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University of California, Santa Barbara

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1 University of California, Santa Barbara
Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved.

2 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Explain why accounting is the language of business Copyright ©2015 Pearson Education Inc. All rights reserved.

3 Copyright ©2015 Pearson Education Inc. All rights reserved.
EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS Accounting is an information system Measures business activities Processes data into reports Communicates results to decision makers Is “the language of business” LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

4 EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS
Exhibit 1-1 | The Flow of Accounting Information People make decisions Business transactions occur Companies report their results LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

5 Investors and Creditors Nonprofit Organizations
Who Uses Accounting Information? Individuals Manage personal bank accounts Decide whether to rent or buy Budget monthly income and expenditures Investors and Creditors Regulatory Bodies Nonprofit Organizations LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

6 Investors and Creditors Nonprofit Organizations
Who Uses Accounting Information? Individuals Investors and Creditors Investors want to know how much they can earn on an investment Creditors want to know when they are going to be paid Regulatory Bodies Nonprofit Organizations LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

7 Investors and Creditors Nonprofit Organizations
Who Uses Accounting Information? Individuals Investors and Creditors Internal Revenue Service (IRS) requires businesses, individuals, and other organizations to pay taxes U.S. Securities and Exchange Commission (SEC) requires public companies to provide financial reports Regulatory Bodies Nonprofit Organizations LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

8 Investors and Creditors Nonprofit Organizations
Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations File periodic reports with the IRS and state governments LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

9 Managerial Accounting
Two Kinds of Accounting Financial Accounting Managerial Accounting For decision makers outside the entity investors creditors government agencies the public Information for managers budgets forecasts projections LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

10 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Exhibit 1-2 | The Various Forms of Business Organization Proprietorship Partnership LLC Corporation 1. Owner(s) Proprietor-one owner Partners-two or more owners Members Stockholders-generally many owners 2. Personal liability of owner(s) for business debts Proprietor is personally liable General partners are personally liable; limited partners are not Members are not personally liable Stockholders are not personally liable LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

11 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Proprietorship Single owner Tend to be small retail stores or solo providers of professional services Proprietor is personally liable for all the business’s debts Business records should not include the proprietor’s personal finances LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

12 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Partnership Two or more parties as co-owners Income and losses “flow through” to the partners Many include retail establishments, professional service firms, real estate, and oil and gas exploration companies General partnerships have mutual agency and unlimited liability A limited-liability partnership lessens risk to the partners LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

13 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Limited-Liability Company (LLC) Business (not the owner) is liable for the company’s debts May have one owner or many owners, called members Members have limited liability LLC’s income “flows through” to the members, just as if they were partners LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

14 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Corporation A business owned by the stockholders Able to raise large sums of capital from issuance of stock Formed under state law Legally distinct from its owners Stockholders have no personal obligation for the corporation’s debts continued LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

15 Copyright ©2015 Pearson Education Inc. All rights reserved.
Organizing a Business Corporation Double taxation Corporation pays income tax Shareholders taxed on dividend distributions Stockholders elect the board of directors, which Sets policy Appoints officers LO 1 Copyright ©2015 Pearson Education Inc. All rights reserved.

16 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Explain and apply underlying accounting concepts, assumptions, and principles Copyright ©2015 Pearson Education Inc. All rights reserved.

17 Copyright ©2015 Pearson Education Inc. All rights reserved.
EXPLAIN AND APPLY UNDERLYING ACCOUNTING CONCEPTS, ASSUMPTIONS, AND PRINCIPLES Accountants follow professional frameworks for measurement and disclosure of financial information. Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) formulates GAAP LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

18 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Accounting’s Objective Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

19 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Accounting’s Objective Fundamental Qualitative Characteristics To be relevant, information must Make a difference to the decision maker Help predict or confirm value Be material Enhancing Qualitative Characteristics Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

20 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Accounting’s Objective Fundamental Qualitative Characteristics To make a faithful representation, the information must Be complete, neutral (free from bias), and free from error Focus on the economic substance of a transaction, event, or circumstance Faithful representation makes the information reliable to users Enhancing Qualitative Characteristics Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

21 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Enhancing Qualitative Characteristics Comparability: Accounting information capable of being compared with information from other companies in the same period Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

22 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Enhancing Qualitative Characteristics Verifiability: Information capable of being checked for accuracy, completeness, and reliability Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

23 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Enhancing Qualitative Characteristics Timeliness: Information made available to users early enough to help them make decisions Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

24 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Enhancing Qualitative Characteristics Understandability: Information sufficiently transparent so that it makes sense to reasonably informed users of the information Constraints LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

25 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-3 | Conceptual Foundations of Accounting Cost Constraint: Cost of disclosure should not exceed the expected benefits to users LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

26 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assumptions and Principles Entity Assumption: Organization stands apart from other organizations and individuals as a separate economic unit Continuity (Going-Concern) Assumption: Entity will remain in operation for the foreseeable future Historical Cost Principle: Assets should be recorded at their actual cost Stable-Monetary-Unit Assumption: Effect of inflation is ignored, based on the assumption that the dollar’s purchasing power is relatively stable LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

27 Copyright ©2015 Pearson Education Inc. All rights reserved.
International Financial Reporting Standards (IFRS) Developed by the IASB Used by many countries around the world Application of GAAP for public companies in the United States is overseen by the U.S. Securities and Exchange Commission (SEC) SEC is studying whether and how to require all U.S. public companies to adopt some version of IFRS LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

28 Copyright ©2015 Pearson Education Inc. All rights reserved.
International Financial Reporting Standards (IFRS) Having a uniform set of high-quality global accounting standards makes financial statements more comparable across borders Most commonly used accounting practices are essentially the same under both U.S. GAAP and IFRS FASB is working hand-in-hand with the IASB toward convergence of standards LO 2 Copyright ©2015 Pearson Education Inc. All rights reserved.

29 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Apply the accounting equation to business organizations Copyright ©2015 Pearson Education Inc. All rights reserved.

30 Copyright ©2015 Pearson Education Inc. All rights reserved.
APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS Assets and Liabilities Financial statements are based on the accounting equation Exhibit 1-4 | The Accounting Equation Copyright ©2015 Pearson Education Inc. All rights reserved.

31 Copyright ©2015 Pearson Education Inc. All rights reserved.
APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS Assets and Liabilities Assets Economic resources Expected future benefit Liabilities Outsider claims Expected future sacrifice Owner’s Equity Insider claims Stockholders’ interest in the assets LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

32 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets and Liabilities What are some of The Gap, Inc.’s assets and liabilities? Assets Liabilities Cash and cash equivalents Inventories Property, plant, and equipment Accounts payable Federal and state income taxes payable Long-term debt Current portion of long- term debt LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

33 Copyright ©2015 Pearson Education Inc. All rights reserved.
APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS Owners’ Equity Assets Liabilities Owner’s Equity The accounting equation can be written as Assets = Liabilities + Stockholders’ Equity Assets = Liabilities + Paid-in Capital + Retained Earnings LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

34 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Assets = Liabilities + Stockholders’ Equity Paid-in Capital Common Stock Paid-in capital: amount stockholders have invested in the corporation LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

35 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Assets = Liabilities + Stockholders’ Equity Paid-in Capital + Retained Earnings Common Stock Retained earnings: amount earned and kept for use in the business LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

36 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Assets = Liabilities + Stockholders’ Equity Paid-in Capital + Retained Earnings Revenues: inflows of resources that increase retained earnings by delivering goods or services to customers Revenues LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

37 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Assets = Liabilities + Stockholders’ Equity Paid-in Capital + Retained Earnings Revenues - Expenses Expenses: resource outflows that decrease retained earnings due to operations LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

38 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Assets = Liabilities + Stockholders’ Equity Paid-in Capital + Retained Earnings Revenues - Expenses - Dividends Dividends: distributions to stockholders (usually cash) generated by net income LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

39 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Expenses decrease Revenues increase Dividends decrease Retained Earnings LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

40 Copyright ©2015 Pearson Education Inc. All rights reserved.
Owners’ Equity Exhibit 1-5 | The Components of Retained Earnings LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

41 Copyright ©2015 Pearson Education Inc. All rights reserved.
Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. Requirements Use these data to write Blue Diamond Corporation’s accounting equation. How much in resources does Blue Diamond Corporation have to work with? How much does Blue Diamond Corporation owe creditors? How much of the company’s assets do the Blue Diamond Corporation stockholders actually own? LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

42 Copyright ©2015 Pearson Education Inc. All rights reserved.
Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. What are the company’s total resources? Stockholders’ Equity = + Assets Liabilities $ 360 600 220 $ 210 560 = + $ 1,180 $ 770 $ 410 (Amount in millions) LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

43 Copyright ©2015 Pearson Education Inc. All rights reserved.
Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much in resources does Blue Diamond Corporation have to work with? Stockholders’ Equity = + Assets Liabilities $ 360 600 220 $ 210 560 = + $ 1,180 $ 770 $ 410 (Amount in millions) LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

44 Copyright ©2015 Pearson Education Inc. All rights reserved.
Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much does Blue Diamond Corporation owe creditors? Stockholders’ Equity = + Assets Liabilities $ 360 600 220 $ 210 560 = + $ 1,180 $ 770 $ 410 (Amount in millions) LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

45 Copyright ©2015 Pearson Education Inc. All rights reserved.
Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much of the company’s assets do the stockholders actually own? Stockholders’ Equity = + Assets Liabilities $ 360 600 220 $ 210 560 = + $ 1,180 $ 770 $ 410 (Amount in millions) LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

46 Copyright ©2015 Pearson Education Inc. All rights reserved.
Advance slide in presentation mode to reveal answers. LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

47 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Evaluate business operations through the financial statements Copyright ©2015 Pearson Education Inc. All rights reserved.

48 Copyright ©2015 Pearson Education Inc. All rights reserved.
EVALUATE BUSINESS OPERATIONS THROUGH THE FINANCIAL STATEMENTS Exhibit 1-6 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 company’s retained earnings change during the year? Statement of retained earnings Beginning retained earnings + Net Income (-Net Loss) − Dividends declared Ending retained earnings What is the company’s financial position at year-end? Balance sheet Assets = Liabilities + Owners’ equity How much cash did the company generate and spend during the year? Statement of cash flows Operating cash flows +/− Investing cash flows +/− Financing cash flows Increase (decrease) in cash Advance slide in presentation mode to reveal financial statement and answer. LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

49 Statement of Retained Earnings Statement of Cash Flows
EVALUATE BUSINESS OPERATIONS THROUGH THE FINANCIAL STATEMENTS Data flow from one financial statement to the next Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

50 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Income Statement Measures Operating Performance Income Statement Also called statement of operations Reports Revenues and gains Expenses and losses Bottom line of net income or net loss for the period Net Income = Total Revenues and Gains - Total Expenses and Losses LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

51 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Income Statement Measures Operating Performance Exhibit 1-7 | The Gap, Inc., Consolidated Statements of Income LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

52 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Statement of Retained Earnings Shows What a Company Did with Its Net Income Retained Earnings Portion of net income reinvested into the business Net income increases retained earnings Net losses and dividends decrease retained earnings Net income (net loss) flows from the income statement to the statement of retained earnings Corporations not obligated to pay dividends LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

53 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Statement of Retained Earnings Shows What a Company Did with Its Net Income Exhibit 1-8 | The Gap, Inc., Consolidated Statements of Retained Earnings LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

54 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Balance Sheet Measures Financial Position Balance Sheet Also called statement of financial position Reports three items: Assets Liabilities Stockholders’ equity Dated at the moment in time when the accounting period ends LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

55 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts and notes receivable Inventory Prepaid expenses Cash is the liquid asset that’s the medium of exchange Cash equivalents include money-market accounts or other financial instruments that are easily convertible to cash LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

56 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts and notes receivable Inventory Prepaid expenses Includes stocks and bonds of other companies that the company intends to sell within the next year LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

57 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Amounts collectible from customers from the sale of goods and services LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

58 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Merchandise that a company sells to customers LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

59 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes Cash and cash equivalents Short-term investments Accounts receivable Inventory Prepaid expenses Amounts paid in advance for costs that include advertising, rent, insurance, and supplies LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

60 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Tangible assets that include land, buildings, computers, and equipment LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

61 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Amount of the historical cost of plant assets that has been allocated to expense in the income statement over time as the asset has been used in producing revenue LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

62 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Long-term Assets Expected to benefit the company for long periods of time Includes Property and equipment Accumulated depreciation Long-term investments Intangibles Includes stocks and bonds of other companies that the company does not intend to sell within the next year LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

63 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Long-term Assets Assets with no physical form, such as patents, trademarks, and goodwill LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

64 Copyright ©2015 Pearson Education Inc. All rights reserved.
Assets on the Balance Sheet Exhibit 1-9 | The Gap, Inc., Partial Consolidated Balance Sheets LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

65 Copyright ©2015 Pearson Education Inc. All rights reserved.
Liabilities on the Balance Sheet Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Amounts owed to vendors and suppliers for purchases of inventory LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

66 Copyright ©2015 Pearson Education Inc. All rights reserved.
Liabilities on the Balance Sheet Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Tax debts owed to the government LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

67 Copyright ©2015 Pearson Education Inc. All rights reserved.
Liabilities on the Balance Sheet Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Includes other liabilities such as interest payable on borrowed money, accrued liabilities for salaries, utilities, and other expenses that are owed but have not been paid LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

68 Copyright ©2015 Pearson Education Inc. All rights reserved.
Liabilities on the Balance Sheet Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes Accounts payable Income taxes payable Accrued expenses Current maturities of long-term debt Portion of long-term liabilities that the company will have to pay off within the next year LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

69 Long-term Liabilities
Liabilities on the Balance Sheet Long-term Liabilities Debts due beyond one year or the company’s normal operating cycle if longer than a year Includes Long-term notes payable Bonds payable LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

70 Copyright ©2015 Pearson Education Inc. All rights reserved.
Liabilities on the Balance Sheet Exhibit 1-9 | The Gap, Inc., Partial Consolidated Balance Sheets LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

71 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Amount represents the par value of the shares issued to stockholders LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

72 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Amount of cash received on initial sale of the company’s stock in excess of the par value LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

73 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Portion of net income reinvested into the business LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

74 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Amounts paid by the company to repurchase its own stock LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

75 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Items of gain or loss that are allowed by the FASB to bypass the income statement and be recorded directly into stockholders’ equity LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

76 Copyright ©2015 Pearson Education Inc. All rights reserved.
Equity on the Balance Sheet Exhibit 1-9 | The Gap, Inc., Partial Consolidated Balance Sheets LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

77 Copyright ©2015 Pearson Education Inc. All rights reserved.
The Statement of Cash Flows Measures Cash Receipts and Payments The Statement of Cash Flows reports three types of activities Operating: Cash flows from selling goods and providing services to customers Investing: Cash flows from the purchase and sale of long-term assets Financing: Borrowing and repayment of borrowed funds Equity transactions, such as issuing stock, paying dividends, and repurchase of company stock LO 4 Copyright ©2015 Pearson Education Inc. All rights reserved.

78 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-10 | The Gap, Inc. Copyright ©2015 Pearson Education Inc. All rights reserved.

79 Financial Statement (s)
Illustration Assume SB Technology, Inc., is expanding into Australia. Identify the financial statement where decision makers can find the following information about SB Technology, Inc. In some cases, more than one statement will report the needed data. Financial Statement (s) Revenue Dividends Current liabilities Total assets Selling, general, and administrative expense Income Statement Statement of Retained Earnings, Statement of Cash Flows Balance Sheet LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

80 Financial Statement (s)
Illustration Identify the financial statement where decision makers can find the following information about SB Technology, Inc. Financial Statement (s) Ending cash balance Cash spent to acquire a building Ending balance of retained earnings Net income Balance Sheet, Statement of Cash Flows Statement of Cash Flows Balance Sheet, Statement of Retained Earnings Income Statement, Statement of Retained Earnings, Statement of Cash Flows LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

81 Financial Statement (s)
Illustration Identify the financial statement where decision makers can find the following information about SB Technology, Inc. Financial Statement (s) Income tax expense Common stock Income tax payable Long-term debt Adjustments to reconcile net income to net cash provided by operations Income Statement Balance Sheet Statement of Cash Flows LO 3 Copyright ©2015 Pearson Education Inc. All rights reserved.

82 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Construct financial statements and analyze the relationships among them Copyright ©2015 Pearson Education Inc. All rights reserved.

83 Copyright ©2015 Pearson Education Inc. All rights reserved.
CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Income Statement Reports revenues (net sales) and expenses of the year Reports net income or net loss If revenues exceed expenses, there is net income If expenses exceed revenues, there is a net loss LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

84 Copyright ©2015 Pearson Education Inc. All rights reserved.
CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Statement of Retained Earnings Opens with the beginning retained earnings balance Adds net income (or subtracts net loss) Net income comes directly from the income statement Subtracts dividends declared Reports retained earnings balance at end of the year LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

85 Copyright ©2015 Pearson Education Inc. All rights reserved.
CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Balance Sheet Reports assets, liabilities, and stockholders’ equity at the end of the year Reports that assets equal the sum of liabilities plus stockholders’ equity Reports retained earnings, which comes from the statement of retained earnings LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

86 Copyright ©2015 Pearson Education Inc. All rights reserved.
CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Statement of Cash Flows Reports cash flows from operating, investing, and financing activities Each category results in net cash provided (an increase) or used (a decrease) Reports whether cash and cash equivalents increased (or decreased) during the year Shows the ending cash and cash equivalents balance LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

87 Copyright ©2015 Pearson Education Inc. All rights reserved.
CONSTRUCT FINANCIAL STATEMENTS AND ANALYZE THE RELATIONSHIPS AMONG THEM Exhibit 1-11 | Relationships among the Financial Statements (in millions of $) 1 LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

88 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-11 | Relationships among the Financial Statements (in millions of $) 2 LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

89 Copyright ©2015 Pearson Education Inc. All rights reserved.
Exhibit 1-11 3 LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

90 What Do Decision Makers Look For?
Question/Decision What to look for Can the company sell its products? Sales revenue Increasing or Decreasing? What are the main income measures to watch for trends? Gross profit, Operating income, and Net income What percentage of sales revenue ends up as profit? Divide net income by sales revenue Can the company collect its receivables? Compare % increase in receivables to % increase in sales Can the company pay its liabilities? Compare assets to liabilities Where is the company’s cash coming from? Observe the line items on the cash flow statement LO 5 Copyright ©2015 Pearson Education Inc. All rights reserved.

91 Copyright ©2015 Pearson Education Inc. All rights reserved.
3 Learning Objective Evaluate business decisions ethically Copyright ©2015 Pearson Education Inc. All rights reserved.

92 Copyright ©2015 Pearson Education Inc. All rights reserved.
EVALUATE BUSINESS DECISIONS ETHICALLY Economics Decision should maximize the economic benefits Legal Proposition that free societies are governed by laws Ethical Recognizes that while certain actions might be both economically profitable and legal, they may still not be right LO 6 Copyright ©2015 Pearson Education Inc. All rights reserved.

93 Copyright ©2015 Pearson Education Inc. All rights reserved.
Decision What is the issue? Who are the stakeholders, and what are the consequences of the decision to each? Weigh the alternatives. Make the decision and be prepared to deal with the consequences. LO 6 Copyright ©2015 Pearson Education Inc. All rights reserved.

94 Copyright ©2015 Pearson Education Inc. All rights reserved.
This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright ©2015 Pearson Education Inc. All rights reserved.


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