Chapter 1 `

Introduction to Financial Statements After studying Chapter 1, you should be able to:
Describe the primary forms of business organization. Identify the users and uses of accounting information. Explain the three principal types of business activity. Describe the content and purpose of each of the financial statements.
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Chapter 1

Introduction to Financial Statements After studying Chapter 1, you should be able to:
Explain the meaning of assets, liabilities, and stockholders equity and state the basic accounting equation. Describe the components that supplement the financial statements in an annual report. Explain the basic assumptions and principles underlying financial statements.

Chapter 1

A Few Financial Scandals in 2002...

Enron Xerox Qwest Global Crossing WorldCom.

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What You Will Learn This Term... Basics about financial reporting to make financial decisions as an investor or manager. Basic tools used to evaluate financial reports.

Forms of Business Organizations

Sole Proprietorship - owned by one person Partnership - owned by more than one person Corporation - organized as a separate legal entity and owned by stockholders

Forms of Business Organizations

Users of Financial Information

Internal Users - managers plan, organize and run a business. External Users Investors Creditors Others
Taxing authorities Regulatory agencies Customers Labor unions Economic planners

Questions Asked by Internal Users

Is cash sufficient to pay bills? What is the cost of manufacturing each unit of product? Can we afford to give employee pay raises this year? What product line is most profitable?
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Questions Asked by External Users

Is the company earning satisfactory income? How does the company compare in size and profitability with competitors? Will the company be able to pay its debts when they become due?
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Ethics in Financial Reporting

Recognize an ethical situation and the ethical issues involved. Identify and analyze the principal elements of the situation. Identify the alternatives and weight the impact of each alternative on various stakeholders.
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3 Types of Business Activity

Financing Investing Operating

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Financing Activities
It
Takes

MONEY
to Make

MONEY!

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Two Ways of Outside Financing of a Corporation Borrowing money (liabilities) Issuing shares of stock in exchange for cash

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Basic Terms
Assets - resources owned by a business Liabilities - debts and obligations of the business - represents claims of creditors on the assets of the business Common stock - stock representing the primary ownership interest in a corporation
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Investing Activities Obtaining the Resources or Assets needed to operate the business Examples of assets...
Cash Accounts Receivable Inventory Buildings, Equipment, Furniture

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Investing Activities Examples

Purchase or sale of computers, delivery trucks, furniture, buildings Purchase or sale of investments

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Candy

Candy

Candy

Investing

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Candy

Operating activities are the main activities for which the organization is in business.
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What Are Revenues?

Revenues are the assets that result from sale of a product or service.

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Examples of Revenues
Taxi Company - sells services
Theatre - sells services & products Retail Store - sells products

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What Are Expenses?

Expenses are the costs of assets consumed or services used to generate revenues. Examples...
Cost of sales Store operating expenses General and administrative expenses Interest expense
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Examples of Expenses
Taxi Company - gasoline, maintenance, insurance Theatre - salaries, supplies, film rental, concessions to resale Retail Store - utilities, taxes, rent, supplies, salaries
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Net Income
Net Income is the excess of revenues over expenses.
Revenue Expenses Net income $10,000 3,000 $ 7,000

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Financial Accounting Statements

Income Statement - reports the results of operations for a specific period of time Retained Earnings Statement - reports the changes in retained earnings for a specific period of time Balance Sheet - reports the assets, liabilities, and stockholders equity at a specific date Statement of Cash Flows - reports the cash receipts and payments for a specific period of time

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Want to Practice? Click HERE to Solve

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From Page 18
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Remember...
Remaining Liquid and Solvent is as important as making a profit because...
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A Company Can Survive a Long Time Without Profits...

but It Cant Survive Very Long Without

CASH!
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Elements of an

Financial Statements
Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

Management Discussion and Analysis Notes to Financial Statements Auditor's Report

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Management Discussion and Analysis

Covers three aspects of a company:
liquidity - ability to pay near-term obligations capital resources - ability to fund operations and expansions results of operations
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Notes to Financial Statements

Provide additional information not included in body of statements Does not have to be numeric Examples:
Description of accounting policies or explanation of uncertainties and contingencies Statistics and voluminous details
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Auditor's Report
Auditor, a professional accountant who conducts an independent examination of the financial accounting data presented by a company. Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with GAAP.
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Monetary Unit Assumption

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Economic Entity Assumption

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Time Period Assumption

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Going Concern Assumption

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Cost Principle

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Full Disclosure Principle

Illustration 1-14

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Income Statement For the Year Ended December 31, 2004

CSU CORPORATION

1st- head up the statement name of company name of statement period of time covered

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Income Statement For the Year Ended December 31, 2004

Revenues Service revenue

CSU CORPORATION

$17,000

2nd - List the revenues

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Income Statement For the Year Ended December 31, 2004

Revenues Service revenue Expenses $9,000 Insurance expense Supplies expense

CSU CORPORATION

$17,000 Rent expense 1,000 200

3rd Total - List and total the expenses expenses 10,200

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Income Statement For the Year Ended December 31, 2004

Revenues Service revenue Expenses $9,000 Insurance expense $17,000

CSU CORPORATION

Rent expense
1,000

Supplies expense
Total expenses Net Income

200
10,200 $ 6,800

4th - Subtract expenses from revenues to obtain net income.

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Retained Earnings Statement For the Year Ended December 31, 2004

CSU CORPORATION

1st- head up the statement name of company name of statement period of time covered

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Retained Earnings Statement For the Year Ended December 31, 2004

CSU CORPORATION

Retained earnings, January 1

2nd - Start with beginning retained earnings

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Retained Earnings Statement For the Year Ended December 31, 2004

CSU CORPORATION

Retained earnings, January 1 Add: Net Income

$ 0 6,800 6,800

3rd - Add net income from the current year - subtotal

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Retained Earnings Statement For the Year Ended December 31, 2004

CSU CORPORATION

Retained earnings, January 1 Add: Net Income 6,800

Less: Dividends Retained earnings, December 31

6,800 600 $ 6,200

4th - Subtract current years dividends and total

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CSU CORPORATION
Balance Sheet December 31, 2004

1st - head up the statement name of company name of statement date

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CSU CORPORATION
Balance Sheet December 31, 2004
Assets

Cash Accounts receivable Supplies Equipment Total assets

$ 1,400 4,000 1,800 16,000 $23,200

2nd - list the assets and total

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CSU CORPORATION
Balance Sheet December 31, 2004
Assets Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders Equity Liabilities Notes payable Accounts payable Total liabilities $ 1,400 4,000 1,800 16,000 $23,200

$ 5,000 2,000 7,000

3rd - list the liabilities and sub-total

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CSU CORPORATION
Balance Sheet December 31, 2004

4th - list stockholders equity subtotal. Add to liabilities, Total

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CSU CORPORATION
Balance Sheet December 31, 2004
Assets

Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders Equity Liabilities Notes payable Accounts payable Total liabilities Stockholders equity Common stock 10,000 Retained earnings 6,200 Total Stockholders equity Total liabilities and stockholders equity

$ 1,400 4,000 1,800 16,000 $23,200

$ 5,000 2`,000 7,000

16,200 $23,200

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If total assets and total liabilities and stockholders equity equal double underline.

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CSU CORPORATION
Balance Sheet December 31, 2004
Assets

Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders Equity Liabilities Notes payable Accounts payable Total liabilities Stockholders equity Common stock 10,000 Retained earnings 6,200 Total Stockholders equity Total liabilities and stockholders equity

$ 1,400 4,000 1,800 16,000 $23,200

$ 5,000 2,000 7,000

16,200 $23,200

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In what order are financial statements prepared?

WHY?

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Income Statement For the Year Ended December 31, 2004

Revenues Service revenue Expenses $9,000 Insurance expense $17,000

CSU CORPORATION

Rent expense
1,000

Supplies expense
Total expenses Net Income

200
10,200 $ 6,800

Net Income is needed for the Statement of Retained Earnings.

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Retained Earnings Statement For the Year Ended December 31, 2004

CSU CORPORATION

Retained earnings, January 1 Add: Net Income

Less: Dividends Retained earnings, December 31

$ 0 6,800 6,800 600 $ 6,200

Ending Retained Earnings is needed for the balance sheet.

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CSU CORPORATION
Balance Sheet December 31, 2004
Assets

Cash Accounts receivable Supplies Equipment Total assets Liabilities and Stockholders Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders equity Common stock 10,000 Retained earnings 6,200 Total Stockholders equity Total liabilities and stockholders equity

$ 1,400 4,000 1,800 16,000 $23,200

$ 2,000 5,000 7,000

16,200 $23,200

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Accounting Equation
Assets = Liabilities + Stockholders Equity

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