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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
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