Chapter 1AN INTRODUCTION TO FINANCIAL STATMENTS

Forms of Business Organization

Sole proprietorship

Partnership

Corporation

Users of Financial InformationInternalManagers who plan, organize and run a businessMarketing managersProduction supervisorsFinance directorsCompany officers

Users of Financial InformationExternal

InvestorsCreditorsOthersRegulatory agenciesTax authoritiesCustomersLabor UnionsEconomic planners

OrganizationFormsUsers ofFinancialInformationInternal managersLabor UnionsSole ProprietorshipsExternalInvestors (Owners)GovernmentAgenciesCustomersCreditors(SuppliersBankers)Tax (IRS)CorporationsRegulatory(IRS, FTC)Partnerships

Types of Business ActivityFinancing

Investing

Operating

Operating ActivitiesRevenues are the increases in assets resulting from the sale of a product or serviceExpenses are the cost of assets consumed or services used in generating revenue.If revenue > expense = Net IncomeIf revenue < expense = Net Loss!

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

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

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

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

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

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

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

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

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

Content and Purpose of Financial StatementsAccountants communicate with users through four financial statements

Four Financial StatementsIncome StatementRetained Earnings StatementBalance SheetStatement of Cash Flows

Income StatementReports operating success or failure for a period.Summarizes revenues and expenses for period: month, quarter, year.If revenue > expense = Net Income.

Income StatementDo this statement first!

Net Income = Revenue - Expenses

Retained Earnings StatementShows changes in retained earnings for period: month, quarter, yearBeginning balanceAdd Net Income from income statement.Deduct DividendsEnding balance

Retained Earnings StatementDo this statement second!RE ending balance = RE beginning balance + net income - dividends

Balance SheetReports assets and claims to assets.Claims of creditors, liabilities.Claims of owners, stockholders equity.Assets = Liabilities + Stockholders EquitySpecific date one point in time!

Balance SheetFrom Retained Earnings StatementAssets = Liabilities + Owners Equity

Statement of Cash FlowsProvides information about cash receipts and cash paymentsSummarizes for period: month, quarter, year.Cash effects of operating, investing, and financing activities.

Statement of Cash FlowsWhere 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!

Statement of Cash Flows..Agrees with Balance SheetCash ending balance = +/- operating +/- investing +/- financing+cash beginning balance

AssetsResources owned by the businessCashAccounts receivableInventoriesFurniture and fixturesEquipmentSupplies

LiabilitiesObligations or debts of businessNotes payableAccounts payableInterest payableSalaries payableUnearned revenue

Stockholders EquityOwnership claims on assetsPaid-in capitalCommon stockRetained earnings

Brief Exercise 1-10

Basic Accounting EquationAssets = Liabilities + Stockholders Equity

Brief Exercise 1-8

Brief Exercise 1-8

Brief Exercise 1-8

Brief Exercise 1-9

Brief Exercise 1-9

Brief Exercise 1-9

Exercise 1-8

Start with Statement of Retained EarningsMove Ending Retained earnings to Balance SheetCalculate Common Stock

Exercise 1-8

Go to Statement of Retained Earnings again! Calculate Net income

Exercise 1-8 contd

Start with Statement of Retained EarningsMove Net Income to Income StatementCalculate Cost of Goods Sold

Assets = Liabilities + (Common Stock + ) BeginningRetainedEarnings

+

-

Dividends= EndingRetainedEarningsRevenue Expenses = Net IncomeIncome Statement[How did we do this time?]Balance Sheet[What is our financial position at this point in time?]Statement ofRetained Earnings[How have we done up until now?]

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

ReviewWhich of the following is not a correct representation of the accounting equation?a. Assets = Liabilities + Stockholders Equityd. Assets - Stockholders Equity = Liabilities c. Assets + Stockholders Equity = Liabilities b. Assets - Liabilities = Stockholders Equity

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

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

Do It Problem: CSU CorporationCSU begins on Jan. 1, 2007For year ended Dec. 31, 2007, prepareIncome statementRetained earnings statementBalance sheet

Sheet1

Service revenue$17,000

Accounts receivable$4,000

Accounts payable$2,000

Building rental expense$9,000

Notes payable$5,000

Common stock$10,000

Retained earnings?

Equipment$16,000

Insurance expense$1,000

Supplies$1,800

Supplies expense$200

Cash$1,400

Dividends$600

Sheet2

Sheet3

Do It Problem: CSU CorporationAction step 1: Report the revenues & expenses for a period of time, Income Statement

Sheet1

Service revenue$17,000

Accounts receivable$4,000

Accounts payable$2,000

Building rental expense$9,000

Notes payable$5,000

Common stock$10,000

Retained earnings?

Equipment$16,000

Insurance expense$1,000

Supplies$1,800

Supplies expense$200

Cash$1,400

Dividends$600

Sheet2

Sheet3

Do It Problem: CSU CorporationAction step 1: Report the revenues & expenses for a period of time, Income Statement

Sheet1

Service revenue$17,000

Accounts receivable$4,000

Accounts payable$2,000

Building rental expense$9,000

Notes payable$5,000

Common stock$10,000

Retained earnings?

Equipment$16,000

Insurance expense$1,000

Supplies$1,800

Supplies expense$200

Cash$1,400

Dividends$600

Sheet2

Sheet3

Do It Problem: CSU Corporation

CSU CorporationIncome StatementFor the Year Ended December 31, 2007

Create the headingWhat? Name of the statementWho? Name of the companyWhen?Period of time

Do It Problem: CSU Corporation

CSU CorporationIncome StatementFor the Year Ended December 31, 2007RevenuesService revenue$17,000List the revenuesUse dollar signs to denote U.S. currency

Do It Problem: CSU Corporation

CSU CorporationIncome StatementFor the Year Ended December 31, 2007RevenuesService revenue$17,000ExpensesRent expense$9,000Insurance expense 1,000Supplies expense 200Total expenses 10,200

________List the expenses & underline sub-totals

Net Income = Revenue - Expenses

Do It Problem: CSU Corporation

CSU CorporationIncome StatementFor the Year Ended December 31, 2007RevenuesService revenue$17,000ExpensesRent expense$9,000Insurance expense 1,000Supplies expense 200Total expenses 10,200Net Income$ 6,800Calculate net income: revenues - expenses________________________________

Do It Problem: CSU CorporationAction step 2: Show amounts and causes of changes in retained earningsUse Net Income from Income StatementDividends

Sheet1

Service revenue$17,000

Accounts receivable$4,000

Accounts payable$2,000

Building rental expense$9,000

Notes payable$5,000

Common stock$10,000

Retained earnings?

Equipment$16,000

Insurance expense$1,000

Supplies$1,800

Supplies expense$200

Cash$1,400

Dividends$600

Sheet2

Sheet3

Do It Problem: CSU Corporation

CSU CorporationRetained Earnings StatementFor the Year Ended December 31, 2007

Retained earnings, January 1$ 0Add: Net income 6,800 6,800Less: Dividends 600Retained earnings, Dec. 31 $ 6,200

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

Do It Problem: CSU CorporationAction step 3: Present assets and claims to those assets at a specific point in time on the Balance SheetUse $6,200 Retained earnings from previous statement!

Sheet1

Service revenue$17,000

Accounts receivable$4,000

Accounts payable$2,000

Building rental expense$9,000

Notes payable$5,000

Common stock$10,000

Retained earnings$6,200

Equipment$16,000

Insurance expense$1,000

Supplies$1,800

Supplies expense$200

Cash$1,400

Dividends$600

Sheet2

Sheet3

Assets = Liabilities + Owners EquityA = L + OE

Students work in teams to complete BE 1- 4, 5, 6First 2 rows work BE1- 6, 5, 4Second 2 rows work BE1- 5, 4, 6Reamining rows work BE1- 4, 6, 5

BE 1-4 Expenses a,c,d,gRevenue b, f Common stock iDividends e No effect on equity -- h

BE 1-5 Assets = Liabilities + Stkdr equity32,000 + 81,000 = 85,000 + 28,000 113,000 = 113,000

BE 1-6Income Statement a, f, g, jBalance Sheet b, c, d, e, h, i

In Class work Practice for Exam 1Work P1-3A on page 39 individuallyStep 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

Solutions to P1-3B will be provided on WebCT for your practice.See you next week!

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