plain background power point slides chapter 1 the financial statements 3655
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Financial Accounting Charles Horngren 6edTRANSCRIPT
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
The Financial Statements
Chapter 1
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©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Use accounting vocabulary for decision making.
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Accounting –The Language of Business
An information system that...measures business activitiesprocesses data into reportscommunicates results to
decision makers
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Individuals
Who Uses Accounting Information?
Businesses
Investors andcreditors
Governmentregulatoryagencies
Taxingauthorities
Nonprofitorganizations
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Financial and Management AccountingExternal UsersInternal Users
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Ethics in Accounting and BusinessStandards of professional
conduct for accountantsAICPA’s Code of Professional
Conduct
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Business Organizations
ProprietorshipsPartnershipsCorporations
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Learning Objective 2
Apply accounting concepts and principles
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AccountingPrinciples and ConceptsGAAP
Generally Accepted Accounting Principles
Rules that govern accounting
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The Entity Concept
An accounting entity is an organization that stands apart as a separate economic unit.
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The Reliability Principle
Data is reliable if It is verifiableIt can be confirmed by an
independent observer
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The Cost Principle
Assets and services acquired should be recorded at their actual (historical) cost.
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The Going-Concern Concept
The entity will continue remain in operation for the foreseeable future.
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The Stable-Monetary-Unit ConceptThe dollar’s purchasing power
is stable
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Learning Objective 3
Use the accounting equation to describe an organization.
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The Accounting Equation
Assets = Liabilities + Owner’s Equity
EconomicResources
Claims toEconomicResources
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Assets
Economic resources that are expected to produce a benefit in the future
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Liabilities
Economic obligations (debt) of a business
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Owner’s Equity
The owner’s claim on the entity’s assets• Capital• Stockholders’ equity• Net assets
Assets – liabilities = owner’s equity
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Stockholders’ Equity
For a corporation, stockholders’ equity is divided into two main categories.Paid in capitalRetained earnings.
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The Accounting Equation
Paid-in capital - amount invested by its owners - common stock.
Retained earnings - amount earned by income-producing activities and kept for use in the business
Assets = Liabilities + Paid-in capital + Retained earnings
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The Accounting Equation
Revenues - increases in retained earnings from delivering goods or services to customers
Expenses - decreases in retained earnings that result from operations
Components of Retained Earnings
Revenues forthe period
–Expenses for
the period
=Net income(or Net loss)
for theperiod
Dividendsfor theperiod
Endingbalance ofretainedearnings
End ofthe period
Start ofthe periodBeginningbalance ofretainedearnings
+or–
– =
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Learning Objective 4
Evaluate operating performance, financial position, and cash flows.
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Income Statement
How well did the company perform during the month?
Revenues
– Expenses
Net Income (Loss)
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Statement of Retained Earnings
Why did the company's retained earnings change during the year?
Beginning retained earnings+Net income (-Net loss)-Dividends Ending retained earnings
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Balance Sheet
What is the company’s financial position at the end of a period?
Assets = Liabilities + Owner’s Equity
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Statement of Cash Flows
How much cash did the company generate and spend during the year?
Operating cash flows+ Investing cash flows+ Financing cash flows
Increase (decrease) in cash
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Learning Objective 5
Explain the relationships among the financial statements.
Relationships Amongthe Financial Statements
ABC CompanyIncome Statement –
Year Ended December 31, 2006Revenues $700,000Expenses 670,000Net income $ 30,000
Relationships Amongthe Financial Statements
ABC CompanyStatement of Retained EarningsYear Ended December 31, 2006
Beginning retained earnings $180,000Net income 30,000Cash dividends (10,000)Ending retained earnings $200,000
Relationships Amongthe Financial Statements
ABC CompanyBalance Sheet
December 31, 2006Assets
Cash $ 25,000All other assets 275,000Total assets $300,000
LiabilitiesTotal liabilities $120,000
Stockholders’ equityCommon stock 40,000Retained earnings 200,000Other equity (60,000)Total liabilities and stockholders’ equity $300,000
Relationships Amongthe Financial Statements
ABC Company Statement of Cash Flows Year Ended December 31, 2006Net cash provided by operating activities$ 90,000Net cash used for investing activities (110,000)Net cash provided by financing activities 40,000Net increase in cash 20,000Beginning cash balance 5,000Ending cash balance $ 25,000
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©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
End of Chapter 1