Wk 1: Financial Statements and Making Business Decisions

Accounting

The process of identifying, measuring, recording, and communicating financial information about a company’s business activities so that decision makers can make informed decisions

Name the Demands of the 5 Main Decision-Makers in Accounting

Internal Decision Makers

• Business Managers —> evaluate the effectiveness of past financial decisions to help them plan + make decisions about the company’s operating, investing, and financing activities

• Employees —> helps them judge the prospects of their company and the feasibility of future promotion opportunities

External Decision Makers

• Investors/shareholders —> evaluate the prospect of their company to make decisions as to where to invest or divest

• Creditors/lender —> evaluate whether to loan money to a company (based on their ability to pay the money back)

• Governments —> determine taxes owed, enforce the implementation of regulatory objectives, and to make policy decisions

Identify the 3 Business Forms + Describe Them

1. Sole proprietorship

   1. Owned entirely by one person, easy to form

   2. Personal liability (owner is responsible for all debts)

   3. Limited life (business ends with the owner)

2. Partnership

   1. Owned jointly by two or more people

   2. Due to multiple owners, increased access to funding and skillsets

   3. Personal liability, jointly responsible for debt amongst partners

   4. Limited life if both partners are no longer invested BUT a partner can leave and be replaced at any time

3. Corporation

   1. Owned by one or more people called shareholders

   2. Ability to raise capital is easiest here due to the ability to issue shares

   3. Limited liability for owners, only liable for the amount invested into business rather than personal assets

   4. More complex to organize due to many regulations

   5. Double taxation

Explain the Components of Operating Activities

Operating Activities: the process of the business earning a profit —> these results are measured through net income or net loss

1. Revenue: the increase in assets that result from the sale of product or services

2. Expenses: the cost of the assets used, or liabilities created, in the operation of the business

3. Net income = Revenues > Expenses

4. Net loss = Expenses > Revenues

Define Financial Statements

The set of standardized reports featuring detailed transactions

State Four Financial Statements + Describe Their Purpose

1. Statement of Financial Position (or balance sheet): reports the assets owned by a company and the claims such as liabilities and shareholders’ equity against those assets at a specific point in time (beginning + end of fiscal period)

2. Statement of Comprehensive Income: reports how well a company has performed its operations (revenues, expenses, and income) over a period-of time → public companies can only use this to report income or expenses not recognized in the statement of earnings

3. Statement of Changes in Equity: reports how much a company’s net earnings was retained in the business, dividend distributions to owners, the dollar amount of shares issued and repurchased, alongside other changes in equity over a period of time

4. Statement of Cash Flows: reports the sources and uses of a company’s cash over a period of time

The Basic Accounting Equation + Its Meaning

Assets = Liabilities + Shareholders’ Equity

• Assets = what the company owns, such as economic resources

• Liabilities = creditors’ claims + Shareholders’ equity = owners’ claims; both are sources of financing for the company, who the company owes to

The Statement of Financial Position (Order + Define How It’d Look)

Header: Company name, Statement of Financial Position, Year, and Unit of Measure

Assets

• Current Assets: short-term investments, listed in order of liquidity (nearness to cash convertibility)

  • Cash

  • Short-term investments or marketable securities

  • Accounts receivable

  • Inventories

• Total Current Assets = …

• Noncurrent Assets: long-term investments

  • Property, Plant, and Equipment

    • Property: Land

    • Plant: Buildings + Machinery

    • Equipment: Vehicles, Office Equipment, and Furniture/Fixtures

    • Accumulated depreciation (if applicable)

  • Total Property, Plant, and Equipment = …

  • Long-term Investments

    • Shares, bonds, real estate

  • Intangible Assets

    • Franchise rights, patents, copyrights

• Total Assets = … (double underline)

Liabilities + Shareholders’ Equity

• Current Liabilities

  • Accounts payable

  • Salaries payable

  • Income and sales taxes payable

• Total Current Liabilities = …

• Long-term Liabilities

  • Loans or Notes payable

  • Bonds payable

• Total Liabilities = …

• Shareholders’ Equity

  • Contributed capital (common or preferred shares)

  • Retained earnings

  • Accumulated other comprehensive income

• Total Shareholders’ Equity = …

• Total Liabilities and Shareholders’ Equity = … (double underline)

Statement of Earnings

Statement of Changes in Equity

Statement of Retained Earnings

Statement of Cash Flows

Describe The Relationship Between the 4 Financial Statements