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McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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Presentation on theme: "McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved."— Presentation transcript:

1 McGraw-Hill/IrwinCopyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

3 Learning Objective 1 Describe various organizational forms and business decision makers. 1-3

4 Organizational Forms Partnership Business organization owned by two or more people. Each partner is personally liable for all debts of the business. Corporation A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Sole Proprietorship Business organization owned by one person. The owner is personally liable for all debts of the business. 1-4

5 Organizational Forms Source: 1-5

6 The Accounting System Business and Financing Activities Accounting System Accounting Reports FinancialManagerial External users (creditors, investors, etc.) Internal users (managers, etc.) Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-6

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

8 The Basic Accounting Equation Resources Owned... by the company Resources Owed... to creditors to stockholders Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. Assets = Liabilities + Stockholders’ Equity 1-8

9 Assets Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash SuppliesFurniture Equipment 1-9

10 Liabilities Amounts owed by the business to creditors. Notes Payable Accounts Payable 1-10

11 Stockholders’ Equity Owners’ claim to the business resources. Stock Certificate Contributed Capital Retained Earnings 1-11

12 Revenues, Expenses and 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 business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Revenues – Expenses = Net Income 1-12

13 Dividends Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. 1-13

14 Financial Statements Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Financial statements are typically prepared in this order. 1-14

15 The Income Statement Reports the amount of revenues less expenses for a period of time. The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. 1-15

16 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. 1-16

17 The Balance Sheet Reports at a point in time: 1.What a business owns (assets). 2.What it owes to creditors (liabilities). 3.What is left over for the owners of the company’s stock (stockholders’ equity). BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity 1-17

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. 1-18

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. 1-19

20 Relationships Among the Financial Statements Net income flows from the Income Statement to the Statement of Retained Earnings. 1 1 1-20

21 Relationships Among the Financial Statements Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2 2 1-21

22 Relationships Among the Financial Statements Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3 3 1-22

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

24 Using Financial Statements Creditors (1)Is the company generating enough cash to make payments on its loans? (2)Does the company have enough assets to cover its liabilities? Investors (1)What immediate return ( through dividends ) on my contributions? (2)What is the long- term return ( through stock price increases resulting from the company’s profits )? … SCF … B/S … SRE.. I/S 1-24

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

26 External Financial Reporting Main Goal: Provide useful financial information to external users for decision making. Relevant Useful Faithful Representation Faithful Representation Faithful Representation Relevant 1-26

27 World Accounting Standards Where? Who? What? IASB IFRS FASB United States United States GAAP 1-27

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. Choose the alternative that is the most ethical. 1-28

29 Chapter 1 Supplement Accounting Careers

30 *Source: 2008 Robert Half Salary Guide. 1-30

31 Chapter 1 Solved Exercises M1-13, E1-3, E1-6, E1-8, S1-6 (Req. 1)

32 M1-13 Preparing a Statement of Retained Earnings Stone Culture Corporation was organized on January 1, 2009. 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 2009 (its first year of operations) and 2010. Show computations. Net Income for 2009$ 36,000 Net Income for 201045,000 Dividends for 200915,000 Dividends for 201020,000 Total assets at the end of 2009125,000 Total assets at the end of 2010242,000 1-32

33 M1-13 Preparing a Statement of Retained Earnings 1-33

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 November 1, 2008, contained the following items (in thousands). Required: 1.Prepare the balance sheet as of November 1, solving for the missing amount. 2.As of November 1, did most of the financing for assets come from creditors or stockholders? 1-34

35 E1-3 Preparing a Balance Sheet Assets Cash$45,570 Accounts Receivable11,888 Property, Plant, and Equipment 233,631 Other Assets 494,294 Total Assets$785,383 Liabilities Accounts Payable$136,405 Notes Payable 99,044 Other Liabilities 79,148 Total Liabilities 314,597 Stockholders’ Equity Contributed Capital291,248 Retained Earnings 179,538 Total Stockholders’ Equity 470,786 Total Liabilities and Stockholders’ Equity$785,383 DSW, Inc. Balance Sheet At November 1, 2008 (in thousands) Most of the financing as of November 1 came from stockholders. The stockholders have financed $470,786 of the total assets and creditors have financed only $314,597 of the total assets of the company. 1-35

36 E1-6 Preparing an Income Statement and Inferring Missing Values Regal Entertainment Group operates movie theaters and food concession counters throughout the United States. Its income statement for the quarter ended June 26, 2008, reported the following amounts (in thousands): Required: 1. Solve for the missing amounts and prepare an Income Statement for the quarter ended June 26, 2008. TIP: First put the items in the order they would appear on the Income Statement and then solve for the missing values. 2. What is Regal’s main source of revenue and biggest expense? 1-36

37 E1-6 Preparing an Income Statement and Inferring Missing Values ? ? 1-37

38 E1-6 Preparing an Income Statement and Inferring Missing Values 1-38

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. 1-39

40 E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations R – E = NIA = L + SE 1-40

41 E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations R – E = NIA = L + SE 1-41

42 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 $350. He figures that, if needed, he could sell it to a friend for $280. Ashley argued that she was better off because she had $1,000 cash in her bank account and a vintage car 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. 1-42

43 What is owned What is owed “Net worth” Cash Car loan AshleyJason $1,000$6,000 Console Car TOTAL Tuition Payable Student Loan -0- 800 $1,800 TOTAL $ 250 -0- 250 1,550 350 -0- $6,350 $ -0- 800 4,800 5,600 750 TOTAL $1,800$6,350 ASSETS LIABILITIES EQUITY Balance Sheet S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet 1-43

44 End of Chapter 1

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