Financial Accounting Chapter 1 Financial Statements and Business Decisions Understanding the Business The players Owners founders who manage a business are called owner managers Creditor lender that borrows money to a company o Lend money to a company for a period of time o Hope to gain by charging interest Investors invest in your company buy the company from previous owners o Make their purchases hoping to gain in 2 ways Receive a portion of what the company earns in the form of cash payments called dividends Sell their share of the company at a higher than they paid Managers hired by the owners of the company to run the business Financing activities When a company borrows additional money or pays back money to its lenders and receives additional funds or pays dividend to owners When a company buys or sells items such as plant and equipment used in Investing activities producing their product The Business Operations Suppliers when a company purchases part of the product from another company that company is the supplier Some companies who make their own product such as computers do not sell their product directly to the public they sell it to other companies such as Wallmart or Target called the customers The Accounting System All business have an accounting system Accounting is a system that collects and processes analyzes measures and records financial information about an organization and reports that information to decision makers Who uses the reports o Internal decision makers The company s managers o External decision makers Parties outside the firm such as investors creditors suppliers and customers The FOUR Basic Financial Statements 1 Balance Sheet 2 Income Statement 3 Statement of Retained Earnings 4 Statement of Cash Flows The Balance Sheet Purpose to report the financial position amount of assets liability and stockholder s equity of an accounting entity at a particular point in time Structure heading 1 Name of the entity 2 Title of the Statement 3 Specific date of the statement 4 Unit of measure MAXIDRIVE CORP Balance Sheet At December 31 2010 in thousands of dollars ASSETS Cash Accounts receivable Inventories Plant and equipment Land Total assets LIABILITIES Accounts payable Notes payable Total liabilities STOCKHOLDERS EQUITY Contributed capital Retained earnings Total stockholders equity Total liabilities and stockholders equity 4 895 5 714 8 517 7 154 981 27 261 7 156 9 000 16 156 2 000 9 105 11 105 27 261 The Balance sheet first lists the company s Assets o Assets economic resources owned by the entity Resources needed to manufacture and sell the product to other companies Cash is always the first under the balance sheet because a company needs cash to purchase land on which to build factories and install machinery plant and equipment Listed in order o liquidity from most liquid to least liquid Next is Liability and Stockholder s Equity o Sources of financing or claims against the company s economic resources o Financing provided by the creditor creates a liability o Financing provided by owner s creates owner s equity o Liability The company s debts and obligations Accounts Payable arise from the purchase of goods or services from suppliers on credit without a formal written contract Notes payable results from cash borrowings based on a formal written debt contract with lending institutions such as banks o Stockholder s Equity Indicates the amount of financing provided by owners of the business and earnings Contributed Capital investment of cash and other assets in the business by the owner Retained Earnings amount of earnings profit reinvested in BASIC ACCOUNTING EQUATION the business o Assets Liabilities Stockholder s Equity Income Statement Also called statement of income of earnings of operations Reports the accountant s primary measure of performance of a business revenues less expenses during the accounting period Net income profits Unlike the balance sheet which reports as of a certain date the income statement report for a specified period of time Accounting period time period covered by the financial statement The income statement has 3 major captions o Revenues o Expenses o Net income Revenue Expenses Net income MAXIDRIVE CORP Income Statement For the Year Ended December 31 2010 in thousands of dollars Revenues Sales revenue Total revenues Expenses Cost of goods sold expense Selling general and administrative expense Research and development expense Interest expense Total expenses Operating income Income tax expense Net income 37 436 37 436 26 980 3 624 1 982 450 33 036 4 400 1 100 3 300 Revenues Expenses o Profit o Are normally reported for goods or services that have been sold to a customer whether or not they have been yet paid for o Represent the dollar amount of resources the entity used to earn revenues during the period o Consist of cost of goods sold seeling general and administrative expense research and development expense and interest expense Net income o Revenue expenses net income o If total expenses exceed total net income a net loss is reported Statement of Retaines Earnings Reports the way that net income and and the distribution of dividends affected the financial position of the company during the accounting period Covers a specified period of time Consist of o Beginning retained earning o Net income reported in the income statement o Dividends declared during the period Retained Earnings Equation o Beginning Retaines Earnings Net Income End of Ratained Earning MAXIDRIVE CORP Income Statement For the Year Ended December 31 2010 in thousands of dollars Revenues Sales revenue Total revenues Expenses Cost of goods sold expense Selling general and administrative expense Research and development expense Interest expense Total expenses Operating income Income tax expense Net income 37 436 37 436 26 980 3 624 1 982 450 33 036 4 400 1 100 3 300 Statement of Cash Flows Reports inflows and outflows reciepts and payments of cash during the accounting period in the categories of cash flow from operating investing and financing Cash Flow from Operating Activities o Cash flows that are directly related to earning income Cash Flow from Investing Activities o Include cash flows related to the acquisition or sale of the company s productive assets Cash Flow from Financing Activities o Are directly related to the financing of the enterprise itself o Cash flow from investors to creditors Add or minus these activities change in cash MAXIDRIVE CORP
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