1. Introduction to Financial Statements

2. Study Objectives Describe the primary forms of business organization.
Identify the users and uses of accounting information.
Explain the three principal types of business activity.
Describe the content and purpose of each of the financial statements.

3. Study Objectives
Explain the meaning of assets, liabilities, and stockholders’ equity, and state the basic accounting equation.
Describe the components that supplement the financial statements in an annual report.

4. #1 Forms of Business Organization
Sole proprietorship
Partnership
Corporation

5. Sole Proprietorship Business owned by one person Simple to establish
Owner controlled
Tax advantages
Owner personally liable
Financing difficult

6. Partnership Two or more owners Simple to establish Shared controlled
Broader skills & resources
Tax advantages
Personal liability

7. Corporation Separate legal entity owned by stockholders
Easy to transfer ownership
Greater capital raising potential
Lower legal liability
Unfavorable tax treatment

8. #2 Users of Financial Information Internal
Managers who plan, organize and run a business
Marketing managers
Production supervisors
Finance directors
Company officers

9. Users of Financial Information Internal Users Ask?
Cash to pay bills?
Cost per unit?
Give raises?
Which product is profitable?

10. Users of Financial Information External
Investors
Creditors
Others
Regulatory agencies
Tax authorities
Customers
Labor Unions
Economic planners

11. Users of Financial Information External Users Ask?
Earning enough?
Compare to competition?
Will the company be able to pay bills when due?

12. #3 Types of Business Activity
Financing
Investing
Operating

13. Financing Activities Borrowing creates liabilities
Bank loans
Debt securities
Goods on credit or payables
Selling stock creates stockholders’ equity

14. Investing Activities
Obtaining resources or assets to operate the business
Land
Buildings
Vehicles
Computers
Furniture

15. Operating Activities Primary activity of business Selling goods
Providing services
Manufacturing
Cost of Sales
Advertising
Paying employees
Paying utilities

16. Operating Activities Revenue is generated from sales or services
Expenses are the cost of doing business
If revenue > expense = Net Income
If revenue < expense = Net Loss!

17. #4 Describe Content and Purpose of Financial Statements
Accountants communicate with users through four financial statements
Income Statement
Retained Earnings Statement
Balance Sheet
Statement of Cash Flows
We will NOT learn 

18. Income Statement Reports operating success or failure for a period.
Summarizes revenues and expenses for period: month, quarter, or year.
If revenue > expense = Net Income.

19. Income Statement
Remember, our SALES & EXPENSES did NOT show on the Balance Sheet

20. Retained Earnings Statement
Shows changes in retained earnings for period: month, quarter, or year
Beginning balance
Add Net Income from income statement!
Deduct Dividends
Ending balance

21. Retained Earnings Statement

22. 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!

23. From Retained Earnings Statement
Balance Sheet
From Retained Earnings Statement

24. Statement of Cash Flows
Provides information about cash receipts and cash payments
Summarizes for period: month, quarter, or year.
Cash effects of operating, investing, and financing activities.

25. Statement of Cash Flows
Where did the cash come from?
How was cash used during the period?
What was the change in the cash balance during the period?
You can’t survive without cash!

26. Statement of Cash Flows
Agrees with Balance Sheet

27. #5 Explain the Meaning of Assets, Liabilities, and Stockholders’ Equity. State the Basic Accounting Equation

28. Assets Resources owned by the business Cash Accounts receivable
Inventories
Building
Furniture and fixtures
Equipment
Supplies

29. Liabilities Obligations or debts of business Notes payable
Accounts payable
Interest payable
Salaries payable
Unearned revenue

30. Stockholders’ Equity Ownership claims on assets Paid-in capital
Common stock
Retained earnings

31. Basic Accounting Equation
Assets =
Liabilities + Stockholders’ Equity

32. #6 Components that Supplement the Financial Statements in an Annual Report
Managements Discussion and Analysis
Notes to Financial Statements
Auditor’s report

33. Management’s Discussion and Analysis covers three items:
Liquidity
Capital resources
Results of operations

34. Management’s Discussion and Analysis

35. Monetary Unit Assumption
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Only what can be expressed in money
Assumes unit of measure stays constant

36. Economic Entity Assumption
Economic events identified with unit
Separately identified apart from owner

37. Time Period Assumption
Divide life of business into artificial time periods
Monthly, quarterly, yearly

38. Going Concern Assumption
Divide life of business into artificial time periods
Monthly, quarterly, yearly

39. Cost Principle Assets must be recorded at cost
Verifiable vs. subjective

40. Full Disclosure Principle
All circumstances and events that would make a difference to users must be disclosed

41. Do It Problem: CSU Corporation
CSU begins on Jan. 1, 2005
For year ended Dec. 31, 2005, prepare
Income statement
Retained earnings statement
Balance sheet

42. Do It Problem: CSU Corporation
Action step 1: Report the revenues & expenses for a period of time, Income Statement

43. Do It Problem: CSU Corporation
Action step 1: Report the revenues & expenses for a period of time, Income Statement

44. Do It Problem: CSU Corporation
Create the heading
Name of the company
CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Name of the statement
Period of time

45. Do It Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000
List the revenues
Use dollar signs to denote U.S. currency

46. Do It Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses ,200
________
________
List the expenses & underline sub-totals

47. Do It Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2005
Revenues
Service revenue $17,000
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense
Total expenses ,200
Net Income $ 6,800
Calculate net income: revenues - expenses
________
________
________
________

48. Do It Problem: CSU Corporation
Action step 2: Show amounts and causes of changes in retained earnings
Use Net Income from Income Statement
Dividends

49. Do It Problem: CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2005
Retained earnings, January 1 $
Add: Net income ,800
6,800
Less: Dividends
Retained earnings, Dec $ 6,800
________
________
________
________

50. Do It Problem: CSU Corporation
Action step 3: Present assets and claims to those assets at a specific point in time on the Balance Sheet
Use $6,800 Retained earnings from previous statement!

51. CSU CORPORATION Balance Sheet December 31, 2005
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Stockholders’ equity
Common stock $10,000
Retained earnings 6,800
Total Stockholders’ equity 16,800
Total liabilities and stockholders’ equity $23,800