The Financial Statements Chapter 1

Learning Objective 1 Use accounting vocabulary for decision making.

Accounting – The Language of Business An information system that... measures business activities processes data into reports communicates results to decision makers

Who Uses Accounting Information? Individuals Government regulatory agencies Businesses Taxing authorities Investors and creditors Nonprofit organizations

Financial and Management Accounting External Users Internal Users

Ethics in Accounting and Business Standards of professional conduct for accountants AICPA’s Code of Professional Conduct

Business Organizations Proprietorships Partnerships Corporations

Learning Objective 2 Apply accounting concepts and principles

Accounting Principles and Concepts GAAP Generally Accepted Accounting Principles Rules that govern accounting

The Entity Concept An accounting entity is an organization that stands apart as a separate economic unit.

The Reliability Principle Data is reliable if It is verifiable It can be confirmed by an independent observer

The Cost Principle Assets and services acquired should be recorded at their actual (historical) cost.

The Going-Concern Concept The entity will continue remain in operation for the foreseeable future.

The Stable-Monetary-Unit Concept The dollar’s purchasing power is stable

Learning Objective 3 Use the accounting equation to describe an organization.

The Accounting Equation Assets = Liabilities + Owner’s Equity Claims to Economic Resources Economic Resources If assets are 100,000 and liabilities are 70,000.. …..OE? 30,000

Assets Economic resources that are expected to produce a benefit in the future Identify some assets

Liabilities Economic obligations (debt) of a business

Owner’s Equity The owner’s claim on the entity’s assets Capital Stockholders’ equity Net assets Assets – liabilities = owner’s equity

Stockholders’ Equity For a corporation, stockholders’ equity is divided into two main categories. Paid in capital Retained earnings.

The Accounting Equation Paid-in capital - amount invested by its owners - common stock. Retained earnings - amount earned by income-producing activities and kept for use in the business Assets = Liabilities + Paid-in capital + Retained earnings

The Accounting Equation Revenues - increases in retained earnings from delivering goods or services to customers Expenses - decreases in retained earnings that result from operations

Components of Retained Earnings Revenues for the period – Expenses for the period Start of the period Ending balance of retained earnings End of the period = Beginning balance of retained earnings + or – Net income (or Net loss) for the period – Dividends for the period =

Learning Objective 4 Evaluate operating performance, financial position, and cash flows.

Income Statement How well did the company perform during the month? Revenues – Expenses Net Income (Loss)

Statement of Retained Earnings Why did the company's retained earnings change during the year? Beginning retained earnings +Net income (-Net loss) -Dividends Ending retained earnings

Assets = Liabilities + Owner’s Equity Balance Sheet What is the company’s financial position at the end of a period? Assets = Liabilities + Owner’s Equity

Statement of Cash Flows How much cash did the company generate and spend during the year? Operating cash flows + Investing cash flows + Financing cash flows Increase (decrease) in cash

Learning Objective 5 Explain the relationships among the financial statements.

Relationships Among the Financial Statements ABC Company Income Statement – Year Ended December 31, 2006 Revenues $700,000 Expenses 670,000 Net income $ 30,000

Relationships Among the Financial Statements ABC Company Statement of Retained Earnings Year Ended December 31, 2006 Beginning retained earnings $180,000 Net income 30,000 Cash dividends (10,000) Ending retained earnings $200,000

Relationships Among the Financial Statements ABC Company Balance Sheet December 31, 2006 Assets Cash $ 25,000 All other assets 275,000 Total assets $300,000 Liabilities Total liabilities $120,000 Stockholders’ equity Common stock 40,000 Retained earnings 200,000 Other equity (60,000) Total liabilities and stockholders’ equity $300,000

Relationships Among the Financial Statements ABC Company Statement of Cash Flows Year Ended December 31, 2006 Net cash provided by operating activities $ 90,000 Net cash used for investing activities (110,000) Net cash provided by financing activities 40,000 Net increase in cash 20,000 Beginning cash balance 5,000 Ending cash balance $ 25,000