Introduction to

Financial Accounting

Chapter 1
The Purpose and Use of Financial Statements
 Learning Objectives
 Identify the uses and users of accounting information
 Describe the primary forms of business organization
 Explain the three main types of business activity
 Describe the purpose and content of each of the financial
statements
ACCOUNTING FOR BUSINESS DECISIONS
 What is Accounting?
 A system of analyzing, recording, and summarizing the results of a
business’ activities and then reporting the results to decision
makers

Capture Record & Summarize Report

 The products of this system are reports

• Financial statements
• Internal reports
 FINANCIAL REPORT USERS
People who base their decisions on information
reported in a company’s financial reports.

Exercise: E1-1
 ORGANIZATIONAL FORMS
 Owned by one person.
 The owner often is personally liable for
business debts that cannot be paid
Sole Proprietorship

 Owned by two or more people.

 Each partner often is personally liable for
partnership debts that cannot be paid
Partnerships

 Operate a business separate from their owners.

 Owners (shareholders) are NOT personally

responsible for debts of the corporation.
Corporations
 ORGANIZATIONAL FORMS
Corporations

Public Private
Companies Companies

Have their stocks Have their stocks

bought and sold on bought and sold
stock exchanges. privately.
 FINANCIAL STATEMENTS
 Summarize and present financial results of a company
 Objective is to provide useful information for decision making
 Usually prepared periodically

ASPE
 Balance Sheet
 Income Statement
 Statement of Retained
Earnings
 Statement of Cash Flows
IFRS
 Statement of Financial Position
 Statement of Comprehensive Income
 Statement of Changes in Owners’
Equity
 Statement of Cash Flows
 BALANCE SHEET
• Reports at a point in time, e.g. December 31,2019
Reports:
• What a business owns (Assets)
• What a business owes (Liabilities)
• What is left over for the owners of the company
(Shareholders’ Equity)
Fundamental Accounting Equation
 BALANCE SHEET

Exercise: E1-9 (a) & (b)

 INCOME STATEMENT
• Reports for a period of time
e.g.: For The Year Ended December 31, 2018

Reports:
• what the business has earned from its operations over
a period of time.
Income Statement Equation
 INCOME STATEMENT

Exercise: E1-11
STATEMENT OF RETAINED EARNINGS
• Reports for a period of time
e.g.: For The Year Ended December 31, 2017
Reports:
• the accumulated earnings retained in the business
over a period of time.
Retained Earnings Equation
Beginning Retained Earnings
+ Net Income (this period)
- Dividends (distributed during the period)
= Ending Retained Earnings
STATEMENT OF RETAINED EARNINGS
STATEMENT OF CHANGES IN EQUITY
SIERRA CORPORATION
Statement of Changes in Equity
Month Ended October 31, 2015

Exercise: E1-9 (c) & (d)

 STATEMENT OF CASH FLOWS
•Reports for a period of time
e.g.: For The Year Ended December 31, 2016

Reports:
• the cash received and paid out by the business
over a period of time.
Cash Flow Equation
Cash Flows from Operating Activities
+ Cash Flows from Investing Activities
+ Cash Flows from Financing Activities
= Net Change in Cash during the year
+ Beginning Cash Balance
= Ending Cash Balance
STATEMENT OF CASH FLOWS

Exercise: E1-3
Relationships Among the Four Basic
Financial Statements
 Notes to the Financial Statements

Accounting Describes the accounting decisions

that were made when preparing
Policies financial statements.

Contents Presents additional detail about what’s

included in certain financial statement
Included account balances.

Additional Provides additional financial

disclosures about items not listed on
Information the statements themselves.