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Chapter 1

Chapter 1. Business Decisions and Financial Accounting. PowerPoint Authors: Brandy Mackintosh Lindsay Heiser. Learning Objective 1-1. Describe various organizational forms and business decision makers.

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Chapter 1

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  1. Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Brandy Mackintosh Lindsay Heiser

  2. Learning Objective 1-1 Describe various organizational forms and business decision makers.

  3. Business organization owned by two or more people. Each partner is personally liable for all debts of the business. A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation. Partnership Corporation Organizational Forms Business organization owned by one person. The owner is personally liable for all debts of the business. Sole Proprietorship

  4. Organizational Forms Source: IRS.gov.

  5. The Accounting System Operating, Investing and Financing Activities Run the company Evaluate the company Accounting System Accounting Reports Internal users (managers, supervisors etc.) External users (creditors, investors, etc.) Financial Managerial Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities.

  6. Learning Objective 1-2 Describe the purpose, structure, and content of the four basic financial statements.

  7. Resources Owned . . . by the company Resources Owed . . . to creditors to stockholders Separate Entity Assumption The financial reports of a business are assumed to include the results of only that business’s activities. The Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity

  8. Assets Economic resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash Equipment Supplies Furniture

  9. Liabilities Measurable amounts owed by the business to creditors. Notes Payable Accounts Payable

  10. Stockholders’ Equity Owners’ claim to the business resources. Contributed Capital Retained Earnings Stock Certificate

  11. Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. Expenses The costs of doing business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Revenues, Expenses and Net Income Revenues – Expenses = Net Income

  12. Dividends Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense.

  13. Financial Statements Financial statements are typically prepared in this order. Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

  14. The Income Statement PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2013 The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. Revenues Pizza Revenue Total Revenue Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income Reports the amount of revenues less expenses for a period of time. $ 12,000 12,000 5,000 2,000 1,500 600 300 100 500 10,000 $ 2,000

  15. The Statement of Retained Earnings PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 $ - 2,000 (1,000) $ 1,000 Reports the way that net income and the distribution of dividends affected the financial position of the company during the period.

  16. BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity The Balance Sheet PIZZA AROMA, INC. Balance Sheet At September 30, 2013 • Reports at a point in time: • What a business owns (assets). • What it owes to creditors (liabilities). • What is left over for the owners of the company’s stock (stockholders’ equity). Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000

  17. The Statement of Cash Flows Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2013 $ 11,000 (6,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 - $ 14,000 Cash Flows from Operating Activities Cash received from customers Cash paid to employees and suppliers Cash Provided by Operating Activities Cash Flows from Investing Activities Cash used to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2013 Ending Cash Balance, Sept. 30, 2013

  18. Notes to the Financial Statements Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions.

  19. Relationships Among the Financial Statements PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2013 Net income flows from the Income Statement to the Statement of Retained Earnings. 1 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 $ - 2,000 (1,000) $ 1,000 Revenues Pizza Revenue Total Revenue Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income $ 12,000 12,000 5,000 2,000 1,500 600 300 100 500 10,000 $ 2,000

  20. Relationships Among the Financial Statements PIZZA AROMA, INC. Balance Sheet At September 30, 2013 PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 $ - 2,000 (1,000) $ 1,000

  21. Relationships Among the Financial Statements PIZZA AROMA, INC. Balance Sheet At September 30, 2013 PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2013 $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity Cash Flows from Operating Activities Cash received from customers Cash paid to employees and suppliers Cash Provided by Operating Activities Cash Flows from Investing Activities Cash used to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2013 Ending Cash Balance, Sept. 30, 2013 $ 11,000 (6,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 - $ 14,000 Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3

  22. Learning Objective 1-3 Explain how financial statements are used by decision makers.

  23. Using Financial Statements Investors Creditors • What is the immediate return (through dividends) on my contributions? • What is the long-term return (through stock price increases resulting from the company’s profits)? • Is the company generating enough cash to make payments on its loans? • Does the company have enough assets to cover its liabilities? … SCF … SRE … B/S .. I/S

  24. Learning Objective 1-4 Describe factors that contribute to useful financial information.

  25. External Financial Reporting Main Goal: Provide useful financial information to external users for decision making. Useful Relevant Relevant Faithful Representation Faithful Representation Comparable Verifiable Timely Understandable

  26. Accounting Standards United States World Where? FASB IASB Who? GAAP What? IFRS

  27. Ethical Conduct When faced with an ethical dilemma: Identify who will benefit from the situation and how others will be harmed. Identify the alternative courses of action. Choose the alternative that is the most ethical.

  28. Chapter 1Supplement Careers That Depend on Accounting Knowledge

  29. Chapter 1Solved Exercises M1-12, E1-3, E1-6, E1-8, S1-6 (Req. 1)

  30. M1-12 Preparing a Statement of Retained Earnings Stone Culture Corporation was organized on January 1, 2012. For its first two years of operations, it reported the following: On the basis of the data given, prepare a statement of retained earnings for 2012 (its first year of operations) and 2013. Show computations. Net Income for 2012 Net Income for 2013 Dividends for 2012 Dividends for 2013 Total assets at the end of 2012 Total assets at the end of 2013 $ 40,000 45,000 15,000 20,000 125,000 242,000

  31. M1-12 Preparing a Statement of Retained Earnings STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2012 STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2013 Retained Earnings, January 1, 2012 Add: Net Income Subtract: Dividends Retained Earnings, December 31, 2012 Retained Earnings, January 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, December 31, 2013 $ - 40,000 (15,000) $ 25,000 $ 25,000 45,000 (20,000) $ 50,000

  32. E1-3 Preparing a Balance Sheet DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at January 29, 2011, contained the following items (listed alphabetically, amounts in thousands). Required: Prepare the balance sheet as of January 29, 2011 solving for the missing amount. As of January 29, did most of the financing for assets come from creditors or stockholders? Accounts Payable $ 149,722 12,514 93,617 314,382 95,589 692,375 122,822 210,391 326,382 1,008,897 ? Accounts Receivable Cash Contributed Capital Notes Payable Other Assets Other Liabilities Property, Plant, and Equipment Retained Earnings Total Assets Total Liabilities and Stockholders’ Equity

  33. E1-3 Preparing a Balance Sheet DSW, Inc. Balance Sheet At January 29, 2011 (In thousands) Most of the financing as of January 29 came from stockholders. The stockholders have financed $640,764 of the total assets and creditors have financed only $368,133 of the total assets of the company. Assets Cash Accounts Receivable Property, Plant, and Equipment Other Assets Total Assets $ 93,617 12,514 210,391 692,375 $ 1,008,897 Liabilities Accounts Payable Notes Payable Other Liabilities Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 149,722 95,589 122,822 368,133 314,382 326,382 640,764 $ 1,008,897

  34. E1-6 Preparing an Income Statement and Inferring Missing Values • Cinemark Holdings, Inc. operates movies and food concession counters throughout the United States. Its income statement for the quarter ended March 31, 2011, reported the following amounts (listed alphabetically in thousands): • Required: • Solve for the missing amounts and prepare an Income Statement for the quarter ended March 31, 2011. • What are Cinemark’s main source of revenue and two biggest expenses? Admissions Revenues Concessions Expenses Concessions Revenues Film Rental Expenses Gen. & Admin. Expenses $ 311,692 23,282 146,681 165,153 179,047 Net Income Other Expenses Other Revenues Rent Expense Total Expenses $ ? 24,265 24,763 66,426 ?

  35. E1-6 Preparing an Income Statement and Inferring Missing Values Cinemark Holdings, Inc. Income Statement For the Quarter Ended March 31, 2011 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues Total Revenues Expenses Concessions Expenses Film Rental Expenses Gen. and Admin. Expenses Rent Expense Other Expenses Total Expenses Net Income $ 311,692 146,681 24,763 23,282 165,153 179,047 66,426 24,265 $ 483,136 458,173 $ 24,963 ? ?

  36. E1-6 Preparing an Income Statement and Inferring Missing Values Cinemark Holdings, Inc. Income Statement For the Quarter Ended March 31, 2011 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues Total Revenues Expenses Concessions Expenses Film Rental Expenses Gen. and Admin. Expenses Rent Expense Other Expenses Total Expenses Net Income $ 311,692 146,681 24,763 23,282 165,153 179,047 66,426 24,265 $ 483,136 458,173 $ 24,963

  37. E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations • Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company. • TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts. A $110,000 $82,000 $70,000 $150,000 B 80,000 12,000 112,000 70,000 C 80,000 86,000 104,000 26,000 D 50,000 22,000 77,000 20,000 Total Assets E 81,000 (6,000) 73,000 28,000 Independent Cases Total Revenues Total Expenses Net Income (Loss) Total Liabilities Stockholders’ Equity

  38. E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations A $110,000 $82,000 $70,000 $80,000 $28,000 $150,000 R – E = NI A = L + SE B 92,000 80,000 12,000 112,000 70,000 42,000 C 80,000 86,000 (6,000) 104,000 78,000 26,000 D 50,000 30,000 99,000 22,000 77,000 20,000 Total Assets E 75,000 81,000 (6,000) 101,000 73,000 28,000 Independent Cases Total Revenues Total Expenses Net Income (Loss) Total Liabilities Stockholders’ Equity

  39. S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $250. He figures that, if needed, he could sell it to a friend for $180. Ashley argued that she was better off because she had $1,000 cash in her bank account and a piece of art that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term. Required: 1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report.

  40. S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet Balance Sheet Ashley Jason ASSETS What is owned $1,000 $6,000 Cash Console -0- 250 800 -0- Art $1,800 $6,250 TOTAL What is owed LIABILITIES Car loan $ 250 $ -0- Tuition Payable -0- 800 Student Loan -0- 4,800 TOTAL 250 5,600 1,550 650 “Net worth” EQUITY $1,800 $6,250 TOTAL

  41. End of Chapter 1

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