Hhtfa9e Ch01 Stud

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.
The Financial Statements

Chapter 1
Explain why accounting is the language of

business
The Language of Business

Measures business activities
Processes data into reports
Communicates results
Produces financial statements
Flow of Accounting Information
Users of Accounting Information
Kinds of Accounting
Financial Accounting
Managerial Accounting
Provides information for

external users
Investors
Creditors
Government
The public
Provides information for

internal users managers
Includes:
Budgets
Forecasts
Organizing a Business
Proprietorship
Partnership
LLC
Owner(s)
Proprietor -One
Partners two Members

or more
Stockholders
usually
many
Personal
liability of
owner(s)
for
business
debts
Proprietor is
personally liable
Partners are
personally
liable; limited
partners are
not
Stockholders
are NOT
personally
liable
Members
are NOT
personally
liable
Corporation
Proprietorships
Single owner
Common business form for small retail stores
and professional service providers
Proprietor personally liable for business debts
Partnerships
Two or more parties as co-owners
Not a taxpaying entity
Income passes through to partners
Governed by an agreement
Mutual agency
Each partner can act on behalf of the entity
Unlimited liability
Involve risk
Limited liability partnerships lessen risk
10
Limited-Liability Company (LLC)

One or many owners (members)
Limited liability
Like a partnership, not a taxpaying entity
Income flows through to members
Popular form of business due to combination of

tax status and limited liability
11
Corporations
Owned by stockholders
Stock represents share of ownership
Ability to raise large sums of capital

Larger than proprietorship and partnerships
Formed under state law
Legally distinct from its owners
12
Corporations
Double taxation
Corporate income is taxed
Shareholders taxed on distributions of earnings
(dividends)
Stockholders elect Board of Directors

Set policy and appoint officers
13
Explain and apply underlying accounting

concepts, assumptions, and principles
14
Conceptual Foundations of
Accounting
15
To provide financial information that is useful to existing investors,

lenders, and other creditors in making decisions about providing
resources to that entity
Objective
Fundament
al
Qualitative
Characteris
tics
Comparability
Relevance
(includes materiality)
Verifiability
Faithful
representation
Timeliness
Understandability
Enhancing
Qualitative
Characteristics
Constraints
Cost
Financial Reporting Standards
16
Assumptions & Principles

Entity assumption
A business is a separate economic unit
Continuity (going- concern) assumption

Entity will continue to exist indefinitely
Historical cost principle

Assets recorded at purchase price
Stable monetary unit assumption

Dollars purchasing power is stable over time
17
International Financial Reporting

Standards (IFRS)
Many countries have own versions of generally
accepted accounting principles (GAAP)
Reports had to be restated to convert accounting
data from one country to another
IFRS developed and are used by most countries

in the world
U.S. still follows own GAAP
18
International Financial Reporting

Standards (IFRS)
U.S. GAAP overseen by the Securities &
Exchange Commission (SEC)
SEC tentatively set date for U.S. adoption of IFRS
in 2015
Will make it easier to compare financial
statements across the world
Most common accounting practices similar

under both U.S. GAAP and IFRS
19
Apply the accounting equation to business

organizations
20
Accounting Equation Elements
21
Assets = Liabilities + Owners Equity

Liabilities
Assets
Owners
equity
22
Assets and Liabilities

Assets
Cash
Merchandise inventory
Property, plant, and
equipment
Liabilities
Accounts payable
Income taxes payable
Long-term debt
23
Owners equity
Assets
Liabilities
Owners Equity
Stockholders equity
Paid-in capital
Retained earnings
24
Corporate Accounting Equation

Assets
Liabilities
Stockholders equity
Paid-in capital
Common
stock
Amounts
stockholders
have
invested
Retained
earnings
Amounts
earned and
kept by
business
25
Transactions Affecting Retained

Earnings
26
27
Net Income
Revenues
If
expenses
exceed
revenues
Expenses
Net Income
A net loss
results
28
The Components of Retained

Earnings
Revenues
minus
Expenses
equals
Beginning Retained
Earnings
Net Income
(Net Loss)
Plus or minus
Ending Retained
Earnings
Dividends
minus
equals
29
Exercise 1-17A
Assets
$280
$430
$170
$880
Liabilities
$170
$300
$470
Assets
$880
$470
Liabilities
Equity
$410
30
Exercise 1-17A
Assets
$280
$430
$880
Liabilities
$170
$470
Assets
$170
Assets = resources
$300
Liabilities = amounts
owed to creditors
Equity
$410
Liabilities
Stockholder ownership
31
Evaluate business operations through the

financial statements
32
The Financial Statements

Question
Financial
Statement
Answer
How well did the company

perform during the year?
Income
statement
Revenues
Expenses
Net income or (net loss)
Why did the companys

retained earnings change
during the year?
Statement of
retained earnings
Beginning retained earnings

+ Net Income (-Net Loss)
Dividends
Ending retained earnings
What is the companys

financial position at yearend?
Balance sheet
Assets = Liabilities + Owners

equity
How much cash did the

company generate and
spend during the year?
Statement of cash Operating cash flows

flows
+/ Investing cash flows
+/ Financing cash flows
Increase(decrease) in cash
33
Income Statement
Statement of
Retained Earnings
Balance Sheet
Statement of Cash
Flows
34
The Income Statement

Also called the Statement of Operations
Reports two main categories
Revenues and gains
Expenses and losses
Shows the bottom line

Net income or net loss for the period
Net income is the most important item in the

financial statements
35
ABC Corporation
Income Statement
Year Ended December 31, 2012
Net sales
$XX,XXX
Other revenue
XX,XXX
Total revenues
XX,XXX
Cost of goods sold
XX,XXX
Gross profit
XX,XXX
Selling, general, and administrative expenses
XX,XXX
Income from operations
XX,XXX
Interest expense
XX,XXX
Income before income taxes
XX,XXX
Income tax expense
XX,XXX
Net Income
$XX,XXX
36
Statement of Retained Earnings

Retained earnings is portion of net income
company has kept over a period of years
Positive balance indicates revenues exceeded
expenses
Accumulated deficit indicates expenses have
exceeded revenues
Net income (or net loss) flows from the Income
Statement to the Statement of Retained
Earnings
37
ABC Corporation
Retained earnings, December 31, 2011
$XX,XXX
Plus: Net income
XX,XXX
Less: Dividends
XX,XXX
Retained earnings, December 31, 2012
$XX,XXX
38
The Balance Sheet

Also called the Statement of Financial Position
Reports
Assets
Liabilities
Stockholders equity
39
Assets on the Balance Sheet

Current Assets
Expected to be converted to
cash, sold or consumed in the
next year or within the
businesss operating cycle
Whichever is longer
Include
Cash and cash equivalents
Short-term investments
Accounts and notes
receivable
Inventory
Prepaid expenses
Long-term Assets
Will be held longer than one

year
Include
Property and equipment
Land
Buildings
Computers
Equipment
Intangibles
Long-term investments
40
Liabilities on the Balance Sheet

Current Liabilities
Debts payable in the next year

or within the businesss
operating cycle
Include
Current maturities of longterm debt
Accounts payable
Income taxes payable
Accrued expenses
Long-term Liabilities
Debts payable more than one

year from balance sheet date
Include
Long-term notes payable
Bonds payable
41
Stockholders Equity on the

Balance Sheet
Represents stockholders ownership of the
business assets
Consists of:
Common stock
Additional paid-in capital
Retained earnings
Treasury Stock
Accumulated other comprehensive income (loss)
42
43
The Statement of Cash Flows

Measures cash receipts and cash payments
Fourth required financial statement
Categorizes into three types of activities:
Operating
Investing
Financing
44
Cash Flow Categories

Operating activities
Cash receipts and payments from selling goods
and services
Investing activities
Purchasing & selling long-term assets
Financing activities
Issuing stock, paying dividends, borrowing, and
repayment of borrowed funds
45
Exercise 1-20A
(a)
Common stock
Balance Sheet
(b)
Income tax payable
Balance Sheet
(c)
Dividends
(d)
Income tax expense
Income Statement
(e)
Ending balance
of retained earnings
Balance Sheet
(f)
Total assets
Balance Sheet
(g)
Long-term debt
Balance Sheet
(h)
Revenue
Income Statement
46
Exercise 1-20A
(i)
Cash spent to acquire a

building
Statement of Cash Flows
(j)
Selling, general &

administrative expenses
Income Statement
(k)
Adjustments to reconcile net

income to net cash from
operations
(l)
Ending cash balance
(m) Current liabilities

(n)
Net income
Balance Sheet
Balance Sheet
Income Statement
47
Construct financial statements and analyze

the relationships among them
48
Income Statement
Reports revenue and expenses
These accounts are only reported on the Income
Statement
Shows net income or net loss

If revenues exceed expenses, company has net
income
If expenses exceed revenues, company has net loss
49

Opens with beginning retained earnings balance
Adds net income (or subtracts net loss)
Flows from the Income Statement
Subtracts dividends
Reports ending retained earnings balance
50
Balance Sheet
Reports assets, liabilities, and stockholders
equity
These accounts are reported only on the balance
sheet
Shows that assets equal sum of liabilities and

stockholders equity
Reports retained earnings which comes from the
statement of retained earnings
51

Reports cash flows from operating, investing,
and financing activities
Results in an increase or decrease
Shows whether cash increased or decreased

during the year
Reports ending cash as shown on the balance
sheet
52
Relationships between Financial

Statements
Income Statement
Revenues
$XX,XXX
Expenses
(XX,XXX)
Net income
$XX,XXX


Net income
Cash dividends
$XX,XXX
XX,XXX
(XX,XXX)
$XX,XXX
53


Net income
$XX,XXX
XX,XXX
Cash dividends
(XX,XXX)
$XX,XXX
Balance Sheet
December 31, 2012
Assets
$XX,XXX
Liabilities
$XX,XXX
Stockholders equity:
Common stock
Retained earnings
Total liabilities and equity
$XX,XXX
XX,XXX
$XX,XXX
54
Balance Sheet
December 31, 2012
Assets
$XX,XXX
Liabilities
$XX,XXX
Stockholders equity:
Common stock
$XX,XXX
Retained earnings
XX,XXX
Total liabilities and equity
$XX,XXX

Cash flows from operating activities
$XX,XXX
Cash flows from investing activities
XX,XXX
Cash flows from financing activities
XX,XXX
Net cash flows
XX,XXX
Cash balance, December 31, 2011
XX,XXX
Cash balance, December 31, 2012
$XX,XXX
Cash from
the Asset
section of
the
Balance
Sheet
equals
ending
Cash on
the
Statement
of Cash
Flows
55
Evaluating a Company
56
Evaluate business decisions ethically
57
Influences on Business Decisions
58
Decision Framework for Making

Ethical Judgments
What is the issue?
Who are the stakeholders and what are the
consequences of the decisions to each?
Weigh the alternatives.
Make the decision and be prepared to deal with the
consequences.
59
60
61

Hhtfa9e Ch01 Stud

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Hhtfa9e Ch01 Stud

Uploaded by

Copyright:

Available Formats

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

The Financial Statements

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Explain why accounting is the language of

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

The Language of Business

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Flow of Accounting Information

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Users of Accounting Information

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Provides information for

Provides information for

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Partners two Members

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Limited-Liability Company (LLC)

Popular form of business due to combination of

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Ability to raise large sums of capital

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Stockholders elect Board of Directors

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Explain and apply underlying accounting

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

To provide financial information that is useful to existing investors,

Assumptions & Principles

Continuity (going- concern) assumption

Historical cost principle

Stable monetary unit assumption

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

International Financial Reporting

IFRS developed and are used by most countries

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

International Financial Reporting

Most common accounting practices similar

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Apply the accounting equation to business

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Accounting Equation Elements

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Assets = Liabilities + Owners Equity

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Assets and Liabilities

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Corporate Accounting Equation

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Transactions Affecting Retained

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

The Components of Retained

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

Evaluate business operations through the

Copyright 2012 Pearson Education Inc. Publishing as Prentice Hall.

The Financial Statements

How well did the company

Why did the companys

Beginning retained earnings

What is the companys