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Chapter 1 MBA 560

The document provides an overview of key accounting concepts including: 1) Accounting is an information system that measures business activities, processes data into reports, and communicates results to decision makers. 2) There are two main types of accounting - financial accounting which provides information to external decision makers, and managerial accounting which provides information to internal managers. 3) The key financial statements are the income statement, balance sheet, statement of retained earnings, and statement of cash flows. The income statement reports revenues and expenses, the balance sheet reports assets, liabilities and equity, and the statement of retained earnings reports changes to retained earnings.

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22 views

Chapter 1 MBA 560

The document provides an overview of key accounting concepts including: 1) Accounting is an information system that measures business activities, processes data into reports, and communicates results to decision makers. 2) There are two main types of accounting - financial accounting which provides information to external decision makers, and managerial accounting which provides information to internal managers. 3) The key financial statements are the income statement, balance sheet, statement of retained earnings, and statement of cash flows. The income statement reports revenues and expenses, the balance sheet reports assets, liabilities and equity, and the statement of retained earnings reports changes to retained earnings.

Uploaded by

Cendorly
Copyright
© © All Rights Reserved
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 47

Chapter 1:

The Financial Statements


Why is Accounting is the Language of
Business?

Accounting is an information system that:


 Measures business activities
 Processes data into reports
 Communicates results to decision makers
The Flow of Accounting Information
Who uses accounting information?

 Individuals
 Investorsand creditors
 Regulatory bodies
 Nonprofit organizations
Two Kinds of Accounting

 Financial Accounting  Managerial Accounting

 For decision makers  For managers inside


outside the entity the entity
 Investors  Budgets
 Creditors  Forecasts
 Government agencies  Projections
 The public
The Various Forms of Business Organization
Organizing a Business
Proprietorship
 Single owner
 Tend to be small retail stores or solo providers
of professional services
 Personally labile for all business’s debts
 Distinct entity for accounting purposes
Organizing a Business
Partnership
 Two or more parties as co-owners
 Income and losses “flow through” to partners
 Many are small or medium-sized companies
 Generalpartnerships have mutual agency and
unlimited liability
 Inlimited-liability partnerships, only liable up
to the investment put in
Organizing a Business

Limited-Liability Company
 Business (not owners) is liable for debts
 May have one owner or many, called members
 Members have limited liability
 Income “flows through” to members
Organizing a Business
Corporation
 Owned by stockholders (shareholders)
 Able to raise large sums of capital by issuing
stock
 Formed under state law
 Legally distinct from its owners
 Stockholders have no personal obligation for
the corporation’s debts, limited liability
Organizing a Business
Corporation
 Double taxation
Corporation pays income tax
Shareholders taxed on dividends
 Stockholders elect board of directors, which
Sets policy
Appoints officers
Generally Accepted Accounting Principles

 Common acronym is GAAP

 Rules, principles and concepts that govern


financial accounting in the United States

 Financial Accounting Standards Board


(FASB)
◦ Seven-person group primarily responsible for
establishing GAAP
◦ Objective is to provide useful information for
lending and investing decisions
International Financial Reporting Standards

 Common acronym is IFRS

 Principles and standards increasingly


used throughout the world

 International Accounting Standards


Board (IASB)
◦ Responsible for establishing IFRS
Conceptual Foundation of Accounting
Assumptions and Principles
Entity Assumption
 An organization stands apart from other organizations and
individuals as a separate economic unit
Continuity (Going-Concern) Assumption
 Entity will continue to operate for the foreseeable future
Historical Cost Principle
 Assets should be recorded at their actual cost on the date of
purchase
Stable-Monetary-Unit Assumption
 Assume the dollar’s purchasing power is stable over time
Recording Business Transactions
 Fundamental accounting equation

Stockholder’
Assets Liabilities s
Equity

Resources Amount of Amount of


business assets assets
owns that financed by financed by
have value lenders stockholders
The Accounting Equation

Memorize the accounting equation


Assets = Liabilities + Equity
Think of it like a scale
Both sides always equal
Can be written as: Assets Liabilities
◦ Liabilities = assets – equity Equity

◦ Equity = assets - liabilities


The Accounting Equation

Stockholder’sE
Assets Liabilities quity

DECEMBER 31, 2012


$91,000 84,000
??? $ 7,000
DECEMBER 31, 2013
$145,000 ???
72,000 $73,000

12,000
Assets

Accounts Notes
Cash
Receivable Receivable

Prepaid
Land Buildings
Expenses

Equipment,
Furniture, and
Fixtures
Liabilities

Accounts Notes
Payable Payable
Accrued
Liabilitie
s
Stockholders’ Equity

Common Retained
Revenues
Stock Earnings

Dividend
Expenses
s
Apply the Accounting Equation to
Business Organizations

Owner’s Equity

• The accounting equation can be rewritten as:


• Assets – Liabilities = Owners’ Equity
• Corporation’s equity is called stockholders’
equity and it has two parts:
• Paid-in capital
• Retained earning
Apply the Accounting Equation to
Business Organizations

Owner’s Equity

Paid-in capital Retained Earnings


The amount The amount of earned
stockholders have income kept for use in
invested in the the business.
business.
EXPANDED Accounting Equation
Stockholders’ equity can be broken down into:
◦ Common stock
◦ Retained earnings

Stockholders
Assets Liabilities
Equity

Common
Retained Earnings
Stock

Revenues Expenses Dividends


Components of Retained Earnings
Beginning Retained
Revenue – Expenses = Earnings

± Net Income
or Loss

− Dividends

= Ending
Retained Earnings
Components of Retained Earnings
Revenues
 Inflow of resources from delivering goods or services
 Increase retained earnings
Expenses
 Outflow of resources due to the cost of operations
 Decrease retained earnings
Dividends
 Distribution of assets to stockholders
 Decrease retained earnings
The Financial Statements

Statement
Statement
Income of Balance
of Cash
Statement Retained Sheet
Flows
Earnings
Relationships Among Financial Statements

Income Statement
Net Income

Statement of Retained Earnings


Ending balance

Balance Sheet

Statement of Cash Flows


Information Reported in the Financial Statements
The Income Statement
 Shows revenue and expenses for a
period of time
◦ Profit occurs when revenue is greater than
expenses
◦ Loss occurs when revenue is less than
expenses

Net Income
Revenues Expenses
or Net Loss
The Walt Disney Company, Consolidated Statements of Income
The Statement of Retained Earnings

Retained Earnings
 Portion of net income reinvested into the
business
 Net income increases retained earnings
 Net losses and dividends decrease retained
earnings
 Net income (net loss) flows from the income
statement to the statement of retained earnings
The Statement of Retained Earnings
Beginning Retained
Earnings
Shows changes to
retained earnings
over time
± Net Income
or Loss

− Dividends

= Ending
Retained Earnings
The Statement of Retained Earnings

Beginning retained earnings


Add: Net income (loss)
Less: Dividends declared___
Ending retained earnings
The Walt Disney Company, Consolidated
Statements of Retained Earnings
The Balance Sheet (also called the
Statement of Financial Position)
 Lists assets, liabilities, and stockholders’
equity at a specific date
 “Proves” the accounting equation

Stockholders’
Assets Liabilities
Equity
The Balance Sheet
Balance Sheet
 Also called the statement of financial
position
 Reports three items:
Assets
Liabilities
Stockholders’ equity
 Reflects
the company’s position at a specific
moment in time
The Balance Sheet - Assets
Assets
 Currentassets – expected to be used or
converted to cash within one business cycle
Examples: cash and cash equivalents, short-
term investments, accounts receivable, prepaid
expenses
 Long-term
assets – expected to benefit the
company beyond just the next fiscal year
Examples: property, plant, and equipment, long-
term investments, intangible assets
The Balance Sheet - Assets
The Balance Sheet - Liabilities
Liabilities
 Current liabilities – debts due within one
year
Examples: accounts payable, salaries payable,
short-term notes payable, accrued liabilities
 Long-term liabilities– debts payable after
one year
Examples: long-term notes payable, long-
term bonds payable
The Balance Sheet - Liabilities
The Balance Sheet - Equity
Equity (Stockholders’ Equity)
 Represents the stockholders’ ownership
of the business’s assets
 Examples: common stock, additional
paid-in capital, retained earnings,
treasury stock, accumulated other
comprehensive income (loss)
The Balance Sheet - Equity
The Walt Disney Company, Consolidated Balance Sheet
The Statement of Cash Flows
 Measures cash receipts and payments
 Three types of activities:
Operating activities: cash flows from selling
goods and services to customers
Investing activities: cash flows from
purchasing and selling long-term assets
Financing activities: cash flows from
borrowing or repaying funds or equity
transactions
The Walt Disney Company - Consolidated Statements of
Cash Flows
End of Chapter 1: QUESTIONS?

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