_Lecture_Slides__Chapter_1_-_Financial_Statements_and_Business_Decisions-2

FINANCIAL ACCOUNTING

• Textbook: Financial Accounting, 10th ed. by Robert Libby, Patricia A. Libby, Frank Hodge

Chapter 1: Financial Statements and Business Decisions

• Key Financial Statements:

  • Balance Sheet

  • Cash Flows

  • Income Statements

  • Statement of Stockholders’ Equity

Learning Objectives

• Identify users and uses of accounting information.

• Recognize the information conveyed in financial statements.

• Describe content and purpose of each financial statement.

Users of Accounting Information

Owner-Managers

• Founders of a business acting as managers; make decisions for the business.

Creditors

• Lend money for specific periods; earn interest on loans.

Investors

• Buy ownership in the company (stocks).

The Accounting System

• Purpose: Collects and processes financial information.

• Reports Information To:

  • Internal Users: Managers

  • External Users: Investors and Creditors

Types of Accounting

Financial Accounting

• Users: External (stockholders, creditors, regulators).

• Reports: Financial statements (quarterly and annually).

• Content: General-purpose; high-level overview of the business.

• Verification: Audited by CPAs.

Managerial Accounting

• Users: Internal (managers).

• Reports: Internal reports as frequently as needed.

• Content: Special-purpose for specific decisions.

• Verification: No independent audits.

The Four Basic Financial Statements

• Types:

  • Income Statement

  • Balance Sheet

  • Statement of Cash Flows

  • Statement of Stockholders’ Equity

• Reporting Frequency: Can be prepared annually, quarterly, or monthly.

The Balance Sheet

Structure

• Name of Entity

• Title of Statement

• Specific Date

• Unit of Measure

Basic Accounting Equation

• Assets = Liabilities + Stockholders' Equity

Assets

• Economic resources owned by the business, listed by ease of conversion into cash:

  • Cash

  • Accounts Receivable

  • Inventories

  • Plant and Equipment

  • Land

Liabilities

• Debts/obligations from past transactions:

  • Accounts Payable

  • Notes Payable

Stockholders' Equity

• Financing from owners and retained earnings:

  • Contributed Capital

  • Retained Earnings

The Income Statement

Overview

• Reports revenues and expenses over a period of time.

Major Components

• Revenues: Earnings from goods/services.

• Expenses: Resources used to earn revenues.

• Net Income Calculation:

  • Revenues – Expenses = Net Income.

Cost Identifications

• Cost of Goods Sold: Cost to produce goods sold.

• SG&A: Selling, general, and administrative costs.

• R&D: Research and development costs.

• Interest Expense: Cost of borrowing.

• Income Tax Expense: Taxes on income.

Statement of Stockholders’ Equity

• Reflects how net income and dividends affect equity position.

Statement of Cash Flows

Importance

• Shows cash inflows/outflows during the period, divided into:

  • Operating Activities

  • Investing Activities

  • Financing Activities

Cash Flow Sections Examples

1. Operating Activities:

   • Cash collected from customers

   • Cash paid to suppliers/employees

2. Investing Activities:

   • Cash used for equipment purchases

3. Financing Activities:

   • Cash received from loans

   • Cash paid for dividends

Notes to Financial Statements

• Provide supplemental info about financial condition:

  • Accounting rules applied

  • Additional detail on financial statement items

  • Information not on financial statements

Relationship Among Financial Statements

• Net Income from the Income Statement affects Ending Retained Earnings in the Stockholders' Equity statement.

• Cash Change on the Cash Flows statement reconciles with the Balance Sheet cash balance.

Professional Ethics in Accounting

• Upheld by the American Institute of Certified Public Accountants (AICPA).

• Reputation for honesty and competence is vital for CPAs.

Review Exercises

• Multiple choice questions and exercises for practice (pp. 26-33).