Financial Statements and Business Decisions

Chapter 1

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Understanding the Business

The Players
Investors Creditors
Managers
1. Purchase parts and labor 2. Manufacture product

The Business Operations

4. Collect cash from customers and pay creditors
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3. Sell products to customers

The Accounting System

Managers (internal decision makers)

Collects and processes financial information

Reports information to decision makers

Investors and Creditors (external decision makers)

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The Four Basic Financial Statements

1. BALANCE SHEET reports the amount of assets, liabilities, and stockholders equity of an accounting entity at a point in time. 2. INCOME STATEMENT reports the revenues less the expenses of the accounting period. 3. STATEMENT OF RETAINED EARNINGS reports the way that net income and distribution of dividends affected the financial position of the company during the accounting period. 4. STATEMENT OF CASH FLOWS reports inflows and outflows of cash during the accounting period in the categories of operating, investing, and financing.

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The Accounting Equation

A = L + SE
(Assets) (Liabilities) (Stockholders Equity)
Economic Resources Sources of Financing for Economic Resources
Liabilities: From Creditors Stockholders Equity: From Stockholders

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Balance Sheet
MAXIDRIVE CORP. Balance Sheet At December 31, 2010 (in thousands of dollars) ASSETS Cash Accounts receivable Inventories Plant and equipment Land Total assets LIABILITIES Accounts payable Notes payable Total liabilities STOCKHOLDERS' EQUITY Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
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$ $

4,895 5,714 8,517 7,154 981 27,261 7,156 9,000 16,156 2,000 9,105 11,105 27,261

Income Statement
MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 2010 (in thousands of dollars) Revenues Sales revenue Total revenues Expenses Cost of goods sold expense Selling, general, and administrative expense Research and development expense Interest expense Total expenses Operating income Income tax expense Net income $ 37,436 37,436 26,980 3,624 1,982 450 33,036 4,400 1,100 3,300

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Statement of Retained Earnings

MAXIDRIVE CORP. Statement of Retained Earnings For the Year Ended December 31, 2010 (in thousands of dollars) Retained earnings, January 1, 2010 Net income for 2010 Dividends for 2010 Retained earnings, December 31, 2010 $6,805 3,300 (1,000) $9,105

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Statement of Cash Flows

MAXIDRIVE CORP. Statement of Cash Flows For the Year Ended December 31, 2010 (in thousands of dollars) Operating activities Cash collected from customers $ Cash paid to suppliers and employees Cash paid for interest Cash paid for taxes Net cash flow from operating activities Investing Activities Cash used to purchase equipment Net cash flow from investing activities Financing Activities Cash received from bank loan Cash dividends paid Net cash provided by financing activities Net increase in cash Cash at beginning of year Cash at end of year $
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33,563 (30,854) (450) (1,190) 1,069 (1,625) (1,625) 1,400 (1,000) 400 (156) 5,051 4,895

Notes
All financial statements should be accompanied by notes which provide the reader with supplemental information about the financial condition and results of operations of the company.

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Generally Accepted Accounting Principles

The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP.

Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP.

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Management Responsibility and the Demand for Auditing

To ensure the accuracy of the companys financial information, management: Maintains a system of controls. Hires outside independent auditors. Forms a committee of the board of directors to review these two safeguards.

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Independent Auditors
Auditors express an opinion as to the fairness of the financial statements. Independent auditors have responsibilities that extend to the general public. The PCAOB issues detailed auditing standards that auditors must follow.
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Overall, I believe these financial statements are fairly stated.

Ethics, Reputation, and Legal Liability

The American Institute of Certified Public Accountants requires that all members adhere to a professional code of ethics.

Code of Ethics
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End of Chapter 1

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