Chapter 1-1
Chapter 1-2
Introduction to
Financial Statements
Accounting, Third Edition
Chapter 1-3
1. Describe the primary forms of business organization.
2. Identify the users and uses of accounting information.
3. Explain the three principal types of business activity.
4. Describe the content and purpose of each of the financial statements.
5. Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.
6. Describe the components that supplement the financial statements in an annual report.
Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives
Chapter 1-4
Internal users
External users
Ethics in financial reporting
Forms of Forms of Business Business
OrganizationOrganization
Forms of Forms of Business Business
OrganizationOrganization
Users and Users and Uses of Uses of
Financial Financial InformationInformation
Users and Users and Uses of Uses of
Financial Financial InformationInformation
Business Business ActivitiesActivitiesBusiness Business ActivitiesActivities
Communicating Communicating with Userswith Users
Communicating Communicating with Userswith Users
A Quick Look A Quick Look at Tootsie at Tootsie
Roll’s Financial Roll’s Financial StatementsStatements
A Quick Look A Quick Look at Tootsie at Tootsie
Roll’s Financial Roll’s Financial StatementsStatements
Sole proprietorship
Partnership
Corporation
Financing
Investing
Operating
Income statement
Retained earnings statement
Balance sheet
Statement of cash flows
Interrelation-ships of statements
Income statement
Retained earnings statement
Balance sheet
Statement of cash flows
Other elements of an annual report
Introduction to Financial StatementsIntroduction to Financial StatementsIntroduction to Financial StatementsIntroduction to Financial Statements
Chapter 1-5
Proprietorship
Partnership Corporation
Owned by two or more persons.
Often retail and service-type businesses
Personally liable for debts of the business
Tax advantages
Ownership in shares of stock
Separate legal entity organized under state corporation law
No personal liability
Easier to raise funds
Forms of Business OrganizationForms of Business OrganizationForms of Business OrganizationForms of Business Organization
Generally owned by one person.
Often small service-type businesses
Personally liable for debts of the business
Tax advantages
SO 1 Describe the primary forms of business organization. SO 1 Describe the primary forms of business organization.
Chapter 1-6
Management
Common Questions
Human Resources
IRS
Labor Unions
SEC
Marketing
Finance
Investors
Creditors
Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information
SO 2 Identify the users and uses of accounting information. SO 2 Identify the users and uses of accounting information.
Customers
Internal Users
External Users
Chapter 1-7
Common Questions Asked? User
1. Can we afford to give our employees a pay raise?
Human Resources
2. Did the company earn a satisfactory income?
3. Which product line is most profitable?
4. Is cash sufficient to pay dividends to the stockholders?
5. What price for our product will maximize net income?
6. Will the company be able to pay its short-term debts?
Investors
Management
Finance
Marketing
Creditors
Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information
SO 2 Identify the users and uses of accounting information. SO 2 Identify the users and uses of accounting information.
Chapter 1-8
Chapter 1-9
Chapter 1-10
Ethics In Financial Reporting
Standards of conduct by which one’s actions are judged as right or wrong, honest or dishonest, fair or not fair, are Ethics.
Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.
Congress passed Sarbanes-Oxley Act of 2002.
Effective financial reporting depends on sound ethical behavior.
Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information
SO 2 Identify the users and uses of accounting information. SO 2 Identify the users and uses of accounting information.
Chapter 1-11
Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information
SO 2 Identify the users and uses of accounting information. SO 2 Identify the users and uses of accounting information.
Illustration 1-4 Steps in analyzing ethics cases
Chapter 1-12
Chapter 1-13
Ethics are the standards of conduct by which one's actions are judged as:
a. right or wrong.
b. honest or dishonest.
c. fair or not fair.
d. all of these options.
Review Question
Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information
SO 2 Identify the users and uses of accounting information. SO 2 Identify the users and uses of accounting information.
Chapter 1-14
All businesses are involved in three types of activity —
financing,
investing,
and operating.
Business ActivitiesBusiness ActivitiesBusiness ActivitiesBusiness Activities
SO 3 Explain the three principal types of business activity. SO 3 Explain the three principal types of business activity.
The accounting information system keeps track of the results of each of these business activities.
Chapter 1-15
Financing Activities
Two primary sources of outside funds are:
1. Borrowing money
Amounts owed are called liabilities.
Party to whom amount is owed are creditors.
Notes payable and bonds payable are different type of liabilities.
2. Issuing shares of stock for cash.
Payments to stockholders are called dividends.
Business ActivitiesBusiness ActivitiesBusiness ActivitiesBusiness Activities
SO 3 Explain the three principal types of business activity. SO 3 Explain the three principal types of business activity.
Chapter 1-16
Investing Activities
Purchase of resources a company needs to operate.
1. Computers, delivery trucks, furniture, buildings, etc.
2. Resources owned by a business are called assets.
Business ActivitiesBusiness ActivitiesBusiness ActivitiesBusiness Activities
SO 3 Explain the three principal types of business activity. SO 3 Explain the three principal types of business activity.
Chapter 1-17
Operating Activities
Once a business has the assets it needs, it can begin its operations.
Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue).
Inventory - Goods available for sale to customers.
Accounts receivable - Right to receive money from a customer,in the future, as the result of a sale.
Business ActivitiesBusiness ActivitiesBusiness ActivitiesBusiness Activities
SO 3 Explain the three principal types of business activity. SO 3 Explain the three principal types of business activity.
Chapter 1-18
Once a business has the assets it needs, it can begin its operations.
Expenses - cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).
Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Business ActivitiesBusiness ActivitiesBusiness ActivitiesBusiness Activities
SO 3 Explain the three principal types of business activity. SO 3 Explain the three principal types of business activity.
Operating Activities
Chapter 1-19
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Retained Earnings Statemen
t
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Chapter 1-20
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.
Review Question
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Chapter 1-21
Reports revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Income Statement Illustration 1-5
Chapter 1-22
Income Statement
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Retained Earnings
Statement
Net income is needed to determine the ending balance
in stockholder’s equity.
Illustration 1-6Illustration 1-5
Chapter 1-23
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Retained Earnings
StatementStatement indicates the reasons why retained earnings has increased or decreased during the period.
Illustration 1-6
Chapter 1-24
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 4 Describe the content and purpose of each of the financial statements.SO 4 Describe the content and purpose of each of the financial statements.
Retained Earnings
Statement
The ending balance in retained earnings is needed
in preparing the balance sheet
Balance SheetIllustration 1-8
Illustration 1-6
Chapter 1-25
Reports the assets, liabilities, and stockholder’s equity at a specific date.
Assets listed at the top, followed by liabilities and stockholder’s equity.
Total assets must equal total liabilities and stockholder’s equity.
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 5 Explain the meaning of assets, SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic liabilities, and stockholders’ equity, and state the basic accounting equation.accounting equation.
Balance SheetIllustration 1-8
Chapter 1-26
Chapter 1-27
Answers:
1. Where did cash come from during the period?
2. How was cash used during the period?
3. What was the change in the cash balance during the period?
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
Statement of Cash Flows Illustration 1-9
SO 5 Explain the meaning of assets, liabilities, and SO 5 Explain the meaning of assets, liabilities, and stockholders’ stockholders’ equity, and state the basic accounting equity, and state the basic accounting equation.equation.
Chapter 1-28
Which of the following financial statements is prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.
Review Question
Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users
SO 5 Explain the meaning of assets, liabilities, and SO 5 Explain the meaning of assets, liabilities, and stockholders’ stockholders’ equity, and state the basic accounting equity, and state the basic accounting equation.equation.
Chapter 1-29
U.S. companies that are publicly traded must provide shareholders with an annual report.
The annual report always includes:
Financial statements.
Management discussion and analysis.
Notes to the financial statements.
Independent auditor's report.
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Chapter 1-30
Management’s Report
The SEC mandates inclusion of Management’s Discussion and Analysis (MD&A).
Management highlights favorable or unfavorable trends related to liquidity, capital resources, and results of operations.
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Chapter 1-31
Management’s Report
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Illustration 1-15
Chapter 1-32
Notes are the means of amplifying or explaining the items presented in the main body of the statements.
Accounting Policies
Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies).
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
Chapter 1-33
Notes are the means of amplifying or explaining the items presented in the main body of the statements.
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Illustration 1-16
Chapter 1-34
Auditor’s Report
Standard unqualified opinion – auditor expresses the opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP.
Other Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual ReportOther Elements of an Annual Report
SO 6 SO 6 Describe the components that Describe the components that supplement the supplement the financial statements in an financial statements in an annual report.annual report.
Illustration 1-17
Chapter 1-35
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission 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.”
CopyrightCopyrightCopyrightCopyright
Recommended