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Financial Statements and Business Decisions

Financial Statements and Business Decisions. Chapter 1. Understanding the Business. The Players. Investors. Creditors. Managers. 1. Purchase parts and labor. The Business Operations. 2. Manufacture product. 4. Collect cash from customers and pay creditors. 3. Sell products to customers.

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Financial Statements and Business Decisions

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  1. Financial Statements and Business Decisions Chapter 1

  2. Understanding the Business The Players Investors Creditors Managers 1. Purchase partsand labor The BusinessOperations 2. Manufactureproduct 4. Collect cash fromcustomers and paycreditors 3. Sell productsto customers

  3. Reports information to decision makers The Accounting System Managers (internaldecisionmakers) Collects and processes financial information Investors and Creditors (externaldecisionmakers)

  4. The Four Basic Financial Statements BALANCE SHEET – reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time. INCOME STATEMENT – reports the revenues less the expenses of the accounting period. STATEMENT OF RETAINED EARNINGS – reports the way that net income and distribution of dividends affected the financial position of the company during the accounting period. STATEMENT OF CASH FLOWS – reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

  5. The Accounting Equation A = L + SE (Assets) (Liabilities) (Stockholders’Equity) Economic Resources Sources of Financing for Economic Resources Liabilities: From CreditorsStockholders’ Equity: From Stockholders

  6. Balance Sheet

  7. Income Statement

  8. Statement of Retained Earnings

  9. Statement of Cash Flows

  10. All financial statements should be accompanied by notes which provide the reader with supplemental information about the financial condition and results of operations of the company. Notes

  11. Generally Accepted Accounting Principles The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP. Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP.

  12. Management Responsibility and the Demand for Auditing • To ensure the accuracy of the company’sfinancial information, management: • Maintains a system of controls. • Hires outside independent auditors. • Forms a committee of the board of directors to review these two safeguards.

  13. Auditors express an opinion as to the fairness of the financial statements. Independent auditors have responsibilities that extend to the general public. The PCAOB issues detailed auditing standards that auditors must follow. Independent Auditors Overall, I believe these financial statements are fairly stated.

  14. Ethics, Reputation, and Legal Liability The American Institute of Certified Public Accountants requires that all members adhere to a professional code of ethics. Code of Ethics

  15. End of Chapter 1

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