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Financial Accounting: Tools for Business Decision Making
Kimmel, Weygandt, Kieso CHAPTER 1 Prepared by Ellen L. Sweatt Georgia Perimeter College
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AN INTRODUCTION TO FINANCIAL STATMENTS
Chapter 1 AN INTRODUCTION TO FINANCIAL STATMENTS
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Forms of Business Organization
11 1 Forms of Business Organization Sole proprietorship Partnership Corporation
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Sole Proprietorship Business owned by one person Simple to establish
Owner controlled Tax advantages Owner personally liable Financing difficult
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Partnership Two or more owners Simple to establish Shared control
Broader skills & resources Tax advantages Personal liability
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Corporation Separate legal entity owned by stockholders
Easy to transfer ownership Greater capital raising potential Lower legal liability Unfavorable tax treatment
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Users of Financial Information Internal
11 2 Users of Financial Information Internal Managers who plan, organize and run a business Marketing managers Production supervisors Finance directors Company officers
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Users of Financial Information External
Investors Creditors Others Regulatory agencies Tax authorities Customers Labor Unions Economic planners
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Types of Business Activity
11 3 Types of Business Activity Financing Investing Operating
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Financing Activities Borrowing creates liabilities
Bank loans Debt securities Goods on credit or payables Selling stock creates stockholders’ equity
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Investing Activities Obtaining resources or assets to operate the business Land Buildings Vehicles Computers Furniture Equipment
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Operating Activities Revenues are the increases in assets resulting from the sale of a product or service Expenses are the cost of assets consumed or services used in generating revenue. If revenue > expense = Net Income If revenue < expense = Net Loss!
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Four Financial Statements
Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows
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Income Statement Reports operating success or failure for a period.
Summarizes revenues and expenses for period: month, quarter, year. If revenue > expense = Net Income.
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Do this statement first!
Income Statement Do this statement first!
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Retained Earnings Statement
Shows changes in retained earnings for period: month, quarter, year Beginning balance Add Net Income from income statement. Deduct Dividends Ending balance
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Retained Earnings Statement
Do this statement second!
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Do E1-5
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Balance Sheet Reports assets and claims to assets.
Claims of creditors, liabilities. Claims of owners, stockholders’ equity. Assets = Liabilities + Stockholders’ Equity Specific date – one point in time!
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From Retained Earnings Statement
Balance Sheet From Retained Earnings Statement
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Statement of Cash Flows
Provides information about cash receipts and cash payments Summarizes for period: month, quarter, year. Cash effects of operating, investing, and financing activities.
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Statement of Cash Flows..
Agrees with Balance Sheet
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Assets 5 Resources owned by the business Cash Accounts receivable
11 5 Assets Resources owned by the business Cash Accounts receivable Inventories Furniture and fixtures Equipment Supplies
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Liabilities Obligations or debts of business Notes payable
Accounts payable Interest payable Salaries payable Unearned revenue
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Stockholders’ Equity Ownership claims on assets Paid-in capital
Common stock Retained earnings
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Basic Accounting Equation
Assets = Liabilities + Stockholders’ Equity
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Do E1-9
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Supplements to the Financial Statements in an Annual Report
11 6 Supplements to the Financial Statements in an Annual Report Management Discussion and Analysis Notes to Financial Statements Auditor’s report
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Management’s Discussion and Analysis covers three items:
Liquidity Capital resources Results of operations
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Notes to Financial Statements
Explanatory notes and supplementary schedules Clarifies information in financial statements Expands with additional detail Describes accounting policies Explains uncertainties and contingencies
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Auditor’s Report Certified Public Accountant – CPA
Auditor (CPA) conducts independent examination of financial statements Fair representation? Follow generally accepted accounting principles (GAAP)? Unqualified opinion
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Do E1-1
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Copyright © 2007 John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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