Chapter 1

1. Chapter 1 The Basic Financial Statements

2. Groups • Get Contact Information for each group member – you are stuck with each other for the next 15 weeks. • Decide what business you are going to start. • Company name • Company business • To Be Turned in: Fill out Group Sheet.

3. Understanding the Business The Players 1. 2. The BusinessOperations 4 3.

4. Effective communication means that the recipient understands what the sender intends to convey. Responsibilities for the Accounting Communication Process Decision makers need to understand accounting measurement rules.

5. How are Generally Accepted Accounting Principles Determined? Who is this dude?

6. How are Generally Accepted Accounting Principles Determined? Prior to 1933, the management teams of most companies were free to choose the accounting principles used to keep track of its transactions. What was going on in 1933?

7. Generally Accepted Accounting Principles Securities Act of 1933 Securities and Exchange Act of 1934 The Securities and Exchange Commission (SEC) has been given broad powers to determine measurement rules for financial statements.

8. 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.

9. Generally Accepted Accounting Principles Companies incur the cost of preparing the financial statements and bear the following economic consequences of the financial statements being published . . . • Effects on the selling price of stock. • Effects on the amount of bonuses received by managers and other employees. • Loss of competitive information to other companies.

10. The Four Basic Financial Statements On a company’s ___________________, all the revenues earned from sales to customers are listed along with the expenses incurred to produce those revenues.

11. Income Statement • Identify the REVENUE Accounts (amounts a company EARNS). • Identify the EXPENSE Accounts (amounts a company incurs in order to earn revenue) • Prepare the Income Statement in the Proper format.

12. The Income Statement Typical Account Titles RevenuesSales RevenueFee RevenueInterest RevenueRent Revenue ExpensesCost of Goods SoldWages ExpenseRent ExpenseInterest ExpenseDepreciation ExpenseAdvertising ExpenseInsurance ExpenseRepair ExpenseIncome Tax Expense

13. Income Statement

14. The Four Basic Financial Statements On a company’s _______________________________ accumulated net earnings less the dividends paid to owners represent reinvestments in the core business. Net Earnings = Net Income from Income Statement

15. Statement of Retained Earnings Beginning Retained EarningPlus: Net Income Less: Dividends Ending Retained Earnings

16. The Four Basic Financial Statements On a company’s _______________, all resources owned (CALLED ASSETS)and amounts owed (CALLED LIABILITIES) are listed in order of liquidity. The DIFFERENCE between the resources owned and the amounts owed, represents the stockholders’ equity in the business.

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

18. The Balance Sheet Typical Account Titles LiabilitiesAccounts PayableAccrued ExpensesNotes PayableTaxes PayableUnearned Revenue Bonds Payable AssetsCashShort-Term InvestmentAccounts ReceivableNotes ReceivableInventory (to be sold)SuppliesPrepaid ExpensesLong-Term InvestmentsEquipmentBuildingsLandIntangibles LiabilitiesAccounts PayableAccrued ExpensesNotes PayableTaxes PayableUnearned Revenue Bonds Payable Stockholders’ EquityContributed CapitalRetained Earnings Stockholders’ EquityContributed CapitalRetained Earnings

19. Balance Sheet

20. The Four Basic Financial Statements On a company’s _________________________, all sources and uses of CASHare listed. Cash is generated by the company’s operations (CALLED OPERATING ACTIVITIES). Cash is spent on investments in buildings, manufacturing equipment, and other assets (CALLED INVESTING ACTIVITIES). FINANCING ACTIVITIES involve amounts borrowed (and paid back) from long-term creditors and sale of stock to owners.

21. Statement of Cash Flows

22. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings. Relationships Among the Statements

23. Ending retained earnings from the statement of retained earnings is one of the two components of stockholders’ equity on the balance sheet. Relationships Among the Statements

24. The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the balance sheet. Relationships Among the Statements

25. Solving the Group Problem • ABC Company has Total Assets of $1,000,000, Total Liabilities of $700,000, Contributed Capital of $100,000, Beginning Retained Earnings of $130,000, Dividends of $40,000, and Total Revenue of $350,000. What is ABC's Net Income?