Acct 2050

Chapter 1: Financial Statements and

Business Decisions

The Accounting System

Business Activities
Financing
Activities
Ex: Borrow money
from bank
Operating
Activities
Ex: Sell
merchandise to
customers

Investing
Activities
Ex: Purchase
equipment

The Three Basic Financial Statements

BALANCE
BALANCE SHEET
SHEET reports
reports the
the amount
amount of
of assets,
assets, liabilities,
liabilities, and
and
stockholders
stockholders equity
equity of
of an
an accounting
accounting entity
entity at
at aa point
point in
in time.
time.
INCOME
INCOME STATEMENT
STATEMENT reports
reports the
the revenues
revenues less
less the
the expenses
expenses
of
of the
the accounting
accounting period.
period.
STATEMENT
STATEMENT OF
OF CASH
CASH FLOWS
FLOWS reports
reports inflows
inflows and
and outflows
outflows of
of
cash
cash during
during the
the accounting
accounting period
period in
in the
the categories
categories of
of
operating,
operating, investing,
investing, and
and financing.
financing.

The Accounting Equation

A = L + SE
Assets

Economic
Resources

Liabilities

Stockholders
Equity

Sources of Financing for

Economic Resources
Liabilities: From Creditors
Stockholders Equity: From
Stockholders

Balance Sheet
Accounts on the Balance
Sheet
Assets (Resources)
Current
Cash
Accounts Receivable
Inventory (to be sold)
sold)
Supplies
Equipment
Buildings
Land
Intangibles

Liabilities
Accounts Payable
Accrued Expenses
Notes Payable
Taxes Payable

Stockholders Equity
Common Stock
Retained Earnings

Income Statement
Accounts on the Income
Statement
Revenues
Sales Revenue

Expenses
Cost of Goods Sold
Wages Expense
Rent Expense
Interest Expense
Depreciation
Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense

Statement of cash flows

Elements of the
Statement of Cash
Flows
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities

+/

Note that each of the three cash

flow sources can be positive (net
cash inflow) or negative (net cash
outflow).

Financial Statement SUMMARY

Ensuring the Accuracy of Financial

Statements
To ensure the accuracy of the companys
financial information, management:
Maintains a system of controls.
Hires external independent auditors.
Forms a committee of the board of
directors
to review these other two safeguards.

Supplement A: Types of Business

Entities
Sole
Sole Proprietorship:
Proprietorship: owned
owned by
by aa single
single individual.
individual.
Partnership:
Partnership: owned
owned by
by two
two or
or more
more individuals.
individuals.
Corporation:
Corporation: ownership
ownership represented
represented by
by shares
shares of
of stock.
stock.
Advantages
Advantages of
of a
a Corporation:
Corporation:

Limited
Limited liability
liability

Continuity
Continuity of
of life
life

Ease
Ease of
of transfer
transfer of
of ownership
ownership

Opportunity
Opportunity to
to raise
raise large
large amounts
amounts of
of money
money
Disadvantage
Disadvantage of
of a
a Corporation:
Corporation:

Double
Double taxation
taxation