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Chapter 1-1 Introduction to Financial Statements Financial Accounting, Fifth Edition
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
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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.
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 1-7
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.
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 1-8
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.
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 1-9
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.
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 1-10
Companies prepare four financial statements from the summarized accounting data:Companies prepare four financial statements from the summarized accounting data:
Balance Sheet
Income Statemen
t
Statement of Cash
Flows
Retained Earnings Statemen
t
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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
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Chapter 1-12
Reports revenues and expenses for a specific period of time.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
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Income Statement Illustration 1-5
Chapter 1-13
Income Statement
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Retained Earnings
Statement
Net income is needed to determine the ending balance
in stockholder’s equity.
Illustration 1-6Illustration 1-5
Chapter 1-14
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Retained Earnings
StatementStatement indicates the reasons why retained earnings has increased or decreased during the period.
Illustration 1-6
Chapter 1-15
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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.
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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?
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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
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