Chapter 1

Business Decisions and Financial

Accounting

PowerPoint Author:
Brandy Mackintosh, CPA, CA

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 Learning Objective 1-1

Describe various
organizational forms and
business decision makers.

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 Organizational Forms
Business organization owned by
Sole one person. The owner is
personally liable for all debts of
Proprietorship the business.

Business organization owned by

two or more people. Each partner
Partnership is personally liable for all debts of
the business.

A separate legal entity. Owners of

corporations (stockholders) are
Corporation not personally liable for debts of
the corporation.

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 Organizational Forms, continued

Source: IRS.gov.
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 The Accounting System
Operating, Investing,
and Financing Activities

Accounting
System

Accounting Reports
External users Financial Managerial Internal users
(creditors, investors, etc.) (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
https://www.youtube.com/watch?v=56xscQ4viWE

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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 Assets
Economic resources presently
controlled by the company that
have measurable value and are
expected to benefit the company
by producing cash inflows or
reducing cash outflows
in the future

Examples:

- Cash
- Supplies
- Furniture
- Equipment
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 Liabilities

Measurable amounts
that the company
owes to creditors

Examples:

- Notes Payable
- Accounts Payable

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 Stockholders’ Equity

Owners’ claims to
the business
resources

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 Revenues, Expenses, and Net Income

Revenues – Expenses = Net Income

Revenues Expenses
Sales of goods or The costs of doing
services to customers, business necessary to
measured at the earn revenues,
amount the business including wages to
charges the customer employees, advertising,
insurance, utilities, and
supplies used in the
office

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 Dividends
Distributions of a
company’s earnings to its
stockholders as a return
on their investment.

Common Stock
(equity paid in by stockholders)

Retained Earnings
(equity earned by the company)

Dividends are not an expense.

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 Financial Statements
Financial
Income
Statement
statements are
typically prepared in
Statement this order.
of Retained
Earnings
Balance
Sheet

Statement
of Cash
Flows
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 The Income Statement
NOODLECAKE STUDIOS, INC. The unit of
Income Statement (Projected)
For the Month Ended September 30, 2018 measure
Revenues assumption
Sales Revenue $ 9,000 Reports
states that
3,000
Service Revenue
Total Revenues 12,000
the amount
results of
of
business
Expenses
Salaries and Wages Expense 5,000 revenues
activities
Rent Expense 2,500 should
lessbe
Utilities Expense 1,600 reported in an
Insurance Expense 300 expenses
100 appropriate
Advertising Expense for a period
Income Tax Expense 500 monetary unit.
Total Expenses 10,000 of time.
Net Income $ 2,000
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 The Statement of Retained Earnings
NOODLECAKE STUDIOS, INC.
Statement of Retained Earnings (Projected)
For the Month Ended September 30, 2018
Retained Earnings, September 1, 2018$ 0
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, September 30, 2018 $ 1,000

Reports the way that net income and the

distribution of dividends affected the financial
position of the company during the period

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 The Balance Sheet
NOODLECAKE, INC.
Balance Sheet (Projected)
Reports at a point in time: At September 30, 2018
Assets
1. What a business owns Cash $ 13,000
Accounts Receivable 2,500
(assets) Supplies 500
Equipment 14,000
2. What it owes to Software 6,000
Total Assets $ 36,000
creditors (liabilities)
Liabilities and Stockholders’ Equity
3. What is left over for the Accounts Payable $ 5,000
Notes Payable 20,000
owners of the Total Liabilities 25,000
company’s stock Stockholders’ Equity
(stockholders’ equity) Common Stock
Retained Earnings
10,000
1,000
Total Stockholders’ Equity 11,000
Total Liabilities and Stockholders’ Equity $ 36,000

BASIC ACCOUNTING EQUATION

Assets = Liabilities + Stockholders’ Equity
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 The Statement of Cash Flows
NOODLECAKE, INC. Summarizes
Statement of Cash Flows (Projected) how a
For the Month Ended September 30, 2018
Cash Flows from Operating Activities
business’s
Cash received from customers $ 9,500 operating,
Cash paid to employees and suppliers (5,500)
Cash Provided by Operating Activities 4,000 investing, and
Cash Flows from (used in) Investing Activities
Cash used to buy equipment and software (20,000) financing
Cash from (used in) Investing Activities
Cash Flows from Financing Activities
(20,000) activities
Cash received for stock issuance 10,000 caused its
Cash dividends paid to stockholders (1,000)
Cash borrowed from the bank 20,000 cash balance
Cash Provided by Financing Activities 29,000
Change in Cash 13,000 to change over
Beginning Cash Balance, September 1, 2018
Ending Cash Balance, September 30, 2018 $ 13,000
0 a particular
period of time.
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 Operating activities are directly related to running the
business to earn profit. They include selling apps and
services, paying employee wages, buying advertising,
renting a building, obtaining insurance coverage, and so
on.

Investing activities involve buying and selling productive

resources with long lives (such as buildings, land,
equipment, and software), purchasing investments, and
lending to others.

Financing activities include any borrowing from banks,

repaying bank loans, receiving cash from stockholders for
company stock, and paying dividends to stockholders.
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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
NOODLECAKE, INC.
Income Statement (projected)
For the Month Ended September 30, 2018
Revenues
Sales Revenue $ 9,000
Service Revenue 3,000
1 Net income
Total Revenues 12,000
from the income
Expenses
Salaries and Wages Expense 5,000 statement is a
Rent Expense 2,500
Utilities Expense 1,600 component in
Insurance Expense 300
Advertising Expense 100 determining
Income Tax Expense 500
Total Expenses 10,000 ending Retained
Net Income $ 2,000
Earnings on the
NOODLECAKE, INC.
Statement of Retained Earnings (projected) Statement of
For the Month Ended September 30, 2018
Retained Earnings, September 1, 2018
$ 0
Retained
Add: Net Income
Subtract: Dividends
2,000
(1,000)
Earnings.
Retained Earnings, September 30, 2018 $ 1,000

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 Relationships Among the Financial Statements,
continued NOODLECAKE, INC.
Balance Sheet (projected)
At September 30, 2018
Assets
2Ending Retained Cash
Accounts Receivable
$ 13,000
2,500
Supplies 500
Earnings from the Equipment
Software
14,000
6,000
Statement of Retained Total Assets $ 36,000

Earnings is then Liabilities and Stockholders’ Equity

Accounts Payable $ 5,000
Notes Payable 20,000
reported on the Total Liabilities 25,000

Balance Sheet. Stockholders’ Equity

Common Stock 10,000
Retained Earnings 1,000
NOODLECAKE, INC. Total Stockholders’ Equity 11,000
Statement of Retained Earnings (projected) Total Liabilities and Stockholders’ Equity $ 36,000
For the Month Ended September 30, 2018
Retained Earnings, September 1, 2018
$ 0
Add: Net Income 2,000
Subtract: Dividends (1,000)
Retained Earnings, September 30, 2018 $ 1,000

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 Relationships Among the Financial Statements,
concluded NOODLECAKE, INC.
Balance Sheet (projected)
At September 30, 2018
NOODLECAKE, INC.
Assets
Statement of Cash Flows (projected)
Cash $ 13,000
For the Month Ended September 30, 2018
Accounts Receivable 2,500
Supplies 500
Cash Flows from Operating Activities $ 4,000 Equipment 14,000
Cash Flows from (Used in) Investing Activities (20,000) Software 6,000
Cash Flows from Financing Activities 29,000 Total Assets $ 36,000
Change in Cash 13,000
Beginning Cash Balance, Sept. 1, 2018 0 Liabilities and Stockholders’ Equity
Ending Cash Balance, Sept. 30, 2018 $ 13,000 Accounts Payable $ 5,000
Notes Payable 20,000
Total Liabilities 25,000

Stockholders’ Equity
Common Stock 10,000
Retained Earnings 1,000
Total Stockholders’ Equity 11,000
Total Liabilities and Stockholders’ Equity $ 36,000

3 Cash on the Balance Sheet is equal to the ending

Cash reported on the Statement of Cash Flows.
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 M1-6

Type Statement
(1) Accounts Receivable A B/S
(2) Office Expenses E I/S
(3) Cash A B/S
(4) Equipment A B/S
(5) Advertising Expense E I/S
(6) Sales Revenue R I/S
(7) Notes Payable L B/S
(8) Retained Earnings SE B/S
(9) Accounts Payable L B/S

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 Learning Objective 1-3

Explain how financial

statements are used by
decision makers.

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 Using Financial Statements

Creditors Investors
1. Is the company 1. What is the
generating immediate return
enough cash to (through dividends)
pay what it owes? on my
contributions?

2. Does the company 2. What is the long-

have enough term return (through
assets to cover its stock price increases
resulting from the
liabilities?
company’s profits)?

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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.

Useful
Useful

Faithful
Faithful
Relevance
Relevant
Relevant Representation
Representation

Timely
Timely Verifiable
Verifiable Comparable
Comparable Understandable
Understandable

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 Accounting Standards

World
World
United
United
States
States Where?
Where?

FASB
FASB Who?
Who? IASB
IASB

GAAP
GAAP What?
What? IFRS
IFRS

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 Ethical Conduct
When faced with an ethical dilemma:

Identify who will be

affected by the
situation.

Identify and evaluate

the alternative
courses of action.

Choose the
alternative that is the
most ethical.

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