CHAPTER 1

Financial Statements and

Business Decisions

Spring 2015

UNDERSTANDING THE BUSINESS

Stockholders

Potential Return for

Stockholders:

Creditors

Potential Return for

Creditors:
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THE ACCOUNTING SYSTEM

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BUSINESS ACTIVITIES
Financing Activities
Ex:

Investing Activities
Ex:

Operating Activities
Ex:

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THE FOUR BASIC FINANCIAL

STATEMENTS
BALANCE
BALANCESHEET
SHEET

INCOME
INCOMESTATEMENT
STATEMENT

STATEMENT
STATEMENTOF
OFSTOCKHOLDERS
STOCKHOLDERSEQUITY
EQUITY

STATEMENT
STATEMENTOF
OFCASH
CASHFLOWS
FLOWS

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BALANCE SHEET
Elements of the Balance Sheet
Assets
Cash
Short-Term Investment
Accounts Receivable
Notes Receivable
Inventory (to be sold)
Supplies
Prepaid Expenses
Long-Term Investments
Equipment
Buildings
Land
Intangibles

Liabilities
Accounts Payable
Accrued Expenses
Notes Payable
Taxes Payable
Unearned Revenue
Bonds Payable
Stockholders Equity
Common Stock
Retained Earnings
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THE ACCOUNTING EQUATION

= +

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BALANCE SHEET

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INCOME STATEMENT
Elements of the Income Statement
Revenues
Sales Revenue
Fee Revenue
Interest Revenue
Rent Revenue

Expenses
Cost of Goods Sold
Wages Expense
Rent Expense
Interest Expense
Depreciation Expense
Advertising Expense
Insurance Expense
Repair Expense
Income Tax Expense
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INCOME STATEMENT

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STATEMENT OF
STOCKHOLDERS EQUITY
Elements of the Statement
of Stockholders Equity

Common Stock

Retained Earnings

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STATEMENT OF
STOCKHOLDERS EQUITY

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STATEMENT OF CASH FLOWS

Elements of the Statement
of Cash Flows

Cash Flows from Operating Activities

Cash Flows from Investing Activities
Cash Flows from Financing Activities

+/

Note that each of the three cash flow

sources can be positive (net cash inflow)
or negative (net cash outflow).
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STATEMENT OF CASH FLOWS

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RELATIONSHIPS AMONG THE

STATEMENTS

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NOTES
Did you notice a sentence at the
bottom of each financial statement?

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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FINANCIAL STATEMENT SUMMARY

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RESPONSIBILITIES FOR THE ACCOUNTING

COMMUNICATION PROCESS

The Rules

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GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Securities Act of 1933
Securities and Exchange Act of 1934

The __________________________________
has been given broad powers to determine
measurement rules for
financial statements.

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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 _____________________________

is recognized as the body to formulate GAAP.

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GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
Companies incur the cost of
preparing the financial statements
and bear the following economic
consequences of their publication . . .
Effects on the selling price of stock.
Effects on the amount of bonuses
received by managers and other employees.
Loss of competitive information to other
companies.

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INTERNATIONAL PERSPECTIVE
The International Accounting Standards Board and
Global Convergence of Accounting Standards
Since 2002, there has been substantial movement toward the adoption of
_____________________________________ issued by the International
_______________________________________.
Examples of jurisdictions requiring the use of IFRS either currently or by 2012:
European Union
Israel and Turkey
Australia and New Zealand
Brazil and Chile
Canada and Mexico
Hong Kong, India, Malaysia, & South Korea
In the United States, the Securities and Exchange Commission now allows
foreign companies whose stock is traded in the U.S. to use IFRS and is
considering requiring the use of IFRS for U.S. domestic companies by 2015.
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ETHICAL CONDUCT
Three Step Process for Making Ethical Decisions
1._

2._

3._

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ENSURING THE ACCURACY OF

FINANCIAL STATEMENTS
To ensure the accuracy of the companys
financial information, management:
.

.
.

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EXTERNAL AUDITORS
An ______ is an
examination of the financial
reports to ensure that they
represent what they claim
and conform with GAAP.

Overall, I believe
these financial
statements are
fairly stated.

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WHAT IF THE NUMBERS ARE

WRONG?
After it was determined that the financial statements for Le-Natures
were misleading, the consequences for the defendants were severe.

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END OF CHAPTER 1

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