1. The function of education is to teach one to think intensively and to think critically... Intelligence plus character – that is the goal of true education.
— Martin Luther King Jr., American civil rights leader ( )

2. THE PURPOSE OF ACCOUNTING
TO PROVIDE:
FINANCIAL INFORMATION
ABOUT A BUSINESS
TO INDIVIDUALS
AND ORGANIZATIONS

3. Forms of Business Organization
Sole proprietorship
Partnership
Corporation

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

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

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

7. THE ACCOUNTING PROCESS
Accounting Is A System Of:
Gathering financial information
About a business
And reporting it to users
It is accomplished in 6 steps:

8. STEP ONE
ANALYZING
Looking at events that have taken place and thinking about how they affect the business

9. STEP TWO
RECORDING
Entering financial information about events into the accounting system

10. STEP THREE
CLASSIFYING
Sorting and grouping similar items together

11. STEP FOUR
SUMMARIZING
Bringing the various items of information together to determine a result

12. STEP FIVE
REPORTING
Giving the results to interested parties

13. STEP SIX
INTERPRETING
Deciding the meaning and importance of the information in various reports

14. Study Objectives of Chapter 1
Understand the content and purpose of each of the financial statements.
Clarify the meaning of assets, liabilities, and stockholders’ equity.
Learn what the basic accounting equation tells us about a business.
Describe the components that supplement the financial statements in an annual report.

15. Study Objectives of Chapter 1
Identify the users and uses of accounting information.
Explain the 3 principal business activities that affect cash.

16. Define some terms:
Sales
Revenue
Expense
Asset
Liability
Owner’s Equity

17. Content and Purpose of Financial Statements
How would you answer the question, “How is your business doing?”
Businesses tell users how they are doing through four financial statements:

18. Four Financial Statements
Income Statement
Retained Earnings Statement
Balance Sheet
Statement of Cash Flows
Over Time
Over Time
At some point in Time
Over Time

19. Income Statement
Did you make any money???
Summarizes revenues and expenses for period: month, quarter, year.
If revenue > expense = Net Income.

20. Do this statement first!
Income Statement
Do this statement first!

21. 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

22. Retained Earnings Statement
Do this statement second!

23. 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!

24. From Retained Earnings Statement
Balance Sheet
From Retained Earnings Statement

25. 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.

26. 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?
A company cannot survive without cash!

27. Statement of Cash Flows..
Agrees with Balance Sheet

28. Three Business Activities that affect Cash
Operating
Investing
Financing

29. 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!

30. Operating Activities What the business does to make money;
Selling goods
Providing services
Manufacturing
Cost of Sales
Advertising
Paying employees
Paying utilities

31. Investing Activities
Investments in the company’s future (Obtaining resources or assets to operate the business)
Land
Buildings
Vehicles
Computers
Furniture
Equipment

32. Financing Activities – Raising money to finance the business
Borrowing creates liabilities
Bank loans
Debt securities
Goods on credit or payables
Selling stock creates stockholders’ equity

33. Statement of Cash Flows
To be continued in chapter 13.

34. Users of Financial Information Internal
vs.
External

35. Assets
Resources owned by the business to be used to generate future revenue
Cash
Accounts receivable
Inventories
Furniture and fixtures
Equipment
Supplies

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

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

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

39. Question 1
Which is not one of the three forms of business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.

40. Question 2
Which is an advantage of corporations relative to partnerships and sole proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.

41. Question 3
Which is not one of the three primary business activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.

42. Question 4
Which of the following is not a correct representation of the accounting equation?
a. Assets = Liabilities + Stockholders’ Equity
b. Assets - Liabilities = Stockholders’ Equity
c. Assets + Stockholders’ Equity = Liabilities
d. Assets - Stockholders’ Equity = Liabilities

43. Question 5
Using the accounting equation, answer the following question.
If Liabilities = $10,000 and
Stockholders’ Equity = $20,000
Then Assets =

44. Question 6
Using the accounting equation, answer the following question.
If Assets = $75,000
And Liabilities = $35,000
Then Stockholders’ Equity =

45. ANSWERS

46. Question 1
Which is not one of the three forms of business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.

47. Question 2
Which is an advantage of corporations relative to partnerships and sole proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business organization.

48. Question 3
Which is not one of the three primary business activities that affect cash?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.

49. Question 4
Which of the following is not a correct representation of the accounting equation?
a. Assets = Liabilities + Stockholders’ Equity
b. Assets - Liabilities = Stockholders’ Equity
c. Assets + Stockholders’ Equity = Liabilities
d. Assets - Stockholders’ Equity = Liabilities

50. Question 5
Using the accounting equation, answer the following question.
If Liabilities = $10,000 and
Stockholders’ Equity = $20,000
Then Assets =
$30,000 = $10,000 + $20,000
$30,000

51. Question 6
Using the accounting equation, answer the following question.
If Assets = $75,000
And Liabilities = $35,000
$40,000
$75,000 = $35,000 + $40,000
Then Stockholders’ Equity =

52. Supplements to the Financial Statements in an Annual Report
Management Discussion and Analysis
Notes to Financial Statements
Auditor’s report

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

54. Management’s Discussion and Analysis

55. 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

56. Notes to Financial Statements

57. 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

58. Auditor’s Report

59. Problem: CSU Corporation
CSU begins on Jan. 1, 2007
For year ended Dec. 31, 2007, prepare
Income statement
Retained earnings statement
Balance sheet

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

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

62. Problem: CSU Corporation
Create the heading
Name of the company
CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Name of the statement
Period of time

63. Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue $17,000
List the revenues
Use dollar signs to denote U.S. currency

64. Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2007
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

65. Problem: CSU Corporation
Income Statement
For the Year Ended December 31, 2007
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
________
________
________
________

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

67. Problem: CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007
Retained earnings, January 1 $
Add: Net income ,800
6,800
Less: Dividends
Retained earnings, Dec $ 6,200
______

68. Problem: CSU Corporation
Action step 3: Present assets and claims to those assets at a specific point in time on the Balance Sheet
Use $6,200 Retained earnings from previous statement!