The Financial Statements Chapter 1 1 1 Copyright

  • Slides: 49
Download presentation
The Financial Statements Chapter 1 1 -1 Copyright © 2008 Pearson Prentice Hall. All

The Financial Statements Chapter 1 1 -1 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Learning Objective 1 Use accounting vocabulary 1 -2 Copyright © 2008 Pearson Prentice Hall.

Learning Objective 1 Use accounting vocabulary 1 -2 Copyright © 2008 Pearson Prentice Hall. All rights reserved

The Language of Business • Accounting is an information system § Measures business activities

The Language of Business • Accounting is an information system § Measures business activities § Processes data into reports § Communicates results to people and organizations • Accounting is used to make decisions 1 -3 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Users of Accounting Individuals Taxing Authorities Investors & Creditors Nonprofit Organizations 1 -4 Copyright

Users of Accounting Individuals Taxing Authorities Investors & Creditors Nonprofit Organizations 1 -4 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Financial and Management Accounting FINANCIAL • Provides information for external users: § Investors §

Financial and Management Accounting FINANCIAL • Provides information for external users: § Investors § Bankers § Government agencies MANAGEMENT • Provides information for internal users: § Managers of the company 1 -5 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Ethics in Accounting • U. S. companies are required to report relevant and reliable

Ethics in Accounting • U. S. companies are required to report relevant and reliable information • Recent corporate scandals have emphasized the need for ethical reporting in accounting • Companies that sell stock to the public must have an audit by independent accountants § Examination of financial records to ensure reliability 1 -6 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Forms of Business Organization Proprietorship Partnership Corporation Limited. Liability Company 1 -7 Copyright ©

Forms of Business Organization Proprietorship Partnership Corporation Limited. Liability Company 1 -7 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Proprietorship • Business has a single owner • Legally, business is not separate from

Proprietorship • Business has a single owner • Legally, business is not separate from owner § Owner is personally liable for business debts • For accounting, business records are kept separate from personal records 1 -8 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Partnership • Two or more owners • Each partner is personally liable for business

Partnership • Two or more owners • Each partner is personally liable for business debts § Can be risky 1 -9 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Limited Liability Companies (LLCs) • Owners are called members • Members are not personally

Limited Liability Companies (LLCs) • Owners are called members • Members are not personally liable for business debts § Reduces owners’ risk • Today, many non-corporate businesses form as LLCs 1 -10 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Corporations • Owners are stockholders § Stockholders elect Board of Directors • Board sets

Corporations • Owners are stockholders § Stockholders elect Board of Directors • Board sets policy and appoint officers § Stockholders not personally liable for corporate debts • Formed under state law § Pay income taxes • Legally distinct from owners 1 -11 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -13 • a. What forms of organization will enable the owners of

E 1 -13 • a. What forms of organization will enable the owners of Quality Environmental to limit their risk of loss to the amount they have invested in the business? • Corporations and Limited Liability Companies (LLC) 1 -12 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -13 • b. What form of business organization will give Beard the

E 1 -13 • b. What form of business organization will give Beard the most freedom to manage the business as she wishes? The owner wouldn’t have to worry about other owners • ___________ 1 -13 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -13 • c. What form of organization will give creditors the maximum

E 1 -13 • c. What form of organization will give creditors the maximum protection in the event that Quality Environmental fails and cannot pay its debts? • Hint: Think about liability and number of owners • Answer: Partnership 1 -14 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Learning Objective 2 Learn accounting concepts and principles 1 -15 Copyright © 2008 Pearson

Learning Objective 2 Learn accounting concepts and principles 1 -15 Copyright © 2008 Pearson Prentice Hall. All rights reserved

GAAP • GAAP is an acronym for Generally Accepted Accounting Principles • U. S.

GAAP • GAAP is an acronym for Generally Accepted Accounting Principles • U. S. GAAP is formulated by the Financial Accounting Standards Board (FASB) • FASB’s Conceptual Framework states that accounting should be: § § Relevant Reliable Comparable Consistent 1 -16 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Accounting Concepts • Entity § A business is separate from its owners • Reliability

Accounting Concepts • Entity § A business is separate from its owners • Reliability § Accounting is based on objective evidence • Cost § Assets are recorded at cost (not fair value) • Going-Concern § Business will continue indefinitely • Monetary Unit § Transactions are recorded in a stable currency ($) 1 -17 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Concept Violated? • Kathy Jones owns a coffee shop. Her personal expenses are included

Concept Violated? • Kathy Jones owns a coffee shop. Her personal expenses are included in the accounting records. • Entity 1 -18 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Concept Violated? • ABC Company owns land. The purchase price is $50, 000. A

Concept Violated? • ABC Company owns land. The purchase price is $50, 000. A recent appraisal indicates the land is worth $200, 000. • ABC shows the land in its financial Which concept statements at $200, 000. deals with the how assets are valued? • ____________ 1 -19 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Learning Objective 3 Apply the accounting equation to organizations 1 -20 Copyright © 2008

Learning Objective 3 Apply the accounting equation to organizations 1 -20 Copyright © 2008 Pearson Prentice Hall. All rights reserved

The Accounting Equation Liabilities = + Owners’ Equity 1 -21 Copyright © 2008 Pearson

The Accounting Equation Liabilities = + Owners’ Equity 1 -21 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Assets • Economic resources that provide a future benefit • Examples: § § §

Assets • Economic resources that provide a future benefit • Examples: § § § Cash Inventory Equipment Land Buildings 1 -22 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Liabilities • Outsiders claims to assets § Include debts payable to creditors • Examples:

Liabilities • Outsiders claims to assets § Include debts payable to creditors • Examples: § Accounts payable – liability for goods or services purchased on credit § Notes payable – written promise to pay on a certain date (bank loan) 1 -23 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Owners’ Equity • Owners’ claim on a business • Assets minus liabilities § What’s

Owners’ Equity • Owners’ claim on a business • Assets minus liabilities § What’s left after debts are paid • A corporation’s equity is called stockholders’ equity 1 -24 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Accounting Equation Example • Compute the missing amount from each situation on the following

Accounting Equation Example • Compute the missing amount from each situation on the following slide • Remember: § Assets = Liabilities + Owners’ Equity 1 -25 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Accounting Equation Example Assets = Liabilities + Owners’ Equity (a) $70, 000 $50, 000

Accounting Equation Example Assets = Liabilities + Owners’ Equity (a) $70, 000 $50, 000 $20, 000 (b) $30, 000 $20, 000 $10, 000 (c) $40, 000 $15, 000 $25, 000 1 -26 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Shareholders’ Equity • Paid-in capital • Retained Earnings • Amounts invested by stockholders •

Shareholders’ Equity • Paid-in capital • Retained Earnings • Amounts invested by stockholders • Common stock • Amounts earned and kept for use in the company • Increased by Revenues • Decreased by Expenses 1 -27 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Net Income • Revenues § Earned by delivering goods or services • Expenses §

Net Income • Revenues § Earned by delivering goods or services • Expenses § Costs of doing business § Rent, utilities, insurance • Revenues minus expenses equal net income § If expense are greater then revenues, a net loss occurs 1 -28 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Dividends • Distributions of assets (usually cash) to shareholders • Decrease Retained Earnings •

Dividends • Distributions of assets (usually cash) to shareholders • Decrease Retained Earnings • Do NOT impact net income 1 -29 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Revenues minus Expenses Beginning Retained Earnings plus Net Income minus Equals Dividends Ending Retained

Revenues minus Expenses Beginning Retained Earnings plus Net Income minus Equals Dividends Ending Retained Earnings 1 -30 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Learning Objective 4 Evaluate business operations 1 -31 Copyright © 2008 Pearson Prentice Hall.

Learning Objective 4 Evaluate business operations 1 -31 Copyright © 2008 Pearson Prentice Hall. All rights reserved

The Financial Statements • Report company’s results to the public • Four Statements §

The Financial Statements • Report company’s results to the public • Four Statements § § Income Statement of Retained Earnings Balance Sheet Statement of Cash Flows 1 -32 Copyright © 2008 Pearson Prentice Hall. All rights reserved

The Income Statement • Measures operating performance for the period • Reports revenue and

The Income Statement • Measures operating performance for the period • Reports revenue and expenses and resulting net income (or loss) • Also includes gains and losses 1 -33 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Statement of Retained Earnings • Shows increases and decreases to retained earnings • Increase:

Statement of Retained Earnings • Shows increases and decreases to retained earnings • Increase: net income • Decrease: dividends 1 -34 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Balance Sheet • Measures financial position • Reports assets, liabilities and shareholders’ equity •

Balance Sheet • Measures financial position • Reports assets, liabilities and shareholders’ equity • Assets and liabilities are categorized § Current and Long-term 1 -35 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Balance Sheet Categories • Current assets § Converted to cash or used within one

Balance Sheet Categories • Current assets § Converted to cash or used within one year § Cash, Short-term Investments, Accounts Receivable, Inventory • Long-term § § Property, plant, and equipment Intangible assets Investments Other 1 -36 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Balance Sheet Categories • Current liabilities § Due within one year of balance sheet

Balance Sheet Categories • Current liabilities § Due within one year of balance sheet date § Accounts payable, salaries payable, taxes payable, short-term borrowings • Long-term liabilities § Long-term notes payable, mortgage payable 1 -37 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Balance Sheet Categories • Stockholders’ Equity § Paid-in capital • Common stock § Retained

Balance Sheet Categories • Stockholders’ Equity § Paid-in capital • Common stock § Retained Earnings 1 -38 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Statement of Cash Flows • Shows inflows and outflows of cash by category: §

Statement of Cash Flows • Shows inflows and outflows of cash by category: § Operating activities § Investing activities § Financing activities 1 -39 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Cash Flow Categories • Operating § Cash generated from day-to-day business activities § Related

Cash Flow Categories • Operating § Cash generated from day-to-day business activities § Related to selling goods and services to customers • Investing § Cash invested in long-term assets § Related to purchasing and selling plant assets and investments 1 -40 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Cash Flow Categories • Financing § How a company obtains resources to finance business

Cash Flow Categories • Financing § How a company obtains resources to finance business § Related to long-term debt and equity (issuing stock) 1 -41 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Learning Objective 5 Use financial statements 1 -42 Copyright © 2008 Pearson Prentice Hall.

Learning Objective 5 Use financial statements 1 -42 Copyright © 2008 Pearson Prentice Hall. All rights reserved

Relationships of Financial Statements • Net Income (bottom line of Income Statement) flows to

Relationships of Financial Statements • Net Income (bottom line of Income Statement) flows to Statement of Retained Earnings • Ending Retained Earnings flows to Balance Sheet • Cash balance from Balance Sheet flows Statement of Cash Flows Financial Statements should be prepared in order since the amount on one statement flows the next Copyright © 2008 Pearson Prentice Hall. All rights reserved 1 -43

INCOME STATEMENT NET INCOME RETAINED EARNINGS STATEMENT ENDING RETAINED EARNINGS BALANCE SHEET ENDING CASH

INCOME STATEMENT NET INCOME RETAINED EARNINGS STATEMENT ENDING RETAINED EARNINGS BALANCE SHEET ENDING CASH STATEMENT OF CASH FLOWS 1 -44 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -19 • a) Common stock § Balance Sheet • b) Income tax

E 1 -19 • a) Common stock § Balance Sheet • b) Income tax payable § Balance Sheet • c) Dividends § Statement of Retained Earnings • d) Income tax expense § Income Statement 1 -45 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -19 • e) Ending balance of Retained Earnings § Statement of Retained

E 1 -19 • e) Ending balance of Retained Earnings § Statement of Retained Earnings AND § Balance Sheet • f) Total assets § Balance Sheet • g) Long-term debt Which statement reports liabilities? § ___________ • h) Revenue § Income Statement Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -19 • i) Cash spent to acquire the building § Statement of

E 1 -19 • i) Cash spent to acquire the building § Statement of Cash Flows • j) Selling, general and administrative expenses § Income Statement • k) Adjustment to reconcile net income to cash provided by operating activities § Statement of Cash Flows 1 -47 Copyright © 2008 Pearson Prentice Hall. All rights reserved

E 1 -10 • l) Ending cash balance § Balance Sheet AND § Statement

E 1 -10 • l) Ending cash balance § Balance Sheet AND § Statement of Cash Flows • m) Current liabilities § Balance Sheet • n) Net Income This number is the bottom line on one statement and is an increase to another § _____________ AND § ______________ Copyright © 2008 Pearson Prentice Hall. All rights reserved

End of Chapter One 1 -49 Copyright © 2008 Pearson Prentice Hall. All rights

End of Chapter One 1 -49 Copyright © 2008 Pearson Prentice Hall. All rights reserved