Chapter 1

AN
INTRODUCTION TO
FINANCIAL
STATMENTS
1

ACCT 252 Study Plan Suggestions

Forms of Business
Organization

1
11

Sole proprietorship

Partnership

Corporation

Sole Proprietorship

Business owned by
one person
Simple to establish
Owner controlled
Tax advantages
Owner personally
liable
Financing difficult
4

Partnership

Two or more
owners
Simple to establish
Shared control
Broader skills &
resources
Tax advantages
Personal liability
5

Corporation

Separate legal
entity owned by
stockholders
Easy to transfer
ownership
Greater capital
raising potential
Lower legal liability
Unfavorable tax
treatment
6

BE1-1 Identify each as sole

proprietorship (SP);
partnership (P), or
corporation (c)

(a) Shared control, tax advantages,

increased skills and resources
(b) Simple to set up and maintains
control with founder
(c) Easier to transfer ownership and
raise funds; no personal liability
7

BE1-2 Who does the following?

Investors in common stock.
Marketing managers.
Creditors

1. Sees if company complied with

Chief
financial officer
tax laws.
Internal
revenue service
2. Sees
if company can pay its
obligations.
3. Sees whether a marketing
proposal will be cost effective.

2
11

Users of Financial
Information
Internal
Managers who

plan, organize and

run a business

Marketing
managers
Production
supervisors
Finance directors
Company officers
9

Users of Financial
Information
Internal Users Ask?

10

Users of Financial
Information
External

Investors
Creditors
Others

Regulatory
agencies
Tax authorities
Customers
Labor Unions
Economic planners
11

Users of Financial
Information
External Users Ask?

12

BE1-2 Who does the following?

Investors in common stock.
Marketing managers.
Creditors
4. Sees whether companys net income
Chief financial officer
will result
in stock service
price increase
Internal
revenue

5. See if company should employ debt

or equity financing

13

3
11

Types of Business Activity

Financing

Investing

Operating
14

Financing Activities

Borrowing creates
liabilities

Bank loans
Debt securities
Goods on credit or
payables

Selling stock creates

stockholders
equity
15

Investing Activities

Obtaining resources
or assets to operate
the business

Land
Buildings
Vehicles
Computers
Furniture
Equipment
16

Operating Activities

Primary activity of
business

Selling goods
Providing services
Manufacturing
Cost of Sales
Advertising
Paying employees
Paying utilities
17

Operating Activities

Revenues are the increases in

assets resulting from the sale of a
product or service
Expenses are the cost of assets
consumed or services used in
generating revenue.
If revenue > expense = Net Income
If revenue < expense = Net Loss!
18

Review Question 1
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
19

Review
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
20

Review Question 2
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business
organization.

21

Review
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business
organization.

22

Review Question 3
Which is not one of the three primary
business activities?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
23

Review
Which is not one of the three primary
business activities?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
24

BE1-3 Identify if item is an

operating (O), investing (I), or
(F) activity
on cash
financing
A. Cash received
from customers
flow
statement.
B. Cash
paid to stockholders as

dividends
C. Cash received from issuing new
common stock
D. Cash paid to suppliers
E. Cash paid to purchase a new
office building.

25

4
11

Content and Purpose of Financial

Statements

Accountants
communicate with
users through four
financial statements

26

Four Financial Statements

Income Statement

Retained Earnings Statement

Balance Sheet

Statement of Cash Flows

27

Income Statement

Reports operating success or failure

for a period.

Summarizes revenues and expenses

for period: month, quarter, year.

If revenue > expense = Net

Income.

28

Income Statement

Do this statement first!

29

Retained Earnings
Statement

Shows changes in retained earnings

for period: month, quarter, year

Beginning balance

Add Net Income from income

statement.

Deduct Dividends

Ending balance
30

Retained Earnings
Statement

Do this statement second!

31

Balance Sheet

Reports assets and claims to assets.

Claims of creditors, liabilities.

Claims of owners, stockholders equity.

Assets = Liabilities + Stockholders

Equity

Specific date one point in time!

32

Balance Sheet

From
Retained
Earnings
Statement
33

Statement of Cash
Flows

Provides information about cash

receipts and cash payments

Summarizes for period: month,

quarter, year.

Cash effects of operating,

investing, and financing
activities.
34

Statement of Cash
Flows

Where did the cash come from?

How was cash used during the

period?

What was the change in the cash

balance during the period?

A company cannot survive without

cash!
35

Statement of Cash Flows..

Agrees
with
Balance
Sheet

36

5
11

Assets

Resources owned by
the business
Cash
Accounts
receivable
Inventories
Furniture and
fixtures
Equipment
Supplies
37

Liabilities

Obligations or debts of business

Notes payable
Accounts payable
Interest payable
Salaries payable
Unearned revenue

38

Stockholders Equity

Ownership claims on assets

Paid-in capital

Common stock

Retained earnings

39

Basic Accounting
Equation
Assets =
Liabilities + Stockholders Equity

40

Review Question 4
Which of the following is not a correct
representation of the accounting
equation?
a. Assets = Liabilities + Stockholders
Equity
b. Assets - Liabilities = Stockholders
Equity
c. Assets + Stockholders Equity =
Liabilities
d. Assets - Stockholders Equity =
Liabilities
41

Review
Which of the following is not a correct
representation of the accounting
equation?
a. Assets = Liabilities + Stockholders
Equity
b. Assets - Liabilities = Stockholders
Equity
c. Assets + Stockholders Equity =
Liabilities
d. Assets - Stockholders Equity =
Liabilities
42

Review Question 5
Using the accounting equation, answer the
following question.
If Liabilities = $10,000 and
Stockholders Equity = $20,000
Then Assets = $30,000
$30,000 = $10,000 + $20,000
43

Review
Using the accounting equation,
answer the following question.
If Assets = $75,000
And Liabilities = $35,000
Then Stockholders Equity $40,000
=
$75,000 = $35,000 + $40,000
44

Thats all for today!