Understanding Financial Statements in Accounting

1. Chapter 1 Accounting and Business

2. Bell Ringer……… • What is the accounting equation • What is the equation for a net gain or a net loss Get out your homework

3. Essential Questions • What makes information useful? • Why do financial statements exist?

4. Students will be able to: • Identify and describe the purpose of the information provided in each financial statement. • Explain how the statements articulate with each other. • Classify basic elements of accounting with the respective financial statement. • Explain the role of management and the auditor in preparing and issuing an annual report.

5. What Makes Information Useful? • Relevance • Capable of making a difference in a decision • Reliability • Dependable • Benefits > Costs • Benefits derived must be greater than cost • Materiality • Large enough to have an impact on a decision

6. What is the purpose of financial statements? • Stakeholders - • People or other business entities who have invested in companies • Use financial statements to determine if they should invest in the companies.

7. What are the 4 Basic Financial Statements and Auditors’ Report? • Income statement – “P&L” • Indicates revenues less expenses = net income for a period of time • Statement of cash flows • Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time (Cash basis). • Statement of owners’ equity • Indicates changes in owners’ equity for a period of time

8. Financial Statements Continued • Balance sheet • Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time • The Accounting Equation: ASSETS = LIABILITIES + OWNER’S EQUITY • Assets and Liabilities are separated in 2 categories : Current and Non-Current

9. Financial Statements Continued – Balance Sheet - Assets • Current – Those that benefit < less than 1 year. • Examples: Cash, Accounts Receivable, Inventory • Non – Current – Those with value or benefits > greater than 1 year. • Examples: Property, Plant and Equipment, Goodwill, Intangibles

10. Financial Statements Continued – Balance Sheet - Liabilities • Current – Obligations paid or released within < one year. • Examples: Accounts Payable, Accrued Expenses, Notes Payable < 1 year. • Non – Current – Obligations paid or released >more than one year. • Examples: Notes Payable due > 1 year.

11. Lecture Examples 2. Describe each of the following items and determine which financial statement it appears on. Accounts payable, $136 Building, $809 Accounts receivable, $876 Patent, $2 Cash received from customers, $13,074 Long-term bank loan, $716 Cash paid for inventory, $8,338 Common stock, $3,827 Cash paid to employees, $1,724 Retained earnings, $373 Cost of goods sold, $8,192 Cash balance, $2,211 Inventory, $908 Miscellaneous payables, $529 Miscellaneous operating expenses, $3,686 Sales, $13,353 Wage expense, $1,750

12. Financial Statements Continued • Auditor’s report • Indicates whether the company followed GAAP when preparing its financial statements • Independence of auditor • Opinion on financial statements • Responsibilities of Management.

13. Students will be able to: • Identify and describe the purpose of the information provided in each financial statement. • Explain how the statements articulate with each other. • Classify basic elements of accounting with the respective financial statement. • Explain the role of management and the auditor in preparing and issuing an annual report.

14. HOMEWORK……. • Complete P1.1 - 1.5 -1.10 -1.11 • THANK YOU!!!!!!