The document provides an overview of basic financial accounting concepts. It discusses that [1] accounting conveys business information via financial statements to interested parties like investors and creditors. It also explains that [2] companies have three main activities - financing, investing and operating - and that [3] the four key financial statements are the balance sheet, income statement, retained earnings statement, and statement of cash flows. The balance sheet specifically reports a company's assets, liabilities, and equity at a point in time.

1. FINANCIAL
ACCOUNTING
BASICS

2. Part One
A. Introduction
B. Business Activities
C. Financial Statements
D. Balance Sheet
E. Balance Sheet Elements
F. Balance Sheet Equation

3. A. INTRODUCTION
1. Accounting is a language – the language of
business
2. The purpose of any language is to convey
information
3. Accounting conveys information about business
activities to interested parties
4. Accounting information is communicated to
interested parties outside the company via
financial statements
• Most important outside users of accounting
information are investors and creditors
5. Financial statements also provide information to
managers inside the company

4. B. BUSINESS ACTIVITIES
There are three primary activities conducted by business
enterprises:
Two sources of financing: (a) equity financing (sale of capital
Financing – obtaining (bank loans, issuance make
1. stock) and (b) debt financingcash to be able to (a) of bonds)
investments and (b) conduct operating activities –
2. Investing – using cash to (a) purchase capital assets (e.g.,
buildings, machinery, equipment, land) needed to conduct
operating activities, (b) purchase capital stock of other
companies for strategic purposes (e.g., purchase of
subsidiary), and (c) invest in income producing financial
investments (e.g., government bonds or bonds of other
companies) (cash management activity)
3. Operating – producing and selling goods and services –
includes using cash to purchase operating assets (such as
inventories) and pay operating expenses (such as wages,

5. C. FINANCIAL STATEMENTS
Companies summarize the results of their
business activities in four financial statements:
1. Balance sheet
2. Income statement
3. Retained earnings statement (or statement of
stockholders’ equity)
4. Statement of cash flows (statement of changes
in financial position)
Balance sheet and income statement are primary
Retained earnings statement and statement of cash
flows are derived from the balance sheet and the
income statement

6. D. BALANCE SHEET
TYPICAL COMPANY
Balance Sheet
December 31, Year 1
(in thousands)
ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT ASSETS CURRENT LIABILITIES
Cash $ 1,449 Accounts payable $ 5,602
Marketable securities 246 Bank loan payable
1,000
Accounts receivable, net 9,944 Accrued liabilities
876
Inventories 10,623 Estimated tax liability
1,541
Prepaid expenses 389 Current portion of long-term debt
500
Total current assets 22,651 Total current liabilities
9,519
NONCURRENT ASSETS NONCURRENT LIABILITIES
Property, plant & equipment 26,946 Long-term debt 2,000
less: Accumulated depreciation (13,534) Deferred income taxes 824
Property, plant & equipment-net 13,412 Total liabilities
12,343
Investments 1,110 STOCKHOLDERS’ EQUITY
Intangible assets 403 Common stock 1,000
Goodwill 663 Additional paid-in capital 11,256

7. D. BALANCE SHEET
The previous slide shows an example of a typical
balance sheet.
The balance sheet reports a company’s assets,
liabilities, and stockholders’ equity at a particular
point in time.
The heading indicates:
Name of company
Name of statement (Balance sheet)
Balance sheet date (the date at which the
company’s “photograph” is being taken)
Measurement unit (e.g., in thousands of dollars)

8. E. BALANCE SHEET ELEMENTS
1. Assets
a. Resources owned (or controlled) by the
company
b. Assets can be acquired in the following ways:
1. Incurring a liability
2. Selling company stock
3. Earning money through profitable
operations
c. Total Assets = Current Assets + Noncurrent
Assets
Current assets – cash and other assets expected
to be converted into cash or used up within one
year from the balance sheet date

9. E. BALANCE SHEET ELEMENTS (cont)
2. Liabilities
a. Obligations to outside parties who have
provided resources to the company
b. Total Liabilities = Current Liabilities +
Noncurrent (or Long-term) Liabilities
Current liabilities – obligations that must be paid
within one year from the balance sheet date
Long-term liabilities – obligations that will be
paid after one year from the balance sheet date
Example – on December 31, Year 1, a bank
loan to be repaid on December 15, Year 2 is a
current liability, but a bank loan to be repaid
on January 5, Year 3 is long-term

10. E. BALANCE SHEET ELEMENTS (cont)
3. Equity
a. Owners’ investment in the company (e.g., stockholders’ equity)
b. Includes amount invested through the purchase of stock (paid-in
capital) and earnings reinvested in the company (retained
earnings)
c. Total Equity = Paid-in Capital + Retained Earnings
d. Paid-in Capital – usually divided between the par value of stock
(Common Stock account) and the amount at which stock was sold
above par value (Additional Paid-in Capital account); for example,
100 shares of $5 par stock is sold for $30 per share:
Common Stock (100 x $5) $
500
Additional Paid-in Capital (100 x $25) 2,500
Total Paid-in Capital $3,000
e. Retained Earnings – the amount of income that has been
generated by the company since its formation that has not
been paid out to the stockholders as dividends:
Cumulative net income
Less: Cumulative dividends paid to stockholders
Equals: Retained Earnings

11. E. BALANCE SHEET ELEMENTS (cont)
Summary of a balance sheet:
Balance Sheet
Assets Liabilities
Current assets Current liabilities
Noncurrent assets Long-term liabilities
Total Stockholders’ equity
Paid-in capital
Retained earnings

12. E. BALANCE SHEET ELEMENTS (cont)
The balance sheet summarizes the resources
(assets) in which a company has invested on
the left side and
How the money was raised to acquire the
resources on the right side
Debt financing (liabilities)
Equity financing (stockholders’ equity)
The left side of the balance sheet summarizes
the company’s investing activities
The right side of the balance sheet
summarizes the company’s financing activities
(Operating activities are summarized on the income statement)

13. F. BALANCE SHEET EQUATION
1. Assets = Liabilities + Equity (A = L + E)
a. This equation is fundamental – after accounting
for each transaction, the equation must remain
in balance
2. Balance sheet equation can be rearranged as:
Assets – Liabilities = Equity
a. Creditors can sue the company if amounts due
are
not paid
b. Equity investors have only a residual claim to
assets after liabilities have been paid
c. Assets – Liabilities also is referred to as net
assets