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Libby Chap1

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  • 1. Accounting 2251 ‘Chapter 1 ( read pages 3-19, 21-23) "V The 4 basic financial statements ‘V Their inter-relationships '* What is GAAP? ‘V Role of management in reporting
  • 2. 1-8 A The Accounting System Accounting System Financial Accounting System managerial Accounting System Periodic financial statements and Detailed plans and continuous related disclosures performance reports Internal Decision Makers Managers throughout the organization External Decision Makers Investors, creditors, suppliers, customers, etc.
  • 3. The Four Basic Financial Statements . statement of cash Hows . Statement of Retained Earnings : Balance Sheet Income Statement Financial sizaiemen-‘cs summarize the financial activities of the business. 1-9
  • 4. 1. Name of entity MAXIDRIVE CORP. 2. Title of statement Balance sheet 3. Specific date At December 31. 2006 4. Unit of measure fl" “1°US3ndS 07 d°"a| ’$l 2 L s 4,895. 2 am The Balance 2 115;: Sheet , epo, ,S 2 1.1 . Z 11111 the financial Z s 21.2111 position of an 2 entity at a Z - EEK! particular Om, in time [ml 9 ° 2 s 111156 1 mm mm: 2 11.105 a s 21.261
  • 5. 1-13 | The Balance Sheet Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity Economic Resources Sources of Financing for V Economic Resources
  • 6. MAXIDRIVE CORP. Balance Sheet At December 31, 2006 (in thousands of dollars) ‘1-seats are economic resources owned by the business as a result of past 7°“ 3959*‘ transactions. I Amount of cash in the company’s bank I accounts. E Accounts Amounts owed by customers from prior receivable sales. ‘ P rts d I t d b t id by their ease of E products- conversion into cash. Factories and production machinery. Land on which factories are built.
  • 7. MAXIDRIVE CORP. Balance Sheet At December 31, 2006 (in thousands of dollars) _ _ $ 4.895 2 5.714 2 8»-‘>17 Plant and equipment ‘ 7,154 : 931 M Total assets 2 $ 27,261 Liabilities and Stockholders Equity _ Liabilities are debts or obligations of the business that result from y pa? Liabilities tranSaCu°nS' ' / | Notes payable M Total liabilities - $ 16,156 Accounts Amounts owed to suppliers for prior ma. .. - Amounts owed on written debt = 2 11105 payable contracts. ' H ' ' . . fl ' ' - ‘ $ 27.261 l
  • 8. MAXIDRIVE CORP. Balance Sheet At December 31, 2006 _Er_ Lijiy is the an thousands of dollars) mm amount of 2 . . Z s «tees ""a“°'n9 2 am prov-ded by 1 11511 owners of the Plant and equipment _ 7.154 ~ l 921 °”3'“e‘°"‘ "‘"d 2 s 21.261 eam'"9s' Liabilities and stockholders Equity 2 Contributed Amounts invested in the business by I capital stockholders. Retained Past earnings not distributed to stockholders. 5 151155 1 I . mm T‘ HIE 2 11-105 g Total liabilitiesand stockholders equity 2 $ 27,261 —
  • 9. MAXI DRIVE CORP. Balance Sheet At December 31, 2006 (in thousands of dollars) Assets (P Cash Use :9 On. the Accounts receivable 5,714 I‘ first ‘tam m a Inventories QFOUD Plant and equipment and on the '-and group total. T°““' 355°“ _ as Liabilitiesand Stockholders’ Equity Liabilities Accounts paya ble _ Notes payable : -assets = Liabilities -1- Stockholcisrs’ Equiiy ' oc o ers qui Corttributed capital » Retained eamings Total stockholders’ equity ’Tota| liabilitiesand stockholders’ equity
  • 10. MAXIDRNE CORP. Income Statement For the Year Ended December 31, 2006 (in thousands of dollars) Revenues I 1. Name of entity I 2. Title of statement sheet, this statement covers a specified of time. ) 4. Unit of measure Total expenses Pretax income Income tax expense Net income 1-18
  • 11. T'ne Income Siaterrlerli reports the revenues minus expenses of the accounting period. Revenues Sales revenue Selling, general and administrative Research and development Interest expense Pretax income Income tax expense 7 Netincome Total expenses 1-19
  • 12. MAXIDRNE CORP. Income Statement For the Year Ended December 31, 2006 (in thousands of dollars) 2 Sales revenue ‘ Revenues are earnings from the sale of goods or services to customers. Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received. 0 a expenses Pretax income Income tax expense Net income
  • 13. O MAXIDRIVE CORP. 1” Income Statement Expenses are the dollar amount of resources used up by the entity to earn revenues during a period. An expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid. ‘ Expenses 22 Cost ofgoods sold $26,980 ‘ Selling, general and administrative ‘ Research and development — lnterestexpense Total expenses ZIIEI Pretax income - jiml Income tax expense Net income
  • 14. MAXIDRNE CORP. Income Statement For the Year Ended December 31, 2M6 (in thousands of dollars) Cost of The cost to produce roducts sold this goods sold period. Selling, general and administrative Research and Expenses incurred to develop new development products. expense Income tax Income taxes on current period ’s pretax Operating expenses not directly related to production. 1 -24
  • 15. 1-29 MAXIDRIVE CORP. Statement of Retained Eamings For the Year Ended December 31, 2006 (in thousands of dollars) Retained eamings January 1, 2006 Net income for 2006 Dividends for 2006 Retained eamings, December 31, 2006 Em The Statement of Retained Eamings reports the way that net income and the distribution of dividends affect the financial position of the company during a period.
  • 16. 1 -30 Statement of Cash Flows . . . and expenses reported do not always equal ash paid . . . Because revenues reported do not always equal cash collected . . net income is usually not equal to the change in cash for the period.
  • 17. 1-32 MAXIDRIVE OORP. The Statement of Cash Flows reports the inflows and outflows of cash during the period in the categories of operating, investing, and financing. Cash flows from operating activities Cad": collected from customers Ca§‘I paid to suppliers and employees Cash paid for interest Cast paid for taxes Net cash flow from operating activities Cash flow from investing activities: Cad1 paid to purchase equipment Net cash flow from investing activities Cash flow from financing activities: Cast received from bank loan Cash paid for dvidends Net cash flow from financing activities Net decrease in cash during the year Cash at beginning of the year Cash at end of the year
  • 18. I-37 Relationship Among the Financial Statements MAXIDRNE CORP. Income Statement For the Year Ended December 31, 2006 (in uaouandsor dollars) fl'Om the , . Revenue, 3 Income statement Sales revenue _ 3 37.436 Expenses ‘§. i’: ‘.. ‘.’. ‘.f'. ;°. :’. ‘.‘. ’.‘. :‘. ":. ‘.. ... ... ... ... ... ... on the statement Re It nd do I nt 1,982 ' ‘ , ,,, ;‘, *°, ;", ;°, ,,§’, ,,, ,,se'°°”'“° of retained earnings. Total expenses 33,036 Pretax Income = S 4,400 Income tax expense — 1.100 MAXIDRNE CORP- Nel '"°°m° , 5 130° Statement of Retained Earnings For the Year Ended December 31, 2006 (In thousands of dollars) Retained eamings January 1, 2006 : ’,_Net income for 2006 Dividendsfor 2006 Retained earnings December 31, 2006 W
  • 19. 1-38 s . m m m gf t S n 8 M1. 6 mmooo . 6 2 am. m.m. .w. .w wmmw m M. demmmm mm? m M . l nD. - mR. mn n c asr SC Id 9 l. .. m aeamen m_. mw 8% s. t cla .1 lzmm Qmweob mww mmnm nhh he % . m% Sh dmsd cmfm m m «mm» mum. 33. ___m__a_ MAXIIRNE CORP. Balana Sheet M December 31. zone (In thousands of dolled Liabilities Accourts payable Notes payable Relationship Among the Financial Statements Accourls remlvable Plant and omlprnerrt Total liabilities Stocldlolders Eqlnty Corlnbuted capital lbtalnod eamings Total dodlholderd eqrity Total llabllltiesarld sbdtholders eqll
  • 20. 1-39 1 Relationship Among the Financial Statements MAXIDRNE CORP. Balance Sheet M December 31, zoos "‘”‘°“"" °°“"- an mousndsofdomrg StahmellofCasllFlo«ls I Forth: Year Ended Decemhlel31,2mG ‘ $ 4895 p V, {n tlousand-. sdaolI.1's) Ac ts ' bl j 714 ' -«'17-‘13rie'5°°'“ ° 1 35": °": :': ::. ::“: .:7;; ";°: ::. :': ;“ "am am‘ °quip"‘°"t ‘ 7-154 I Cash pGl(1’I0.§LI, npl'IeiS and emploxecs E—: 981I cashnaidlolimelei I Total assets ‘ 3 27,261 I Cash paid for taxes Liabilities and Stockholders’ Equity : | “= ‘°34‘ W "W" °9°'= ""9 a°“V“i°S . . . Cashflowfruninvesling aaivites Uamlmes ‘ I Cam paid to ptnhas eqllplrent Accounts payable I Matcail flow from investing activities Nome; payame m I C.1.dl llow from llmndvlg acllvlties: Total liabilities 2 3 16,156 | 2: "‘; ':“‘d'°; "m”; * '°‘" stockhowers‘ Equity ‘ N lliatcalj: llo: flnasml actvilies Contributed capital [flm | _ , , "9 Retained eamings M I letdecreaselncashdmllgtheyear _ , Cash at beglnnhg oftlle year Total §odtholclers' equity ‘ 11,105 | , Tam at end of he year Total liabilltlesand stockholders’ equltj 2 3 27,261 | ! I he on the statement of cash flows added to the in cash equals the on the balance sheet.
  • 21. Notes / :/Notes provide supplemental information about the financial condition of a company. «: /Three basic types of notes: +2» Description of accounting rules applied. ->T: > Presentation of additional detail about an item on the financial statements. ~= é:+ Provide additional information about an item not on the financial statements.
  • 22. 1-42 Price/ Earnings Ratio Market Price (of the Company) Net Income Price/ Earnings Ratio = This ratio is one method ~29 1 for estimating the value -’ Q ‘ of a company.
  • 23. 1-47 Generally Accepted Accounting Principles (GAAP) The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP. Currently. the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP. --
  • 24. 1-51 Management Responsibility and the Demand for Auditing To ensure the accuracy of the company’s financial information, management: -f Maintains a system of controls. 4 Hires outside independent auditors. * Forms a board of directors to review these two safeguards. . __Y ll z ’. . ‘l ' l 1‘ ‘J’ i
  • 25. 1-53 ‘ Independent Auditors An audit involves . . . e Examining the financial reports to ensure compliance with GAAP. e Examining the underlying transactions incorporated into the financial statements. . Expressing an opinion as to the fairness of presentation of financial information.
  • 26. Answers to multiple choice questions on p.31 ) ) ) )))m caac b) d) d) C 8 1234567891
  • 27. End of chapter 1 I Use Homework Manager section 1 http: //mh6.brownstonc. nct/ classcs/ acct225 1 fl)7sccO 1/ Section 6 http: //rnh6.brownstone. nct/ classes/ acct225 1f07secO6/ Chapter 1 HW El-1 to E 1-10