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Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
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After studying Chapter 1, you should be able to:
Describe the primary forms of business organization.
Identify the users and uses of accounting.
Explain the three principal types of business activity.
Describe the content and purpose of each of the financial
statements.
Chapter 1
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Chapter 1
Introduction to Financial Statements
After studying Chapter 1, you should be able to:
Explain the meaning of assets, liabilities, and stockholders’ equity
and state the basic accounting equation.
Describe the components that supplement the financial statements
in an annual report.
Explain the basic assumptions and principles underlying financial
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Forms of Business
Organizations
Sole Proprietorship -
owned by one
person
Partnership -
owned by more than
one person
Corporation -
organized as a
Forms of Business
Organizations
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Users of Financial
Information
Internal Users - managers plan, organize
and run a business.
External Users -
Investors
Creditors
Others
Taxing authorities
Regulatory agencies
Customers
Labor unions
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Questions Asked by
Internal Users
Is cash sufficient to pay bills?
What is the cost of manufacturing each unit
of product?
Can we afford to give employee pay raises
this year?
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Is the company earning satisfactory
income?
How does the company compare in size and
profitability with competitors?
Will the company be able to pay its debts
when they become due?
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Basic Terms
Assets -
resources owned by a business
Liabilities -
debts and obligations of
the business
Common stock -
stock representing the
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Statement of Cash Flows
The primary purpose of a statement of
cash flows is to provide financial
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3 Types of Business Activity
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Financing Activities
It
Takes
MONEY
to
Make
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2 Ways of Outside Financing
of a Corporation
Borrowing Money
(liabilities)
Selling Shares of
Stock
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Investing Activities
Obtaining the
Resource
s
or
Assets
needed to operate the
business
Examples of assets...
Cash
Accounts Receivable
Prepaid Rent
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Investing Activities -
Examples
Purchase or Sale of computers,
delivery trucks, furniture, buildings
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Investing
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Operating activities are the main activities
for which the organization is in business.
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What Are Revenues?
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Examples of Revenues
Taxi Company - sells services
Theatre - sells services & products
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Expenses
are the costs of assets
consumed or services used to
generate revenues. Examples...
What Are Expenses?
Cost of sales
Store operating expenses
General and administrative expenses
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Examples of Expenses
Taxi Company - gasoline, maintenance,
insurance
Theatre - salaries, supplies, film rental,
concessions to resale
Retail Store - utilities, taxes, rent,
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Net Income
Net Income is the excess of revenues
over expenses.
Revenue
$10,000
Expenses
3,000
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Financial Accounting Statements
Income Statement -
reports the results of
operations for a specific period of time
Retained Earnings Statement -
reports the
changes in retained earnings for a specific
period of time
Balance Sheet -
reports the assets, liabilities,
and stockholders’ equity at a specific date
Statement of Cash Flows -
reports the cash
Accounting Equation
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From Page 14
Remember...
Remaining
Liquid and Solvent
is as important as
A Company Can Survive a Long
Time Without Profits...
but It Can’t
Survive
Very Long
Without
Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Management Discussion and Analysis
Notes to Financial Statements
Auditor's Report
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Management Discussion
and Analysis
Covers three aspects of a company:
liquidity
- ability to pay near term
obligations
capital resources
- fund operations and
expansions
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Notes to Financial Statements
Provide additional information not
included in body of statements
Describe accounting policies or explain
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Auditor's Report
Auditor, a professional accountant who
conducts an independent examination of the
financial accounting data presented by a
company.
Auditor gives an unqualified opinion if the
financial statements present the financial
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COPYRIGHT
Copyright © 1998 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that named in
Section 117 of the United States Copyright Act without the express
written consent of the copyright owner is unlawful. Request for
further information should be addressed to the Permissions
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
1st- head up the statement
•
name of company
•
name of statement
Revenues
Service revenue
$17,000
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
$9,000
Insurance expense
1,000
Supplies expense 200
Total expenses
10,200
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
$9,000
Insurance expense
1,000
Supplies expense 200
Total expenses
10,200
Net Income
$ 6,800
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
4th - Subtract expenses from
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
1st- head up the statement
•
name of company
•
name of statement
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$ 0
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$ 0
Add: Net Income
6,800
6,800
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$ 0
Add: Net Income
6,800
6,800
Less: Dividends
0
Retained earnings, December 31
$ 6,800
CSU CORPORATION
Balance Sheet
December 31, 1998
1st- head up the statement
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800 Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000
CSU CORPORATION
Balance Sheet
December 31, 1998
4th - list stockholders’ equity
subtotal. Add to liabilities,
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800 Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000 Stockholders’ equity
Common stock 10,000 Retained earnings 6,800
Total Stockholders’ equity 16,800 Total liabilities and stockholders’ equity $23,800
If total assets and total
liabilities and stockholders’
equity equal…
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800 Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000 Stockholders’ equity
Common stock 10,000 Retained earnings 6,800
Total Stockholders’ equity 16,800 Total liabilities and stockholders’ equity $23,800
In what order are financial
statements prepared?
Revenues
Service revenue
$17,000
Expenses
Rent expense
$9,000
Insurance expense
1,000
Supplies expense 200
Total expenses
10,200
Net Income
$ 6,800
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$ 0
Add: Net Income
6,800
6,800
Less: Dividends
0
Retained earnings, December 31
$ 6,800
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash $ 2,000
Accounts receivable 4,000
Supplies 1,800
Equipment 16,000
Total assets $23,800 Liabilities and Stockholders’ Equity
Liabilities
Accounts payable $ 2,000
Notes payable 5,000
Total liabilities 7,000 Stockholders’ equity
Common stock 10,000 Retained earnings 6,800
Total Stockholders’ equity 16,800 Total liabilities and stockholders’ equity $23,800
COP Y RI GHT
Copyright © 1999, John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted in
Section 117 of the 1976 United States Copyright Act without the
express written permission of the copyright owner is unlawful.
Request for further information should be addressed to the
Permissions Department, John Wiley & Sons, Inc. The purchaser
may make back-up copies for his/her own use only and not for
