Introduction to Financial StatementsChapter 1-1 Financial Accounting, Fifth Edition
Introduction to Financial Statements Users and Uses of Business Communicating Financial Activities with Users Information Internal users Financing Income External Investing statement users Operating Retained earnings statement Balance sheet Statement of cash flows Interrelation- ships of statementsChapter 1-2
Users and Uses of Financial Information Common Questions Asked? User 1. Can we afford to give our employees a pay raise? 2. Did the company earn a satisfactory income? 3. Which product line is most profitable? 4. Is cash sufficient to pay dividends to the stockholders? 5. What price for our product will maximize net income? 6. Will the company be able to pay its short-term debts?Chapter 1-4
Business Activities All businesses are involved in three types of activity — financing, investing, and operating. The accounting information system keeps track of the results of each of these business activities.Chapter 1-5 SO 3 Explain the three principal types of business activity.
Business Activities Financing Activities Two primary sources of outside funds are: 1. Borrowing money Amounts owed are called liabilities. Party to whom amount is owed are creditors. 2. Issuing shares of stock for cash. Payments to stockholders are called dividends.Chapter 1-6 SO 3 Explain the three principal types of business activity.
Business Activities Investing Activities Purchase of resources a company needs to operate. • Computers, delivery trucks, furniture, buildings, etc. • Resources owned by a business are called assets.Chapter 1-7 SO 3 Explain the three principal types of business activity.
Business Activities Operating Activities Once a business has the assets it needs, it can begin its operations. • Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue). • Inventory - Goods available for sale to customers. • Accounts receivable - Right to receive money from a customer,in the future, as the result of a sale.Chapter 1-8 SO 3 Explain the three principal types of business activity.
Business Activities Operating Activities Once a business has the assets it needs, it can begin its operations. • Expenses - cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense). • Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. • Net income – revenues exceed expenses. • Net loss – expenses exceed revenues.Chapter 1-9 SO 3 Explain the three principal types of business activity.
Communicating with Users Companies prepare four financial statements from the summarized accounting data: Retained Statement Income Balance Earnings of Cash Statement Sheet Statement FlowsChapter 1-10
Communicating with Users Review Question Net income will result during a time period when: a. assets exceed liabilities. b. assets exceed revenues. c. expenses exceed revenues. d. revenues exceed expenses.Chapter 1-11
Communicating with Users Income Statement Illustration 1-5 Reports revenues and expenses for a specific period of time. Net income – revenues exceed expenses. Net loss – expenses exceed revenues.Chapter 1-12
Communicating with Users Retained Earnings Income Statement Illustration 1-5 Statement Illustration 1-6 Net income is needed to determine the ending balance in stockholder’s equity.Chapter 1-13
Communicating with Users Retained Earnings Statement Illustration 1-6 Statement indicates the reasons why retained earnings has increased or decreased during the period.Chapter 1-14
Communicating with Users Balance Sheet Retained Earnings Illustration 1-8 Statement Illustration 1-6 The ending balance in retained earnings is needed in preparing the balance sheetChapter 1-15
Communicating with Users Balance Sheet Reports the assets, liabilities, and Illustration 1-8 stockholder’s equity at a specific date. Assets listed at the top, followed by liabilities and stockholder’s equity. Total assets must equal total liabilities and stockholder’s equity.Chapter 1-16
Communicating with Users Statement of Cash Flows Illustration 1-9 Answers: 1. Where did cash come from during the period? 2. How was cash used during the period? 3. What was the change in the cash balance during the period?Chapter 1-17
Communicating with Users Review Question Which of the following financial statements is prepared as of a specific date? a. Balance sheet. b. Income statement. c. Owners equity statement. d. Statement of cash flows.Chapter 1-18