Plain Background Power Point Slides Chapter 1 The Financial Statements 3655

The Financial
Statements
Chapter 1
©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
Learning Objective 1
Use accounting vocabulary for

decision making.

Accounting –
The Language of Business
An information system that...
measures business activities
processes data into reports
communicates results to
decision makers

Who Uses Accounting
Information?
Government
Individuals regulatory
agencies
Taxing
Businesses
authorities
Investors and Nonprofit

creditors organizations
Financial and Management
Accounting
External Users
Internal Users

Ethics in Accounting and
Business
Standards of professional
conduct for accountants
AICPA’s Code of Professional
Conduct

Business Organizations
Proprietorships
Partnerships
Corporations

Apply accounting concepts and

principles

Accounting
Principles and Concepts
GAAP
 Generally Accepted Accounting
Principles
 Rules that govern accounting

The Entity Concept
An accounting entity is an
organization that stands apart
as a separate economic unit.

The Reliability Principle
Data is reliable if
 It is verifiable
 It can be confirmed by an
independent observer

The Cost Principle
Assets and services acquired
should be recorded at their
actual (historical) cost.

The Going-Concern Concept
The entity will continue remain
in operation for the foreseeable
future.

The Stable-Monetary-Unit
Concept
The dollar’s purchasing power
is stable

Use the accounting equation to

describe an organization.

The Accounting Equation
Assets = Liabilities + Owner’s Equity
Economic Claims to
Resources Economic
Resources

Assets
Economic resources that are

expected to produce a benefit in
the future

Liabilities
Economic obligations (debt) of a

business

Owner’s Equity
The owner’s claim on the entity’s

assets
• Capital
• Stockholders’ equity
• Net assets
Assets – liabilities = owner’s equity

Stockholders’ Equity
For a corporation,
stockholders’ equity is divided
into two main categories.
 Paid in capital
 Retained earnings.

 Paid-in capital - amount invested
by its owners - common stock.
 Retained earnings - amount
earned by income-producing
activities and kept for use in the
business
Assets = Liabilities + Paid-in capital + Retained earnings

Revenues - increases in
retained earnings from
delivering goods or services to
customers
Expenses - decreases in
retained earnings that result
from operations
Components of Retained
Earnings
Revenues for
the period
–
Expenses for
the period
Start of End of
the period = the period
Beginning Net income Ending
+ Dividends
balance of (or Net loss) balance of
or – for the =
retained for the retained
– period
earnings period earnings
Evaluate operating performance,

financial position, and cash
flows.

Income Statement
How well did the company perform

during the month?
Revenues
– Expenses
Net Income (Loss)
Statement of Retained Earnings
Why did the company's retained

earnings change during the year?
Beginning retained earnings

+Net income (-Net loss)
-Dividends
Ending retained earnings

Balance Sheet
What is the company’s financial

position at the end of a period?
Assets = Liabilities + Owner’s Equity

Statement of Cash Flows
How much cash did the company

generate and spend during the year?
Operating cash flows

+ Investing cash flows
+ Financing cash flows
Increase (decrease) in cash

Explain the relationships among

the financial statements.

Relationships Among
the Financial Statements
ABC Company
Income Statement –
Year Ended December 31, 2006
Revenues $700,000
Expenses 670,000
Net income $ 30,000
Relationships Among
ABC Company
Statement of Retained Earnings
Beginning retained earnings $180,000
Net income 30,000
Cash dividends (10,000)
Ending retained earnings $200,000
Relationships Among
ABC Company
Balance Sheet
December 31, 2006
Assets
Cash $ 25,000
All other assets 275,000
Total assets $300,000
Liabilities
Total liabilities $120,000
Stockholders’ equity
Common stock 40,000
Retained earnings 200,000
Other equity (60,000)
Total liabilities and stockholders’ equity $300,000
Relationships Among
ABC Company
Statement of Cash Flows
Net cash provided by operating activities$ 90,000
Net cash used for investing activities (110,000)
Net cash provided by financing activities 40,000
Net increase in cash 20,000
Beginning cash balance 5,000
Ending cash balance $ 25,000
End of Chapter 1


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The Financial

©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1

Use accounting vocabulary for

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 2

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 3

Investors and Nonprofit

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 5

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 6

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 7

Apply accounting concepts and

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 8

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 9

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 10

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 11

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 12

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 13

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 14

Use the accounting equation to

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 15

Assets = Liabilities + Owner’s Equity

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 16

Economic resources that are

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 17

Economic obligations (debt) of a

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 18

The owner’s claim on the entity’s

Assets – liabilities = owner’s equity

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 19

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 20

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 21

Evaluate operating performance,

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 24

How well did the company perform

Why did the company's retained

Beginning retained earnings

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 26

What is the company’s financial

Assets = Liabilities + Owner’s Equity

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 27

How much cash did the company

Operating cash flows

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 28

Explain the relationships among

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 29

©2004 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 34

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