ACCT2020 Introduction to Accounting for Non-Business Majors Chapter 1

7/23/2019 ACCT2020 Introduction to Accounting for Non-Business Majors Chapter 1

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Financial StatementsFinancial Statements

and Business Decisionsand Business DecisionsChapter 1

McGraw-Hill/Irwin © 2! "he McGraw-Hill Companies# Inc$



McGraw-Hill/Irwin Slide 3McGraw-Hill/Irwin Slide 3

%nderstandin& the Business

The PlayersThe Players

In'estors Creditors

Mana&ersMana&ers

"he "he

BusinessBusiness

(peratio(perationsns

1. Purchase parts

and labor

2. Manufacture

product

3. Sell products

to customers

4. Collect cash from

customers and pay

creditors




"he )ccountin& S*stem

Accounting System

Financial Accounting SystemPeriodic financial statements and

related disclosures

Managerial Accounting SystemDetailed plans and continuous

performance reports

External Decision MakersInvestors, creditors,

suppliers, customers, etc.

Internal Decision MakersManagers throughout the

organization




"he Four Basic Financial Statements

1.1. On a companysOn a companys !"#"$C% S&%%T!"#"$C% S&%%T' all resources o(ned and' all resources o(ned andamounts o(ed are listed in order of li)uidity. The difference bet(eenamounts o(ed are listed in order of li)uidity. The difference bet(een

the resources o(ned and the amounts o(ed' represents thethe resources o(ned and the amounts o(ed' represents the

stoc*holders e)uity in the business.stoc*holders e)uity in the business.

2.2. On a companysOn a companys +$COM% ST"T%M%$T+$COM% ST"T%M%$T' all the re,enues earned' all the re,enues earned

from sales to customers are listed alon- (ith the epenses incurredfrom sales to customers are listed alon- (ith the epenses incurredto produce those re,enues.to produce those re,enues.

3.3. On a companysOn a companys ST"T%M%$T O/ 0%T"+$% %"0$+$SST"T%M%$T O/ 0%T"+$% %"0$+$S

accumulated net earnin-s less the di,idends paid to o(nersaccumulated net earnin-s less the di,idends paid to o(ners

represent rein,estments in the core business.represent rein,estments in the core business.

4.4. On a companysOn a companys ST"T%M%$T O/ C"S& /#OS'ST"T%M%$T O/ C"S& /#OS' all sources andall sources and

uses of cash are listed. Cash is -enerated by the companysuses of cash are listed. Cash is -enerated by the companys

operations. Cash is spent on in,estments in buildin-s' manufacturin-operations. Cash is spent on in,estments in buildin-s' manufacturin-

e)uipment' and other assets. /inancin- acti,ities in,ol,e amountse)uipment' and other assets. /inancin- acti,ities in,ol,e amounts

borro(ed from lon-term creditors and sale of stoc* to o(ners.borro(ed from lon-term creditors and sale of stoc* to o(ners.



McGraw-Hill/Irwin Slide McGraw-Hill/Irwin Slide

"he )ccountin& +,uation

AA == LL ++ SESE6"ssets7 6#iabilities7 6Stoc*holders

%)uity7

%conomic%conomic

0esources0esources

Sources of /inancin- for %conomicSources of /inancin- for %conomic

0esources0esources#iabilities8 /rom Creditors#iabilities8 /rom Creditors

Stoc*holders %)uity8 /rom Stoc*holdersStoc*holders %)uity8 /rom Stoc*holders


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elationships )mon& the Statements

1$ .et income rom the income statement resultsin an increase in endin& retained earnin&s onthe statement o retained earnin&s$

Income Statement

e'enues1# Statement o etained +arnin&s

+3penses

45#6

Be&innin& retainedearnin&s

!#

.etincome

7# .et income 7#

Di'idends 42#6

+ndin& retainedearnin&s

89#


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2$ +ndin& retained earnin&s rom the statement oretained earnin&s is one o the two components

o stoc:holders; e,uit* on the <alance sheet$

Statement o etained+arnin&s Balance Sheet

Be&innin& retainedearnin&s

!# Cash

1=#

.et income 7# (ther assets 171#

Di'idends

42#6 "otal assets

15#+ndin& retainedearnin&s

89# >ia<ilities

=2#

Stoc:holders? +,uit*

Common stoc: 5#

etained earnin&s

89# "otal lia<ilities ande uit

15


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9$ "he chan&e in cash on the statement ocash @ows is added to the <e&innin&-o-*ear <alance in cash to arri'e at end-o-

*ear cash on the <alance sheet$Statement o Cash Flows Balance Sheet

Cash @ows rom operatin&acti'ities

21# Cash

1=#

Cash @ows rom in'estin&acti'ities

418#6 (ther assets

171#

Cash @ows rom Anancin&acti'ities

9# "otal assets

15#

Increase in cash 5# >ia<ilities

=2#

Be&innin& cash <alance # Stoc:holders? +,uit*

+ndin& cash <alance 1=# Common stoc:

5#

etained earnin&s 89#

"otal lia<ilities ande,uit*

15#


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Mana&ement %ses o FinancialStatements

Marketing managers and credit managers use

customers’ financial statements to decide

weter to extend credit!

"urcasing managers use su##liers’ financial

statements to decide weter su##liers a$e te

resources to meet te demand for #roducts!

Em#loyees’ union and uman resource

managers use te com#any’s financial

statements as a %asis for contract negotiations

regarding #ay rates!



TheThe Securities and %chan-e CommissionSecurities and %chan-e Commission 6S%C76S%C7

has been -i,en broad po(ers to determinehas been -i,en broad po(ers to determine

measurement rules formeasurement rules for

financial statements.financial statements.

TheThe Securities and %chan-e CommissionSecurities and %chan-e Commission 6S%C76S%C7

has been -i,en broad po(ers to determinehas been -i,en broad po(ers to determine

measurement rules formeasurement rules for

financial statements.financial statements.

Securities "ct of 1;33Securities "ct of 1;33

Securities and %chan-e "ct of 1;34Securities and %chan-e "ct of 1;34

Securities "ct of 1;33Securities "ct of 1;33

Securities and %chan-e "ct of 1;34Securities and %chan-e "ct of 1;34

Generall* )ccepted )ccountin&rinciples




Currently' theCurrently' the /inancial "ccountin-/inancial "ccountin-

Standards !oard 6/"S!7Standards !oard 6/"S!7 is reco-ni=edis reco-ni=edas the body to formulate ""P.as the body to formulate ""P.

Currently' theCurrently' the /inancial "ccountin-/inancial "ccountin-

Standards !oard 6/"S!7Standards !oard 6/"S!7 is reco-ni=edis reco-ni=edas the body to formulate ""P.as the body to formulate ""P.

The S%C has (or*ed closely (ith theThe S%C has (or*ed closely (ith the

accountin- profession toaccountin- profession to

(or* out the detailed rules that ha,e(or* out the detailed rules that ha,e

become *no(n as ""P.become *no(n as ""P.

The S%C has (or*ed closely (ith theThe S%C has (or*ed closely (ith the

accountin- profession toaccountin- profession to

(or* out the detailed rules that ha,e(or* out the detailed rules that ha,e

become *no(n as ""P.become *no(n as ""P.




&om#anies incur te cost of #re#aring

te financial statements and %ear te

following economic conse'uences ! ! !

Effects on te selling #rice of stock! Effects on te amount of %onuses

recei$ed %y managers and oter em#loyees! Loss of com#etiti$e information to oter

com#anies!



)uditors e3press an)uditors e3press an

opinion as to theopinion as to the

airnessairness o the Anancialo the Anancial

statementstatementpresentation$presentation$

Independent auditorsIndependent auditors

ha'e responsi<ilitiesha'e responsi<ilitiesthat e3tend to thethat e3tend to the

&eneral pu<lic$&eneral pu<lic$

Independent )uditors

($erall) I %elie$e

tese financial

statements are

fair!


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ACCT2020 Introduction to Accounting for Non-Business Majors Chapter 1