0. Introduction to Financial Statements
Chapter One
Introduction to Financial Statements
Zining Li
ACCT 2301 FALL 2009
Cox School of Business, SMU

1. What do we hope to learn?
What are the characteristics of a corporation?
What are the four basic financial statements?
What information does each statement convey?
What categories of items are reported in each financial statement?
How are elements within a statement related?
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2. How is Business Formed Sole proprietorship Partnership Corporation
Single owner
Not separate entity for liability & responsibility
Partnership
Two or more owners, but not a separate entity
Corporation
Typically multiple owners
separate legal entity
This course is about Corporations.
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3. Corporations Popular form of business because…
It’s simple for individuals to purchase small amounts of stock
Allows easy transfer of ownership through established exchanges
Provides limited liability – the most you can lose is your initial investment
Easier to raise capital
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4. Separate Legal Entity
Since a corporation is a separate legal entity it can:
Own assets
Incur liabilities
Sue and be sued
Enter into contracts independent of the stockholders (owners)
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5. Accounting System and its Users
Accounting system records and summarizes financial information.
Users
Internal decision makers (managers) get reports.
External decision makers (investors, creditors, suppliers, and customers) get financial statements prepared in accordance with rules.
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6. Four Basic Financial Statements
Balance Sheet
Report the financial condition about a firm
Income Statement
Performance measure of a business
Statement of Shareholders’ Equity
Statement of Retained Earnings is part of it
Statement of Cash Flows
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7. Balance Sheet: Basic Accounting Equation
Assets = Liabilities + Owners’ Equity
Economic resources
Sources of financing for the economic resources
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8. Balance Sheet: Elements
Assets: economic resources controlled by the company
Liabilities: debts or obligation
Owners’ Equity
Also called Shareholders’ Equity, Stockholders’ Equity
Contributed Capital
Retained Earnings
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9. Income Statement The income statement equation is:
Revenues – Expenses = Net Income
Net Income is also called net earnings, profits, or the bottom line number.
It is just a subtotal!
net profit
net loss result
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10. Income Statement: Elements
Revenues are inflows of net assets
Expenses are dollar amount of resources used to earn the revenues
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11. Statement of Shareholders’ Equity
Beginning Contributed Capital
+ Issuance of capital
- Purchase of capital
= Ending Contributed Capital
Beginning Retained Earnings
+ Net Income for the period
- Dividends Declared for the period
= Ending Retained Earnings
Total Shareholders’ Equity: $$
(sum of ending Contributed Capital and ending Retained Earnings)
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12. The Statement of Cash Flows
Reports cash inflows (receipts) and cash outflows (payments).
Three categories
Operating activities
Investing activities
Financing activities
Net change in cash usually NOT equal to net income
The statement ends with a reconciliation of cash
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13. Four Financial Statements All Contains a Heading that Includes
Company name
Statement title
Specific date or a period of time that a statement relates to
Unit of measure
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14. Dates of Financial Statements are Important!
Balance sheet is “AS OF…” or “AT” a particular date
Income statement, Statement of changes in owner’s equity and Statement of cash flows cover a period of time, and thus are “FOR THE PERIOD ENDING”
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15. Is There Some Relationship Among the Statements?
Net Income from the Income Statement is shown as an increase to the beginning Retained Earnings on the Statement of S/E
The ending balances of Retained Earnings and Contributed Capital from the Statement of S/E appear in the Balance Sheet (the owners equity section)
The Statement of Cash Flows reflects the change in the CASH account on the Balance Sheet
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16. Structure of Financial Statements
Statement of Owners’ Equity
Beginning balance of Contributed Capital
+ Issuance (sale) of (own) stocks
- Purchase of (own) stocks
= Ending balance of C.C.
Beginning balance of Retained Earnings
+ Net Income
- Dividends
= Ending balance of R/E
Ending balance of Shareholders’ Equity
Income Statement
Revenues - Expenses
= Net Income
Statement of Cash Flows
Beginning cash balance
+ Cash Inflows
- Cash outflows
= Ending cash balance
Balance Sheets
Assets = Liabilities + S/E
(C.C. +R/E)

17. Notes to Financial Statements
Notes provide supplemental information about the financial condition of a company.
Three basic types of notes:
Description of accounting rules applied.
Presentation of additional detail about an item on the financial statements.
Provides additional information about an item not on the financial statements.
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18. Who Prepares and is Responsible for the Financial Statements?
The management of a business is responsible for accounting for transactions and preparing financial statements.
Maintain a system of controls over both records and assets.
Engage independent auditors
Establish an audit committee
The auditors attest to whether the management prepared the report in accordance with the ‘rules’.
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19. To Take Away… What are the four financial statements?
What information is provided by each statement? How is the information different?
What categories of items are reported in each financial statements? Can you give some examples of those elements?
How are elements within a statement related?
Acct 2301 Li Fall 09 Chapter 1