Financial Accounting A Decision-Making Approach, 2nd Edition King, Lembke, and Smith John Wiley & Sons, Inc. Prepared by Dr. Denise English, Boise State University *

After reading Chapter 2, you should be able to: 1. Identify the four basic financial statements and explain how the financial statements provide useful information to decision makers. 2. Identify how the relationships that exist among the financial statements serve to present a complete picture of a company’s operations and financial position. 3. Understand the types of decisions that users of financial statements make based on accounting information. 4. Explain how accounting information systems help ensure useful information for decision makers. 5. Describe the different types of accounting activities and the role each plays in providing information for decision makers. 6. Describe the role of accounting rules or standards in ensuring useful information for decision makers. 7. Describe how the current social and economic environment influences the accounting profession. CHAPTER TWO ACCOUNTING IN A DECISION-MAKING ENVIRONMENT

1) Income Statement 2) Statement of Financial Position (Balance Sheet) 3) Statement of Cash Flows 4) Statement of Changes in Owners’ Equity (or Statement of Changes in Retained Earnings) The Four Basic Financial Statements

Purpose: to present information concerning the profitability of an organization for a defined period of time. Presentation Formula: + Revenues (amounts generated by the sale of goods or services) - Expenses (costs incurred in doing business) = Net Income (Loss) ==================================== The Income Statement

Purpose: provide information about all of the organization’s resources and the claims against those resources at a point in time. Presentation formula: Assets = Liabilities + Owners’ Equity (resources of (claims against the assets) value providing (by creditors) (by owners) future benefit) Statement of Financial Position (also known as the Balance Sheet)

Purpose: provide information about the sources and uses of cash due to operating, investing, and financing activities for a defined period of time. Presentation Formula: Net cash provided (used) by operating activities + Net cash provided (used) by investing activities + Net cash provided (used) by financing activities Net increase in Cash ==================================== Statement of Cash Flows

Purpose: provide information about changes in the two owners’ equity elements for a defined period of time. Presentation formula: Stockholders’ Equity = Contributed Capital + Retained Earnings Beginning Cont. Capital Beginning Retained Earnings + Contributions by stkholders + Net Income ( or - Net Loss) Dividends to stockholders = Ending Contributed Capital _____________________ ====================== Ending Retained Earnings ====================== Statement of Changes in Owners’ Equity (or Retained Earnings)

The Statement of Financial Position (Balance Sheet): Assets = Liabilities + Owners’ Equity (resources of (claims against the assets) value providing (by creditors) (by owners) future benefit) This formula can also be stated as: Assets – Liabilities = Owners’ Equity (resources of (creditor claims(residual owners’ value providing against assets) claims against future benefit assets) The Statement of Financial Position

Relationships between the 4 basic financial statements The Statement of Financial Position (Balance Sheet): Assets = Liabilities + Owners’ Equity Cash Flow Statement: Net Cash generated by Operating + Investing + Financing Activities Statement of Changes in Owners’ Equity: Contributed Capital + Retained Earnings Changes to Previously Undistributed Owners’ Invest- Income ments + Net Income - Distributions The Income Statement: Revenues – Expenses = Net Income

Internal Users: Owners/managers Allocate resources Choose products & services Arrange financing Employees Assess employment prospects Negotiate wages and benefits External Users: Owners (passive) Regulators Decide future Restrict profits Select management Set rates or prices Creditors Establish operating Set lending practicesrestrictions Set collection practices Taxing Authorities Vendors (Suppliers) Assess taxes Sell products & services Establish compliance Extend credit Users of Accounting Information and their Decisions

“60% of all frauds are a result of poor internal control” (KPMG, 1998 Fraud Survey). Internal controls: all policies and procedures designed to ensure that the goals of the organization will be achieved, such as: - safeguarding resources - complying with applicable laws - reporting financial information fairly. Internal Control is Important

General Accountant Cost Accountant Tax Accountant Independent Auditor Internal Auditor Academic Accountant Consultant Who wants to be a millionaire (or at least account for millions)?

CPA CMA CIA Governing bodyStates Institute Institute of Management of Internal Accountants Auditors Approximate # of certifications430,000 21,000 25,000 Approximate # annually taking exam 125,000 10,000 5,000 Education required Varies by state Bachelor’s Bachelor’s Experience required0-3 years 2 years 2 years Website CPA Professional Accounting Certifications

Financial Auditing--gathering information about an entity to form an opinion on the fairness of its financial statements. Audit Reports--upon completing a financial audit (including an assessment of internal control and relying on the work of internal auditors as necessary), a report is issued indicating the auditor’s responsibility and expressing an opinion about the fairness of financial statements. Opinion types are: unqualified qualified adversedisclaimer. The Role of Auditors

Securities and Exchange Commission (SEC) – oversees the issuance and trading of securities of publicly held companies and establishes reporting and disclosure requirements for those companies Financial Accounting Standards Board (FASB) – issues pronouncements that dictate the way in which financial accounting and reporting is performed Internal Revenue Service (IRS) – administers and audits to ensure compliance with tax laws and regulations International Accounting Standards Committee (IASC) – developing international accounting standards for worldwide standardization The Standard Setting Organizations

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