Chapter 1. accounting overview2

transcript

Chapter 1-1

Introduction to

Financial Statements

Financial Accounting, Fifth Edition

Chapter 1-2

Internal users

External users

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

Financing

Investing

Operating

Income statement

Retained earnings statement

Balance sheet

Statement of cash flows

Interrelation-ships of statements

Introduction to Financial StatementsIntroduction to Financial StatementsIntroduction to Financial StatementsIntroduction to Financial Statements

Chapter 1-3

External Users

•Lenders

•Shareholders

•Governments

•External Auditors

•Customers

Internal Users

•Managers

•Officers

•Internal Auditors

•Sales Staff

•Budget Officers

•Controllers

Chapter 1-4

Common Questions Asked? User

1. Can we afford to give our employees a pay raise?

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?

Users and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial InformationUsers and Uses of Financial Information

Chapter 1-5

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 1-6

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.

2. Issuing shares of stock for cash.

Payments to stockholders are called dividends.

Chapter 1-7

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.

Chapter 1-8

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.

Chapter 1-9

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.

Operating Activities

Chapter 1-10

Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:

Balance Sheet

Income Statemen

Statement of Cash

Retained Earnings Statemen

Communicating with UsersCommunicating with UsersCommunicating with UsersCommunicating with Users

Chapter 1-11

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

Chapter 1-12

Reports revenues and expenses for a specific period of time.

Net income – revenues exceed expenses.

Net loss – expenses exceed revenues.

Income Statement Illustration 1-5

Chapter 1-13

Income Statement

Retained Earnings

Statement

Net income is needed to determine the ending balance

in stockholder’s equity.

Illustration 1-6Illustration 1-5

Chapter 1-14

Retained Earnings

StatementStatement indicates the reasons why retained earnings has increased or decreased during the period.

Illustration 1-6

Chapter 1-15

Retained Earnings

Statement

The ending balance in retained earnings is needed

in preparing the balance sheet

Balance SheetIllustration 1-8

Illustration 1-6

Chapter 1-16

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.

Balance SheetIllustration 1-8

Chapter 1-17

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?

Statement of Cash Flows Illustration 1-9

Chapter 1-18

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