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CHAPTER 1 BUSINESS DECISIONS AND FINANCIAL ACCOUNGING Learning Objective 1

Learn about different organizational forms and decision makers in business, as well as the purpose and structure of financial statements. Understand how financial information is used by decision makers.

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CHAPTER 1 BUSINESS DECISIONS AND FINANCIAL ACCOUNGING Learning Objective 1

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  1. CHAPTER 1BUSINESS DECISIONS AND FINANCIAL ACCOUNGINGLearning Objective 1 Describe various organizational forms and business decision makers. 1-1

  2. Business organization owned by two or more people. Each partner is personally liable for all debts of the business. A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Partnership Corporation Organizational Forms Business organization owned by one person. The owner is personally liable for all debts of the business. Sole Proprietorship 1-2

  3. Organizational Forms Source: BizStats.com 1-3

  4. The Accounting System Business and Financing Activities Run the company Evaluate the company Accounting System Accounting Reports Internal users (managers, etc.) External users (creditors, investors, etc.) Financial Managerial Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-4

  5. Learning Objective 2 Describe the purpose, structure, and content of the four basic financial statements. 1-5

  6. Resources Owned . . . by the company Resources Owed . . . to creditors to stockholders Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. The Basic Accounting Equation Assets = Liabilities + Stockholders’ Equity 1-6

  7. Assets Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash Equipment Supplies Furniture 1-7

  8. Liabilities Amounts owed by the business to creditors. Notes Payable Accounts Payable 1-8

  9. Stockholders’ Equity Owners’ claim to the business resources. Contributed Capital Retained Earnings Stock Certificate 1-9

  10. Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. Expenses The costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Revenues, Expenses and Net Income Revenues – Expenses = Net Income 1-10

  11. Dividends Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. 1-11

  12. Financial Statements Income Statement Financial statements are typically prepared in this order. Statement of Retained Earnings Balance Sheet Statement of Cash Flows 1-12

  13. The Income Statement The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. Reports the amount of revenues less expenses for a period of time. 1-13

  14. The Statement of Retained Earnings Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. 1-14

  15. BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity The Balance Sheet • Reports at a point in time: • What a business owns . • What it owes to creditors. • What is left over for the owners of the company’s stock. 1-15

  16. The Statement of Cash Flows Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. 1-16

  17. Notes to the Financial Statements Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions. 1-17

  18. Relationships Among the Financial Statements Net income flows from the Income Statement to the Statement of Retained Earnings. 1 1-18

  19. Relationships Among the Financial Statements Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2 1-19

  20. Relationships Among the Financial Statements Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3 1-20

  21. Learning Objective 3 & 4 • Explain how financial statements are used by decision makers. • Describe factors that contribute to useful financial information. 1-21

  22. Using Financial Statements Investors Creditors • What immediate return (through dividends) on my contributions? • What is the long-term return (through stock price increases resulting from the company’s profits)? • Is the company generating enough cash to make payments on its loans? • Does the company have enough assets to cover its liabilities? … SRE … SCF … B/S .. I/S 1-22

  23. External Financial Reporting Main Goal: Provide useful financial information to external users for decision making. Useful Relevant Relevant Faithful Representation Faithful Representation Comparable Verifiable Timely Understandable 1-23

  24. Accounting Standards United States World Where? FASB IASB Who? GAAP What? IFRS 1-24

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