Download Financial Accounting and Accounting Standards

Chapter
1-1
Introduction to
Financial Statements
Chapter
1-2
Financial Accounting, Fifth Edition
Study Objectives
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.
Chapter
1-3
Forms of Business Organization
Proprietorship
Chapter
1-4
Partnership
Corporation
Generally owned
by one person.
Owned by two or
more persons.
Ownership in
shares of stock
Often small
service-type
businesses
Often retail and
service-type
businesses
Personally liable
for debts of the
business
Personally liable
for debts of the
business
Separate legal
entity organized
under state
corporation law
Tax advantages
Tax advantages
No personal
liability
Easier to raise
funds
SO 1 Describe the primary forms of business organization.
Users and Uses of Financial Information
Internal Users
Management
IRS
Investors
Human
Resources
Finance
Common Questions
Creditors
Marketing
Customers
Chapter
1-5
Labor
Unions
SEC
External
Users
SO 2 Identify the users and uses of accounting information.
Users and Uses of Financial Information
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?
Chapter
1-6
SO 2 Identify the users and uses of accounting information.
Users and Uses of Financial Information
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
1-7
SO 2 Identify the users and uses of accounting information.
Communicating with Users
Companies prepare four financial statements from
the summarized accounting data:
Income
Statement
Chapter
1-8
Balance
Sheet
Retained
Earnings
Statement
Statement
of Cash
Flows
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Review Question
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.
Chapter
1-9
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Income Statement
Illustration 1-5
Reports revenues and
expenses for a specific
period of time.
Net income – revenues
exceed expenses.
Net loss – expenses
exceed revenues.
Chapter
1-10
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Income Statement
Illustration 1-5
Retained Earnings
Statement
Illustration 1-6
Net income is needed to
determine the ending balance in
stockholder’s equity.
Chapter
1-11
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Retained Earnings
Statement
Statement indicates the
reasons why retained
earnings has increased
or decreased during the
period.
Chapter
1-12
Illustration 1-6
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Balance Sheet
Illustration 1-8
Retained Earnings
Statement
Illustration 1-6
The ending balance in retained
earnings is needed in preparing
the balance sheet
Chapter
1-13
SO 4 Describe the content and purpose of each of the financial statements.
Communicating with Users
Balance Sheet
Illustration 1-8
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.
Chapter
1-14
SO 5 Explain the meaning of assets, liabilities,
and stockholders’ equity, and state the basic accounting equation.
Communicating with Users
Statement of Cash Flows
Illustration 1-9
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?
Chapter
1-15
SO 5
Explain the meaning of assets, liabilities, and stockholders’
equity, and state the basic accounting equation.
Communicating with Users
Review Question
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.
Chapter
1-16
SO 5
Explain the meaning of assets, liabilities, and stockholders’
equity, and state the basic accounting equation.
Other Elements of an Annual Report
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.
Chapter
1-17
SO 6
Describe the components that supplement the
financial statements in an annual report.
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Chapter
1-18