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Chap 01 financial statement

Financial Statement Analysis

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Chap 01 financial statement

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  1. The Financial Statements Chapter 1 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  2. Learning Objective 1 Use accounting vocabulary Copyright ©2008 Pearson Prentice Hall. All rights reserved

  3. The Language of Business • Accounting is an information system • Measures business activities • Processes data into reports • Communicates results to people and organizations • Accounting is used to make decisions Copyright ©2008 Pearson Prentice Hall. All rights reserved

  4. Users of Accounting Investors & Creditors Individuals Taxing Authorities Nonprofit Organizations Copyright ©2008 Pearson Prentice Hall. All rights reserved

  5. FINANCIAL Provides information for external users: Investors Bankers Government agencies MANAGEMENT Provides information for internal users: Managers of the company Financial and Management Accounting Copyright ©2008 Pearson Prentice Hall. All rights reserved

  6. Ethics in Accounting • U.S. companies are required to report relevant and reliable information • Recent corporate scandals have emphasized the need for ethical reporting in accounting • Companies that sell stock to the public must have an audit by independent accountants • Examination of financial records to ensure reliability Copyright ©2008 Pearson Prentice Hall. All rights reserved

  7. Forms of Business Organization Proprietorship Partnership Limited-Liability Company Corporation Copyright ©2008 Pearson Prentice Hall. All rights reserved

  8. Proprietorship • Business has a single owner • Legally, business is not separate from owner • Owner is personally liable for business debts • For accounting, business records are kept separate from personal records Copyright ©2008 Pearson Prentice Hall. All rights reserved

  9. Partnership • Two or more owners • Each partner is personally liable for business debts • Can be risky Copyright ©2008 Pearson Prentice Hall. All rights reserved

  10. Limited Liability Companies (LLCs) • Owners are called members • Members are not personally liable for business debts • Reduces owners’ risk • Today, many non-corporate businesses form as LLCs Copyright ©2008 Pearson Prentice Hall. All rights reserved

  11. Corporations • Owners are stockholders • Stockholders elect Board of Directors • Board sets policy and appoint officers • Stockholders not personally liable for corporate debts • Formed under state law • Pay income taxes • Legally distinct from owners Copyright ©2008 Pearson Prentice Hall. All rights reserved

  12. E1-13 • a. What forms of organization will enable the owners of Quality Environmental to limit their risk of loss to the amount they have invested in the business? • Corporations and Limited Liability Companies (LLC) Copyright ©2008 Pearson Prentice Hall. All rights reserved

  13. E1-13 b. What form of business organization will give Beard the most freedom to manage the business as she wishes? ______________________ The owner wouldn’t have to worry about other owners 1-13 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  14. E1-13 • c. What form of organization will give creditors the maximum protection in the event that Quality Environmental fails and cannot pay its debts? • Hint: Think about liability and number of owners • Answer: Partnership Copyright ©2008 Pearson Prentice Hall. All rights reserved

  15. Learning Objective 2 Learn accounting concepts and principles Copyright ©2008 Pearson Prentice Hall. All rights reserved

  16. G A A P • GAAP is an acronym for Generally Accepted Accounting Principles • U.S. GAAP is formulated by the Financial Accounting Standards Board (FASB) • FASB’s Conceptual Framework states that accounting should be: • Relevant • Reliable • Comparable • Consistent Copyright ©2008 Pearson Prentice Hall. All rights reserved

  17. Accounting Concepts • Entity • A business is separate from its owners • Reliability • Accounting is based on objective evidence • Cost • Assets are recorded at cost (not fair value) • Going-Concern • Business will continue indefinitely • Monetary Unit • Transactions are recorded in a stable currency ($) Copyright ©2008 Pearson Prentice Hall. All rights reserved

  18. Concept Violated? • Kathy Jones owns a coffee shop. Her personal expenses are included in the accounting records. • Entity Copyright ©2008 Pearson Prentice Hall. All rights reserved

  19. Concept Violated? ABC Company owns land. The purchase price is $50,000. A recent appraisal indicates the land is worth $200,000. ABC shows the land in its financial statements at $200,000. ________________________ Which concept deals with the how assets are valued? 1-19 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  20. Learning Objective 3 Apply the accounting equation to organizations Copyright ©2008 Pearson Prentice Hall. All rights reserved

  21. The Accounting Equation Liabilities = Assets + Owners’ Equity Copyright ©2008 Pearson Prentice Hall. All rights reserved

  22. Assets • Economic resources that provide a future benefit • Examples: • Cash • Inventory • Equipment • Land • Buildings Copyright ©2008 Pearson Prentice Hall. All rights reserved

  23. Liabilities • Outsiders claims to assets • Include debts payable to creditors • Examples: • Accounts payable – liability for goods or services purchased on credit • Notes payable – written promise to pay on a certain date (bank loan) Copyright ©2008 Pearson Prentice Hall. All rights reserved

  24. Owners’ Equity • Owners’ claim on a business • Assets minus liabilities • What’s left after debts are paid • A corporation’s equity is called stockholders’ equity Copyright ©2008 Pearson Prentice Hall. All rights reserved

  25. Accounting Equation Example • Compute the missing amount from each situation on the following slide • Remember: • Assets = Liabilities + Owners’ Equity Copyright ©2008 Pearson Prentice Hall. All rights reserved

  26. Accounting Equation Example $70,000 $20,000 $25,000 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  27. Paid-in capital Amounts invested by stockholders Common stock Retained Earnings Amounts earned and kept for use in the company Increased by Revenues Decreased by Expenses Shareholders’ Equity 1-27 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  28. Net Income • Revenues • Earned by delivering goods or services • Expenses • Costs of doing business • Rent, utilities, insurance • Revenues minus expenses equal net income • If expense are greater then revenues, a net loss occurs 1-28 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  29. Dividends • Distributions of assets (usually cash) to shareholders • Decrease Retained Earnings • Do NOT impact net income 1-29 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  30. Revenues minus Expenses plus minus Equals Ending Retained Earnings Beginning Retained Earnings Net Income Dividends 1-30 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  31. Learning Objective 4 Evaluate business operations 1-31 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  32. The Financial Statements • Report company’s results to the public • Four Statements • Income Statement • Statement of Retained Earnings • Balance Sheet • Statement of Cash Flows 1-32 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  33. The Income Statement • Measures operating performance for the period • Reports revenue and expenses and resulting net income (or loss) • Also includes gains and losses 1-33 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  34. Statement of Retained Earnings • Shows increases and decreases to retained earnings • Increase: net income • Decrease: dividends 1-34 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  35. Balance Sheet • Measures financial position • Reports assets, liabilities and shareholders’ equity • Assets and liabilities are categorized • Current and Long-term 1-35 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  36. Balance Sheet Categories • Current assets • Converted to cash or used within one year • Cash, Short-term Investments, Accounts Receivable, Inventory • Long-term • Property, plant, and equipment • Intangible assets • Investments • Other 1-36 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  37. Balance Sheet Categories • Current liabilities • Due within one year of balance sheet date • Accounts payable, salaries payable, taxes payable, short-term borrowings • Long-term liabilities • Long-term notes payable, mortgage payable 1-37 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  38. Balance Sheet Categories • Stockholders’ Equity • Paid-in capital • Common stock • Retained Earnings 1-38 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  39. Statement of Cash Flows • Shows inflows and outflows of cash by category: • Operating activities • Investing activities • Financing activities 1-39 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  40. Cash Flow Categories • Operating • Cash generated from day-to-day business activities • Related to selling goods and services to customers • Investing • Cash invested in long-term assets • Related to purchasing and selling plant assets and investments 1-40 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  41. Cash Flow Categories • Financing • How a company obtains resources to finance business • Related to long-term debt and equity (issuing stock) 1-41 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  42. Learning Objective 5 Use financial statements 1-42 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  43. Relationships of Financial Statements • Net Income (bottom line of Income Statement) flows to Statement of Retained Earnings • Ending Retained Earnings flows to Balance Sheet • Cash balance from Balance Sheet flows Statement of Cash Flows Financial Statements should be prepared in order since the amount on one statement flows the next 1-43 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  44. INCOME STATEMENT NET INCOME RETAINED EARNINGS STATEMENT ENDING RETAINED EARNINGS BALANCE SHEET ENDING CASH STATEMENT OF CASH FLOWS 1-44 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  45. E1-19 • a) Common stock • Balance Sheet • b) Income tax payable • Balance Sheet • c) Dividends • Statement of Retained Earnings • d) Income tax expense • Income Statement 1-45 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  46. E1-19 • e) Ending balance of Retained Earnings • Statement of Retained Earnings AND • Balance Sheet • f) Total assets • Balance Sheet • g) Long-term debt • _____________________ • h) Revenue • Income Statement Which statement reports liabilities? Copyright ©2008 Pearson Prentice Hall. All rights reserved

  47. E1-19 • i) Cash spent to acquire the building • Statement of Cash Flows • j) Selling, general and administrative expenses • Income Statement • k) Adjustment to reconcile net income to cash provided by operating activities • Statement of Cash Flows 1-47 Copyright ©2008 Pearson Prentice Hall. All rights reserved

  48. E1-10 • l) Ending cash balance • Balance Sheet AND • Statement of Cash Flows • m) Current liabilities • Balance Sheet • n) Net Income • __________________________ AND • ____________________________ This number is the bottom line on one statement and is an increase to another Copyright ©2008 Pearson Prentice Hall. All rights reserved

  49. End of Chapter One 1-49 Copyright ©2008 Pearson Prentice Hall. All rights reserved

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