Ch01

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



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.



Chapter 1-11



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



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.



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.



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.



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.



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



Chapter 1-21

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 1-22

Income Statement



Retained Earnings

Statement

Net income is needed to determine the ending balance

in stockholder’s equity.

Illustration 1-6Illustration 1-5

Chapter 1-23



Retained Earnings

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

Illustration 1-6

Chapter 1-24



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.


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?


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


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.



Chapter 1-31

Management’s 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).



Chapter 1-33

Notes are the means of amplifying or explaining the items presented in the main body of the statements.



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.



Illustration 1-17

Chapter 1-35

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