FinancialAccounting:

ToolsforBusinessDecisionMaking,4thEd.Kimmel,Weygandt,KiesoCHAPTER1Preparedby

EllenL.SweattGeorgiaPerimeterCollege1Chapter1ANINTRODUCTIONTOFINANCIALSTATMENTS2StudyObjectivesDescribetheprimaryformsofbusinessorganization.Identifytheusersandusesofaccountinginformation.Explainthethreeprincipaltypesofbusinessactivity.Describethecontentandpurposeofeachofthefinancialstatements.3StudyObjectivesExplainthemeaningofassets,liabilities,andstockholders’equity,andstatethebasicaccountingequation.Describethecomponentsthatsupplementthefinancialstatementsinanannualreport.4FormsofBusinessOrganizationSoleproprietorshipPartnershipCorporation1115SoleProprietorshipBusinessownedbyonepersonSimpletoestablishOwnercontrolledTaxadvantagesOwnerpersonallyliableFinancingdifficult6PartnershipTwoormoreownersSimpletoestablishSharedcontrolBroaderskills&resourcesTaxadvantagesPersonalliability7CorporationSeparatelegalentityownedbystockholdersEasytotransferownershipGreatercapitalraisingpotentialLowerlegalliabilityUnfavorabletaxtreatment8UsersofFinancialInformation

InternalManagerswhoplan,organizeandrunabusinessMarketingmanagersProductionsupervisorsFinancedirectorsCompanyofficers1129UsersofFinancialInformation

InternalUsersAsk?10UsersofFinancialInformation

ExternalInvestorsCreditorsOthersRegulatoryagenciesTaxauthoritiesCustomersLaborUnionsEconomicplanners11UsersofFinancialInformation

ExternalUsersAsk?12TypesofBusinessActivityFinancingInvestingOperating11313FinancingActivitiesBorrowingcreates

liabilitiesBankloansDebtsecuritiesGoodsoncreditorpayablesSellingstock

createsstockholders’equity14InvestingActivitiesObtainingresourcesorassetstooperatethebusinessLandBuildingsVehiclesComputersFurnitureEquipment15OperatingActivitiesPrimaryactivityofbusinessSellinggoodsProvidingservicesManufacturingCostofSalesAdvertisingPayingemployeesPayingutilities16OperatingActivitiesRevenues

aretheincreasesinassetsresultingfromthesaleofaproductorserviceExpensesarethecostofassetsconsumedorservicesusedingeneratingrevenue.Ifrevenue>expense=

NetIncomeIfrevenue<expense=

NetLoss!17ReviewWhichisnot

oneofthethreeformsofbusinessorganization?a.

Soleproprietorship.d.

Corporation.c.

Partnership.b.

Creditorship.18ReviewWhichisnot

oneofthethreeformsofbusinessorganization?a.

Soleproprietorship.d.

Corporation.c.

Partnership.b.

Creditorship.19ReviewWhichisanadvantageofcorporationsrelativetopartnershipsandsoleproprietorships?a.

Lowertaxes.d.

Mostcommonformofbusiness organization.c.

Reducedlegalliabilityforinvestors.b.

Hardertotransferownership20ReviewWhichisanadvantageofcorporationsrelativetopartnershipsandsoleproprietorships?a.

Lowertaxes.d.

Mostcommonformofbusiness organization.c.

Reducedlegalliabilityforinvestors.b.

Hardertotransferownership21ReviewWhichisnot

oneofthethreeprimarybusinessactivities?a.

Financing.d.

Investing.c.

Advertising.b.Operating.22ReviewWhichisnot

oneofthethreeprimarybusinessactivities?a.

Financing.d.

Investing.c.

Advertising.b.Operating.23ContentandPurposeofFinancialStatementsAccountantscommunicatewithusersthroughfourfinancialstatements11424FourFinancialStatementsIncomeStatementRetainedEarningsStatementBalanceSheetStatementofCashFlows25IncomeStatementReportsoperatingsuccessorfailureforaperiod.Summarizesrevenuesandexpensesforperiod:month,quarter,year.Ifrevenue>expense=

NetIncome.26IncomeStatementDothisstatementfirst!27RetainedEarningsStatementShowschangesinretainedearningsforperiod:month,quarter,yearBeginningbalanceAdd

NetIncomefromincomestatement.DeductDividendsEndingbalance28RetainedEarningsStatementDothisstatementsecond!29BalanceSheetReportsassets

andclaimstoassets.Claimsofcreditors,liabilities.Claimsofowners,stockholders’equity.Assets=Liabilities+Stockholders’EquitySpecificdate–onepointintime!30BalanceSheetFromRetainedEarningsStatement31StatementofCashFlowsProvidesinformationaboutcashreceiptsandcashpaymentsSummarizesforperiod:month,quarter,year.Casheffectsofoperating,investing,andfinancingactivities.32StatementofCashFlowsWheredidthecashcomefrom?Howwascashusedduringtheperiod?Whatwasthechangeinthecashbalanceduringtheperiod?Acompanycannotsurvivewithoutcash!33StatementofCashFlows..Agreeswith

BalanceSheet34AssetsResourcesownedbythebusinessCashAccountsreceivableInventoriesFurnitureandfixturesEquipmentSupplies11535LiabilitiesObligationsordebtsofbusinessNotespayableAccountspayableInterestpayableSalariespayableUnearnedrevenue36Stockholders’EquityOwnershipclaimsonassetsPaid-incapitalCommonstockRetainedearnings37BasicAccountingEquationAssets=Liabilities+Stockholders’Equity38ReviewWhatquestionsmighteachofthefollowingdecisionmakersaskthatcouldbeansweredbythefinancialstatements…Bankloanofficer?Federalbankregulator?Laborunionpresident?Stockinvestor?39ReviewWhichofthefollowingisnotacorrectrepresentationoftheaccountingequation?a.

Assets=Liabilities+Stockholders’Equityd.

Assets-

Stockholders’Equity=Liabilitiesc.

Assets+Stockholders’Equity=Liabilitiesb.

Assets-Liabilities=Stockholders’Equity40ReviewWhichofthefollowingisnotacorrectrepresentationoftheaccountingequation?a.

Assets=Liabilities+Stockholders’Equityd.

Assets-

Stockholders’Equity=Liabilitiesc.

Assets+Stockholders’Equity=Liabilities

b.

Assets-Liabilities=Stockholders’Equity41ReviewUsingtheaccountingequation,answerthefollowingquestion.IfLiabilities=$10,000andThenAssets=

Stockholders’Equity=$20,000$30,000=$10,000+$20,000$30,00042Usingtheaccountingequation,answerthefollowingquestion.IfAssets=$75,000ThenStockholders’Equity=

AndLiabilities=$35,000Review$40,000$75,000=$35,000+$40,00043SupplementstotheFinancialStatementsinanAnnualReportManagementDiscussionandAnalysisNotestoFinancialStatementsAuditor’sreport11644Management’sDiscussionandAnalysiscoversthreeitems:LiquidityCapitalresourcesResultsofoperations45Management’sDiscussionandAnalysis46NotestoFinancialStatementsExplanatorynotesandsupplementaryschedulesClarifiesinformationinfinancialstatementsExpandswithadditionaldetailDescribesaccountingpoliciesExplainsuncertaintiesandcontingencies47NotestoFinancialStatements48Auditor’sReportCertifiedPublicAccountant–CPAAuditor(CPA)conductsindependentexaminationoffinancialstatementsFairrepresentation?Followgenerallyacceptedaccountingprinciples(GAAP)?Unqualifiedopinion49Auditor’sReport50DoItProblem:CSUCorporationCSUbeginsonJan.1,2007ForyearendedDec.31,2007,prepareIncomestatementRetainedearningsstatementBalancesheet51Actionstep1:Reporttherevenues&expensesforaperiodoftime,IncomeStatementDoItProblem:CSUCorporation52Actionstep1:Reporttherevenues&expensesforaperiodoftime,IncomeStatementDoItProblem:CSUCorporation53DoItProblem:CSUCorporationCSUCorporationIncomeStatementFortheYearEndedDecember31,2007CreatetheheadingNameofthestatementNameofthecompanyPeriodoftime54DoItProblem:CSUCorporationCSUCorporationIncomeStatementFortheYearEndedDecember31,2007Revenues Servicerevenue $17,000ListtherevenuesUsedollarsignstodenoteU.S.currency55DoItProblem:CSUCorporationCSUCorporationIncomeStatementFortheYearEndedDecember31,2007Revenues Servicerevenue $17,000Expenses Rentexpense $9,000 Insuranceexpense 1,000 Suppliesexpense 200 Totalexpenses 10,200________Listtheexpenses&underlinesub-totals56DoItProblem:CSUCorporationCSUCorporationIncomeStatementFortheYearEndedDecember31,2007Revenues Servicerevenue $17,000Expenses Rentexpense $9,000 Insuranceexpense 1,000 Suppliesexpense 200 Totalexpenses 10,200NetIncome $6,800Calculatenetincome:revenues-expenses________________________________57DoItProblem:CSUCorporationActionstep2:ShowamountsandcausesofchangesinretainedearningsUseNetIncomefromIncomeStatementDividends58DoItProblem:CSUCorporationCSUCorporationRetainedEarningsStatementFortheYearEndedDecember31,2