned by one person zAdvantages ySimple to establish yOwner Controlled yTax advantages

6. Partnership zA business owned by more than one person zAdvantages of a partnership - ySimple to establish yShared control yTax advantages yBroader skills and resources

7. Corporation zA business organized as a separate legal entity owned by stockholders zAdvantages - yEasy to transfer ownership yGreater capital raising potential yLower legal liability

8. USERS AND USES OF ACCOUNTING zInternal users zExternal users

9. Internal Users zManagement uses financial information to answer the following questions: yIs cash sufficient to pay our debts? yAre customers paying their bills promptly? yWhat is the cost of each unit of product? yWhat costs exceed budget? yCan we afford to give employees pay raises this year? yWhich product line is the most profitable? yHow much money must be borrowed to expand?

10. External Users zInvestors, creditors, and other external users use financial information to answer the following questions: yIs the company earning satisfactory income? yHow does the company compare in size and profitability with competitors? yWill the company be able to pay its debt as they come due? yAre interest payments and dividends protected by an adequate inflow of cash from operations?

11. BUSINESS ACTIVITIES zFinancing activities zInvesting activities zOperating activities

12. Financing Activities zBorrowingzSelling ownership interests in business

13. Investing Activities zA business must acquire the resources it needs to operate--equipment, office supplies, etc.

14. Operating Activities zRevenues - the assets a business receives from the sale of merchandise or the performance of services. zExpenses - the cost of assets consumed or services used in the process of generating revenue.

15. CONTENT AND PURPOSE OF FINANCIAL STATEMENTS zIncome Statement zStatement of Retained Earnings zBalance Sheet zStatement of Cash Flows

16. Income Statement zReports success or failure of the company's operations during the period. zSummarizes all revenue and expenses for period--month, quarter, or year. If revenues exceed expenses, the result is a net income. If expenses exceed revenue, the result is a (net loss).

17. COPYRIGHT zCopyright © 1998 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

18. Statement of Retained Earnings zIndicates amount invested by owners, amount paid out in dividends, and amount of net income or net loss for period. zShows changes in retained earnings balance during period covered by statement.

19. Balance Sheet zShows relationship between assets and equities--assets=equities--on a particular date. zAssets and equities (liabilities and stockholders' equity) must balance.

20. Statement of Cash Flows zReports the cash effects of a company's operations for a period of time. zShows cash increases and decreases from investing and financing activities. zIndicates increase or decrease in cash balance as well as ending cash balance.

21. ASSETS, LIABILITIES, STOCKHOLDERS’ EQUITY, AND THE ACCOUNTING EQUATION zAssets - resources owned by the business. zLiabilities - creditors claims on total assets (obligations or debts of the business). zStockholders' Equity - ownership claim on total assets. zAccounting equation: Assets = Liabilities + Stockholders' Equity

22. ELEMENTS OF AN ANNUAL REPORT zFinancial Statements zManagement Discussion and Analysis zNotes to Financial Statements zAuditor's Report

23. Financial Statements zIncome Statement zStatement of Retained Earnings zBalance Sheet zStatement of Cash Flows

24. Management Discussion and Analysis zCovers three aspects of a company: yliquidity, ycapital resources, and yresults of operation.

25. Notes to Financial Statements zProvide additional information not included in body of statements. zDescribe accounting policies or explain uncertainties and contingencies.

26. 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 accepted accounting standards.

27. BASIC ASSUMPTIONS AND PRINCIPLES UNDERLYING FINANCIAL STATEMENTS zMonetary unit assumption zEconomic entity assumption zCost principle zTime period assumption zGoing concern assumption

28. Monetary Unit Assumption zStates that only transactions expressed in terms of money be included in accounting records. zAssumes that unit of measure remains constant over time.

29. Economic Entity Assumption zAssumes economic events can be identified with a particular unit of accountability. zRequires economic activities of an entity be kept separate from those of owner and separate from all other economic entities.

30. Cost Principle zRequires assets to be recorded at original cost as it is verifiable.

31. Time Period Assumption zAllows the business to be divided into artificial time periods.

32. Going Concern Assumption zAssumes business will be in existence long enough to carry out goals. zAssumption allows use of cost when recording assets.

33. Chapter 1 Review zName the three primary forms of business organization. zIdentify the users of accounting. How do they use this information? zExplain the three principal types of business activity. zDescribe the content and purpose of each of the financial statements.

34. Chapter 1 Review 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. zState the basic assumptions and principles underlying financial statements.

35. COPYRIGHT zCopyright © 1998 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.