Chapter 1

AN
INTRODUCTION TO
FINANCIAL
STATMENTS
1

Forms of Business
Organization

1
11

Sole proprietorship

Partnership

Corporation

2
11

Users of Financial
Information
Internal
Managers who

plan, organize and

run a business

Marketing
managers
Production
supervisors
Finance directors
Company officers
3

Users of Financial
Information
External

Investors
Creditors
Others

Regulatory
agencies
Tax authorities
Customers
Labor Unions
Economic planners
4

Internal managers

Sole Proprietorships
Partnerships

Users of
Financial
Information

Investors
(Owners)

Organization
Forms
External

Corporations

Government
Agencies
Tax (IRS)

Creditors
(Suppliers
Bankers)
Customers
Labor Unions

Regulatory
(IRS, FTC)

3
11

Types of Business Activity

Financing

Investing

Operating
6

Operating Activities

Revenues are the increases in

assets resulting from the sale of a
product or service
Expenses are the cost of assets
consumed or services used in
generating revenue.
If revenue > expense = Net Income
If revenue < expense = Net Loss!
7

Review Question 1
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
8

Review
Which is not one of the three forms of
business organization?
a. Sole proprietorship.
b. Creditorship.
c. Partnership.
d. Corporation.
9

Review Question 2
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business
organization.

10

Review
Which is an advantage of corporations
relative to partnerships and sole
proprietorships?
a. Lower taxes.
b. Harder to transfer ownership
c. Reduced legal liability for investors.
d. Most common form of business
organization.

11

Review Question 3
Which is not one of the three primary
business activities?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
12

Review
Which is not one of the three primary
business activities?
a. Financing.
b. Operating.
c. Advertising.
d. Investing.
13

BE1-1
(a) P partnership shared
control
(b) SP sole proprietorship
founder control
(c) C
corporation transfer
ownership

14

BE1-2
(a) 4 investors / income
(b) 3
marketing mgr / mktg proposal
(c) 2
creditors / pay obligations
(d) 5
CFO / debt/equity financing
decision
(e) 1
IRS / Tax laws

15

BE 1-3
(a) Operating
(b) Financing
(c) Financing
(d) Operating
(e) Investing

16

4
11

Content and Purpose of

Financial Statements

Accountants
communicate with
users through four
financial
statements
17

Four Financial
Statements

Income Statement

Retained Earnings Statement

Balance Sheet

Statement of Cash Flows

18

Income Statement

Reports operating success or failure

for a period.

Summarizes revenues and expenses

for period: month, quarter, year.

If revenue > expense = Net

Income.

19

Net Income = Revenue - Expenses

Income Statement

Do this statement first!

20

Retained Earnings
Statement

Shows changes in retained earnings

for period: month, quarter, year

Beginning balance

Add Net Income from income

statement.

Deduct Dividends

Ending balance
21

Retained Earnings
Statement

RE ending balance = RE beginning balance + net income - dividends

Do this statement second!

22

Balance Sheet

Reports assets and claims to assets.

Claims of creditors, liabilities.

Claims of owners, stockholders equity.

Assets = Liabilities + Stockholders

Equity

Specific date one point in time!

23

Assets = Liabilities + Owners Equity

Balance Sheet

From
Retained
Earnings
Statement
24

Statement of Cash
Flows

Provides information about cash

receipts and cash payments

Summarizes for period: month,

quarter, year.

Cash effects of operating,

investing, and financing
activities.
25

Statement of Cash
Flows

Where did the cash come from?

How was cash used during the

period?

What was the change in the cash

balance during the period?

A company cannot survive without

cash!
26

Cash ending balance = +/- operating +/- investing +/- financing

+cash beginning balance

Statement of Cash Flows..

Agrees
with
Balance
Sheet

27

5
11

Assets

Resources owned by
the business
Cash
Accounts
receivable
Inventories
Furniture and
fixtures
Equipment
Supplies
28

Liabilities

Obligations or debts of business

Notes payable
Accounts payable
Interest payable
Salaries payable
Unearned revenue

29

Stockholders Equity

Ownership claims on assets

Paid-in capital

Common stock

Retained earnings

30

Brief Exercise 1-10

BRIEF EXERCISE 1-10
A
L
A
A
SE
L

(a)
(b)
(c)
(d)
(e)
(f)

Accounts receivable
Salaries payable
Equipment
Office supplies
Common stock
Notes payable

31

Basic Accounting
Equation
Assets =
Liabilities + Stockholders Equity

32

Brief Exercise 1-8

BRIEF EXERCISE 1-8
(a) $90,000 + $230,000 = $320,000 (Total assets)
(b) $170,000 $90,000 = $80,000 (Total liabilities)
(c) $700,000 0.5($700,000) = $350,000 (Stockholders equity)

33

Brief Exercise 1-8

BRIEF EXERCISE 1-8
(a) $90,000 + $230,000 = $320,000 (Total assets)
(b) $170,000 $90,000 = $80,000 (Total liabilities)
(c) $700,000 0.5($700,000) = $350,000 (Stockholders equity)

34

Brief Exercise 1-8

BRIEF EXERCISE 1-8
(a) $90,000 + $230,000 = $320,000 (Total assets)
(b) $170,000 $90,000 = $80,000 (Total liabilities)
(c) $700,000 0.5($700,000) = $350,000 (Stockholders equity)

35

Brief Exercise 1-9

BRIEF EXERCISE 1-9
(a) ($900,000 + $150,000) ($500,000 $80,000) = $630,000
(Stockholders equity)
(b) ($500,000 + $100,000) + ($900,000 $500,000 $70,000) = $930,000
(Assets)
(c) ($900,000 $90,000) ($900,000 $500,000 + $110,000) = $300,000
(Liabilities)

36

Brief Exercise 1-9

BRIEF EXERCISE 1-9
(a) ($900,000 + $150,000) ($500,000 $80,000) = $630,000
(Stockholders equity)
(b) ($500,000 + $100,000) + ($900,000 $500,000 $70,000) = $930,000
(Assets)
(c) ($900,000 $90,000) ($900,000 $500,000 + $110,000) = $300,000
(Liabilities)

37

Brief Exercise 1-9

BRIEF EXERCISE 1-9
(a) ($900,000 + $150,000) ($500,000 $80,000) = $630,000
(Stockholders equity)
(b) ($500,000 + $100,000) + ($900,000 $500,000 $70,000) = $930,000
(Assets)
(c) ($900,000 $90,000) ($900,000 $500,000 + $110,000) = $300,000
(Liabilities)

38

Exercise 1-8
EXERCISE 1-8
First note that the retained earnings statement shows that (b) equals $29,000.
Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders equity

$5,000 + a + $29,000 = $60,000

a + $34,000 = $60,000
a = $26,000
Beginning retained earnings + Net income Dividends = Ending retained earnings

Start with
Statement
of Retained Earnings
$10,000
+ e $5,000
= $29,000
Move+Ending
Retained earnings to Balance
$5,000
e = $29,000
eCalculate
= $24,000 Common Stock

Sheet

39

Exercise 1-8
EXERCISE 1-8
First note that the retained earnings statement shows that (b) equals $29,000.
Accounts payable + Common stock + Retained earnings = Total liabilities and stockholders equity

$5,000
a + $29,000 = of
$60,000
Go to+ Statement
Retained
a + $34,000 = $60,000
Calculate Net income
a = $26,000

Earnings again!

Beginning retained earnings + Net income Dividends = Ending retained earnings

$10,000 + e $5,000 = $29,000

$5,000 + e = $29,000
e = $24,000

40

Exercise 1-8 contd

From above, we know that net income (d) equals $24,000.
Revenue Cost of goods sold Administrative expenses = Net income

$80,000 c $10,000 = $24,000

$70,000 c = $24,000
c = $46,000

Start with Statement of Retained Earnings

Move Net Income to Income Statement
Calculate Cost of Goods Sold

41

Statement of
Retained
Earnings
[How have we
done up until
now?]

Beginning
Retained
Earnings

Income
Statement
[How did we
do
this time?]

Revenue Expenses = Net Income

-

Assets = Liabilities + (Common Stock +

Dividends
=
Ending
Retained
Earnings

Balance Sheet
[What is our
financial position at
this point in time?]

42

Review Question 4
Which of the following is not a correct
representation of the accounting
equation?
a. Assets = Liabilities + Stockholders
Equity
b. Assets - Liabilities = Stockholders
Equity
c. Assets + Stockholders Equity =
Liabilities
d. Assets - Stockholders Equity =
Liabilities
43

Review
Which of the following is not a correct
representation of the accounting
equation?
a. Assets = Liabilities + Stockholders
Equity
b. Assets - Liabilities = Stockholders
Equity
c. Assets + Stockholders Equity =
Liabilities
d. Assets - Stockholders Equity =
Liabilities
44

Review Question 5
Using the accounting equation, answer the
following question.
If Liabilities = $10,000 and
Stockholders Equity = $20,000
Then Assets = $30,000
$30,000 = $10,000 + $20,000
45

Review
Using the accounting equation, answer the
following question.
If Assets = $75,000
And Liabilities = $35,000
Then Stockholders Equity = $40,000
$75,000 = $35,000 + $40,000
46

Do It Problem: CSU
Corporation

CSU begins on
Jan. 1, 2007
For year ended
Dec. 31, 2007,
prepare

Income
statement
Retained
earnings
statement
Balance sheet
47

Do It Problem: CSU
Corporation

Action step 1:
Report the
revenues &
expenses for
a period of
time, Income
Statement

48

Do It Problem: CSU
Corporation

Action step 1:
Report the
revenues &
expenses for
a period of
time, Income
Statement

49

Do It Problem: CSU
Corporation
Create the heading
Who? Name of
the company

CSU Corporation
What? Name of
the statement
Income Statement
For the Year Ended December 31, 2007
When?
Period
of time

50

Do It Problem: CSU Corporati

CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue
$17,000

List the revenues

Use dollar signs to denote U.S. currency
51

Net Income
= Revenue - Expenses
Do It Problem:
CSU
Corporation

CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue
$17,000
Expenses
Rent expense
$9,000
Insurance expense
1,000
________
Supplies expense
200
Total expenses
10,200

List the expenses & underline sub-totals

Do It Problem: CSU
Corporation
CSU Corporation
Income Statement
For the Year Ended December 31, 2007
Revenues
Service revenue
$17,000
Expenses
Rent expense
$9,000
Insurance expense
1,000
________
Supplies expense
200
________
Total expenses
10,200
________
________
Net Income
$ 6,800

Calculate net income: revenues - expenses

Do It Problem: CSU
Corporation

Action step 2:
Show amounts
and causes of
changes in
retained
earnings
Use Net Income
from Income
Statement
Dividends
54

RE ending
= RE beginning balance
+ net income - dividends
Do
Itbalance
Problem:
CSU
Corporation

CSU Corporation
Retained Earnings Statement
For the Year Ended December 31, 2007
Retained earnings, January 1
Add: Net income
Less: Dividends
Retained earnings, Dec. 31

0
6,800
6,800
________
600
$ 6,200
55

Do It Problem: CSU
Corporation

Action step 3:
Present assets
and claims to
those assets at a
specific point in
time on the
Balance Sheet
Use $6,200
Retained
earnings from
previous
statement!
56

Assets = Liabilities + Owners Equity

A = L
+
OE

57

Students work in teams to

complete BE 1- 4, 5, 6
First 2 rows work BE1- 6, 5, 4
Second 2 rows work BE1- 5, 4,
6
Reamining rows work BE1- 4,
6, 5

BE 1-4
Expenses a,c,d,g
Revenue b, f
Common stock i
Dividends e
No effect on equity -- h

59

BE 1-5
Assets
= Liabilities + Stkdr
equity
32,000 + 81,000 = 85,000 + 28,000
113,000 = 113,000

60

BE 1-6

Income Statement a, f, g, j
Balance Sheet b, c, d, e, h, i

61

In Class work Practice for

Exam 1

Work P1-3A on page 39 individually

Step 1 Identify each account as an
Asset, Liability, Stockholders Equity,
Revenue, or Expense account.
You may place letter A, L, SE, R, E to
left of amount in book.
-- Step 2 Complete the requirements
for the problem

62

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64

65

66

Solutions to P1-3B will be

provided on WebCT for your
practice.
See you next week!

67