Chapter 1, Slide #1 Using Financial Accounting Information: The Alternative to Debits and Credits Fifth Edition Gary A. Porter and Curtis L. Norton Copyright © 2008 Thomson South-Western, a part of the Thomson Corporation. Thomson, the Star logo, and South-Western are trademarks used herein under license.

Chapter 1, Slide #2 What is Accounting? Identifying Measuring Communicating Economic Information to various users

Chapter 1, Slide #3 Internal and External Users of Accounting Information Internal Users – Management Creditors Current and Potential Owners Government Agencies Suppliers Trade Associations Financial Analysts Bankers LO1

Chapter 1, Slide #4 Decisions Made with Financial Information Invest?? Borrow $$?? Sell stocks or bonds?? Build new plant?? Add new product line?? Start new business?? Loan $$?? Extend credit $$??

Chapter 1, Slide #5 The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders’ Equity) Creditors’ claims to assets Owners’ claims to assets Economic resources = + Examples: Cash Accounts receivable Land Accounts payable Notes payable Capital stock Retained earnings LO2

Chapter 1, Slide #6 Balance Sheet Assets Liabilities Owners’ Equity (or Stockholders’ Equity) = + – snapshot of financial position

Chapter 1, Slide #7 Current assets: Cash $ 200 Accounts receivable 600 Land 4,000 Lodge, lifts and equipment 2,500 Total assets $7,300 Top of the World Balance Sheet June 30, 2007 Assets A A = L + SE

Top of the World Balance Sheet June 30, 2007 Liabilities: Accounts payable$ 700 Salaries and wages payable 400 Notes payable 3,000 Total liabilities$4,100 Liabilities and Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 7,300 = L A = L + SE Stockholders’ equity: Capital stock$2,000 Retained earnings 1,200 Total stockholders’ equity$3,200 + SE

Chapter 1, Slide #9 Income Statement Revenues $$ Less: Expenses($$) Net income $$

Chapter 1, Slide #10 Top of the World Income Statement For the Year Ended June 30, 2007 Revenues: Lift tickets $5,800 Equipment rentals 2,200 Total revenues $8,000 Expenses: Salaries and wages $2,000 Depreciation 100 Water, gas, and electricity 1,500 Insurance1,100 Interest 300 Income taxes 1,000 Total expenses 6,000 Net income $2,000 Revenues Revenues – Expenses = Net Income Expenses Net Income

Statement of Retained Earnings Beginning retained earnings $$$ Add: Net income for the period $$$ Deduct: Dividends for the period ($$$) = Ending retained earnings $$$

Chapter 1, Slide #12 Top of the World Statement of Retained Earnings For the Year Ended June 30, 2007 Retained earnings, beginning of the year $ 0 Add: Net income for the year2,000 Deduct: Dividends for the year (800) Retained earnings, end of the year $ 1,200

Chapter 1, Slide #13 Income Statement for 2007 Revenues$ 8,000 Less: Expenses ( 6,000) Net income$ 2,000 Statement of Retained Earnings for 2007 Beginning balance, retained earnings $ 0 Add: Net income 2,000 Deduct: Cash dividends (800) Ending balance, retained earnings $1,200 Relationships among Financial Statements – Top of the World Example Balance Sheets Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0

Chapter 1, Slide #14 Financial Statement Assumptions Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption LO3

Chapter 1, Slide #15 Economic Entity Concept  Each entity has its own books, records, and financial statements that are separate from owners  No intermingling of personal and business assets and liabilities or income and expenses Business Books and Records Owners’ Books and Records

Chapter 1, Slide #16 Cost Principle  Record assets at cost paid to acquire them  Continue to value assets at historical cost until sold  More objective than market value

Chapter 1, Slide #17 Going Concern  Assume business will continue indefinitely into the future  Justifies use of historical cost

Chapter 1, Slide #18 Monetary Unit  How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.)  Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

Chapter 1, Slide #19 Time Period Assumption  Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year)  Necessary to provide users with financial results on a timely basis  Requires use of estimates

Chapter 1, Slide #20 The Rules of the Game  GAAP  FASB  SEC  AICPA  The rules  The rule makers  The rule enforcers  The CPA regulators

Chapter 1, Slide #21 Ethics in Accounting 1. Identification 2. Analysis 3. Resolution LO4

Chapter 1, Slide #22 The Changing Face of the Accounting Profession A “financial reporting crisis” caused by:  Enron: the omission of entities from the financial statements  WorldCom: treating costs as assets rather than expenses causing higher net income

Chapter 1, Slide #23 Sarbanes-Oxley Act Provisions of the act:  Established the Public Company Accounting Oversight Board  Required external auditors to report directly to the company’s audit committee  Prohibits external auditors from providing other services compromising independence

Chapter 1, Slide #24 Where Accountants Work  Private business  Nonbusiness entities  Public accounting Auditing services Tax services Management consulting services  Education LO5

Chapter 1, Slide #25 End of Chapter 1