Chapter 1 Introduction to Financial Statements Learning Objectives 1 Describe the primary forms of business organization Sole Proprietorship Simple to establish Owner controlled Tax advantages Partnership Simple to establish Shared control Broader skills Resources Tax Advantages Easier to transfer ownership Easier to raise funds No personal liability Corporation 2 Identify the users and uses of accounting information Internal vs external users Internal Users Managers who plan organize run a business Ex Marketing managers production supervisors finance directors company officers External Users Investors use to buy hold sell stock creditors suppliers bankers taxing authorities customers labor unions regulatory agencies Ethics in financial reporting e g Sarbanes Oxley Sarbanes Oxley Act Sox To reduce unethical corporate behavior decrease the likelihood of future corporate scandals Top management must now certify accuracy of financial management Penalties are much more severe Increased independence of outside auditors who review the accuracy of corporate financial statements and increased the oversight role of boards of directors 3 Explain the three principal types of business activity Operating investing and financing activities Operating activities Revenue Sales Service Interest Supplies Assets used in day to day operations inventory accounts receivables expenses Investing Activities Uses cash from financing activities involves purchases needed to operate Ex Purchasing Assets Financing Activities Borrowing money debt finance selling issuing shares of stock Ex Notes Payable and Bonds Payable 4 Describe the content and purpose of each of the financial statements Income Statement To show how successfully your business performed during a period of time Revenues Expenses Retained Earnings Statement To indicate how much of previous income was distributed to you and the other owners of your business in the form of dividends How much was retained to allow for future growth Beginning Retained Earnings Net Income dividends ending retained earnings Assets claims to assets liabilities stockholders equity at a specific point in time Assets Liabilities Stockholders Equity Helps other companies determine if they will be repaid Balance Sheet Statement of Cash Flows To provide financial information about the cash receipts cash payments of a business for a specific period of time Cash effects of a company s operating investing financing activities 5 Explain the meaning of assets liabilities and stockholders equity and state the basic accounting equation Assets Liabilities Stockholders Equity Resources Amounts Owners claim to Owned by owed to Business creditors assets In the form Of debts Other Obligations Chapter 2 A Further Look at Financial Statements Learning objectives 1 Identify the sections of a classified balance sheet Liabilities Stockholders Equity Current Liabilities Long Term Liabilities Stockholders Equity Assets Current Assets Long Term Investments Property Plant Equipment Intangible Assets 2 Identify tools for analyzing financial statements and compute ratios for analyzing a company s profitability Ratio Analysis Using Income Statement Earnings per share Measures net income earned on each share of common stock Preferred Stock Net Income Preferred Dividends Avg of common shares outstanding during the year 3 Explain the relationship between a retained earnings statement and a statement of stockholders equity Most companies use a statement of stockholders equity Presents causes of changes to stockholders equity during a period including those that caused retained earnings to change 4 Identify and compute ratios for analyzing a company s liquidity and solvency using a balance sheet Liquidity Working capital Current ratio Working Capital Current assets Current Liabilities When current assets current liabilities working capital company more likely to pay liabilities Current Ratio Current Assets Current Liabilities More dependable indicator of liquidity Solvency Debt to assets ratio Debts to Assets Ratio total liabilities total assets Increase increase risk debits won t be paid 5 Use the statement of cash flows to evaluate solvency free cash flow Describes net cash provided by operating activities Free cash flow net cash provided by operating activities capital expenditures cash dividends 6 Explain the meaning of generally accepted accounting principles Standard setting e g GAAP SEC FASB IASB IFRS PCAOB GAAP Generally Accepted Accounting Principles Set of accounting standards that have authoritative support SEC Securities Exchange Committee Agency of US Govt that oversees US financial markets and accounting standard setting bodies FASB Financial Accounting Standards Board Primary Accounting Standard Setting Body in the US IASB International accounting standards board Issues standards called IFRS IFRS International financial reporting standards Have been adopted by many countries outside of the US PCAOB Public Company Accounting Oversight Board Determines auditing standards and reviews accounting firms Chapter 3 The Accounting Information System Learning Objectives 1 Analyze the effect of business transactions on the basic accounting equation Assets Liabilities Stockholders Equity ALWAYS EQUAL 2 Explain what an account is and how it helps in the recording process An account is an individual accounting record of increases and decreases in a specific asset liability stockholders equity and revenue or expense item Consists of 1 Title of the account 2 A left or debit side 3 Define debits and credits and explain how they are used to record business transactions 3 A right or credit side T ACCOUNT Debit Dr Left Side Increase in cash Increase in Assets Decrease in Liabilities Decrease in Common Stock Decreased Retained Earnings Increase in Dividends Decrease Revenue Increase Expenses Credit Cr Right Side Decrease in cash Decrease in Assets Increase in Liabilities Increase in Common Stock Increase in Retained Earnings Decrease in Dividends Increase Revenue Decrease Expenses Notice that in the account form we record the increases in cash as debits and the decreases in cash as credits For each transaction debits must equal credits 4 Identify the basic steps in the recording process 1 Analyze each transaction in terms of its effects on the accounts 2 Enter the transaction information in a journal 3 Transfer the journal information to the appropriate accounts in the ledger 5 Explain what a journal is and
View Full Document
Unlocking...