TO FINANCIAL

1
1

• INTRODUCTION
• TO FINANCIAL
• STATEMENTS

Accounting, Fifth Edition
2

• Classify each item as an
• asset
• liability
• common stock
• revenue
• expense.

1. Cost of renting property.
2. Truck purchased.
3. Notes payable.
4. Issuance of ownership shares.
5. Amount earned from providing service.
6. Amounts owed to suppliers.

LO 3 Explain the three principal types of
business activity.
3
Learning Objectives

• After studying this chapter, you should be able
  to
• Describe the primary forms of business
  organization.
• Identify the users and uses of accounting
  information.
• Describe the content and purpose of each of the
  financial statements.
• 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.

4
Forms of Business Organization
LO 1 Describe the primary forms of business
organization.
5
Internal Users
Illustration 1-1 Questions that internal users
ask
LO 2
6
(No Transcript)
7
Users and Uses of Financial Information
External Users
Illustration 1-2 Questions that external users
ask
LO 2
8
Liabilities Equity
Assets
9
Cash
Notes RECEIVABLE
Accounts RECEIVABLE
Resources owned or controlled by a company
Land
Prepaid Expenses
Buildings
Store Supplies
Equipment
10
Notes PAYABLE
Accounts PAYABLE
Creditors claims on assets
Wages PAYABLE
Taxes PAYABLE
11
Investments by the shareholders

• Amounts earned from the sale of products or
  services
• Sales
• Revenue
• Interest Income
• Rent Revenue

• Amounts spent to generate revenues
• Salaries Exp
• Rent Exp
• Interest Exp
• Utilities Exp

Returns made to shareholders

• Increases Equity
• Decreases Equity

12
Accounting
Identifies
Records
GAAP
Relevant
Communicates
Reliable
to help users make better decisions.
Comparable
13
Communicating with Users
Companies prepare four financial statements from
the summarized accounting data
1) Income Statement (Revenues Expenses Net
Income)
2) Retained Earnings Statement (Income
Dividends)
3) Balance Sheet (Assets, Liabilities Equity)
Statement of Cash Flows (Cash) (Ch 12)
Represents a period of time (i.e. Jan 1 Dec
31) Represents a single point of time (i.e Dec
31)
LO 4 Describe the content and purpose of each of
the financial statements.
14
Income Statement
Illustration 1-4
LO 4 Describe the content and purpose of each of
the financial statements.
15
Accounting Equation Finl Statements
Illustration 3-2 Expanded accounting equation
Income Statement
LO 1 Analyze the effect of business transactions
on the basic accounting equation.
16
Account Identification Income Statement
Practice Problem
Ex 1-8, p 31

• Tips to solve
• Label each account as one of the following
• Assets what is OWNED
• Liabilities what is OWED
• Equity
• Common stock investments by shareholders
• Dividends investment returns to shareholders
• Revenue amounts earned from the sale of product
  or services
• Expense amounts spent to generate revenue

17
Retained Earnings Statement
Retained Earnings Statement

• Statement shows amounts and causes of changes in
  retained earnings during the period.
• Time period is the same as that covered by the
  income statement.
• Users can evaluate dividend payment practices.

Illustration 1-5
Helpful Hint The heading of this statement
identifies the company, the type of statement,
and the time period covered by the statement.
LO 4 Describe the content and purpose of each of
the financial statements.
18
Accounting Equation Finl Statements
Illustration 3-2 Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions
on the basic accounting equation.
19
Communicating with Users
2) Retained Earnings Statement
1) Income Statement
Illustration 1-5
Illustration 1-4
Net income is needed to determine the ending
balance in retained earnings.
LO 4 Describe the content and purpose of each of
the financial statements.
20
Balance Sheet
Balance Sheet

• Reports assets and claims to assets at a specific
  point in time.
• Assets Liabilities Stockholders Equity.
• Lists assets first, followed by liabilities and
  stockholders equity.

Illustration 1-7
Helpful Hint The heading of a balance sheet must
identify the company, the statement, and the date.
LO 5 Explain the meaning of assets,
liabilities, and stockholders equity, and state
the basic accounting equation.
21
Accounting Equation Finl Stmts
Balance Sheet
Illustration 3-2 Expanded accounting equation
Stmt of Retained Earnings
Net Income/Income Statement
LO 1 Analyze the effect of business transactions
on the basic accounting equation.
22
Communicating with Users
Retained Earnings Statement
Balance Sheet
Ending balance in retained earnings is needed in
preparing the balance sheet.
LO 4 Describe the content and purpose of each of
the financial statements.
23
Retained Earnings Balance Sheet Practice
Problem
Ex 1-10, p 32

• Tips to solve
• Mark each account listed as an asset, liability,
  common stock, revenue or expense.
• After identifying each account, indicate whether
  that account belongs on the Income Statement,
  Retained Earnings Statement or Balance Sheet.
• Complete the Retained Earnings Statement and
  Balance Sheet according to the examples provided.

24
Elements of an Annual Report

• U.S. companies that are publicly traded must
  provide shareholders with an annual report.
• The annual report always includes
• Financial statements.
• Management discussion and analysis.
• Notes to the financial statements.
• Auditor's report.

LO 6 Describe the components that supplement the
financial statements in an annual report.
25
Other Elements of an Annual Report
Management Discussion and Analysis
Management discussion and analysis (MDA) covers
the companys ability to pay near-term
obligations, its ability to fund operations and
expansion, and its results of operations.
Management must highlight favorable or
unfavorable trends and identify significant
events and uncertainties that affect these three
factors.
LO 6 Describe the components that supplement the
financial statements in an annual report.
26
Other Elements of an Annual Report
Notes to the Financial Statements

• Clarify the financial statements.
• Provide additional detail.
• Notes are essential to understanding a companys
  operating performance and financial position.

Illustration 1-11
LO 6
27
Other Elements of an Annual Report
Auditors Report
Auditors opinion as to the fairness of the
presentation of the financial position and
results of operations and their conformance with
generally accepted accounting principles.
Illustration 1-12
LO 6
28

• IFRS tends to be simpler in its accounting and
  disclosure requirements some people say it is
  more principles-based. GAAP is more detailed
  some people say it is more rules-based.
• International standards are referred to as
  International Financial Reporting Standards
  (IFRS), developed by the International Accounting
  Standards Board (IASB). Over 115 countries
  require or permit use of IFRS.
• Recent events in the global capital markets
  underscore the importance of financial disclosure
  and transparency not only in the United States
  but in markets around the world. As a result,
  many are examining which accounting and financial
  disclosure rules should be followed.
• Over 120 countries use the IFRS 90 countries
  have fully adopted (http//www.ifrs.com/ifrs_faqs.
  html Jul 2016)

LO 7 Describe the impact of international
accounting standards on U.S. financial reporting.
29
Users and Uses of Financial Information
Ethics In Financial Reporting

• United States regulators and lawmakers were very
  concerned that the economy would suffer if
  investors lost confidence in corporate accounting
  because of unethical financial reporting.
• Recent financial scandals include Enron,
  WorldCom, HealthSouth, AIG, and others.
• Congress passed Sarbanes-Oxley Act of 2002.
• Effective financial reporting depends on sound
  ethical behavior.

LO 2 Identify the users and uses of accounting
information.
30
Users and Uses of Financial Information
Ethics In Financial Reporting
Beliefs that distinguish right from wrong
Accepted standards of good and bad behavior
31
Guidelines to Ethical Decisions

• Identify ethical concerns

• Analyze options

• Make ethical decision

Consider all good and bad consequences.
Use personal ethics to recognize ethical concern.
Choose best option after weighing all
consequences.
32
What is Ethics?
https//www.youtube.com/watch?vvAuv0HujFbc