Ch01
- 2. Introduction to Financial Statements Accounting, Third Edition
- 3. 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. 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. Study Objectives
- 4. Internal users External users Ethics in financial reporting Forms of Business Organization Users and Uses of Financial Information Business Activities Communicating with Users A Quick Look at Tootsie Roll’s Financial Statements Sole proprietorship Partnership Corporation Financing Investing Operating Income statement Retained earnings statement Balance sheet Statement of cash flows Interrelation-ships of statements Income statement Retained earnings statement Balance sheet Statement of cash flows Other elements of an annual report Introduction to Financial Statements
- 5. Forms of Business Organization Proprietorship Partnership Corporation Owned by two or more persons. Often retail and service-type businesses Personally liable for debts of the business Tax advantages Ownership in shares of stock Separate legal entity organized under state corporation law No personal liability Easier to raise funds Generally owned by one person. Often small service-type businesses Personally liable for debts of the business Tax advantages SO 1 Describe the primary forms of business organization.
- 6. Users and Uses of Financial Information Management Common Questions Human Resources IRS Labor Unions SEC Marketing Finance Investors Creditors SO 2 Identify the users and uses of accounting information. Customers Internal Users External Users
- 7. Common Questions Asked? Users and Uses of Financial Information User 1. Can we afford to give our employees a pay raise? Human Resources 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? Investors Management Finance Marketing Creditors SO 2 Identify the users and uses of accounting information.
- 10. 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. SO 2 Identify the users and uses of accounting information.
- 11. Users and Uses of Financial Information SO 2 Identify the users and uses of accounting information. Illustration 1-4 Steps in analyzing ethics cases
- 13. Users and Uses of Financial Information Ethics are the standards of conduct by which one's actions are judged as: right or wrong. honest or dishonest. fair or not fair. all of these options. Review Question SO 2 Identify the users and uses of accounting information.
- 14. Business Activities All businesses are involved in three types of activity — financing, investing, and operating. 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.
- 15. Business Activities Financing Activities Two primary sources of outside funds are: Borrowing money Amounts owed are called liabilities . Party to whom amount is owed are creditors . Notes payable and bonds payable are different type of liabilities. Issuing shares of stock for cash. Payments to stockholders are called dividends . SO 3 Explain the three principal types of business activity.
- 16. Business Activities Investing Activities Purchase of resources a company needs to operate. Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets . SO 3 Explain the three principal types of business activity.
- 17. Business Activities 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. SO 3 Explain the three principal types of business activity.
- 18. Business Activities 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. SO 3 Explain the three principal types of business activity. Operating Activities
- 19. Communicating with Users Companies prepare four financial statements from the summarized accounting data: Balance Sheet Income Statement Statement of Cash Flows Retained Earnings Statement SO 4 Describe the content and purpose of each of the financial statements.
- 20. Communicating with Users Net income will result during a time period when: assets exceed liabilities. assets exceed revenues. expenses exceed revenues. revenues exceed expenses. Review Question SO 4 Describe the content and purpose of each of the financial statements.
- 21. Communicating with Users Reports revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues. SO 4 Describe the content and purpose of each of the financial statements. Income Statement Illustration 1-5
- 22. Communicating with Users Income Statement SO 4 Describe the content and purpose of each of the financial statements. Retained Earnings Statement Net income is needed to determine the ending balance in stockholder’s equity. Illustration 1-6 Illustration 1-5
- 23. Communicating with Users SO 4 Describe the content and purpose of each of the financial statements. Retained Earnings Statement Statement indicates the reasons why retained earnings has increased or decreased during the period. Illustration 1-6
- 24. Communicating with Users SO 4 Describe the content and purpose of each of the financial statements. Retained Earnings Statement The ending balance in retained earnings is needed in preparing the balance sheet Balance Sheet Illustration 1-8 Illustration 1-6
- 25. Communicating with Users 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. SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation. Balance Sheet Illustration 1-8
- 27. Communicating with Users Answers: Where did cash come from during the period? How was cash used during the period? What was the change in the cash balance during the period? Statement of Cash Flows Illustration 1-9 SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.
- 28. Communicating with Users Which of the following financial statements is prepared as of a specific date? Balance sheet. Income statement. Owner's equity statement. Statement of cash flows. Review Question SO 5 Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.
- 29. 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. SO 6 Describe the components that supplement the financial statements in an annual report.
- 30. Other Elements of an Annual Report Management’s Report The SEC mandates inclusion of Management’s Discussion and Analysis (MD&A) . Management highlights favorable or unfavorable trends related to liquidity, capital resources, and results of operations. SO 6 Describe the components that supplement the financial statements in an annual report.
- 31. Other Elements of an Annual Report Management’s Report SO 6 Describe the components that supplement the financial statements in an annual report. Illustration 1-15
- 32. Other Elements of an Annual Report Notes are the means of amplifying or explaining the items presented in the main body of the statements. Accounting Policies Companies should present a statement identifying the accounting policies adopted (Summary of Significant Accounting Policies). SO 6 Describe the components that supplement the financial statements in an annual report.
- 33. Other Elements of an Annual Report Notes are the means of amplifying or explaining the items presented in the main body of the statements. SO 6 Describe the components that supplement the financial statements in an annual report. Illustration 1-16
- 34. Other Elements of an Annual Report Auditor’s Report Standard unqualified opinion – auditor expresses the opinion that the financial statements are presented fairly, in all material respects, in conformity with GAAP. SO 6 Describe the components that supplement the financial statements in an annual report. Illustration 1-17
- 35. Copyright “ Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.”
Editor's Notes
- #4: 1. On the topic, “Challenges Facing Financial Accounting,” what did the AICPA Special Committee on Financial Reporting suggest should be included in future financial statements? Non-financial Measurements (customer satisfaction indexes, backlog information, and reject rates on goods purchases). Forward-looking Information Soft Assets (a company’s know-how, market dominance, marketing setup, well-trained employees, and brand image). Timeliness (no real time financial information)
- #5: Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods
- #6: Service Cost - Actuaries compute service cost as the present value of the new benefits earned by employees during the year. Future salary levels considered in calculation. Interest on Liability - Interest accrues each year on the PBO just as it does on any discounted debt. Actual Return on Plan Assets - Increase in pension funds from interest, dividends, and realized and unrealized changes in the fair market value of the plan assets. Amortization of Unrecognized Prior Service Cost - The cost of providing retroactive benefits is allocated to pension expense in the future, specifically to the remaining service-years of the affected employees. Gain or Loss - Volatility in pension expense can be caused by sudden and large changes in the market value of plan assets and by changes in the projected benefit obligation. Two items comprise the gain or loss: difference between the actual return and the expected return on plan assets and, amortization of the unrecognized net gain or loss from previous periods