1. The Financial Statements
Chapter 1

2. Learning Objective 1
Use accounting vocabulary for decision making.

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

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

5. Financial and Management Accounting
External Users
Internal Users

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

7. Business Organizations
Proprietorships
Partnerships
Corporations

8. Learning Objective 2
Apply accounting concepts and principles

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

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

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

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

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

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

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

16. 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

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

18. Liabilities
Economic obligations (debt) of a business

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

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

21. 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

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

23. 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 =

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

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

26. 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

27. 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

28. 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

29. Learning Objective 5
Explain the relationships among the financial statements.

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

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

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

33. 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 ,000
Net increase in cash ,000
Beginning cash balance ,000
Ending cash balance $ 25,000