2. 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
statements
Chapter
1-2
4. 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
5. 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.
6. 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.
7. 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.
8. 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.
9. 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.
10. Communicating with Users
Companies prepare four financial statements from
the summarized accounting data:
Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows
Chapter
1-10
11. 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
12. 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
13. 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
14. 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
15. 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 sheet
Chapter
1-15
16. 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
17. 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
18. 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. Owner's equity statement.
d. Statement of cash flows.
Chapter
1-18
