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Describe various organizational forms and business decision
makers.
1-1
Sole Proprietorship
Business organization owned by one person. The owner is
personally liable for all debts of the business.
1-2
72%
20%
5% 3%
Percentage of Organizational Forms in the U.S.
Sole Proprietorships
Corporations
Partnerships
Limited Liability Companies
Source: BizStats.com1-3
Business and Financing Activities
AccountingSystem
Accounting ReportsFinancial ManagerialExternal users
(creditors, investors, etc.)
Internal users(managers, etc.)
Accounting is a system of analyzing, recording, summarizing and reporting the results of a
business’s activities.1-4
Describe the purpose, structure, and content of the four basic
financial statements.
1-5
Resources Owned . . .by the company
Resources Owed . . . to creditors to stockholders
Separate Entity Assumption
Requires that a business’s financial reports include only the activities of the
business and not those of its stockholders.
Assets = Liabilities + Stockholders’ Equity
1-6
Resources controlled by the company that have measurable
value and are expected to provide future benefits to the
company.
Cash
Supplies Furniture
Equipment
1-7
Amounts owed by the business to creditors.
Notes Payable
Accounts Payable
1-8
Owners’ claim to the business resources.
Stock Certificate
Contributed Capital
Retained Earnings
1-9
Revenues – Expenses = Net Income
1-10
Distributions of a company’s earnings to its stockholders as a return
on their investment.
Dividends are not an expense. 1-11
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Financial statements are typically
prepared in this order.
1-12
RevenuesPizza Revenue 11,000$ Total Revenue 11,000
ExpensesSupplies Expense 4,000 Wages Expense 2,000 Rent Expense 1,500 Utilities Expense 600 Insurance Expense 300 Advertising Expense 100 Income Tax Expense 500 Total Expenses 9,000 Net Income 2,000$
For the Month Ended September 30, 2010Income StatementPIZZA AROMA, INC.
Reports the amount of revenues
less expenses
for a period of time.
The unit of measure
assumption states that results of business activities should be
reported in an appropriate
monetary unit.
1-13
Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
Reports the way that net income and the distribution of dividends affected the financial
position of the company during the period.
1-14
Reports at a point in time:
1. What a business owns .
2. What it owes to creditors.
3. What is left over for the owners of the company’s stock.
AssetsCash 14,000$ Accounts Receivable 1,000 Supplies 3,000 Equipment 40,000 Total Assets 58,000$
LiabilitiesAccounts Payable 7,000$ Notes Payable 20,000 Total Liabilities 27,000
Stockholders' EquityContributed Capital 30,000 Retained Earnings 1,000 Total Stockholders' Equity 31,000 Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.Balance Sheet
At September 30, 2010
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity1-15
Cash Flows from Operating ActivitiesCash collected from customers 10,000$ Cash paid to suppliers and employees (5,000)
Cash Provided by Operating Activities 5,000 Cash Flows from Investing ActivitiesCash paid to buy equipment (40,000) Cash Used in Investing Activities (40,000) Cash Flows from Financing ActivitiesCapital contributed by stockholders 30,000 Cash dividends paid to stockholders (1,000) Cash borrowed from the bank 20,000 Cash Provided by Financing Activities 49,000 Change in Cash 14,000 Beginning Cash Balance, Sept. 1, 2010 - Ending Cash Balance, Sept. 30, 2010 14,000$
PIZZA AROMA, INC.Statement of Cash Flows
For the Month Ended September 30, 2010
Summarizes how a
business’s operating,
investing, and financing activities
caused its cash balance to
change over a particular
period of time.1-16
Notes help financial statement users understand how the amounts were derived and what other information
may affect their decisions.
1-17
Net income flows from the
Income Statement to
the Statement of Retained
Earnings.Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
1
RevenuesPizza Revenue 11,000$ Total Revenue 11,000
ExpensesSupplies Expense 4,000 Wages Expense 2,000 Rent Expense 1,500 Utilities Expense 600 Insurance Expense 300 Advertising Expense 100 Income Tax Expense 500 Total Expenses 9,000 Net Income 2,000$
For the Month Ended September 30, 2010Income StatementPIZZA AROMA, INC.
1-18
Retained Earnings, Sept. 1, 2010 -$ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 1,000$
For the Month Ended September 30, 2010
PIZZA AROMA, INC.Statement of Retained Earnings
Ending Retained Earnings flows from
the Statement of Retained Earnings to
the Balance Sheet.
AssetsCash 14,000$ Accounts Receivable 1,000 Supplies 3,000 Equipment 40,000 Total Assets 58,000$
LiabilitiesAccounts Payable 7,000$ Notes Payable 20,000 Total Liabilities 27,000
Stockholders' EquityContributed Capital 30,000 Retained Earnings 1,000 Total Stockholders' Equity 31,000 Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.Balance Sheet
At September 30, 2010
2
1-19
Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree.
AssetsCash 14,000$ Accounts Receivable 1,000 Supplies 3,000 Equipment 40,000 Total Assets 58,000$
LiabilitiesAccounts Payable 7,000$ Notes Payable 20,000 Total Liabilities 27,000
Stockholders' EquityContributed Capital 30,000 Retained Earnings 1,000 Total Stockholders' Equity 31,000 Total Liabilities and Stockholders' Equity 58,000$
PIZZA AROMA, INC.Balance Sheet
At September 30, 2010
Cash Flows from Operating ActivitiesCash collected from customers 10,000$ Cash paid to suppliers and employees (5,000)
Cash Provided by Operating Activities 5,000 Cash Flows from Investing ActivitiesCash paid to buy equipment (40,000) Cash Used in Investing Activities (40,000) Cash Flows from Financing ActivitiesCapital contributed by stockholders 30,000 Cash dividends paid to stockholders (1,000) Cash borrowed from the bank 20,000 Cash Provided by Financing Activities 49,000 Change in Cash 14,000 Beginning Cash Balance, Sept. 1, 2010 - Ending Cash Balance, Sept. 30, 2010 14,000$
PIZZA AROMA, INC.Statement of Cash Flows
For the Month Ended September 30, 2010
3
1-20
• Explain how financial statements are used by decision makers.
• Describe factors that contribute to useful financial information.
1-21
Creditors(1)Is the company
generating enough cash to make payments on its loans?
(2)Does the company have enough assets to cover its liabilities?
Investors(1)What immediate
return (through dividends) on my contributions?
(2)What is the long-term return (through stock price increases resulting from the company’s profits)?
… SCF
… B/S
… SRE
.. I/S
1-22
Main Goal: Provide useful financial information to external users for decision making.
RelevantRelevant
UsefulUseful
Faithful Representation
Faithful Representation
Faithful Representation
Relevant
1-23
WorldWorld
Where?Where?
Who?Who?
What?What?
IASBIASB
IFRSIFRS
FASBFASB
United States
United States
GAAPGAAP
1-24