nullFinancial Statements and Business DecisionsChapter 1Financial Statements and Business Decisions Understanding the Business Understanding the Business Understanding the Business Understanding the Business Investors purchase stock (or ownership) in businesses hoping to gain in two ways: Understanding the Business Understanding the Business The Business Operations The Business OperationsManufacturers either make the parts needed to produce its products or buy the parts from suppliers.ManufacturerFinal ProductCustomer The Accounting System The Accounting System The Accounting System The Accounting SystemAccounting System Learning Objectives Learning ObjectivesRecognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers). The Four Basic Financial Statements The Four Basic Financial StatementsIncome Statement(损益
)Balance Sheet(资产负债表)Statement of Cash Flows(现金流量表)Statement of Retained Earnings(留存收益表)Financial statements summarize the financial activities of the business. The Four Basic Financial Statements The Four Basic Financial StatementsCompanies can prepare financial statements at the end of the year, quarter or month. Financial statements prepared at the end of the year are called annual reports. 2011XnullLet’s look at MAXIDRIVE CORP.’s financial statements.nullThe Balance Sheet reports the financial position of an entity at a particular point in time.nullAssets are listed by their ease of
conversion into cash.Assets are economic resources owned by the business as a result of past transactions.nullLiabilities are debts or obligations of the business that result from past transactions.nullEquity is the amount of financing provided by owners of the business and earnings. The Balance Sheet The Balance SheetBasic Accounting Equation
Balance Sheet EquationAssets = Liabilities + Stockholders’ Equitynull Use $ on the first item in a group
and on the group total. nullnullThe Income Statement reports the revenues minus expenses of the accounting period.nullRevenues are earnings from the sale of goods or services to customers.Revenue is recognized in the period in which
goods and services are sold, not necessarily
the period in which cash is received. Revenues Revenues(1) When will the revenue from this
transaction be recognized? Earnings from the sale of goods or services. Revenues RevenuesEarnings from the sale of goods or services.(2) When will the revenue from this
transaction be recognized? nullExpenses are the dollar amount of resources used
up by the entity to earn revenues during a period.An expense is recognized in the period in which
goods and services are used, not necessarily
the period in which cash is paid.null Expenses ExpensesAn expense is recognized in the period
in which goods and services are used(1) When will the expense for this
transaction be recognized? Expenses Expenses(2) When will the expense for this
transaction be recognized?An expense is recognized in the period
in which goods and services are usednullIf expenses exceed revenues,
we report net loss.Statement of Retained EarningsStatement of Retained EarningsIncome of the enterprise.StockholdersDividendsRetained
by enterpriseRetained Earnings nullnullThe Statement of Retained Earnings reports the way that net income and the distribution of dividends affect the financial position of the company during a period.Statement of Cash FlowsStatement of Cash FlowsBecause
revenues reported
do not always equal
cash collected. . .. . . and expenses
reported do not
always equal
cash paid . . .net income is
usually not equal
to the change
in cash for
the period.nullnullThe Statement of Cash Flows reports the inflows and outflows of cash during the period in the categories of operating, investing, and financing.nullCash flows directly related to earning income are shown in the operating section.nullCash flows related to the acquisition or sale of productive assets are shown in the investing section.nullCash flows from or to investors or creditors are shown in the financing section.nullThe statement ends with a reconciliation of Cash. Relationship Among the Financial Statements Relationship Among the Financial Statements Net income from the income statement increases ending retained earnings on the statement of retained earnings. Relationship Among the Financial Statements Relationship Among the Financial StatementsEnding retained earnings from the statement of retained earnings is one of the components of stockholders’ equity on the balance sheet. Relationship Among the Financial Statements Relationship Among the Financial StatementsThe change in cash on the statement of cash flows added to the beginning of the year balance in cash equals the ending balance in cash on the balance sheet. Notes NotesNotes provide supplemental information about the financial condition of a company.
Three basic types of notes:
Description of accounting rules applied.
Presentation of additional detail about an item on the financial statements.
Provide additional information about an item not on the financial statements. Price/Earnings Ratio Price/Earnings RatioThis ratio is one method for estimating the value of a company. Learning Objectives Learning ObjectivesIdentify the role of generally accepted accounting principles (GAAP, 公认会计准则) in determining the content of financial statements.Responsibilities for the Accounting Communication ProcessDecision makers need to understand
accounting measurement rules.Responsibilities for the Accounting Communication Process Effective communication means that the recipient understands what the sender intends to convey.How are Generally Accepted Accounting Principles Determined?How are Generally Accepted Accounting Principles Determined?Our accounting system has a long and distinguished history. An Italian monk named Luca Pacioli, published the first elements of double-entry bookkeeping in 1494.
Prior to 1933, the management of most companies were free to choose the accounting principles used to keep track of its transactions.Generally Accepted Accounting Principles (GAAP)The Securities and Exchange Commission (SEC)
has been given broad powers to determine
measurement rules for
financial statements.Securities Act of 1933
Securities and Exchange Act of 1934Generally Accepted Accounting Principles (GAAP)Generally Accepted Accounting Principles (GAAP)Generally Accepted Accounting Principles (GAAP)Currently, the Financial Accounting
Standards Board (FASB) is recognized
as the body to formulate GAAP.The SEC has worked closely with the
accounting profession to
work out the detailed rules that have
become known as GAAP.The Equivalents in ChinaThe Equivalents in ChinaSEC:
CSRC (China Securities Regulatory Commission, 中国证券监督管理委员会,证监会)
FASB:
CICPA (Chinese Institute of Certified Public Accountants,中国注册会计师协会) International Perspective International PerspectiveSince 2002, there has been substantial movement to develop international financial reporting standards by the International Accounting Standards Board (IASB). Learning Objectives Learning ObjectivesAppreciate the importance of ethics, reputation, and legal liability in accounting. Ethics, Reputation, and Legal Liability Ethics, Reputation, and Legal Liability The American Institute of Certified Public Accountants requires that all members adhere to a professional code of ethics. Ethics, Reputation, and Legal LiabilityA CPA’s reputation for honesty and competence is his/her most important asset.Like lawyers, CPAs have
liability for malpractice. Ethics, Reputation, and Legal LiabilityHow about a real life example?How about a real life example?
Warning: real life is messy!
Microsoft Corporation 2012 Annual ReportEnd of Chapter 1End of Chapter 1SummaryReading: Chapter 1
Overview four financial statements
Get familiar with the main categories in each financial statement.
Role & history of GAAP
The importance of ethics
HW1 & Project are due next week
Summary