Business decisions and financial accounting

Financial StatementsIncome Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Financial statements are typically prepared in this order... Relationships A

Learning Objective 1

Describe various organizational forms and business decision makers.

Organizational Forms

Sole Proprietorship

Business organization owned by one person The owner is personally liable for all debts of

the business.

Organizational Forms

The Accounting System

Business and Financing Activities

Accounting System

The Basic Accounting Equation

its stockholders

Assets = Liabilities + Stockholders’ Equity

Resources controlled by the

company that have measurable value and are expected to provide future benefits to the company.

Cash

Supplies Furniture

Equipment

Amounts owed by the business to

creditors.

Notes Payable

Accounts Payable

Retained Earnings

Revenues, Expenses and Net Income

Revenues – Expenses = Net Income

Distributions of a company’s earnings to its stockholders as a return

on their investment.

Dividends are not an expense

Financial Statements

Income Statement

Statement

of Retained Earnings

Balance Sheet

Statement

of Cash Flows

Financial statements are typically prepared in

this order.

The Income Statement

Reports the amount

of revenues

less expenses for a period

of time.

The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit.

The Statement of Retained Earnings

Reports the way that net income and the distribution of dividends affected the financial position of the company during the period.

The Balance Sheet

Reports at a point in time:

1 What a business owns

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.

Notes to the Financial Statements

Notes help financial statement users understand how the amounts were derived and what other information

may affect their decisions.

Relationships Among the Financial Statements

Net income flows from the

Income Statement to the Statement

of Retained Earnings.

1

Relationships Among the Financial Statements

Relationships Among the Financial Statements

Cash on the Balance Sheet and Cash at End

of Year on the Statement of Cash Flows agree.

3

Learning Objective 3

Explain how financial statements are used by

decision makers.

Using Financial Statements

Creditors

(1)Is the company

generating enough cash to make

payments on its loans?

(2)Does the company

have enough assets to cover its liabilities?

Investors

(1)What immediate

dividends ) on my contributions?

(2)What is the

stock price increases resulting from the

Learning Objective 4

Describe factors that contribute to useful financial

information.

External Financial Reporting

Main Goal: Provide useful financial information to

external users for decision making.

Relevant

Useful

Faithful Representation

Faithful Representation

Faithful Representation Relevant

United States

United States

GAAP

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.

Chapter 1

Supplement

Accounting Careers

Chapter 1

Solved Exercises

M1-13, E1-3, E1-6, E1-8, S1-6 (Req 1)

M1-13 Preparing a Statement of Retained Earnings

Stone Culture Corporation was organized on January 1, 2009 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 2009 (its first year of operations) and 2010 Show computations

Total assets at the end of 2009 125,000 Total assets at the end of 2010 242,000

M1-13 Preparing a Statement of Retained Earnings

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 November 1, 2008, contained the

following items (in thousands)

E1-3 Preparing a Balance Sheet

Total Stockholders’ Equity 470,786

Total Liabilities and Stockholders’

DSW, Inc.

Balance Sheet

At November 1, 2008 (in thousands) Most of the financing

as of November 1

came from stockholders The stockholders have financed $470,786 of the total assets and creditors have financed only

$314,597 of the total

assets of the company.

E1-6 Preparing an Income Statement and Inferring Missing

Values

Regal Entertainment Group operates movie theaters and food

concession counters throughout the United States Its income

statement for the quarter ended June 26, 2008, reported the

following amounts (in thousands):

Required:

1 Solve for the missing amounts and prepare an Income Statement

for the quarter ended June 26, 2008 TIP: First put the items in the

order they would appear on the Income Statement and then solve for the missing values

2 What is Regal’s main source of revenue and biggest expense?

E1-6 Preparing an Income Statement and Inferring Missing Values

?

?

E1-6 Preparing an Income Statement and Inferring Missing Values

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

E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations

E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations

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 $350 He figures

that, if needed, he could sell it to a friend for $280 Ashley argued that she was better off because she had $1,000 cash in her bank account and a vintage car 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

Tuition Payable Student Loan

800

-0-$1,800

TOTAL

$ 250 -0- -0- 250

1,550

350 -0-

$6,350

$ -0- 800 4,800 5,600

End of Chapter 1