Directory UMM :wiley:Public:college:accounting:kimmel:
Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter
1
`
Chapter 1
Introduction to Financial Statements
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.
3
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
statements.
4
Forms of Business
Organizations
Sole Proprietorship - owned by one
person
Partnership - owned by more than
one person
Corporation - organized as a
separate legal entity and owned by
stockholders
5
Page 5 in book
Forms of Business
Organizations
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
Economic planners
7
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?
What product line is most profitable?
8
Questions Asked by
External Users
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?
9
Basic Terms
Assets - resources owned by a business
Liabilities - debts and obligations of
the business
Common stock - stock representing the
primary ownership interest in a
corporation
10
Statement of Cash Flows
The primary purpose of a statement of
cash flows is to provide financial
information about the cash receipts
and cash payments for a period of
time.
11
3 Types of Business Activity
Financing
Investing
Operating
12
Financing Activities
It
Takes
MONEY
to
Make
MONEY!
13
Page 8 in book
2 Ways of Outside Financing
of a Corporation
Borrowing Money
(liabilities)
Selling Shares of
Stock
14
Investing Activities
Obtaining the
Resources or Assets
needed to operate the
business
Examples of assets...
Cash
Accounts Receivable
Prepaid Rent
Buildings, Equipment, Furniture
15
Investing Activities Examples
Purchase or Sale of computers,
delivery trucks, furniture, buildings
Purchase or Sale of investments
16
Page 8 in book
Investing
17
Page 9 in book
Operating activities are the main activities
for which the organization is in business.
18
What Are Revenues?
Revenues are the assets that result
from sale of a product or service.
19
Examples of Revenues
Taxi Company - sells services
Theatre - sells services & products
Retail Store - sells products
20
What Are Expenses?
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
21
Examples of Expenses
Taxi Company - gasoline, maintenance,
insurance
Theatre - salaries, supplies, film rental,
concessions to resale
Retail Store - utilities, taxes, rent,
supplies, salaries
22
Net Income
Net Income is the excess of revenues
over expenses.
Revenue
Expenses
Net income
$10,000
3,000
$ 7,000
23
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
receipts and payments for a specific period of
time
24
Accounting Equation
Assets = Liabilities + Stockholders’
Equity
Want to Practice?
Click HERE to Solve
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From Page 14
Remember...
Remaining
Liquid and Solvent
is as important as
making a profit
because...
A Company Can Survive a Long
Time Without Profits...
but It Can’t
Survive
Very Long
Without
CASH!
Elements of an
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
Management Discussion
and Analysis
Covers three aspects of a company:
liquidity - ability to pay near term
obligations
capital resources - fund operations and
expansions
results of operation
30
Notes to Financial Statements
Provide additional information not
included in body of statements
Describe accounting policies or explain
uncertainties and contingencies
31
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
position, results of operations, and cash flows
in accordance with GAAP.
32
Monetary Unit Assumption
Economic Entity Assumption
Time Period Assumption
Going Concern Assumption
Cost Principle
Full Disclosure Principle
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
Department, John Wiley & Sons, Inc. The purchaser may make
back-up copies for his/her own use only and not for distribution
or resale. The Publisher assumes no responsibility for errors,
omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.
39
Do It - Page 14
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
1st- head up the statement
•name of company
•name of statement
•period of time covered
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
2nd - List the revenues
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
$9,000
1,000
200
10,200
3rd - List and total the expenses
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net Income
$9,000
1,000
200
10,200
$ 6,800
4th - Subtract expenses from
revenues to obtain net income.
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
1st- head up the statement
•name of company
•name of statement
•period of time covered
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$
2nd - Start with beginning
retained earnings
0
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
$
0
6,800
6,800
3rd - Add net income from the
current year - subtotal
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
Less: Dividends
Retained earnings, December 31
$
0
6,800
6,800
0
$ 6,800
4th - Subtract current year’s
dividends and total
CSU CORPORATION
Balance Sheet
December 31, 1998
1st- head up the statement
•name of company
•name of statement
•date
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 2,000
4,000
1,800
16,000
$23,800
2nd - list the assets and total
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable
Notes payable
Total liabilities
3rd - list the liabiliti
sub-total
CSU CORPORATION
Balance Sheet
December 31, 1998
4th - list stockholders’ equity
subtotal. Add to liabilities,
Total
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…
double underline.
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?
WHY?
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net Income
$9,000
1,000
200
10,200
$ 6,800
Net Income is needed for the
Statement of Retained Earnings.
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
Less: Dividends
Retained earnings, December 31
$
0
6,800
6,800
0
$ 6,800
Ending Retained Earnings is needed
for the balance sheet.
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
60
COP Y R I 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
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
S
EL
1
Chapter
1
`
Chapter 1
Introduction to Financial Statements
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.
3
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
statements.
4
Forms of Business
Organizations
Sole Proprietorship - owned by one
person
Partnership - owned by more than
one person
Corporation - organized as a
separate legal entity and owned by
stockholders
5
Page 5 in book
Forms of Business
Organizations
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
Economic planners
7
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?
What product line is most profitable?
8
Questions Asked by
External Users
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?
9
Basic Terms
Assets - resources owned by a business
Liabilities - debts and obligations of
the business
Common stock - stock representing the
primary ownership interest in a
corporation
10
Statement of Cash Flows
The primary purpose of a statement of
cash flows is to provide financial
information about the cash receipts
and cash payments for a period of
time.
11
3 Types of Business Activity
Financing
Investing
Operating
12
Financing Activities
It
Takes
MONEY
to
Make
MONEY!
13
Page 8 in book
2 Ways of Outside Financing
of a Corporation
Borrowing Money
(liabilities)
Selling Shares of
Stock
14
Investing Activities
Obtaining the
Resources or Assets
needed to operate the
business
Examples of assets...
Cash
Accounts Receivable
Prepaid Rent
Buildings, Equipment, Furniture
15
Investing Activities Examples
Purchase or Sale of computers,
delivery trucks, furniture, buildings
Purchase or Sale of investments
16
Page 8 in book
Investing
17
Page 9 in book
Operating activities are the main activities
for which the organization is in business.
18
What Are Revenues?
Revenues are the assets that result
from sale of a product or service.
19
Examples of Revenues
Taxi Company - sells services
Theatre - sells services & products
Retail Store - sells products
20
What Are Expenses?
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
21
Examples of Expenses
Taxi Company - gasoline, maintenance,
insurance
Theatre - salaries, supplies, film rental,
concessions to resale
Retail Store - utilities, taxes, rent,
supplies, salaries
22
Net Income
Net Income is the excess of revenues
over expenses.
Revenue
Expenses
Net income
$10,000
3,000
$ 7,000
23
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
receipts and payments for a specific period of
time
24
Accounting Equation
Assets = Liabilities + Stockholders’
Equity
Want to Practice?
Click HERE to Solve
DO IT
From Page 14
Remember...
Remaining
Liquid and Solvent
is as important as
making a profit
because...
A Company Can Survive a Long
Time Without Profits...
but It Can’t
Survive
Very Long
Without
CASH!
Elements of an
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
Management Discussion
and Analysis
Covers three aspects of a company:
liquidity - ability to pay near term
obligations
capital resources - fund operations and
expansions
results of operation
30
Notes to Financial Statements
Provide additional information not
included in body of statements
Describe accounting policies or explain
uncertainties and contingencies
31
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
position, results of operations, and cash flows
in accordance with GAAP.
32
Monetary Unit Assumption
Economic Entity Assumption
Time Period Assumption
Going Concern Assumption
Cost Principle
Full Disclosure Principle
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
Department, John Wiley & Sons, Inc. The purchaser may make
back-up copies for his/her own use only and not for distribution
or resale. The Publisher assumes no responsibility for errors,
omissions, or damages, caused by the use of these programs or
from the use of the information contained herein.
39
Do It - Page 14
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
1st- head up the statement
•name of company
•name of statement
•period of time covered
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
2nd - List the revenues
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
$9,000
1,000
200
10,200
3rd - List and total the expenses
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net Income
$9,000
1,000
200
10,200
$ 6,800
4th - Subtract expenses from
revenues to obtain net income.
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
1st- head up the statement
•name of company
•name of statement
•period of time covered
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
$
2nd - Start with beginning
retained earnings
0
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
$
0
6,800
6,800
3rd - Add net income from the
current year - subtotal
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
Less: Dividends
Retained earnings, December 31
$
0
6,800
6,800
0
$ 6,800
4th - Subtract current year’s
dividends and total
CSU CORPORATION
Balance Sheet
December 31, 1998
1st- head up the statement
•name of company
•name of statement
•date
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
$ 2,000
4,000
1,800
16,000
$23,800
2nd - list the assets and total
CSU CORPORATION
Balance Sheet
December 31, 1998
Assets
Cash
Accounts receivable
Supplies
Equipment
Total assets
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable
Notes payable
Total liabilities
3rd - list the liabiliti
sub-total
CSU CORPORATION
Balance Sheet
December 31, 1998
4th - list stockholders’ equity
subtotal. Add to liabilities,
Total
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…
double underline.
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?
WHY?
CSU CORPORATION
Income Statement
For the Year Ended December 31, 1998
Revenues
Service revenue
$17,000
Expenses
Rent expense
Insurance expense
Supplies expense
Total expenses
Net Income
$9,000
1,000
200
10,200
$ 6,800
Net Income is needed for the
Statement of Retained Earnings.
CSU CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 1998
Retained earnings, January 1
Add: Net Income
Less: Dividends
Retained earnings, December 31
$
0
6,800
6,800
0
$ 6,800
Ending Retained Earnings is needed
for the balance sheet.
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
60
COP Y R I 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
distribution or resale. The Publisher assumes no responsibility
for errors, omissions, or damages, caused by the use of these
programs or from the use of the information contained herein.