Slide on accounting subject. Tools for decision making.

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Kimmel, Weygandt, Kieso, Trenholm
KIMMEL
Financial Accounting:
Tools for Business Decision Making

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After studying Chapter 1, you should
be able to:
1. Describe the primary forms of business organization.
2. Identify the users and uses of accounting.
3. Explain the three principal types of business activity.
4. Describe the content and purpose of each of the
financial statements.
Chapter 1
Introduction to Financial Statements

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Chapter 1
Introduction to Financial Statements
After studying Chapter 1, you should be able
to:
5. Explain the meaning of assets, liabilities, and shareholders’
equity and state the basic accounting equation.
6. Describe the components that supplement the financial
statements in an annual report.
7. Explain the basic assumptions and principles underlying
financial statements.

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Forms of Business
Organization
Illustration 1-1

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Users of Financial Information
+ Internal Users
+ Managers plan, organize and run a
business

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+ External Users
+ Investors
+ Creditors
+ Others
+ Taxing authorities
+ Regulatory agencies
+ Customers
+ Labour unions
+ Economic planners
Users of Financial Information
Primary users

7. Accounting Equation
Assets = Liabilities + Shareholders’
Equity

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Basic Terms
+ Assets - resources owned by a business
+ Liabilities - obligations of the business
+ Shareholders’ equity
+ Share capital - representing the primary
ownership interest in a corporation
+ Retained earnings – accumulated earnings of
corporation that have not been distributed to
shareholders

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3 Types of Business Activity
+ Financing
+ Investing
+ Operating

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Financing Activities
+ Borrowing
money (debt)
+ Selling shares
(equity)
It takes money to
make money!

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Investing Activities
+ Obtaining the resources or assets
needed to operate the business for
the long-run
+ Examples
+Purchase or sale of investments
+Purchase or sale of capital
assets

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Operating Activities
+ Operating
activities are
the main
activities for
which the
organization is
in business
Loblaw

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+ Revenues arise
from sale of a
product or
service
+ Revenues result
in an inflow of
assets
Revenues

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+ Expenses are the costs of assets
consumed or services used to
generate revenues
+ Examples
+ Cost of sales
+ Store operating expenses
+ General and administrative expenses
+ Interest expense
Expenses

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Revenue $10,000
Less: Expenses 3,000
Net earnings $ 7,000
(Net loss is the excess of expenses over revenues)
Net Earnings
+ Net earnings are the excess of
revenue over expenses

16. Remember …
+ Remaining liquid and
solvent is as
important as
making a profit
because...
+ A company can
survive without
earnings, but it
can’t survive very
long without cash

17. + Management Discussion and Analysis
+ Auditor's Report
+ Financial Statements
+ Statement of Earnings
+ Statement of Retained Earnings
+ Balance Sheet
+ Statement of Cash Flows
+ Notes to Financial Statements
Elements of an

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Management Discussion
and Analysis
+ Covers three aspects of a company
+ Liquidity - ability to pay near-term
obligations
+ Capital resources - ability to fund
operations and expansions
+ Results of operations

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Auditor’s Report
+ Auditor gives an unqualified opinion
if the financial statements present
the financial position, results of
operations, and cash flows in
accordance with generally
accepted accounting principles
(GAAP)

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Financial Accounting
Statements
+ Statement of Earnings
+ Reports the results of operations for a specific
period of time
+ Statement of Retained Earnings
+ Reports the changes in retained earnings for a
specific period of time
+ Balance Sheet
+ Reports the assets, liabilities, and shareholders’
equity as at a specific point in time
+ Statement of Cash Flows
+ Reports the cash receipts and payments for a
specific period of time

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Notes to Financial Statements
+ Provide additional information not
included in body of statements
+ Do not have to be numeric
+ Examples
+ Description of accounting policies or
explanation of uncertainties and
contingencies
+ Statistics and supporting details

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Assumptions and Principles
+ Assumptions
+ Monetary unit
+ Economic
entity
+ Time period
+ Going
concern
+ Generally
accepted
accounting
principles
+ Cost
+ Full disclosure

24. Illustration 1-10
Monetary Unit Assumption

25. Illustration 1-10
Economic Entity Assumption

26. Illustration 1-10
Time Period Assumption

27. Illustration 1-10
Going Concern Assumption

28. Illustration 1-11
Cost Principle

29. Illustration 1-11
Full Disclosure Principle

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Decision Checkpoints
+ Are the company’s operations profitable?
+ What is the company’s policy toward
dividends and growth?
+ Does the company rely primarily on debt
or shareholders’ equity to finance its
assets?
+ Does the company generate sufficient
cash from operations to fund its
investing activities?

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COPYRIGHT
Copyright © 2001 John Wiley & Sons Canada, Ltd. All rights
reserved. Reproduction or translation of this work beyond
that permitted by CANCOPY (Canadian Reprography
Collective) is unlawful. Request for further information
should be addressed to the Permissions Department, John
Wiley & Sons Canada, Ltd. The purchaser may make back-
up copies for his / her own use only and not for distribution
or resale. The author and the publisher assume no
responsibility for errors, omissions, or damages, caused by
the use of these programs or from the use of the information
contained herein.

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33. CSU CORPORATION
Statement of Earnings
For the Year Ended December 31, 2001
1st - Statement of Earnings
ØHead up the statement
Øname of company
Øname of statement
Øperiod of time covered

34. Revenues
Service revenue
$22,200
CSU CORPORATION
Statement of Earnings
For the Year Ended December 31, 2001
ØList the revenues

35. Revenues
Service revenue
$22,200
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
CSU CORPORATION
Statement of Earnings
For the Year Ended December 31, 2001
ØList and total the expenses. Note
that income tax is shown separately
from other expenses

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Revenues
Service revenue
$22,200
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800
ØSubtract expenses from revenues to
obtain net earnings (loss)
CSU CORPORATION
Statement of Earnings
For the Year Ended December 31, 2001

37. CSU CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2001
2nd – Statement of Retained Earnings
ØHead up the statement
Øname of company
Øname of statement
Øperiod of time covered (same period
as statement of earnings)

38. CSU CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2001
Retained earnings, January 1 $ 0
ØStart with beginning
retained earnings (same as
ending retained earnings
of prior period)

39. CSU CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2001
Retained earnings, January 1 $ 0
Add: Net earnings 6,800
6,800
ØAdd net earnings (subtract
loss) from the current year
(see Statement of Earnings)
ØSubtotal

40. CSU CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2001
Retained earnings, January 1 $ 0
Add: Net earnings 6,800
6,800
Less: Dividends 0
Retained earnings, December 31 $ 6,800
ØSubtract current year’s
dividends (if any) and total

41. CSU CORPORATION
Balance Sheet
December 31, 2001
3rd – Balance Sheet
ØHead up the statement
Øname of company
Øname of statement
Ødate (as at a specific point in time)

42. CSU CORPORATION
Balance Sheet
December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
ØList the assets and total

43. CSU CORPORATION
Balance Sheet
December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
ØList the liabilities and subtotal

44. CSU CORPORATION
Balance Sheet
December 31, 2001
ØList shareholders’ equity.
Subtotal
ØAdd to liabilities, total

45. CSU CORPORATION
Balance Sheet
December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings 6,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

46. Stop and Check
üTotal assets must equal total
liabilities and shareholders’ equity

47. In what order are financial
statements prepared?
Presented?
WHY?

48. CSU CORPORATION
Statement of Earnings
For the Year Ended December 31, 2001
Net earnings is needed for the
Statement of Retained Earnings
Revenues
Service revenue
$22,200
Expenses
Rent expense $9,000
Insurance expense 1,000
Supplies expense 200
Total expenses 10,200
Earnings before income tax 12,000
Income tax expense 5,200
Net earnings $ 6,800

49. CSU CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2001
Retained earnings, January 1 $ 0
Add: Net earnings 6,800
6,800
Less: Dividends 0
Retained earnings, December 31 $ 6,800
Ending retained earnings is needed
for the Balance Sheet

50. CSU CORPORATION
Balance Sheet
December 31, 2001
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
Liabilities and Shareholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
Shareholders’ equity
Common shares $10,000
Retained earnings 6,800
Total shareholders’ equity 16,800
Total liabilities and shareholders’ equity $23,800

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