©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1 The Financial...

11©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

The Financial StatementsThe Financial Statements

Chapter 1Chapter 1


Learning Objective 1Learning Objective 1

Use accounting vocabulary for decision Use accounting vocabulary for decision making.making.


Accounting –Accounting –The Language of BusinessThe Language of Business

An information system that...An information system that... measures business activitiesmeasures business activities processes data into reportsprocesses data into reports communicates results to decision makerscommunicates results to decision makers


Individuals

Who Uses Accounting Who Uses Accounting Information?Information?

Businesses

Investors andcreditors

Governmentregulatoryagencies

Taxingauthorities

Nonprofitorganizations


Financial and Management Financial and Management AccountingAccounting

External UsersExternal Users Internal UsersInternal Users


Ethics in Accounting and Ethics in Accounting and BusinessBusiness

Standards of professional conduct for Standards of professional conduct for accountantsaccountants

AICPA’s Code of Professional ConductAICPA’s Code of Professional Conduct


Business OrganizationsBusiness Organizations

ProprietorshipsProprietorships PartnershipsPartnerships CorporationsCorporations



Apply accounting concepts and principlesApply accounting concepts and principles


AccountingAccountingPrinciples and ConceptsPrinciples and Concepts

GAAP GAAP – Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles– Rules that govern accounting:Rules that govern accounting:

Some accounting rules have generally acceptance Some accounting rules have generally acceptance due to the test of time, e.g. accounting for due to the test of time, e.g. accounting for depreciation of fixed assetsdepreciation of fixed assets

The Financial Accounting Standards Board The Financial Accounting Standards Board establishes accounting principles for morecomplex establishes accounting principles for morecomplex issuesissues


The Entity ConceptThe Entity Concept

An accounting entity is an organization that stands An accounting entity is an organization that stands apart as a separate economic unit.apart as a separate economic unit.

That is, the financial affairs of a business owner That is, the financial affairs of a business owner should be accounted for separately from the should be accounted for separately from the owner’s personal financial activitiesowner’s personal financial activities


The Reliability PrincipleThe Reliability Principle

Data is reliable if: Data is reliable if: – It is verifiableIt is verifiable– It can be confirmed by an independent observerIt can be confirmed by an independent observer


The Cost PrincipleThe Cost Principle

Assets and services acquired should be recorded Assets and services acquired should be recorded at their actual (historical) cost.at their actual (historical) cost.

This can result in some “Alice in Wonderland” This can result in some “Alice in Wonderland” disclosures on the balance sheetdisclosures on the balance sheet

An example: a square block of land purchased in An example: a square block of land purchased in downtown Dallas for $10,000 in 1930 would still be downtown Dallas for $10,000 in 1930 would still be reported on the balance sheet at $10,000, even reported on the balance sheet at $10,000, even though its fair value today is $10 million!though its fair value today is $10 million!


The Going-Concern ConceptThe Going-Concern Concept

The entity will continue remain in operation The entity will continue remain in operation for the foreseeable future.for the foreseeable future.


The Stable-Monetary-Unit The Stable-Monetary-Unit ConceptConcept

The dollar’s purchasing power is stableThe dollar’s purchasing power is stable



Use the accounting equation to describe an Use the accounting equation to describe an organization.organization.


The Accounting EquationThe Accounting Equation

Assets = Liabilities + Owner’s Equity

EconomicResources

Claims toEconomicResources


AssetsAssets

Economic resources that are expected to Economic resources that are expected to produce a benefit in the futureproduce a benefit in the future


LiabilitiesLiabilities

Economic obligations (debt) of a businessEconomic obligations (debt) of a business


Owner’s EquityOwner’s Equity

The owner’s claim on the entity’s assetsThe owner’s claim on the entity’s assets• Capital (for a partnership or sole Capital (for a partnership or sole

proprietorship)proprietorship)• Stockholders’ equity (for a corporation)Stockholders’ equity (for a corporation)

Assets – liabilities = owner’s equityAssets – liabilities = owner’s equity


Stockholders’ EquityStockholders’ Equity

For a corporation, For a corporation, stockholders’ equitystockholders’ equity is is divided into two main categories:divided into two main categories:– Paid in capitalPaid in capital– Retained earnings.Retained earnings.



Paid-in capital: amount invested by its Paid-in capital: amount invested by its owners, i.e. common stock.owners, i.e. common stock.

Retained earnings: amount earned by Retained earnings: amount earned by income-producing activities and kept for use income-producing activities and kept for use in the businessin the business

Assets = Liabilities + Paid-in capital + Retained earnings



Revenues (sales) are increases in retained Revenues (sales) are increases in retained earnings from delivering goods or services earnings from delivering goods or services to customersto customers

Expenses are decreases in retained Expenses are decreases in retained earnings that result from operationsearnings that result from operations

Components of Retained Components of Retained EarningsEarnings

Revenues forthe period

–Expenses for

the period

=Net income(or Net loss)

for theperiod

Dividendsfor theperiod

Endingbalance ofretainedearnings

End ofthe period

Start ofthe periodBeginningbalance ofretainedearnings

+or–

– =



Evaluate operating performance, financial Evaluate operating performance, financial position, and cash flows.position, and cash flows.


Income StatementIncome Statement

How well did the company perform during the How well did the company perform during the month?month?

Revenues Revenues – – ExpensesExpenses

Net Income (Loss)Net Income (Loss)


Statement of Retained EarningsStatement of Retained Earnings

Why did the company's retained earnings change Why did the company's retained earnings change during the year?during the year?

Beginning retained earningsBeginning retained earnings+Net income (-Net loss)+Net income (-Net loss)-Dividends-Dividends Ending retained earningsEnding retained earnings


Balance SheetBalance Sheet

What is the company’s financial position at What is the company’s financial position at the end of a period?the end of a period?

Assets = Liabilities + Owner’s EquityAssets = Liabilities + Owner’s Equity


Statement of Cash FlowsStatement of Cash Flows

How much cash did the company generate and spend How much cash did the company generate and spend during the year?during the year?

Operating cash flowsOperating cash flows++ Investing cash flows Investing cash flows++ Financing cash flowsFinancing cash flows

Increase (decrease) in cashIncrease (decrease) in cash

Which of these three cash flow components is most Which of these three cash flow components is most crucial to a business’s success?crucial to a business’s success?



Explain the relationships among the financial Explain the relationships among the financial statements.statements.

Relationships AmongRelationships Amongthe Financial Statementsthe Financial Statements

ABC CompanyIncome Statement –

Year Ended December 31, 2006Revenues $700,000Expenses 670,000Net income $ 30,000


ABC CompanyStatement of Retained EarningsYear Ended December 31, 2006

Beginning retained earnings $180,000Net income 30,000Cash dividends (10,000)Ending retained earnings $200,000


ABC CompanyBalance Sheet

December 31, 2006Assets

Cash $ 25,000All other assets 275,000Total assets $300,000

LiabilitiesTotal liabilities $120,000

Stockholders’ equityCommon stock 40,000Retained earnings 200,000Other equity (60,000)Total liabilities and stockholders’ equity $300,000


ABC Company Statement of Cash Flows Year Ended December 31, 2006Net cash provided by operating activities$ 90,000Net cash used for investing activities (110,000)Net cash provided by financing activities 40,000Net increase in cash 20,000Beginning cash balance 5,000Ending cash balance $ 25,000


Be Sure to Study the Yum! Brands, Be Sure to Study the Yum! Brands, Inc. discussion Chapter 1 to Better Inc. discussion Chapter 1 to Better

Understand the Financial Statement Understand the Financial Statement RelationshipsRelationships


A Few final Words about Homework A Few final Words about Homework AssignmentsAssignments

Homework solutions are readily available to Homework solutions are readily available to studentsstudents

Used correctly, these can be helpfulUsed correctly, these can be helpful Used incorrectly, they can be even more Used incorrectly, they can be even more

harmful!harmful!


How to Make an A or B in this How to Make an A or B in this CourseCourse

This is a homework problem-based course, but This is a homework problem-based course, but you don’t have to be a math wizard!you don’t have to be a math wizard!

Make a good effort to do the exercises and Make a good effort to do the exercises and problems WITHOUT ANY REFERENCE TO problems WITHOUT ANY REFERENCE TO AVAILABLE SOLUTIONS MATERIALSAVAILABLE SOLUTIONS MATERIALS

When I cover the problems in class, make notes of When I cover the problems in class, make notes of what you did wrong in your solutionswhat you did wrong in your solutions

Within 24 hours, reconcile what you did wrong with Within 24 hours, reconcile what you did wrong with reference to my in class solutions, and, if reference to my in class solutions, and, if necessary, the solutions manual materialsnecessary, the solutions manual materials


How to Make a C or WorseHow to Make a C or Worse

Miss classes and don’t study properlyMiss classes and don’t study properly Get behind in the classGet behind in the class Listen to people who got bad grades in ACCT. Listen to people who got bad grades in ACCT.

2301 in previous semesters because they missed 2301 in previous semesters because they missed classes and didn’t study wellclasses and didn’t study well

Go directly to the solutions materials for exercises Go directly to the solutions materials for exercises and problems without having made a good attemptand problems without having made a good attempt

If you do the latter, “You won’t know what you If you do the latter, “You won’t know what you didn’t know!” and will not learn effectivelydidn’t know!” and will not learn effectively

©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1 The Financial...

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