1. Fundamentals of Financial Accounting 4e by Phillips, Libby, and Libby.

2. Business Decisions and Financial Accounting
Chapter 1
Business Decisions and Financial Accounting
PowerPoint Authors:
Brandy Mackintosh
Lindsay Heiser
Chapter 1: Business Decisions and Financial Accounting

3. Describe various organizational forms and business decision
Learning Objective 1-1
Describe various organizational forms and business decision
makers.
Learning objective 1 is to describe various organizational forms and business decision makers.

4. Organizational Forms Sole Proprietorship Partnership Corporation
Business organization owned by one person. The owner is personally liable for all debts of the business.
Partnership
Business organization owned by two or more people. Each partner is personally liable for all debts of the business.
Corporation
A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation.
Part I
There are three types of business organizations.
A sole proprietorship is a business organization owned by one person. The owner is personally liable for all the debts of the business.
Part II
A partnership is a business organization owned by two or more people. Each partner is personally liable for all the debts of the business.
Part III
A corporation operates a business separate from its owners from both a legal and accounting perspective. Owners of corporations (often called stockholders) are not personally responsible for debts of the corporation. Corporations may be either public companies or private companies. Public companies have their stock bought and sold on stock exchanges. Private companies have their stock bought and sold privately. Most corporations start out as private companies and will become public companies if they need a lot of financing, which they obtain from selling new stock certificates to investors.

5. Organizational Forms Source: IRS.gov.
As this graphic shows, the majority (72%) of businesses are organized as sole proprietorships. Another 18% are organized as a corporation, followed by 4% as partnerships and 6% as limited liability companies. Limited liability companies (LLC) is a hybrid business entity that has certain characteristics of both a corporation and a partnership or sole proprietorship (depending on how many owners there are). The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership or a sole proprietorship is the availability of pass-through income taxation. An LLC is often more flexible than a corporation and is well-suited for companies with a single owner.
Source: IRS.gov.

6. Operating, Investing and Financing Activities
The Accounting System
Operating, Investing and Financing Activities
Evaluate the company
Run the company
Accounting
System
Part I
Most companies exist to earn profits for their stockholders. To know just how successful a company is the company will need to establish and maintain a good system of financial recordkeeping—an accounting system.
Part II
Accounting is an information system designed by an organization to capture (analyze, record, and summarize) the activities affecting its financial condition and performance and then report the results to decision makers, both inside and outside the organization.
Part III
The accounting system produces two kinds of reports.
Part IV
Managerial accounting reports include detailed financial plans and continuously updated reports about the financial performance of the company. These reports are made available only to employees of the company so that they can make business decisions such as whether to build, buy, or rent a building, whether to continue or discontinue making particular products, how much to pay employees, and how much to borrow.
Part V
Financial accounting reports are prepared periodically to provide information to people not employed by the business. These external financial statement users are not given access to the detailed internal records of the company, so they rely extensively on the financial statements. Financial statements are accounting reports that summarize the results of business activities. The two primary external users are creditors (such as banks and suppliers) and investors (such as stockholders). Other external users include customers and various local, state, and federal governments.
Accounting Reports
External users
(creditors, investors, etc.)
Internal users
(managers, supervisors etc.)
Financial
Managerial
Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities.

7. Learning Objective 1-2
Describe the purpose, structure, and content of the four basic financial statements.
Learning objective 1-2 is to describe the purpose, structure, and content of the four basic financial statements.

8. The Basic Accounting Equation
Resources Owned . . .
by the company
Resources Owed . . .
to creditors to stockholders
Assets = Liabilities + Stockholders’ Equity
Separate Entity Assumption
The financial reports of a business are assumed to include the results of only that business’s activities.
Part I
One of the most central concepts to understanding financial reports is that what a company owns must equal what a company owes to its creditors and stockholders. In accounting, there are special names for what a company owns and what a company owes to creditors and stockholders. Resources owned by the company are called assets. Resources owed to creditors are called liabilities. Resources owed to stockholders are called stockholders’ equity. The relationship between assets, liabilities, and stockholders’ equity is known as the basic accounting equation.
Part II
The business itself, not the stockholders who own the business, is viewed as owning the assets and owing the liabilities. This is called the separate entity assumption, which requires that a business’s financial reports include only the activities of the business and not those of its stockholders.

9. Assets
Economic resources controlled by the company that have measurable value and are expected to provide future benefits to the company.
Assets are resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Assets include things like cash, supplies, furniture, and equipment.
Cash
Equipment
Supplies
Furniture

10. Measurable amounts owed by the business to creditors.
Liabilities
Measurable amounts owed by the business to creditors.
Liabilities are measurable amounts owed to creditors. If a company borrows from a bank, it would owe a liability called a note payable. The business can also owe payments to suppliers who deliver goods and services to the business. Amounts owed to suppliers are called accounts payable because purchases made using credit are said to be “on account.” As you may have noticed, anything with the word payable in its name is considered a liability.
Notes Payable
Accounts Payable

11. Owners’ claim to the business resources.
Stockholders’ Equity
Owners’ claim to the business resources.
Stockholders’ equity represents the owners’ claims on the business. These claims arise for two reasons.
The owners have a claim on amounts they contributed to the business by purchasing the company’s stock (Contributed Capital). A stock certificate is evidence of ownership in a corporation.
The owners have a claim on amounts the company has earned through profitable business operations (Retained Earnings).
Contributed Capital
Retained Earnings
Stock Certificate

12. Revenues, Expenses and Net Income
Revenues – Expenses = Net Income
Revenues
Sales of goods or services to customers. They are measured at the amount the business charges the customer.
Expenses
The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities.
Part I
Revenues are the sales of goods or services to customers. They are measured at the amount the business charges the customer.
Part II
Expenses are the costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities.
Net income is equal to revenues minus expenses. By generating net income, a company increases its stockholders’ equity. Net income can either be left in the company to accumulate (called retained earnings) or paid out to the company’s stockholders for their own personal use (called dividends).
If revenues are less than expenses, the business would have a “net loss.”

13. Dividends are not an expense.
Distributions of a company’s earnings to its stockholders as a return on their investment.
Part I
A company’s profits are accumulated in Retained Earnings until a decision is made to distribute them to stockholders.
Part II
Distributions to stockholders are called dividends. The simplest type of dividend, and the most common, is a dividend paid in cash.
Part III
Dividends are not an expense of the company. Rather, dividends are a distribution of earnings. They are determined at the discretion of the company’s stockholders.
Dividends are not an expense.

14. Financial Statements
Financial statements are typically prepared in this order.
Income Statement
Statement of Retained Earnings
Balance Sheet
Assets, liabilities, stockholders’ equity, revenues, expenses, and dividends appear in different reports in the financial statements. The term financial statements refers to four accounting reports, typically prepared in the following order:
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Financial statements can be prepared at any time during the year, although they are most commonly prepared monthly, every three months (quarterly reports), and at the end of the year (annual reports). Companies are allowed to choose any date for the end of their accounting (or fiscal) year.
Statement of Cash Flows

15. For the Month Ended September 30, 2013
The Income Statement
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2013
Revenues
Pizza Revenue
Total Revenue
Expenses
Supplies Expense
Wages Expense
Rent Expense
Utilities Expense
Insurance Expense
Advertising Expense
Income Tax Expense
Total Expenses
Net Income
$ 12,000
12,000
5,000
2,000
1,500
600
300
100
500
10,000
$ 2,000
The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit.
Reports the amount of revenues less expenses for a period of time.
Part I
The purpose of the income statement is to report the amount of revenues less expenses for a period of time. For Pizza Aroma, revenues are earned from the sale of pizza to customers. Expenses are the costs incurred during the period to earn the revenue. The income statement is prepared first in order for us to calculate the amount of net income, as net income then is placed on the statement of retained earnings.
Part II
The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit, which in the United States is the U.S. dollar.
The heading of every financial statement answers three questions: who (name of the business), what (title of the statement), and when (accounting period).

16. The Statement of Retained Earnings
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2013
Retained Earnings, Sept. 1, 2013
Add: Net Income
Subtract: Dividends
Retained Earnings, Sept. 30, 2013 $
2,000
(1,000)
$ 1,000
The Statement of Retained Earnings reports the way that net income and the distribution of dividends affected the financial position of the company during the period. A more comprehensive statement of stockholders’ equity that explains changes in all stockholders’ equity accounts is provided by large corporations. For Pizza Aroma, most changes in stockholders’ equity relate to generating and distributing earnings, so a statement of retained earnings is just as informative as a detailed statement of stockholders’ equity.
Reports the way that net income and the distribution of dividends affected the financial position of the company during the period.

17. Reports at a point in time:
The Balance Sheet
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2013
Assets
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
Stockholders’ Equity
Contributed Capital
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$ 7,000
20,000
27,000
30,000
31,000
Reports at a point in time:
What a business owns (assets).
What it owes to creditors (liabilities).
What is left over for the owners of the company’s stock (stockholders’ equity).
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
Part I
The balance sheet reports a company’s financial position at a point in time. You can think of the balance sheet kind of like a picture or a snapshot of what a business owns (called assets), what it owes to creditors (called liabilities), and what is leftover for the owners of the company’s stock (called stockholders’ equity).
Assets are listed in order of liquidity, that is, how quickly they are used up or converted into cash. Notes payable are like accounts payable except that they: (1) are not interest free; (2) will not be paid as soon; and (3) are formal written debt contracts.
Part II
The balance sheet “balances” because the resources (assets) equal the claims to the resources (liabilities and stockholders’ equity).

18. The Statement of Cash Flows
Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time.
PIZZA AROMA, INC.
Statement of Cash Flows
For the Month Ended September 30, 2013
Cash Flows from Operating Activities
Cash received from customers
Cash paid to employees and suppliers
Cash Provided by Operating Activities
Cash Flows from Investing Activities
Cash used to buy equipment
Cash Used in Investing Activities
Cash Flows from Financing Activities
Capital contributed by stockholders
Cash dividends paid to stockholders
Cash borrowed from the bank
Cash Provided by Financing Activities
Change in Cash
Beginning Cash Balance, Sept. 1, 2013
Ending Cash Balance, Sept. 30, 2013
$ 11,000
(6,000)
5,000
(40,000)
30,000
(1,000)
20,000
49,000
14,000 -
$ 14,000
The fourth financial statement is the Statement of Cash Flows. It includes only those activities that result in cash changing hands. The statement is divided into three categories of business activities. The operating section reports cash transactions directly related to running the business to earn profit. This section includes cash transactions such as cash received from customers and cash paid for supplies, wages, repairs, advertising, and utilities. The investing section reports cash transactions involving buying and selling productive resources with long lives, such as buildings, land, equipment, and tools. The financing section reports cash transactions related to borrowing from or repaying creditors and receiving cash from or paying cash to stockholders.
Pizza Aroma’s income statement showed positive net income of $2,000, but net income is not necessarily equal to cash because revenues are reported when earned and expenses when incurred regardless of when cash is received or paid.

19. Notes to the Financial Statements
Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions.
The four basic financial statements are not complete without notes to help financial statement users understand how the amounts were derived and what other information may affect their decisions. We will talk more about notes in a later chapter.

20. Relationships Among the Financial Statements
PIZZA AROMA, INC.
Income Statement
For the Month Ended September 30, 2013
Revenues
Pizza Revenue
Total Revenue
Expenses
Supplies Expense
Wages Expense
Rent Expense
Utilities Expense
Insurance Expense
Advertising Expense
Income Tax Expense
Total Expenses
Net Income
$ 12,000
12,000
5,000
2,000
1,500
600
300
100
500
10,000
$ 2,000
Net income flows from the Income Statement to the Statement of Retained Earnings. 1
The goal of the next few slides is to show how the four statements fit together. First, the income statement reports the results of business operations for the accounting period. The net income from the income statement flows to the statement of retained earnings.
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2013
Retained Earnings, Sept. 1, 2013
Add: Net Income
Subtract: Dividends
Retained Earnings, Sept. 30, 2013 $
2,000
(1,000)
$ 1,000

21. Relationships Among the Financial Statements
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2013
Assets
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
Stockholders’ Equity
Contributed Capital
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$ 7,000
20,000
27,000
30,000
31,000
Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2
The ending retained earnings balance for the period is also reported on the balance sheet. If we did not report the ending retained earnings balance on the balance sheet, our balance sheet would not balance. So the statement of retained earnings must be prepared before the balance sheet may be completed.
PIZZA AROMA, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2013
Retained Earnings, Sept. 1, 2013
Add: Net Income
Subtract: Dividends
Retained Earnings, Sept. 30, 2013 $
2,000
(1,000)
$ 1,000

22. Relationships Among the Financial Statements
PIZZA AROMA, INC.
Balance Sheet
At September 30, 2013
Assets
Cash
Accounts Receivable
Supplies
Equipment
Total Assets
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
Stockholders’ Equity
Contributed Capital
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 14,000
1,000
3,000
40,000
$ 58,000
$ 7,000
20,000
27,000
30,000
31,000
PIZZA AROMA, INC.
Statement of Cash Flows
For the Month Ended September 30, 2013
Cash Flows from Operating Activities
Cash received from customers
Cash paid to employees and suppliers
Cash Provided by Operating Activities
Cash Flows from Investing Activities
Cash used to buy equipment
Cash Used in Investing Activities
Cash Flows from Financing Activities
Capital contributed by stockholders
Cash dividends paid to stockholders
Cash borrowed from the bank
Cash Provided by Financing Activities
Change in Cash
Beginning Cash Balance, Sept. 1, 2013
Ending Cash Balance, Sept. 30, 2013
$ 11,000
(6,000)
5,000
(40,000)
30,000
(1,000)
20,000
49,000
14,000 -
$ 14,000
Cash on the balance sheet and Cash at End of Year on the statement of cash flows agree.
Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3

23. Explain how financial statements are used by decision makers.
Learning Objective 1-3
Explain how financial statements are used by decision makers.
Learning objective 1-3 is to explain how financial statements are used by decision makers.

24. Using Financial Statements
Creditors
Investors
Is the company generating enough cash to make payments on its loans?
Does the company have enough assets to cover its liabilities?
What is the immediate return (through dividends) on my contributions?
What is the long-term return (through stock price increases resulting from the company’s profits)?
… SCF
… SRE
Part I
Here is how creditors and investors use financial statements.
Creditors are mainly interested in assessing two things:
Is the company generating enough cash to make payments on its loans? Creditors will find this information on the statement of cash flows.
Part II
2. Does the company have enough assets to cover its liabilities? Creditors will find this information on the balance sheet
Part III
Investors expect a return on their contributions to a company. The return may be immediate (through dividends) or long-term (through selling stock certificates at a price higher than their original cost). Dividends and higher stock prices are more likely if a company is profitable. As a result, investors look closely at the statement of retained earnings for information about the company’s ability to distribute dividends.
Part IV
Investors look closely at the income statement for information about the company’s ability to generate a profit.
… B/S
.. I/S

25. Describe factors that contribute to useful financial information.
Learning Objective 1-4
Describe factors that contribute to useful financial information.
Learning objective 1-4 is to describe factors that contribute to useful financial information.

26. External Financial Reporting
Main Goal: Provide useful financial information to external users for decision making.
Useful
Relevant
Relevant
Faithful
Representation
Faithful
Representation
Part I
The main goal of external financial reporting is to ensure companies produce financial information that is useful to present and potential investors, lenders, and other creditors in making decisions in their capacity as capital providers.
Part II
For financial information to be judged useful, it must be relevant and a faithful representation. Information is relevant if it makes a difference in decision making and it is a faithful representation if it fully depicts the economic substance of business activities.
Part III
The usefulness of financial information is enhanced when it is comparable (to prior periods and other companies), verifiable, timely, and understandable.
Comparable Verifiable Timely Understandable

27. Accounting Standards World United States Where? FASB Who? IASB GAAP
The system of financial statement reporting in use today has a long history—all the way back to a publication in 1494 by an Italian monk and mathematician, Luca Pacioli. Currently, in the United States, the Financial Accounting Standards Board (FASB) has the primary responsibility for setting the underlying rule of accounting. As a group, these rules are called Generally Accepted Accounting Principles, or GAAP for short (pronounced like the name of the clothing store). The accounting rules in the United States are similar, for the most part, to those used elsewhere in the world, but some important differences exist. The FASB is working alongside the International Accounting Standards Board (IASB) to eliminate these differences. The accounting rules developed by the IASB are called International Financial Reporting Standards, or IFRS for short.
GAAP
What?
IFRS

28. Ethical Conduct When faced with an ethical dilemma:
Identify who will benefit from the situation and how others will be harmed.
Identify the alternative courses of action.
Ethics refers to the standards of conduct for judging right from wrong, honest from dishonest, and fair from unfair. Intentional financial misreporting is both unethical and illegal. As you will see throughout this course, some accounting and business issues have clear answers that are either right or wrong. However, many situations require accountants, auditors, and managers to weigh the pros and cons of alternatives before making final decisions. To help ensure these decisions are made in a professional and ethical manner, the American Institute of Certified Public Accountants (AICPA) requires all its members to adhere to a Code of Professional Conduct.
Not all ethical dilemmas are clear-cut. Some situations will require you to weigh one moral principle (e.g., honesty) against another (e.g., loyalty). Advise your employees that, when faced with an ethical dilemma, they should follow a three-step process:
Identify who will benefit from the situation (often the manager or employee) and how others will be harmed (other employees, the company’s reputation, owners, creditors, and the public in general).
Identify the alternative courses of action.
Choose the alternative that is the most ethical —and that you would be proud to have reported in the news.
Often, there is no one right answer to ethical dilemmas and hard choices will need to be made. In the end, however, following strong ethical practices is a key factor in business success and in ensuring good financial reporting.
Choose the alternative that is the most ethical.

29. Careers That Depend on Accounting Knowledge
Chapter 1 Supplement
Careers That Depend on Accounting Knowledge
Chapter 1 Supplement: Careers that depend on accounting knowledge

30. Accounting knowledge can make the difference in your ability to land a dream job, whether you hope to work in production and operations management, human resources, finance, or marketing. Accounting knowledge is not just for Accountants. Accounting knowledge is vital to other positions as it provides valuable information for people in these positions to make day to day decisions. Such as a Customer Business Developer with Procter & Gamble will need to collaborate with the accounting department on enhancing customer profits and cash flows.

31. Chapter 1 Solved Exercises
M1-12, E1-3, E1-6, E1-8, S1-6 (Req. 1)
Chapter 1 Solved Exercises: M1-12, E1-3, E1-6, E1-8, S1-6 (Req 1)

32. M1-12 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, For its first two years of operations, it reported the following:
On the basis of the data given, prepare a statement of retained earnings for 2012 (its first year of operations) and Show computations.
Net Income for 2012
Net Income for 2013
Dividends for 2012
Dividends for 2013
Total assets at the end of 2012
Total assets at the end of 2013
$ 40,000
45,000
15,000
20,000
125,000
242,000
M1-12 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, For its first two years of operations, it reported the following:
Net Income for 2012, $40,000;
Net Income for 2013, $45,000;
Dividends for 2012, $15,000;
Dividends for 2013, $20,000;
Total assets at the end of 2012, $125,000; and
Total assets at the end of 2013, $242,000.
On the basis of the data given, prepare a statement of retained earnings for 2012 (its first year of operations) and Show computations.

33. M1-12 Preparing a Statement of Retained Earnings
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2012
Retained Earnings, January 1, 2012
Add: Net Income
Subtract: Dividends
Retained Earnings, December 31, 2012 $
40,000
(15,000)
$ 25,000
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2013
Retained Earnings, January 1, 2013
Add: Net Income
Subtract: Dividends
Retained Earnings, December 31, 2013
$ 25,000
45,000
(20,000)
$ 50,000
Part I
Stone Culture Corporation began 2012 with zero retained earnings. During 2012, net income was $40,000 and dividends were $15,000. This resulted in ending retained earnings at December 31, 2012 of $25,000.
Part II
In 2013, Stone Culture Corporation began the year with $25,000 in retained earnings. During 2013, net income was $45,000 and dividends were $20,000. This resulted in ending retained earnings at December 31, 2013 of $50,000.

34. E1-3 Preparing a Balance Sheet
DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at January 29, 2011, contained the following items (listed alphabetically, amounts in thousands).
Required:
Prepare the balance sheet as of January 29, 2011 solving for the missing amount.
As of January 29, did most of the financing for assets come from creditors or stockholders?
Accounts Payable
Accounts Receivable
Cash
Contributed Capital
Notes Payable
Other Assets
Other Liabilities
Retained Earnings
Property, Plant, and Equipment
Total Assets
Total Liabilities and Stockholders’ Equity
$ ,722
12,514
93,617
314,382
95,589
692,375
122,822
210,391
326,382
1,008,897 ?
E1-3 Preparing a Balance Sheet
DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at January 29, 2011 contained the following items (in thousands).
Accounts Payable $149,722 Other Liabilities $122,822
Accounts Receivable 12,514 Property, Plant, and Equipment 210,391
Cash 93, Retained Earnings 326,382
Contributed Capital 314,382 Total Assets 1,008,897
Notes Payable 95,589 Total Liabilities and Stockholders’ Equity ?
Other Assets 692,375

35. E1-3 Preparing a Balance Sheet
DSW, Inc.
Balance Sheet
At January 29, 2011
(In thousands)
Assets
Cash
Accounts Receivable
Property, Plant, and Equipment
Other Assets
Total Assets
$ ,617
12,514
210,391
692,375
$ 1,008,897
Most of the financing as of January 29 came from stockholders. The stockholders have financed $640,764 of the total assets and creditors have financed only $368,133 of the total assets of the company.
Liabilities
Accounts Payable
Notes Payable
Other Liabilities
Total Liabilities
Stockholders’ Equity
Contributed Capital
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ ,722
95,589
122,822
368,133
314,382
326,382
640,764
$ 1,008,897
Part I
First, we prepare the heading for the balance sheet which includes the company name, the financial statement title, and the date. Next, we prepare the assets section, which consists of cash, accounts receivable, property, plant, and equipment, and other assets.
Part II
The liabilities section includes accounts payable, notes payable, and other liabilities. The stockholders’ equity section includes contributed capital and retained earnings. Notice that the balance sheet is in balance where total assets equal total liabilities and stockholders’ equity.
Part III
Most of the financing as of November 1 came from stockholders. The stockholders have financed $640,764 of the total assets and creditors have financed only $368,133 of the total assets of the company.

36. E1-6 Preparing an Income Statement and Inferring Missing Values
Cinemark Holdings, Inc. operates movies and food concession counters throughout the United States. Its income statement for the quarter ended March 31, 2011, reported the following amounts (listed alphabetically in thousands):
Required:
Solve for the missing amounts and prepare an Income Statement for the quarter ended March 31, 2011.
What are Cinemark’s main source of revenue and two biggest expenses?
Net Income
Other Expenses
Other Revenues
Rent Expense
Total Expenses
Admissions Revenues
Concessions Expenses
Concessions Revenues
Film Rental Expenses
Gen. & Admin. Expenses
$ 311,692
23,282
146,681
165,153
179,047
$ ?
24,265
24,763
66,426 ?
E1-6 Preparing an Income Statement and Inferring Missing Values
Cinemark Holdings, Inf. operates movies and food concession counters throughout the United States. Its income statement for the quarter ended March 31, 2011, reported the following amounts (alphabetically in thousands):
Admissions Revenue $311,692 Net Income ?
Concessions Expenses 23,282 Other Expenses $24,265
Concessions Revenue 146,681 Other Revenues 24,763
Film Rental Expenses 165,153 Rent Expense 66,426
General and Administrative Expenses 179,047 Total Expenses ?
Required:
1. Solve for the missing amounts and prepare an Income Statement for the quarter ended March 31, 2011.
2. What is Cinemark’s main source of revenue and two biggest expenses?

37. For the Quarter Ended March 31, 2011
E1-6 Preparing an Income Statement and Inferring Missing Values
Cinemark Holdings, Inc.
Income Statement
For the Quarter Ended March 31, 2011
(in thousands)
Revenues
Admissions Revenues
Concessions Revenues
Other Revenues
Total Revenues
Expenses
Concessions Expenses
Film Rental Expenses
Gen. and Admin. Expenses
Rent Expense
Other Expenses
Total Expenses
Net Income
$ 311,692
146,681
24,763
$ 483,136
23,282
165,153
179,047
66,426
24,265
458,173
$ 24,963
Part I
The first part of Cinemark’s income statement includes the three revenue accounts: admissions revenues, concessions revenues, and other revenues. Total revenues is $483,136.
Part II
The second part of Cinemark’s income statement includes all the expense accounts. One of the missing values in this problem was the total expenses. What did you get for total expenses?
Part III
Did you get the correct answer of $458,173 for total expenses? If not, go back and make sure you included all the expenses in the income statement.
Another missing value in this problem was net income. Net income is calculated as revenues minus expenses.
Part IV
Cinemark’s net income for this period is $24,963? ? ?

38. For the Quarter Ended March 31, 2011
E1-6 Preparing an Income Statement and Inferring Missing Values
Cinemark Holdings, Inc.
Income Statement
For the Quarter Ended March 31, 2011
(in thousands)
Revenues
Admissions Revenues
Concessions Revenues
Other Revenues
Total Revenues
Expenses
Concessions Expenses
Film Rental Expenses
Gen. and Admin. Expenses
Rent Expense
Other Expenses
Total Expenses
Net Income
$ 311,692
146,681
24,763
$ 483,136
23,282
165,153
179,047
66,426
24,265
458,173
$ 24,963
Regal’s main source of revenue is from admissions and the two main expenses are the film rental expense and general and administrative expenses.

39. E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations
Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company.
TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts. D
Independent Cases
Total Revenues
Total Expenses
Net Income (Loss)
Total
Assets
Total Liabilities
Stockholders’ Equity E C B A
$110,000
80,000
50,000
81,000
86,000
$82,000
(6,000)
20,000
12,000
104,000
112,000
$150,000
73,000
22,000
26,000
$70,000
28,000
77,000
70,000
E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations
Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company.
TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts.

40. E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations
R – E = NI
A = L + SE D
Independent Cases
Total Revenues
Total Expenses
Net Income (Loss)
Total
Assets
Total Liabilities
Stockholders’ Equity E C B A
$110,000
92,000
80,000
50,000
75,000
81,000
30,000
86,000
$82,000
(6,000)
20,000
12,000
$28,000
101,000
99,000
104,000
112,000
$150,000
73,000
22,000
26,000
42,000
$70,000
28,000
77,000
78,000
70,000
$80,000
Part I
The numerical relationship for the first three columns is that revenues minus expenses equals net income. The numerical relationship of the last three columns is that total assets equal total liabilities plus stockholders’ equity.
For Case A, calculate the net income amount and the stockholders’ equity amount.
Part II
Net income of $28,000 is calculated as revenues of $110,000 minus expenses of $82,000. To calculate stockholders’ equity we must use a little algebra with the basic accounting equation and solve for stockholders’ equity. If total assets equals total liabilities plus stockholders’ equity, and if we know the amounts for two of the three numbers, we can solve for the missing value. In this case, total assets of $150,000 minus total liabilities of $70,000 equals stockholders’ equity of $80,000.
Now, let’s solve the missing values in Case B.
Part III
To solve for total revenues, we add together total expenses of $80,000 and net income of $12,000 to get total revenues of $92,000. Total liabilities is calculated by taking total assets of $112,000 and subtracting stockholders’ equity of $70,000. This results in total liabilities of $42,000.
Let’s solve the missing values in Case C.
Part IV
Net loss of $6,000 is calculated as revenues of $80,000 minus expenses of $86,000. To calculate stockholders’ equity take total assets of $104,000 minus total liabilities of $26,000 which equals stockholders’ equity of $78,000.
Now, let’s solve the missing values in Case D.
Part V
To solve for total expenses, we take total revenues of $50,000 and subtract net income of $20,000 to get total expenses of $30,000. Total assets is calculated by adding total liabilities of $22,000 and stockholders’ equity of $77,000. This results in total assets of $99,000.
Let’s solve the missing values in Case E.
Part VI
To solve for total revenues, we add total expenses of $81,000 and net loss of $6,000 to get total revenues of $75,000. Total assets is calculated by adding total liabilities of $73,000 and stockholders’ equity of $28,000. This results in total assets of $101,000.

41. S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $250. He figures that, if needed, he could sell it to a friend for $180. Ashley argued that she was better off because she had $1,000 cash in her bank account and a piece of art that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term.
Required:
1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report.
S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $250. He figures that, if needed, he could sell it to a friend for $180. Ashley argued that she was better off because she had $1,000 cash in her bank account and a piece of art that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term.
Required:
1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report.

42. Balance Sheet Ashley Jason ASSETS What is owned Cash $1,000 $6,000
S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
Balance Sheet
Ashley
Jason
ASSETS
What is owned
Cash
$1,000
$6,000
Console
-0-
250
Art
800
-0-
TOTAL
$1,800
$6,250
LIABILITIES
What is owed
Car loan
$ 250
$ -0-
A balance sheet lists items owned (assets) and owed (liabilities) at a particular point in time, producing a “net worth” that represents the excess of assets over liabilities. Let’s prepare a balance sheet based on historical cost, which is consistent with generally accepted accounting principles. First, we will identify what is owned. Then, we will identify what is owed.
Continue to click through the solution to see what Ashley owns and owes and what Jason owns and owes. At the end, we will show you how the items on this slide relate to what we have learned about assets, liabilities, and equity in this chapter.
If we used market values instead of historical cost, Ashley’s art would be valued at $1,400 and her equity would increase to $2,150. For Jason, his console would be $180 and his equity would decrease to $580.
Tuition Payable
-0-
800
Student Loan
-0-
4,800
TOTAL
250
5,600
EQUITY
“Net worth”
1,550
650
TOTAL
$1,800
$6,250

43. End of Chapter 1
End of chapter 1.