Financial Statements. Presentation 1

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1 Financial Statements Presentation 1

2 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 3. Sell products to customers 1-2

3 The Accounting System Collects and processes financial information Reports information to decision makers Managers (internal decision makers) Investors and Creditors (external decision makers) 1-3

4 The Accounting System Accounting System Financial Accounting System Periodic financial statements and related disclosures Managerial Accounting System Detailed plans and continuous performance reports External Decision Makers Investors, creditors, suppliers, customers, etc. Internal Decision Makers Managers throughout the organization 1-4

5 The Accounting System and Decision Makers An organized format used by companies to accumulate the Euro effects of transactions. Cash Inventory Equipment Notes Payable 1-5

6 The Four Basic Financial Statements 1. On a company s BALANCE SHEET, all resources owned and amounts owed are listed in order of liquidity. The difference between the resources owned and the amounts owed, represents the stockholders equity in the business. 2. On a company s INCOME STATEMENT, all the revenues earned from sales to customers are listed along with the expenses incurred to produce those revenues. 3. On a company s STATEMENT OF RETAINED EARNINGS accumulated net earnings less the dividends paid to owners represent reinvestments in the core business. 4. On a company s STATEMENT OF CASH FLOWS, all sources and uses of cash are listed. Cash is generated by the company s operations. Cash is spent on investments in buildings, manufacturing equipment, and other assets. Financing activities involve amounts borrowed from long-term creditors and sale of stock to owners. 1-6

7 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 1-7

8 The Balance Sheet Typical Account Titles 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 Contributed Capital Retained Earnings 1-8

9 The Income Statement Typical Account Titles 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 1-9

10 Statement of Retained Earnings Beginning Retained Earning Plus: Net Income Less: Dividends Ending Retained Earnings

11 Statement of Cash Flows Statement of Cash Flows 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 month Cash at end of month

12 Relationships Among the Statements 1. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings. Income Statement Revenues $ 15,500 Statement of Retained Earnings (8,500) Expenses Beginning retained earnings $ 59,000 Net income $ 7,000 Net income 7,000 Dividends (2,500) Ending retained earnings $ 63,

13 Relationships Among the Statements 2. Ending retained earnings from the statement of retained earnings is one of the two components of stockholders equity on the balance sheet. Statement of Retained Earnings Balance Sheet Beginning retained earnings $ 59,000 Cash $ 14,000 Net income 7,000 Other assets 171,500 Dividends (2,500) Total assets $ 185,500 Ending retained earnings $ 63,500 Liabilities $ 42,000 Stockholders' Equity Common stock 80,000 Retained earnings 63,500 Total liabilities and equity $ 185,

14 Relationships Among the Statements 3. The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the balance sheet. Statement of Cash Flows Balance Sheet Cash flows from operating activities $ 21,000 Cash $ 14,000 Cash flows from investing activities (16,000) Other assets 171,500 Cash flows from financing activities 3,500 Total assets $ 185,500 Increase in cash $ 8,500 Liabilities $ 42,000 Beginning cash balance 5,500 Stockholders' Equity Ending cash balance $ 14,000 Common stock 80,000 Retained earnings 63,500 Total liabilities and equity $ 185,

15 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

16 Management Uses of Financial Statements Marketing managers and credit managers use customers financial statements to decide whether to extend credit. Purchasing managers use suppliers financial statements to decide whether suppliers have the resources to meet the demand for products. Employees union and human resource managers use the company s financial statements as a basis for contract negotiations pay rates

17 Responsibilities for the Accounting Communication Process Effective communication means that the recipient understands what the sender intends to convey. Decision makers need to understand accounting measurement rules

18 Management Responsibility and the Demand for Auditing To ensure the accuracy of the company s financial information, management: Maintains a system of controls. Hires outside independent auditors. Forms a board of directors to review these two safeguards

19 Independent Auditors Auditors express an opinion as to the fairness of the financial statement presentation. Independent auditors have responsibilities that extend to the general public. Overall, I believe these financial statements are fair

20 Independent Auditors An audit involves... Examining the financial reports to ensure compliance with GAAP. Examining the underlying transactions incorporated into the financial statements. Expressing an opinion as to the fairness of presentation of financial information. 1-20

21 End of Presentation 1 Accounting For Business

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