copyright © 2016 by mcgraw-hill education. chapter 1 business decisions and financial accounting...
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Copyright © 2016 by McGraw-Hill Education
Copyright © 2016 by McGraw-Hill Education
Chapter 1Business Decisions and Financial Accounting
PowerPoint Author:Brandy Mackintosh, CA
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Learning Objective 1-1
Describe various organizational forms and
business decisionmakers.
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Organizational Forms
PartnershipBusiness organization owned by two or more people. Each partner is personally liable for all debts of
the business.
Corporation
A separate legal entity. Owners of corporations (stockholders) are not personally liable for debts of
the corporation.
Sole Proprietorship
Business organization owned by one person. The owner is
personally liable for all debts of the business.
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Organizational Forms
Source: IRS.gov.
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The Accounting System
Operating, Investing and Financing Activities
AccountingSystem
Accounting ReportsFinancial ManagerialExternal users
(creditors, investors, etc.)
Internal users(managers, supervisors etc.)
Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities.
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Learning Objective 1-2
Describe the purpose, structure, and content of the
four basic financial statements.
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The Basic Accounting Equation
Separate Entity Assumption
The financial reports of a business are assumed to include the results of only that business’s activities.
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AssetsEconomic resources presently controlled by the company that have measurable value and are
expected to benefit the company by producing cash inflows or
reducing cash outflowsin the future
Cash
Supplies Furniture
Equipment
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Liabilities
Measurable amounts that the company owes to creditors
Notes Payable
Accounts Payable
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Stockholders’ Equity
Owners’ claim to the business resources.
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Revenues, Expenses and Net Income
RevenuesSales of goods or services
to customers. They are measured at the
amount the business charges the customer.
ExpensesThe costs of doing
business necessary to earn revenues,
including wages to employees, advertising, insurance, utilities, and
supplies used in the office.
Revenues – Expenses = Net Income
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Dividends
Distributions of a company’s earnings to its stockholders as a return
on their investment.
Retained Earnings(equity earned by the company)
Common Stock(equity paid in by stockholders)
Dividends are not an expense.
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Financial Statements
Income Statement
Statement of Retained Earnings
Balance Sheet
Statement of Cash Flows
Financial statements are
typically prepared in this order.
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The Income Statement
Reports the amount
of revenues
less expenses
for a period of time.
The unit of measure
assumption states that results of business activities should be
reported in an appropriate
monetary unit.
SONICGATEWAY INC.Income Statement (Projected)
For the Month Ended September 30, 2015
Revenues Sales Revenue Service Revenue Total Revenues
Expenses Salaries and Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total ExpensesNet Income
$ 9,000 3,000
12,000
5,0002,5001,600
300100
500 10,000$ 2,000
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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.
SONICGATEWAY, INC.Statement of Retained Earnings (Projected)For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015 Add: Net Income Subtract: DividendsRetained Earnings, September 30, 2015
$ 0 2,000
(1,000)$ 1,000
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The Balance SheetReports at a point in time:
1. What a business owns (assets).
2. What it owes to creditors (liabilities).
3. What is left over for the owners of the company’s stock (stockholders’ equity).
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
SONICGATEWAY, INC.Balance Sheet (Projected)
At September 30, 2015
Assets Cash Accounts Receivable Supplies Equipment SoftwareTotal Assets
Liabilities Accounts Payable Notes Payable Total Liabilities
Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ EquityTotal Liabilities and Stockholders’ Equity
$ 13,0002,500
500 14,000
6,000$ 36,000
$ 5,000 20,000 25,000
10,000 1,000 11,000$ 36,000
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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.
SONICGATEWAY, INC.Statement of Cash Flows (Projected)
For the Month Ended September 30, 2015
Cash Flows from Operating ActivitiesCash received from customersCash paid to employees and suppliers Cash Provided by Operating ActivitiesCash Flows from (Used in) Investing ActivitiesCash used to buy equipment and software Cash from (Used in) Investing ActivitiesCash Flows from Financing ActivitiesCash received for stock issuanceCash dividends paid to stockholdersCash borrowed from the bank Cash Provided by Financing ActivitiesChange in CashBeginning Cash Balance, September 1, 2015Ending Cash Balance, September 30, 2015
$ 9,500 (5,500) 4,000
(20,000) (20,000)
10,000(1,000)
20,000 29,000
13,000 -$ 13,000
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Notes to the Financial Statements
Notes help financial statement users understand how the amounts were derived and what other information
may affect their decisions.
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Relationships Among the Financial Statements
Net income from the income statement is a component in determining
ending Retained Earnings on the
Statement of Retained Earnings.
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SONICGATEWAY, INC.Income Statement
For the Month Ended September 30, 2015
Revenues Sales Revenue Service Revenue Total Revenues
Expenses Salaries and Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total ExpensesNet Income
$ 9,000 3,000
12,000
5,0002,5001,600
300100
500 10,000
$ 2,000
SONICGATEWAY, INC.Statement of Retained Earnings
For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015Add: Net IncomeSubtract: DividendsRetained Earnings, September 30, 2015
$ - 2,000
(1,000)$ 1,000
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Relationships Among the Financial Statements
Ending Retained Earnings from the
Statement of Retained Earnings is then reported on the Balance Sheet.
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SONICGATEWAY, INC.Statement of Retained Earnings
For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015Add: Net IncomeSubtract: DividendsRetained Earnings, September 30, 2015
$ - 2,000
(1,000)$ 1,000
SONICGATEWAY, INC.Balance Sheet
At September 30, 2015
Assets Cash Accounts Receivable Supplies Equipment Software Total Assets
LiabilitiesAccounts PayableNotes Payable Total Liabilities
Stockholders’ EquityCommon StockRetained Earnings Total Stockholders’ EquityTotal Liabilities and Stockholders’ Equity
$ 13,0002,500
500 14,000 6,000$ 36,000
$ 5,000 20,000 25,000
10,000 1,000 11,000$ 36,000
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Relationships Among the Financial Statements
Cash on the Balance Sheet is equal to the ending Cash reported on the Statement of Cash Flows.
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SONICGATEWAY, INC.Balance Sheet
At September 30, 2015
Assets Cash Accounts Receivable Supplies Equipment SoftwareTotal Assets
Liabilities Accounts Payable Notes Payable Total Liabilities
Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ EquityTotal Liabilities and Stockholders’ Equity
$ 13,0002,500
500 14,000 6,000$ 36,000
$ 5,000 20,000 25,000
10,000 1,000 11,000$ 36,000
SONICGATEWAY, INC.Statement of Cash Flows
For the Month Ended September 30, 2015
Cash Flows from Operating ActivitiesCash Flows from (Used in) Investing ActivitiesCash Flows from Financing ActivitiesChange in CashBeginning Cash Balance, Sept. 1, 2015Ending Cash Balance, Sept. 30, 2015
$ 4,000 (20,000)
29,000 13,000
0$ 13,000
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Learning Objective 1-3
Explain how financial statements are used by
decision makers.
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Using Financial Statements
Creditors1. Is the company
generating enough cash to make payments on its loans?
2. Does the company have enough assets to cover its liabilities?
Investors1. What is the
immediate return (through dividends) on my contributions?
2. What is the long-term return (through stock price increases resulting from the company’s profits)?
… SCF
… B/S
… SRE
.. I/S
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Learning Objective 1-4
Describe factors that contribute to useful financial
information.
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External Financial Reporting
Main Goal: Provide useful financial information to external users for decision making.
RelevantRelevant
UsefulUseful
Faithful Representation
Faithful Representation
Comparable Verifiable Timely UnderstandableComparable Verifiable Timely Understandable
Faithful Representation
Relevant
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WorldWorld
Accounting Standards
Where?Where?
Who?Who?
What?What?
IASBIASB
IFRSIFRS
FASBFASB
United States
United States
GAAPGAAP
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Ethical Conduct
When faced with an ethical dilemma:
Identify who will benefit from the
situation and how others will be
harmed.
Identify the alternative courses
of action.
Choose the alternative that is the
most ethical.
Copyright © 2016 by McGraw-Hill Education
Chapter 1Supplement
Careers That Depend on Accounting Knowledge
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Copyright © 2016 by McGraw-Hill Education
Chapter 1Solved Exercises
M1-12, E1-3, E1-6, E1-8, S1-6 (Req. 1)
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M1-12 Preparing a Statement of Retained EarningsStone Culture Corporation was organized on January 1, 2014. For its first two years of operations, it reported the following:
On the basis of the data given, prepare a statement of retained earnings for 2014 (its first year of operations) and 2015.
Net Income for 2014Net Income for 2015Dividends for 2014Dividends for 2015Total assets at the end of 2014Total assets at the end of 2015
$ 40,00045,00015,00020,000
125,000242,000
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M1-12 Preparing a Statement of Retained Earnings
STONE CULTURE CORPORATIONStatement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014Add: Net IncomeSubtract: DividendsRetained Earnings, December 31, 2014
$ -40,000
(15,000)$ 25,000
STONE CULTURE CORPORATIONStatement of Retained Earnings
For the Year Ended December 31, 2015
Retained Earnings, January 1, 2015Add: Net IncomeSubtract: DividendsRetained Earnings, December 31, 2015
$ 25,00045,000
(20,000)$ 50,000
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E1-3 Preparing a Balance SheetDSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at February 2, 2013, contained the following items (listed alphabetically, amounts in thousands).
Required:1. Prepare the balance sheet as of February 2, 2013 solving for the
missing amount.2. As of February 2, did most of the financing for assets come from
creditors or stockholders?
Accounts Payable
Accounts Receivable
Cash
Common Stock
Equipment
Inventory
Notes Payable
Retained Earnings
Total Assets
Total Liabilities and Stockholders’ Equity
$ 275,300
114,800
313,200
841,600
440,300
393,800
128,200
17,000
1,262,100
?
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E1-3 Preparing a Balance Sheet
Most of the financing as of February 2 came
from stockholders. The stockholders
have financed $858,600 of the total assets and creditors have financed only
$403,500 of the total assets of the
company.
DSW, Inc.Balance Sheet
At February 2, 2013(In thousands)
Assets Cash Accounts Receivable Inventory EquipmentTotal Assets
$ 313,200114,800393,800
440,300$ 1,262,100
Liabilities Accounts Payable Notes Payable Total LiabilitiesStockholders’ Equity Common Stock Retained Earnings Total Stockholders’ EquityTotal Liabilities and Stockholders’ Equity
$ 275,300 128,200
403,500
841,600 17,000
858,600$ 1,262,100
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E1-6 Preparing an Income Statement and Inferring Missing ValuesCinemark Holdings, Inc. operates movies and food concession counters throughout the United States. Its income statement for the quarter ended September 30, 2013, reported the following amounts (listed alphabetically in thousands):
Required:1. Solve for the missing amounts and prepare an Income
Statement for the quarter ended September 30, 2013. 2. What are Cinemark’s main source of revenue and two biggest
expenses?
Office ExpensesSalaries & Wages ExpenseRent ExpenseTotal Expenses
Admissions RevenuesConcessions ExpensesConcessions RevenuesFilm Rental ExpensesNet Income
$ 479,60039,000
308,000254,800
?
$254,700 73,300
85,100?
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Cinemark Holdings, Inc.Income Statement
For the Quarter Ended September 30, 2013(in thousands)
RevenuesAdmissions RevenuesConcessions Revenues Total Revenues
ExpensesOffice ExpensesFilm Rental ExpensesRent ExpensesConcessions ExpenseSalaries and Wages Expenses Total ExpensesNet Income
$ 479,600 308,000
254,700254,80085,10039,000
73,300
$ 787,600
706,900 $
80,700
E1-6 Preparing an Income Statement and Inferring Missing Values
?
?
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Cinemark Holdings, Inc.Income Statement
For the Quarter Ended September 30, 2013(in thousands)
RevenuesAdmissions RevenuesConcessions Revenues Total Revenues
ExpensesOffice ExpensesFilm Rental ExpensesRent ExpensesConcessions ExpenseSalaries and Wages Expenses Total ExpensesNet Income
$ 479,600 308,000
254,700254,80085,10039,000
73,300
$ 787,600
706,900 $
80,700
E1-6 Preparing an Income Statement and Inferring Missing Values
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E1-8 Inferring Values Using the Income Statement and Balance Sheet EquationsReview the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company.
TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts.
D
Independent Cases
Total Revenues
Total Expenses
Net Income (Loss)
Total Assets
Total Liabilities
Stockholders’ Equity
E
C
B
A $110,000
80,000
50,000
81,000
86,000
80,000
$82,000
(6,000)
20,000
12,000
104,000
112,000
$150,000
73,000
22,000
26,000
$70,000
28,000
77,000
70,000
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E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations
R – E = NI A = L + SE
D
Independent Cases
Total Revenues
Total Expenses
Net Income (Loss)
Total Assets
Total Liabilities
Stockholders’ Equity
E
C
B
A $110,000
92,000
80,000
50,000
75,000 81,000
30,000
86,000
80,000
$82,000
(6,000)
20,000
(6,000)
12,000
$28,000
101,000
99,000
104,000
112,000
$150,000
73,000
22,000
26,000
42,000
$70,000
28,000
77,000
78,000
70,000
$80,000
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S1-6 (Req. 1) Critical Thinking: Developing a Balance SheetOn September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $250. He figures that, if needed, he could sell it to a friend for $180. Ashley argued that she was better off because she had $1,000 cash in her bank account and a piece of art that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term.Required:1. Prepare a financial report that compares what Ashley and Jason
each own and owe on September 30. Make a list of any decisions you had to make when preparing your report.
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What is owned
What is owed
“Net worth”
Cash
Car loan
Ashley Jason
$1,000 $6,000ConsoleArtTOTAL
Tuition PayableStudent Loan
-0- 800$1,800
TOTAL
$ 250 -0-
-0- 250 1,550
250 -0-$6,250
$ -0- 800
4,800 5,600 650
TOTAL $1,800 $6,250
ASSETS
LIABILITIES
EQUITY
Balance SheetS1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet
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End of Chapter 1