Transcript Chapter 1

Chapter 1
The Basic Financial Statements
Groups
1. Get Contact Information for each group
member – you are stuck with each other for
the next 15 weeks.
2. Decide what business you are going to start.
1. Company name
2. Company business
3. To Be Turned in: Fill out Group Sheet.
Understanding the Business
The Players
1.
2.
The
Business
Operations
4
3.
Responsibilities for the Accounting
Communication Process
Effective communication means that
the recipient understands what the
sender intends to convey.
Decision makers need to understand
accounting measurement rules.
How are Generally Accepted
Accounting Principles Determined?
Who is this dude?
How are Generally Accepted
Accounting Principles Determined?
Prior to 1933, the management teams of most
companies were free to choose the accounting
principles used to keep track of its transactions.
What was going on in 1933?
Generally Accepted Accounting
Principles
Securities Act of 1933
Securities and Exchange Act of 1934
The Securities and Exchange Commission (SEC)
has been given broad powers to determine
measurement rules for
financial statements.
Generally Accepted Accounting
Principles
The SEC has worked closely with the
accounting profession to
work out the detailed rules that have
become known as GAAP.
Currently, the Financial Accounting
Standards Board (FASB) is recognized
as the body to formulate GAAP.
Generally Accepted Accounting
Principles
Companies incur the cost of preparing the
financial statements and bear the following
economic consequences of the financial
statements being published . . .
 Effects on the selling price of stock.
 Effects on the amount of bonuses
received by managers and other employees.
 Loss of competitive information to other
companies.
The Four Basic Financial Statements
1. On a company’s ___________________, all the revenues earned
from sales to customers are listed along with the expenses incurred
to produce those revenues.
Income Statement
1. Identify the REVENUE Accounts (amounts a
company EARNS).
2. Identify the EXPENSE Accounts (amounts a
company incurs in order to earn revenue)
3. Prepare the Income Statement in the Proper
format.
The Income Statement
Typical Account Titles
Revenues
Expenses
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue
Cost of Goods Sold
Wages Expense
Rent Expense
Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
Income Statement
MAXIDRIVE CORP.
Income Statement
For the Year Ended December 31, 2009
(in thousands of dollars)
Revenues
Sales revenue
Total revenues
Expenses
Cost of goods sold expense
Selling, general, and administrative expense
Interest expense
Total expenses
Operating income
Income tax expense
Net income
$
$
37,436
37,436
26,980
5,606
450
33,036
4,400
1,100
3,300
The Four Basic Financial Statements
On a company’s _______________________________ accumulated
net earnings less the dividends paid to owners represent
reinvestments in the core business.
Net Earnings = Net Income from Income Statement
Statement of Retained Earnings
Beginning Retained Earning
Plus: Net Income
Less: Dividends
Ending Retained Earnings
The Four Basic Financial Statements
On a company’s _______________, all resources owned (CALLED
ASSETS) and amounts owed (CALLED LIABILITIES) are listed in
order of liquidity.
The DIFFERENCE between the resources owned and the amounts
owed, represents the stockholders’ equity in the business.
The Accounting Equation
A = L + SE
(Assets)
Economic
Resources
(Liabilities)
(Stockholders’
Equity)
Sources of Financing for Economic
Resources
Liabilities: From Creditors
Stockholders’ Equity: From Stockholders
The Balance Sheet
Typical Account Titles
Assets
Cash
Short-Term Investment
Accounts Receivable
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term Investments
Equipment
Buildings
Land
Intangibles
Liabilities
Liabilities
Accounts
AccountsPayable
Payable
Accrued
AccruedExpenses
Expenses
Notes
NotesPayable
Payable
Taxes
TaxesPayable
Payable
Unearned
UnearnedRevenue
Revenue
Bonds
BondsPayable
Payable
Stockholders’
Stockholders’Equity
Equity
Contributed
ContributedCapital
Capital
Retained
RetainedEarnings
Earnings
Balance Sheet
MAXIDRIVE CORP.
Balance Sheet
At December 31, 2009
(in thousands of dollars)
2009
ASSETS
Cash
Accounts receivable
Inventories
Plant and equipment
Land
Total assets
LIABILITIES
Accounts payable
Notes payable
Total liabilities
STOCKHOLDERS' EQUITY
Contributed capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
$
$
$
$
4,895
5,714
8,517
7,154
981
27,261
7,156
9,000
16,156
2,000
9,105
11,105
27,261
The Four Basic Financial Statements
On a company’s _________________________, all sources and uses
of CASH are listed.
Cash is generated by the company’s operations (CALLED OPERATING
ACTIVITIES).
Cash is spent on investments in buildings, manufacturing equipment,
and other assets (CALLED INVESTING ACTIVITIES).
FINANCING ACTIVITIES involve amounts borrowed (and paid back)
from long-term creditors and sale of stock to owners.
Statement of Cash Flows
MAXIDRIVE CORP.
Statement of Cash Flows
For the Year Ended December 31, 2009
(in thousands of dollars)
Operating activities
Cash collected from customers
$
Cash paid to suppliers and employees
Cash paid for interest
Cash paid for taxes
Net cash flow from operating activities
Investing Activities
Cash used to purchase equipment
Net cash flow from investing activities
Financing Activities
Cash received from bank loan
Cash dividends paid
Net cash provided by financing activities
Net increase in cash
Cash at beginning of month
Cash at end of month
$
33,563
(30,854)
(450)
(1,190)
1,069
(1,625)
(1,625)
1,400
(1,000)
400
(156)
5,051
4,895
Relationships Among the Statements
1. Net income from the income statement results
in an increase in ending retained earnings on
the statement of retained earnings.
Income Statement
Revenues
$ 15,500
(8,500)
Expenses
Net income $ 7,000
Statement of Retained Earnings
Beginning retained earnings
Net income
Dividends
Ending retained earnings
$ 59,000
7,000
(2,500)
$ 63,500
Relationships Among the Statements
2. Ending retained earnings from the statement of
retained earnings is one of the two components
of stockholders’ equity on the balance sheet.
Statement of Retained Earnings
Beginning retained earnings
$ 59,000
Net income
7,000
Dividends
(2,500)
Ending retained earnings
$ 63,500
Balance Sheet
Cash
Other assets
Total assets
Liabilities
Stockholders' Equity
Common stock
Retained earnings
Total liabilities and equity
$ 14,000
171,500
$ 185,500
$ 42,000
80,000
63,500
$ 185,500
Relationships Among the Statements
3. The change in cash on the statement of cash
flows is added to the beginning-of-year balance
in cash to arrive at end-of-year cash on the
balance sheet.
Statement of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Increase in cash
Beginning cash balance
Ending cash balance
Balance Sheet
$ 21,000
(16,000)
3,500
$ 8,500
5,500
$ 14,000
Cash
Other assets
Total assets
Liabilities
Stockholders' Equity
Common stock
Retained earnings
Total liabilities and equity
$ 14,000
171,500
$ 185,500
$ 42,000
80,000
63,500
$ 185,500
Solving the Group Problem
• ABC Company has Total Assets of $1,000,000,
Total Liabilities of $700,000, Contributed
Capital of $100,000, Beginning Retained
Earnings of $130,000, Dividends of $40,000,
and Total Revenue of $350,000. What is ABC's
Net Income?