Hhtfa8e ch01 stud devry Accounting 212 FINANCIAL ACCOUNTING

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Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.

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The Financial Statements
Chapter 1

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Use accounting vocabulary

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The Language of Business

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Users of Accounting Information

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Types of Accounting
Financial Managerial
• Provides information • Provides information
for external users for internal users –
managers

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Forms of Business Organization
Proprietorship Partnership LLC Corporation
Owner(s) Proprietor -One Partners – two Members Stockholders –
or more usually many
Personal
liability of
owner for
business
debts

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Proprietorship
• Single owner
• Common business form for small retails stores
and professional service providers
• Proprietor personally liable for business debts

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Partnerships
• Not a taxpaying entity
• Governed by an agreement
• Mutual agency
• Unlimited liability
• Involve risk

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Limited Liability Companies (LLC)
• Like a partnership, not a taxpaying entity
• Popular form of business due to combination of
tax status and limited liability

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Corporations
• Formed under state law
• Double taxation
• Stockholders elect Board of Directors

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Learn the underlying concepts, assumptions
and principles of accounting

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Conceptual Foundations

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To provide financial information that is useful to present and potential
Objective
capital providers in making investment and lending decisions

Fundamental
Faithful
Relevance
Qualitative
Characteristics representation

Enhancing
Comparability Verifiability Timeliness Understandability
Qualitative
Characteristics

Constraints Materiality Cost

Financial Reporting Standards
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Assumptions & Principles

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International Financial Standards
• Historically, different countries use their own
accounting standards.
• The IASB has developed international standards
(IFRS)
• In November 2008, the SEC announced it will
require all U.S. public companies to adopt IFRS

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International Financial Standards
• In the long run, global use of IFRS could reduce
cost of doing business internationally
• Will U.S. GAAP continue to exist?
• U.S. GAAP is rule-based
• IFRS allows more judgment

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Apply the accounting equation to business
organizations

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Accounting Equation Elements

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Assets = Liabilities + Owner’s Equity

Liabilities

Assets
Assets
Owner’s
equity

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ASSETS LIABILITIES

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Corporate Accounting Equation
Assets Liabilities
+ Stockholders’ equity

Paid-in capital Retained
earnings

Amounts Amounts 1-23
shareholders earned and
have kept by
invested business
Common
Common
stock
stock
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Retained Earnings

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Net Income
If
Revenues expenses
exceed
revenues

Expenses

A net loss
results
Net Income

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Exercise 1-17A
Assets $290 $490 $150

Liabilities $150 $310

Assets Liabilities Equity

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Exercise 1-17A
Assets $290 $490 $150

Assets = resources

Liabilities $150 $310

Liabilities = amounts
owed to creditors

Assets Liabilities Equity

Stockholder ownership
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Evaluate business operations

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The Financial Statements

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The Income Statement
• Also called the Statement of Operations
• Reports two main categories
• Shows the “bottom line”
• Net income is the most important item in the
financial statements

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ABC Corporation
Income Statement
For the year ending December 31, 2010
Net sales $$,$$$
Other revenue $$,$$$
Total revenues $$,$$$
Cost of goods sold $$,$$$
Gross profit $$,$$$
Selling, general and administrative expenses $$,$$$
Income from operations $$,$$$
Interest expense $$,$$$
Income before income taxes $$,$$$
Income tax expense $$,$$$
Net Income $$,$$$
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Statement of Retained Earnings
• Retained earnings is portion of net income
company has kept
• Positive balance indicates revenues exceeded
expenses
• Accumulated deficit indicates expenses have
exceed revenues
• Net income (or net loss) flows from the Income
Statement to the Statement of Retained
Earnings
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ABC Corporation
For the year ending December 31, 2010
Retained earnings, December 31, 2009 $$,$$$
Plus: Net income $$,$$$
Less: Dividends $$,$$$
Retained earnings, December 31, 2010 $$,$$$

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The Balance Sheet
• Also called the Statement of Financial Position

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Assets on the Balance Sheet
Current Long-term
• Expected to be converted to • Will be held longer than one
cash, sold or consumed in year
the next year or within the
business’s operating cycle

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Liabilities on the Balance Sheet
Current Long-term
• Debts payable in the next • Debts payable more than
year or within the business’s one year from balance sheet
operating cycle date

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Stockholders’ Equity on the Balance
Sheet
• Represents stockholders ownership of the
business assets

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ABC Corporation
Balance Sheet
December 31, 2010
Assets Liabilities and Stockholders' Equity
Cash and cash equivalents Accounts payable
Merchandise inventory Taxes payable
Prepaid expenses Total current liabilities
Total current assets Long-term debt
Total liabilities
Property and Equipment Common stock
Less: accumulated depreciation Additional paid-in capital
Net Property and Equipment Retained earnings
Other assets Total stockholders' equity
Total assets Total liabilities & stockholders' equity

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The Statement of Cash Flows
• Measures cash receipts and cash payments
• Fourth required financial statement

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Cash Flow Categories

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Exercise 1-20A
(a) Common stock (h) Revenue
(b) Income tax payable (I) Cash spent to acquire a
building
(c) Dividends (j) Selling, general &
administrative expenses
(d) Income tax expense (k) Adjustments to reconcile net
income to net cash from
operations
(e) Ending balance of retained (l) Ending cash balance
earnings
(f) Total assets (m) Current liabilities
(g) Long-term debt (n) Net income

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Exercise 1-20A
(a) (h)
(b) (I)
(c) (j)
(d) (k)
(e) (l)

(f) (m)
(g) (n)

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Use information in financial statements to
make business decisions, which are informed by
economic, legal and ethical guidelines

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Relationships between Financial
Statements
Income Statement
For the year ended December 31, 2010
Revenues $$$,$$$
Expenses ($$,$$$)
Net income $$,$$$

Beginning retained earnings $$$,$$$
Net income $$,$$$
Cash dividends ($$,$$$)
Ending retained earnings $$,$$$
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Beginning retained earnings $$$,$$$
Net income $$,$$$
Cash dividends ($$,$$$)
Ending retained earnings $$,$$$

Balance Sheet
December 31, 2010
Assets $$$,$$$
Liabilities $$$,$$$
Stockholders’ equity:
Common stock $$$,$$$
Retained earnings $$$,$$$
Total liabilities and equity $$$,$$$
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Balance Sheet
December 31, 2010
Assets $$$,$$$
Liabilities
Cash from
$$$,$$$
the Asset
Stockholders’ equity:
section of
Common stock $$$,$$$
the
Retained earnings $$$,$$$ Balance
Total liabilities and equity $$$,$$$ Sheet
Statement of Cash Flows equals
ending
Cash flows from operating activities $$$,$$$
Cash on
Cash flows from investing activities $$,$$$ the
Cash flows from financing activities $$,$$$ Statement
Net cash flows $$,$$$ of Cash
Cash balance, December 31, 2009 $$,$$$ Flows
Cash balance, December 31, 2010 $$,$$$ 47

Evaluating a Company

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Why are Ethics Important?
• What decisions have you made today?
• Who is impacted by your decisions?
• What factors influence our decisions?

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Hhtfa8e ch01 stud devry Accounting 212 FINANCIAL ACCOUNTING

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