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Financial Accounting:
Tools for Business Decision Making, 4th Ed.
Kimmel, Weygandt, Kieso
CHAPTER 1


Prepared by

Dzung Manh Tran

FAA-National Economics University


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Chapter 1
AN INTRODUCTION
TO FINANCIAL
STATMENTS
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Study Objectives
1. Describe the primary forms of
business organization.
2. Identify the users and uses of
accounting information.
3. Explain the three principal chinh yeu
types of business activity.
4. Describe the content and purpose of
each of the financial statements.
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Study Objectives
5. Explain the meaning of assets,
liabilities, and stockholders equity,
and state the basic accounting
equation.
6. Describe the components that
supplement-b sung, ph thm vo the
financial statements in an annual
report.

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Forms of Business
Organization

Sole proprietorship/owner

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
Managers who plan, organize and run a
business
Marketing managers
Production supervisors-ngi gim st
Finance directors
Company officers

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Users of Financial Information
Internal Users Ask?
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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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Users of Financial Information
External Users Ask?
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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
Primary activity of
business
Selling goods
Providing services
Manufacturing
Cost of Sales
Advertising
Paying employees
Paying utilities


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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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Review
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
d. Corporation.
c. Partnership.
b. Creditorship.
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Review
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
d. Corporation.
c. Partnership.
b. Creditorship.
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Review
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
d. Most common form of business
organization.
c. Reduced legal liability for investors.
b. Harder to transfer ownership
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Review
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
d. Most common form of business
organization.
c. Reduced legal liability for investors.
b. Harder to transfer ownership
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Review
Which is not one of the three primary
business activities?
a. Financing.
d. Investing.
c. Advertising.
b. Operating.
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Review
Which is not one of the three primary
business activities?
a. Financing.
d. Investing.
c. Advertising.
b. Operating.
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Content and Purpose of Financial Statements
Accountants
communicate with users
through four financial
statements
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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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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/Opening balance
Add Net Income from income
statement.
Deduct Dividends
Ending balance/Closing balance
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Retained Earnings Statement
Do this statement second!
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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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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
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!

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Statement of Cash Flows..
Agrees
with
Balance
Sheet
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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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Review
Which of the following is not a correct
representation of the accounting equation?
a. Assets = Liabilities + Stockholders Equity
d. Assets - Stockholders Equity = Liabilities
c. Assets + Stockholders Equity = Liabilities
b. Assets - Liabilities = Stockholders Equity
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Review
Which of the following is not a correct
representation of the accounting equation?
a. Assets = Liabilities + Stockholders Equity
d. Assets - Stockholders Equity = Liabilities
c. Assets + Stockholders Equity = Liabilities
b. Assets - Liabilities = Stockholders Equity
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Review
Using the accounting equation, answer the
following question.
If Liabilities = $10,000 and
Then Assets =
Stockholders Equity = $20,000
$30,000 = $10,000 + $20,000
$30,000
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Using the accounting equation, answer the
following question.
If Assets = $75,000
Then Stockholders Equity =
And Liabilities = $35,000
Review
$40,000
$75,000 = $35,000 + $40,000
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Supplements to the Financial
Statements in an Annual Report
Management Discussion and
Analysis

Notes to Financial Statements

Auditors report
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Managements Discussion and
Analysis covers three items:
1. Liquidity
2. Capital resources
3. Results of operations
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Managements Discussion and
Analysis
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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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Notes to Financial Statements
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Auditors Report
Certified Public Accountant CPA
Auditor (CPA) conducts independent
examination of financial statements
Fair representation?
Follow generally accepted accounting
principles (GAAP)? IFRS?
Unqualified opinion

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Auditors Report
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Do It Problem: CSU Corporation
Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings ?
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $1,400
Dividends $600
CSU begins on
Jan. 1, 2007
For year ended
Dec. 31, 2007,
prepare
Income
statement
Retained
earnings
statement
Balance sheet



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Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings ?
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $1,400
Dividends $600
Action step 1:
Report the
revenues &
expenses for a
period of time,
Income
Statement

Do It Problem: CSU Corporation
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Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings ?
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $1,400
Dividends $600
Action step 1:
Report the
revenues &
expenses for a
period of time,
Income
Statement

Do It Problem: CSU Corporation
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Do It Problem: CSU Corporation

CSU Corporation
Income Statement
For the Year Ended December 31, 2007

Create the heading
Name of the
statement
Name of the
company
Period
of time
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Do It Problem: CSU Corporation

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
Do It Problem: CSU Corporation
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 200
Total expenses 10,200

________
List the expenses & underline sub-totals

Do It Problem: CSU Corporation
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 200
Total expenses 10,200
Net Income $ 6,800
Calculate net income: revenues - expenses
________
________
________
________
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Do It Problem: CSU Corporation
Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings ?
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $1,400
Dividends $600
Action step 2:
Show amounts
and causes of
changes in
retained
earnings
Use Net Income
from Income
Statement
Dividends
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Do It Problem: CSU Corporation

CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007

Retained earnings, January 1 $ 0
Add: Net income 6,800
6,800
Less: Dividends 600
Retained earnings, Dec. 31 $ 6,200

________
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Do It Problem: CSU Corporation
Service revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $5,000
Common stock $10,000
Retained earnings $6,200
Equipment $16,000
Insurance expense $1,000
Supplies $1,800
Supplies expense $200
Cash $1,400
Dividends $600
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!
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