Survey of Accounting: Introduction To Financial Statements

Survey of Accounting
Second Edition
Kimmel ● Weygandt
Chapter 1
Introduction to Financial Statements
Prepared by
Coby Harmon
University of California, Santa Barbara
Westmont College
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Copyright ©2020 John Wiley & Sons, Inc.
Chapter Outline
Learning Objectives
LO 1 Identify the forms of business organization and the uses
of accounting information.
LO 2 Explain the three principal types of business activity.
LO 3 Describe the four financial statements and how they are
prepared.
Copyright ©2020 John Wiley & Sons, Inc. 2

Learning Objective 1
Identify the Forms of Business
Organization and the Uses of
Accounting Information
LO 1 Copyright ©2020 John Wiley & Sons, Inc. 3

Business Organization and Accounting
Information Uses
Forms of Business Organization
Sole Proprietorship Partnership Corporation
• Simple to • Simple to establish • Easier to transfer
establish • Shared control ownership
• Owner-controlled • Broader skills and • Easier to raise
• Tax advantages resources funds
• Tax advantages • No personal
liability

Users and Uses of Financial Information
Internal Users

Users and Uses of Financial Information
External Users

Explain the Three Principal Types of
Business Activity

The Three Principal Types of Business
Activity
All businesses are involved in three types of activity:
• Financing
• Investing
• Operating
The accounting information system keeps track of the results
of each of these business activities.

Financing Activities
Two primary sources of outside funds are:

1. Borrowing money (debt financing).
• Amounts owed are called liabilities.
• Party to whom amounts are owed are creditors.
• Notes payable and bonds payable are different types
of liabilities.

Financing Activities (continued)
Two primary sources of outside funds are:

2. Issuing (selling) shares of stock for cash (equity financing).
• Common stock is the term used to describe the amount
paid by stockholders for shares they purchase.
• Payments to stockholders are called dividends.

Investing Activities
Purchase of resources a company needs to operate.

• Resources owned by a business are called assets.
• Computers, delivery trucks, furniture, buildings.
• Investments are another example of an investing activity.
o Investments include securities (stocks or bonds) of
other corporations.

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

operations.
• Revenue is the increase in assets or decrease in liabilities
resulting from the sale of goods or the performance of
services in the normal course of business.
• Common sources of revenue include sales revenue,
service revenue, and interest revenue.

Operating Activities (continued)
Certain assets with shorter lives result from operating

activities.
• Supplies - Assets used in day-to-day operations (rather
than sold to customers).
• Inventory - Goods available for sale to customers.
• Accounts receivable - Right to receive money from a
customer as the result of a sale in the future after money.

Operating Activities (concluded)
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 (accounts payable, interest
payable, wages payable, sales taxes payable, and income
taxes payable).
• Net income – when revenues exceed expenses
• Net loss – when expenses exceed revenues

Describe the Four Financial Statements and
How They Are Prepared

The Four Financial Statements
Companies prepare four financial statements from the

summarized accounting data:
• Income Statement
• Retained Earnings Statement
• Balance Sheet
• Statement of Cash Flows

Income Statement

Income Statement (continued)
• Reports revenues and expenses for a specific period of

time.
• Net income – revenues exceed expenses.
• Net loss – expenses exceed revenues.
• Past net income provides information for predicting
future earnings.
Helpful Hint The financial statement heading identifies the
company, the type of statement, and the time period covered.
Sometimes, another line indicates the unit of measure, e.g., “in
thousands” or “in millions.”
Retained Earnings Statement
• Shows amounts and causes of changes in retained

earnings during the period.
• Time period is the same as income statement.
• Users can evaluate dividend payment practices.
Balance Sheet

Balance Sheet (continued)
• Reports assets and claims to assets at a specific point in

time.
• Assets = Liabilities + Stockholders’ Equity.
• Lists assets first, followed by liabilities and stockholders’
equity.
Helpful Hint The heading of a balance sheet must identify
the company, the statement, and the date.

Statement of Cash Flows

Statement of Cash Flows (continued)
Provides answers to:

• Where did cash come from during the period?
• How was cash used during the period?
• What was the change in the cash balance during the
period?

Interrelationships of Statements
Net income is needed to

determine the ending
balance in retained
earnings.

(continued)
Ending balance in retained
earnings is needed in
preparing the balance sheet.

(concluded)

Elements of an Annual Report
U.S. companies that are publicly traded must provide

shareholders with an annual report.
The annual report always includes:
• Financial statements.
• Management discussion and analysis.
• Notes to the financial statements.
• Auditor's report.

Management Discussion and Analysis
Management discussion and analysis (MD&A) presents
management’s view on the company’s ability to pay near-term
obligations, its ability to fund operations and expansion, and
its results of operations.
Management must highlight favorable or unfavorable trends
and identify significant events and uncertainties that affect
these three factors.

Management Discussion and Analysis Example

Notes to the Financial Statements
• Clarify the financial statements.

• Provide additional detail.
Notes are essential to understanding a company’s operating
performance and financial position.

Notes to the Financial Statements Example

Auditor’s Report
• Auditor’s opinion as to the fairness of the presentation of

the financial position and results of operations and their
conformance with generally accepted accounting
principles.
• Only certified public accountants (CPAs) may perform
audits.

Auditor’s Report Example

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What are the three principal types of business activity discussed in the text?

What are the three principal types of business activity discussed in the text?

What are the four main financial statements covered?

What are the four main financial statements covered?

Survey of Accounting

Copyright ©2020 John Wiley & Sons, Inc. 2

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LO 1 Copyright ©2020 John Wiley & Sons, Inc. 4

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 5

LO 1 Copyright ©2020 John Wiley & Sons, Inc. 6

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Two primary sources of outside funds are:

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Two primary sources of outside funds are:

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 10

Purchase of resources a company needs to operate.

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 11

Once a business has the assets it needs, it can begin its

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 12

Certain assets with shorter lives result from operating

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 13

Once a business has the assets it needs, it can begin its

LO 2 Copyright ©2020 John Wiley & Sons, Inc. 14

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 15

Companies prepare four financial statements from the

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 16

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• Reports revenues and expenses for a specific period of

• Shows amounts and causes of changes in retained

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 20

• Reports assets and claims to assets at a specific point in

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 21

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 22

Provides answers to:

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 23

Net income is needed to

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 24

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 25

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 26

U.S. companies that are publicly traded must provide

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 27

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 28

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• Clarify the financial statements.

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 30

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 31

• Auditor’s opinion as to the fairness of the presentation of

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 32

LO 3 Copyright ©2020 John Wiley & Sons, Inc. 33

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