The Financial Statements
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Prologue:
Accounting’s Role in Business
Good managers plan for the future.
They develop a budget.
A budget is a formal plan stated in monetary terms.
Prologue:
Accounting’s Role in Business
Accounting helps banks decide to whom they will lend money.
Accounting provides information that helps investors pick stocks.
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Prologue:
Accounting’s Role in Business
Budgeting
Information systems design Cost accounting
Internal auditing
Prologue:
Accounting’s Role in Business
Consulting Assurance services including
auditing Tax
accounting
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Accounting Positions within Organizations
Partner
Manager
Senior Accountant Staff Accountant
Chief Executive Officer
or Major Operating Executive
Chief Financial Officer, Controller, or Treasurer
Staff Accountant Senior Accountant
Learning Objective 1
Use accounting vocabulary
for decision making.
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Accounting is the information system that...Accounting is the information system that...
measures business activities,measures business activities, processes data into reports, andprocesses data into reports, and
communicates results to decision makers.communicates results to decision makers.
Accounting –
The Language of Business
The Flow of Accounting Information
3. Businesses prepare reports to show 2. Business transactions occur.
1. People make decisions.
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Individuals
Who Uses Accounting Information?
Businesses Investors and
creditors
Government regulatory
agencies Taxing authorities
Nonprofit organizations
Internal Users External Users
Financial and Management
Accounting
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Standards of professional
conduct for accountants Standards of
professional conduct for accountants
AICPA’s Code of Professional
Conduct
AICPA’s Code of Professional
Conduct
Ethics in Accounting and Business
ProprietorshipsProprietorships
PartnershipsPartnerships
CorporationsCorporations
How to Organize a Business
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Learning Objective 2
Analyze a business using accounting concepts
and principles.
How to Do Accounting:
Principles and Concepts
The rules that govern accounting are called GAAP (generally accepted accounting principles).
The rules that govern accounting are called GAAP (generally accepted accounting principles).
Accountants follow professional guidelines.Accountants follow professional guidelines.
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Public Sector (SEC)
GAAP
Key Accounting Organizations
Private Sector (FASB)
Private Sector (AICPA)
The Entity Concept
An accounting entity is an organization that stands apart
as a separate economic unit.
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(1)
are verifiable and(1) are verifiable and
(2)
can be confirmed by an independent observer.
(2)
can be confirmed by an independent observer.
The Reliability Principle
Assets and services acquired should be recorded at their
actual (historical) cost.
The Cost Principle
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The Going-Concern Concept
The entity will continue to operate in the future.
The Stable-Monetary-Unit Concept
The dollar’s purchasing power is relatively stable.
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Learning Objective 3
Use the accounting
equation to describe an
organization.
The Accounting Equation
Assets are the economic resources of a business that are expected to
produce a benefit in the future.
Liabilities are “outsider claims,”
or economic obligations payable to outsiders.
Owners’ equity represents the
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The Accounting Equation
The Accounting Equation
Assets
Owners’
Equity Liabilities
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The Accounting Equation
For a corporation, stockholders’ equity is divided into two main categories.
Paid-in capital Retained earnings Assets = Liabilities + Stockholders’ equity
Assets = Liabilities + Paid-in capital + Retained earnings
The Accounting Equation
Paid-in capital is the amount invested in the corporation by its owners.
The basic component of paid-in capital is common stock.
Retained earnings is the amount earned by income-producing activities and
kept for use in the business.
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The Accounting Equation
Revenues are increases in retained earnings from delivering goods
or services to customers.
Expenses are decreases in retained earnings that result from operations.
Components of Retained Earnings
Revenues for the period
–
Expenses for the period
=
Net income (or Net loss)
for the
Dividends for the
Ending balance of
retained End of the period Start of
the period Beginning balance of
retained
or+ – =
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Learning Objective 4
Examine a company’s operating performance, financial position,
and cash flows.
The Financial Statements
The financial statements are a picture of the company in financial terms.
Each financial statement relates to a specific date or covers a particular period.
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Information Reported on the Financial Statements
1. How well did the company perform (or operate) during the period?
Revenues – Expenses
Net income (Net loss)
Income statement
Question Answer Financial
Statement
2. Why did the company’s retained earnings
change during the period?
Beg. retained earnings
+ Net income (or – Net loss) Ending retained earnings
Statement of
retained earnings
Information Reported on the Financial Statements
3. What is the company’s financial position at the end of the period?
Assets
= Liabilities + Owners’ equity
Balance sheet
Question Answer Financial
Statement
4. How much cash did the company generate and spend during
Operating cash flows
± Investing cash flows
± Financing cash flows
Statement of
cash
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Fossil, Inc.
Consolidated Statement of Income
Net sales revenue $546 $504
Cost of goods sold 274 248
Gross profit 272 256
Operating expenses:
Selling and distribution expense 150 126 General and administrative expense 45 36 Total operating expenses 195 162
Operating income 77 94
Years Ended December 31, 2001 2000 Amounts in millions
Fossil, Inc.
Consolidated Statement of Income
Operating income 77 94
Other revenue (expense):
Write-off of investment (5) – Other income (expense) net 1 1 Income before income tax 73 95
Income tax expense 29 39
Years Ended December 31, 2001 2000 Amounts in millions
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The Income Statement:
Measuring Operating Performance
The income statement, statement of operations, or statement of earnings
reports the company’s revenues, expenses, and net income
or net loss for the period.
Comprehensive income includes net income from the income statement
plus additional items which do not affect net income.
Fossil, Inc. Consolidated
Statement of Retained Earnings
Retained earnings:
Balance, beginning of year $208 $152
Net earnings for the year 44 56 Less: Cash dividends declared (0) (0)
Balance, end of year $252 $208
Years Ended December 31, 2001 2000 Amounts in millions
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Fossil, Inc.
Consolidated Balance Sheet
Assets:
Current assets:
Cash and cash equivalents $ 68 $ 80
Short-term investments 5 11
Accounts receivable 74 63
Inventories 104 81
Prepaid expenses 19 18
Total current assets $270 $253
Investments 1 6
Property, plant, and equipment, net 90 42 Intangible and other assets 20 7
Total assets $381 $308
December 31, 2001 2000 Amounts in millions
Fossil, Inc.
Consolidated Balance Sheet
Liabilities:
Current liabilities:
Notes payable, short-term $ 16 $ 5
Accounts payable 21 19
Advertising payable 15 14
Compensation (salary) payable 8 6 Other accrued expenses payable 28 19
Income taxes payable 18 20
Total current liabilities $106 $ 83
Long-term liabilities 11 4
December 31, 2001 2000 Amounts in millions
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Fossil, Inc.
Consolidated Balance Sheet
Stockholders’ equity:
Common stock $ 16 $ 15
Retained earnings 252 208
Other equity (4) (2)
Total stockholders’ equity $264 $221
Total liabilities and stockholders’ equity $381 $308 December 31, 2001 2000 Amounts in millions
Fossil, Inc.
Consolidated Balance Sheet
Total assets $381
= Total liabilities
Current $106
Long-term 11
Total liabilities 117
+ Total stockholders’ equity 264
Total liabilities and stockholders’ equity $381
2001
equalMust
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The Statement of Cash Flows
The statement of cash flows reports the company’s cash inflows and outflows from operating, investing,
and financing activities.
Fossil, Inc.
Statement of Cash Flows
Operating activities:
Net income $44 $56
Adjustments to reconcile net income
to net cash from operating activities 5 (16) Net cash provided by operating activities $49 $40
Amounts in millions December 31,
2001 2000
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Fossil, Inc.
Statement of Cash Flows
Investing activities:
Business acquisitions $(16) (2)
Additions to property, plant, and equipment (56) (20)
Sale of investments 6 –
Other investing activities (2) (2) Net cash used for investing activities $(68) $(24)
Amounts in millions December 31,
2001 2000
Fossil, Inc.
Statement of Cash Flows
Financing activities:
Issuance of common stock $3 $ 1
Purchase and retirement of common stock (4) (28) Issuance of notes payable (borrowing) 9 – Other financing activities (1) – Net cash provided by financing activities $7 $(27)
Amounts in millions December 31,
2001 2000
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Fossil, Inc.
Statement of Cash Flows
Net increase in cash and cash equivalents $(12) $(11) Cash and cash equivalents,
beginning of year 80 91
Cash and cash equivalents, end of year $ 68 $ 80
Amounts in millions December 31,
2001 2000
Learning Objective 5
Explain the relationships among
the financial statements.
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Relationships Among the Financial Statements
Revenues $700,000
Expenses 670,000
Net income $ 30,000
Income Statement – Year Ended December 31, 2003
Beginning retained earnings $180,000
Net income 30,000
Cash dividends (10,000)
Ending retained earnings $200,000
Statement of Retained Earnings – Year Ended December 31, 2003
Relationships Among the Financial Statements
Assets
Cash $ 25,000
All other assets 275,000
Total assets $300,000
Liabilities
Total liabilities $120,000
Stockholders’ equity
Common stock 40,000
Retained earnings 200,000
Balance Sheet – December 31, 2003
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Relationships Among the Financial Statements
Net cash provided by operating operations $ 90,000 Net cash used for investing activities (110,000) Net cash provided by financing activities 40,000
Net increase in cash 20,000
Beginning cash balance 5,000
Ending cash balance $ 25,000
Statement of Cash Flows – Year Ended December 31, 2003