Introduction to Financial

Accounting Information, 7/e

Curtis L. Norton and Gary

A. Porter
PowerPoint Author: Catherine Lumbattis
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 What Is Business?
to provide with
members goods
Activities of an and
economic services
system

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LO1
 Forms of Organization
Sole Proprietorship one owner

Partnership two or more owners

Corporation
entity organized under
laws of a particular state

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LO2
 Nonbusiness Entities
Government Entities Private Organizations

Federal, State, and

Hospitals, Universities,
Local Governments
Cooperatives

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 The Nature of Business Activity
Financing Investing Operating
Activities Activities Activities
Examples:
•borrowing • sale of
• purchase of assets
products/services
•sale of stock
• costs incurred
to operate
business
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LO3
 What Is Accounting?
Identifying
to
Measuring Economic various
Information users

Communicating

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LO4
 Internal and External
Users of Accounting Information
Bankers
Current
Creditors
and
Potential
Internal
Owners
Users –
Financial
Management
Analysts
Suppliers

Trade Government
Associations Agencies
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 Decisions Made with
Financial Information
Add new
Invest??
product line??
Borrow $$?? Build new plant??
Extend credit $$?? Loan $$??
Start new business?? Sell stocks or bonds??

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 The Accounting Equation
Assets = Liabilities + Owners’ Equity
(or Stockholders’ Equity)

Economic Creditors’ Owners’

resources
= claims + claims
to assets to assets
Examples:
Cash Accounts payable Capital stock
Accounts receivable Notes payable Retained earnings
Land
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
LO5
 Balance Sheet
(snapshot of financial position)

Assets = Liabilities
+
Owners’ Equity
(or Stockholders’ Equity)

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 Top of the World
Balance Sheet
June 30, 2010
A A = L + SE
Current assets:
Cash $ 200
Accounts receivable 600
Land 4,000
Lodge, lifts and equipment 2,500
Total assets $7,300
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Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Top of the World Balance Sheet
June 30, 2010 A = L + SE
Liabilities and Stockholders’ Equity
Liabilities: = L
Accounts payable $ 700
Salaries and wages payable 400
Notes payable 3,000
Total liabilities $4,100

Stockholders’ equity: + SE
Capital stock $2,000
Retained earnings 1,200
Total stockholders’ equity $3,200
Total Liabilities and Stockholders’ Equity $7,300

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 Income Statement
(for a period of time)

Revenues $$
Less: Expenses ($$)
Net income $$

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 Top of the World
Income Statement
For the Year Ended June 30, 2010
Revenues – Expenses = Net Income
Revenues:
Lift tickets $5,800
Equipment rentals Revenues 2,200
Total revenues $8,000

Expenses:
Salaries and wages $2,000
Depreciation 100
Water, gas, and electricity 1,500
Insurance
Expenses 1,100
Interest 300
Income taxes 1,000
Total expenses 6,000
Net income Net Income $2,000

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 Statement of Retained Earnings
(for a period of time)

Beginning retained earnings $$$

Add: Net income for the period $$$
Deduct: Dividends for the period ($$$)
Ending retained earnings $$$

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 Top of the World
Statement of Retained Earnings
For the Year Ended June 30, 2010
Retained earnings, beginning of the year $ 0
Add: Net income for the year 2,000
Deduct: Dividends for the year (800)
Retained earnings, end of the year $ 1,200

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 Top of the World
Statement of Cash Flows
For the Year ended June 30, 2010
Cash flows from operating activities:
Cash collected from customers $ 7,400
Cash payments for:
Salaries and wages $ 1,000
Water, gas, and electricity 1,500
Insurance 400
Interest 300
Income taxes 1,000
Total cash payments 4,800
Net cash provided by operating activities $ 2,600
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 Top of the World
Statement of Cash Flows
For the Year ended June 30, 2010
Cash flows from investing activities:
Purchase of land $(4,000)
Purchase of lodge, lift and equipment (2,600)
Net cash flows from investing activities $(6,000)
Cash flows from financing activities:
Proceeds from issuance of long term note $ 3,000
Proceeds from issuance of capital stock 2,000
Dividends declared and paid (800)
Net cash flows from financing activities 4,200
Net increase in cash $ 200
Cash at beginning of year 0
Cash at the end of the year $ 200

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Relationship among Financial Statements
Top of the World Example
Income Statement for Year ended June 30, 2010
Revenues $ 8,000
Less: Expenses ( 6,000)
Net income $ 2,000
Statement of Retained Earnings for Year ended June 30, 2010
Beginning balance, retained earnings $ 0
Add: Net income 2,000
Deduct: Cash dividends (800)
Ending balance, retained earnings $ 1,200

Balance Sheets
June 30, 2010 July 1, 2009
Total assets $7,300 $ 0
Liabilities 4,100 0
Capital stock 2,000 0
Retained earnings 1,200 0
Total liabilities and stockholders’ equity $7,300 $ 0
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 The Conceptual Framework:
Foundation for Financial Statements
 Aids accountants in their role as
interpreters and communicators of
relevant information
 Acts as a foundation for the specific
principles and standards needed by
the profession
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LO6
 Financial Statement Assumptions
Economic
Entity Cost
Concept Principle
Time
Period
Assumption
Going Monetary
Concern Unit

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 Economic Entity Concept
 Each entity has its own books,
records, and financial statements
that are separate from owners
 No intermingling of personal and
business assets and liabilities or
income and expenses
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 Cost Principle
Record assets at cost paid to
acquire them
Continue to value assets at
historical cost until sold
More objective than market
value
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 Going Concern
Assume business will
continue indefinitely into the
future
Justifies use of historical cost

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 Monetary Unit
 How we measure amounts in the
financial statements (e.g., U.S.
dollar, Japanese yen, Mexican peso,
etc.)
 Assumes economic measure is
relatively stable; no adjustment for
inflation made in financial
statements
© 2011 Cengage Learning. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S.
Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
 Generally Accepted
Accounting Principles
 The various methods, rules, practices
and other procedures that have
evolved over time that regulates the
preparation of financial statements

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Accounting as a Social Science
 Accounting is a service activity
 Accounting is a social science, not a
physical science
 Accounting principles develop in
response to changing business
conditions
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 The Rules of the Game
 The rules  GAAP
 The rule makers  FASB
 The rule enforcers  SEC
 The CPA regulators  AICPA

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LO7
 International
Accounting Standards
International Accounting Standards
Board was created in 2001
There may be significant differences
between U.S. and international
standards

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 Auditing
Financial statements are prepared by
and are the responsibility of the
company’s management
External auditors performs tests and
procedures to render an opinion as to
the financial statements are fairly
presented
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 The Changing Face of the
Accounting Profession
A “financial reporting crisis” caused by:

 Enron: the omission of entities from the

financial statements
 WorldCom: treating costs as assets rather
than expenses causing higher net income
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 Ethics in Accounting
1. Identify the ethical dilemma
2. Analyze key elements
3. Determine the alternatives
4. Resolve by selecting ethical alternative

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LO8
 Sarbanes-Oxley Act
Provisions of the act:
 Established the Public Company Accounting
Oversight Board
 Required external auditors to report directly to
the company’s audit committee
 Prohibits external auditors from providing
other services compromising independence

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 End of Chapter 1

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