ucf acg2021 ch 1 ppt garison noreen

8/14/2019 Ucf Acg2021 Ch 1 Ppt garison noreen

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Chapter One

The FinancialStatements


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Why Accounting?

Financial AccountingTax Accounting and Tax Planning

Regulatory Accounting

Management Accounting Information Systems

Auditing

Governmental and Not-for-ProfitAccounting


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Accounting: The Language ofBusiness

Accounting is an information system: Economic events become accounting

events

Measures business activity

Processes data into reports

Communicates results to people via thefinancial statements

Users of the accounting process makedecisions


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Users of Accounting Information

Financial Accounting primarily providesinformation for external users

Individuals

Investors and Creditors

Taxing Authorities

Government and Regulatory Authorities

Management Accounting primarily

provides information for internal users Managers within a firm


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Business Organizational Forms

Sole Proprietorships One owner

Owner is personally liable for debts

Partnerships

Two or more owners (partners)All partners are personally liable for debts (general

partners only)

Corporations

Many owners (stockholders) Stockholders are not liable for debts


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Business Organizational Forms

How many are there?

How much business do they do?

Source for organizational form percentages and business transacted: US Treasury Department, Internal

Revenue Service, Statistics of Income Bulletin, Spring 1997, pp. 200-203.

0

5,000,000

10,000,000

15,000,000

20,000,000

SoleProprietorship

Partnership

Corporation

$0$2,000,000,000,000$4,000,000,000,000$6,000,000,000,000

$8,000,000,000,000$10,000,000,000,000$12,000,000,000,000$14,000,000,000,000$16,000,000,000,000

Sole Proprietorship

Partnership

Corporation


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Generally Accepted AccountingPrinciples

Generally Accepted AccountingPrinciples (GAAP)

Represents professional guidelines thatgovern how accountants measure, process,

and communicate financial information i.e.,rules that govern accounting.

Primary objective of financial reporting is toprovide information that is useful for

investment and lending decisions.


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Accounting Principles andConcepts

Entity Concept an accounting entity standsapart as a separate economic unit.

Reliability Principle information is free ofbias: verifiable, representationally faithful, neutral.

(Historical) Cost Principle assets andservices are recorded at historical cost.

Going-Concern Concept assumes that thebusiness will continue into the future.

Stable-Monetary Unit Concept ignores theeffect of inflation.

Note: Additional accounting principles and concepts exist.


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The Accounting Equation

Assets:

Economic

Resources

Liabilities:

Creditors

Claims

Owners Equity:

Owners

Claims

Assets =Liabilities +Owners Equity

All of a firms assetsare subject toclaims either by itscreditor(s) or its

owner(s).

Adapted from Smith et al. (2001)


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Assets

Assets are economic resources expectedto produce a future benefit. Cash, both cash and cash equivalents.

Accounts Receivable (A/R), a promise of future

collection of cash. Inventory, goods purchased by a company for resale.

Supplies, short-term assets used or consumed by acompany.

Prepaid Expenses, expenses paid for in advance (such

as Prepaid Rent).

Property, plant, and equipment, land, buildings,and equipment (long-term).

Refer to pages 18-19 and 51 for examples of assets.


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Liabilities

Liabilities are claims (debts) payable tocreditors. This represents the portion of theassets owed to creditors.

Accounts Payable (A/P): liability backed by thereputation of the seller (generally short-term).

Notes Payable: written promise to pay a debt at a futuredate (generally long-term).

Accrued Liabilities: liability for an expense not yet paid.

Unearned Revenue: collection of cash from customers

prior to earning the revenue.Refer to pages 19 and 51-52 for examples of liabilities.


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Owners Equity

A corporations owners equity hastwo primary sub-parts:

Paid-in-Capital the amount invested inthe corporation by the stockholders.Includes Common and Preferred Stock.

Retained Earnings the amount earnedby the organization and kept for use inthe business. Is affected by Revenues,Expenses, and Dividends.

Refer to pages 20 and 52 for examples of owners equity.


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In-Class Exercise

Classify each of the following as anAsset, Liability, or Owners Equity.

Accounts Receivable Accounts Payable

Long-term Debt Common Stock

Merchandise Inventory Supplies

Notes Payable Retained Earnings

Salaries Payable LandEquipment Prepaid Expenses


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Revenues

Revenues represent increases inRetained Earnings due to thedelivery of goods or performance of

services to customers. Cash sale of goods or services to a customer. Informal customer promise at the time of

sale to pay for goods or services (AccountsReceivable, or A/R).

Terms include: Sales Revenue, ServiceRevenue, Interest Revenue, Fees, etc.

Refer to pages 16 and 52 for a brief description of revenues.


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Expenses

Expenses represent decreases in RetainedEarnings due to operations, such as the costof selling products or providing services.

Cash paid for merchandise sold to customers or forrelated costs.

Informal company promise to pay for the various costs ofdoing business (Accounts Payable, or A/P).

Terms include: Cost of Goods Sold, Salary Expense, RentExpense, Interest Expense, etc.

Refer to pages 16-17 and 52 for a brief description of expenses.


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Distributions to Owners

Distributions to owners in the form ofcash or other property are notexpensesand do notaffect net income.

For a corporation, distributions to

stockholders of cash (or other assets)generated by net income are dividends.

These distributions, including dividends,decrease retained earnings.

Dividends NEVER affect net income!


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Financial Statements

Income Statement (Statement ofOperations)

Statement of Retained Earnings (Statementof Stockholders Equity or the Statement of

Owners Equity) Balance Sheet (Statement of Financial

Position)

Statement of Cash Flows

Refer to Exhibit 1-16 on page 15 for a chart summarizing theinformation reported in each financial statement.


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Income Statement

Time Frame: Reports a period of time. Content: Revenue - Expense = Net Income

Use/Objective: Used as a tool to measure/evaluateperformance of management.

Revenues and Gains

Expenses and Losses

Net Income

Statement form can vary:

May have comparative data/periods.

May have a single step vs. multi-step approach to incomedetermination.


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Statement of Retained Earnings

Time Frame: Reports a period of time. Content: Retained Earnings, Income earned and

Dividends paid. (Does not show capital contributed byowners).

Use/Objective: To track the ongoing balance of

earnings not yet paid out to stockholders, and todetermine why the companys retained earningsbalance changed during the year.

Beginning retained earnings

+Net income (-Net loss)

-Dividends

Ending retained earnings


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Balance Sheet

Time Frame: Reports apointin time (i.e., asnapshot in time).

Content: Lists the book value (remember the costprinciple) of all the variables in the accountingequation: Assets, Liabilities, and Owners Equity.

Use/Objective: Depicts the overall financial positionof the company at the end of a period. Puts therelationship of claims on the firms resources(liabilities and owners equity) to the firmsresources (assets) in perspective.

Assets = Liabilities + Owners Equity


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Statement of Cash Flows

Time Frame: Reports a period of time.

Content: Sources of Cash and Uses of Cash.

Use/Objective: Illustrates the uses and sources of cash over a periodof time to show where the firm is generating and spending its cash.

Operating cash flows

+ Investing cash flows

+ Financing cash flows

Increase (decrease) in cash

l i hi h i i l


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Relationships among the FinancialStatements

Income StatementNet Income (Loss)

Balance SheetCash

Retained Earnings

Statement of

CashFlowsEnding Cash

Stmt of Retained Earnings

Net Income (Loss)

Ending Retained Earnings

Chart is adapted from Evans (2006)

Refer to pages 22-23 for more information on these relationships.


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Questions?

Any questions or concerns?

ucf acg2021 ch 1 ppt garison noreen

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