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Chapter One

Chapter One. Introduction to Financial Statements. Zining Li ACCT 2301 FALL 2009 Cox School of Business, SMU. What do we hope to learn? . What are the characteristics of a corporation? What are the four basic financial statements? What information does each statement convey?

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Chapter One

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  1. Chapter One Introduction to Financial Statements Zining Li ACCT 2301 FALL 2009 Cox School of Business, SMU

  2. What do we hope to learn? • What are the characteristics of a corporation? • What are the four basic financial statements? • What information does each statement convey? • What categories of items are reported in each financial statement? • How are elements within a statement related? Acct 2301 Li Fall 09 Chapter 1

  3. How is Business Formed • Sole proprietorship • Single owner • Not separate entity for liability & responsibility • Partnership • Two or more owners, but not a separate entity • Corporation • Typically multiple owners • separate legal entity • This course is about Corporations. Acct 2301 Li Fall 09 Chapter 1

  4. Corporations • Popular form of business because… • It’s simple for individuals to purchase small amounts of stock • Allows easy transfer of ownership through established exchanges • Provides limited liability – the most you can lose is your initial investment • Easier to raise capital Acct 2301 Li Fall 09 Chapter 1

  5. Separate Legal Entity • Since a corporation is a separate legal entity it can: • Own assets • Incur liabilities • Sue and be sued • Enter into contracts independent of the stockholders (owners) Acct 2301 Li Fall 09 Chapter 1

  6. Accounting System and its Users Accounting system records and summarizes financial information. Users • Internal decision makers (managers) get reports. • External decision makers (investors, creditors, suppliers, and customers) get financial statements prepared in accordance with rules. Acct 2301 Li Fall 09 Chapter 1

  7. Four Basic Financial Statements • Balance Sheet • Report the financial condition about a firm • Income Statement • Performance measure of a business • Statement of Shareholders’ Equity • Statement of Retained Earnings is part of it • Statement of Cash Flows Acct 2301 Li Fall 09 Chapter 1

  8. Balance Sheet:Basic Accounting Equation Assets = Liabilities + Owners’ Equity Economic resources Sources of financing for the economic resources Acct 2301 Li Fall 09 Chapter 1

  9. Balance Sheet: Elements Assets: economic resources controlled by the company Liabilities: debts or obligation Owners’ Equity Also called Shareholders’ Equity, Stockholders’ Equity • Contributed Capital • Retained Earnings Acct 2301 Li Fall 09 Chapter 1

  10. Income Statement The income statement equation is: • Revenues – Expenses = Net Income Net Income is also called net earnings, profits, or the bottom line number. • It is just a subtotal! • net profit • net loss result Acct 2301 Li Fall 09 Chapter 1

  11. Income Statement: Elements • Revenues are inflows of net assets • Expenses are dollar amount of resources used to earn the revenues Acct 2301 Li Fall 09 Chapter 1

  12. Statement of Shareholders’ Equity Beginning Contributed Capital + Issuance of capital - Purchase of capital = Ending Contributed Capital Beginning Retained Earnings + Net Income for the period - Dividends Declared for the period = Ending Retained Earnings Total Shareholders’ Equity: $$ (sum of ending Contributed Capital and ending Retained Earnings) Acct 2301 Li Fall 09 Chapter 1

  13. The Statement of Cash Flows • Reports cash inflows (receipts) and cash outflows (payments). • Three categories • Operating activities • Investing activities • Financing activities • Net change in cash usually NOT equal to net income • The statement ends with a reconciliation of cash Acct 2301 Li Fall 09 Chapter 1

  14. Four Financial Statements All Contains a Heading that Includes • Company name • Statement title • Specific date or a period of time that a statement relates to • Unit of measure Acct 2301 Li Fall 09 Chapter 1

  15. Dates of Financial Statements are Important! • Balance sheet is “AS OF…” or “AT” a particular date • Income statement, Statement of changes in owner’s equity and Statement of cash flows cover a period of time, and thus are “FOR THE PERIOD ENDING” Acct 2301 Li Fall 09 Chapter 1

  16. Is There Some Relationship Among the Statements? • Net Income from the Income Statement is shown as an increase to the beginning Retained Earnings on the Statement of S/E • The ending balances of Retained Earnings and Contributed Capital from the Statement of S/E appear in the Balance Sheet (the owners equity section) • The Statement of Cash Flows reflects the change in the CASH account on the Balance Sheet Acct 2301 Li Fall 09 Chapter 1

  17. Structure of Financial Statements Statement of Owners’ Equity Beginning balance of Contributed Capital + Issuance (sale) of (own) stocks - Purchase of (own) stocks = Ending balance of C.C. Beginning balance of Retained Earnings + Net Income - Dividends = Ending balance of R/E Ending balance of Shareholders’ Equity Income Statement Revenues - Expenses = Net Income Statement of Cash Flows Beginning cash balance + Cash Inflows - Cash outflows = Ending cash balance Balance Sheets Assets = Liabilities + S/E (C.C. +R/E)

  18. Notes to Financial Statements Notes provide supplemental information about the financial condition of a company. Three basic types of notes: • Description of accounting rules applied. • Presentation of additional detail about an item on the financial statements. • Provides additional information about an item not on the financial statements. Acct 2301 Li Fall 09 Chapter 1

  19. Who Prepares and is Responsible for the Financial Statements? The management of a business is responsible for accounting for transactions and preparing financial statements. • Maintain a system of controls over both records and assets. • Engage independent auditors • Establish an audit committee The auditors attest to whether the management prepared the report in accordance with the ‘rules’. Acct 2301 Li Fall 09 Chapter 1

  20. To Take Away… • What are the four financial statements? • What information is provided by each statement? How is the information different? • What categories of items are reported in each financial statements? Can you give some examples of those elements? • How are elements within a statement related? Acct 2301 Li Fall 09 Chapter 1

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