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Introduction To Financial Statements: Financial Accounting, Fifth Edition

The document provides an introduction to financial statements. It discusses the internal and external users of financial information and the common questions they ask. It then explains the three principal types of business activity: financing, investing, and operating. Finally, it describes the four main financial statements that communicate information to users - the income statement, retained earnings statement, balance sheet, and statement of cash flows.

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52 views18 pages

Introduction To Financial Statements: Financial Accounting, Fifth Edition

The document provides an introduction to financial statements. It discusses the internal and external users of financial information and the common questions they ask. It then explains the three principal types of business activity: financing, investing, and operating. Finally, it describes the four main financial statements that communicate information to users - the income statement, retained earnings statement, balance sheet, and statement of cash flows.

Uploaded by

Hoài Sơn Vũ
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 18

Introduction to

Financial Statements

Chapter
1-1 Financial Accounting, Fifth Edition
Introduction to Financial Statements

Users and
Uses of Business Communicating
Financial Activities with Users
Information

Internal users Financing Income


External Investing statement
users Operating Retained
earnings
statement
Balance sheet
Statement of
cash flows
Interrelation-
ships of
statements
Chapter
1-2
Internal Users
External Users

•Lenders •External Auditors •Managers •Sales Staff

•Shareholders •Customers •Officers •Budget Officers

•Governments •Internal Auditors •Controllers

Chapter
1-3
Users and Uses of Financial Information
Common Questions Asked? User
1. Can we afford to give our
employees a pay raise?
2. Did the company earn a
satisfactory income?
3. Which product line is most
profitable?
4. Is cash sufficient to pay
dividends to the stockholders?
5. What price for our product
will maximize net income?
6. Will the company be able to
pay its short-term debts?
Chapter
1-4
Business Activities

All businesses are involved in three types of


activity —
financing,
investing,
and operating.

The accounting information system keeps track


of the results of each of these business
activities.

Chapter
1-5 SO 3 Explain the three principal types of business activity.
Business Activities

Financing Activities
Two primary sources of outside funds are:
1. Borrowing money
 Amounts owed are called liabilities.

 Party to whom amount is owed are creditors.

2. Issuing shares of stock for cash.


 Payments to stockholders are called dividends.

Chapter
1-6 SO 3 Explain the three principal types of business activity.
Business Activities

Investing Activities
Purchase of resources a company needs
to operate.
1. Computers, delivery trucks, furniture, buildings,
etc.
2. Resources owned by a business are called
assets.

Chapter
1-7 SO 3 Explain the three principal types of business activity.
Business Activities

Operating Activities
Once a business has the assets it needs,
it can begin its operations.

Revenues - Amounts earned from the sale of


products (sales revenue, service revenue, and
interest revenue).

Inventory - Goods available for sale to customers.

Accounts receivable - Right to receive money from a


customer,in the future, as the result of a sale.

Chapter
1-8 SO 3 Explain the three principal types of business activity.
Business Activities

Operating Activities
Once a business has the assets it needs,
it can begin its operations.
Expenses - cost of assets consumed or services
used. (cost of goods sold, selling, marketing,
administrative, interest, and income taxes expense).
Liabilities arising from expenses include accounts
payable, interest payable, wages payable, sales taxes
payable, and income taxes payable.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Chapter
1-9 SO 3 Explain the three principal types of business activity.
Communicating with Users

Companies prepare four financial statements from


the summarized accounting data:

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Chapter
1-10
Communicating with Users

Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

Chapter
1-11
Communicating with Users

Income Statement
Illustration 1-5

Reports revenues and


expenses for a specific
period of time.

Net income – revenues


exceed expenses.

Net loss – expenses


exceed revenues.

Chapter
1-12
Communicating with Users
Retained Earnings
Income Statement
Statement
Illustration 1-5 Illustration 1-6

Net income is needed to


determine the ending balance in
stockholder’s equity.

Chapter
1-13
Communicating with Users
Retained Earnings
Statement
Illustration 1-6

Statement indicates the


reasons why retained
earnings has increased
or decreased during the
period.

Chapter
1-14
Communicating with Users

Balance Sheet Retained Earnings


Illustration 1-8
Statement
Illustration 1-6

The ending balance in retained


earnings is needed in preparing
the balance sheet

Chapter
1-15
Communicating with Users

Balance Sheet Reports the assets,


Illustration 1-8
liabilities, and
stockholder’s equity at
a specific date.

Assets listed at the


top, followed by
liabilities and
stockholder’s equity.

Total assets must


equal total liabilities
and stockholder’s
equity.
Chapter
1-16
Communicating with Users

Statement of Cash Flows


Illustration 1-9

Answers:
1. Where did cash come
from during the
period?

2. How was cash used


during the period?

3. What was the change


in the cash balance
during the period?

Chapter
1-17
Communicating with Users

Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.

Chapter
1-18

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