Business decisions and financial accounting

McGraw-Hill/Irwin

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.


Chapter 1
Business Decisions and Financial
Accounting

PowerPoint Authors:
Susan Coomer Galbreath, Ph.D., CPA
Charles W. Caldwell, D.B.A., CMA
Jon A. Booker, Ph.D., CPA, CIA
Fred Phillips, Ph.D., CA


Learning Objective 1

Describe various
organizational forms and
business decision makers.

1-3


Organizational Forms
Sole
Proprietorship

1-4

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


Organizational Forms

1-5

Source: BizStats.com


The Accounting System
Business and
Financing Activities

Accounting
System

Accounting Reports
External users
(creditors, investors, etc.)

1-6

Financial

Managerial

Internal users
(managers, etc.)

Accounting is a system of analyzing, recording,
summarizing and reporting the results of a
business’s activities.


Learning Objective 2

Describe the purpose,
structure, and content of the
four basic financial
statements.

1-7


The Basic Accounting Equation
Resources Owned . . .
by the company

Resources Owed . . .
to creditors

to stockholders

Assets = Liabilities + Stockholders’ Equity
Separate Entity
Assumption

Requires that a business’s
financial reports include
only the activities of the
business and not those of
its stockholders.
1-8


Assets
Resources controlled by the
company that have
measurable value and are
expected to provide future
benefits to the company.

Cash

Equipment
Supplies

1-9

Furniture


Liabilities
Amounts owed by
the business to
creditors.

Notes
Payable

1-10

Accounts
Payable


Stockholders’ Equity
Owners’ claim to the
business resources.

Contributed
Capital

Retained
Earnings
Stock Certificate

1-11


Revenues, Expenses and Net Income
Revenues – Expenses = Net Income

1-12


Dividends

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

Dividends are not an expense.
1-13


Financial Statements
Income
Statement
Statement
of Retained
Earnings

Financial
statements are
typically prepared in
this order.
Balance
Sheet
Statement
of Cash
Flows

1-14


The Income Statement

The unit of
measure
Reports
assumption
the
amount
states that
of
results of
revenues
business
less
activities
expenses
should be
reported
in an
for
a period
appropriate
of time.
monetary unit.
1-15


The Statement of Retained Earnings

Reports the way that net income and the
distribution of dividends affected the financial
position of the company during the period.

1-16


The Balance Sheet
Reports at a point in time:
1. What a business owns
(assets).
2. What it owes to
creditors (liabilities).
3. What is left over for the
owners of the
company’s stock
(stockholders’ equity).
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
1-17


The Statement of Cash Flows
Summarizes
how a
business’s
operating,
investing, and
financing
activities
caused its
cash balance
to change over

a particular
period of time.
1-18


Notes to the Financial Statements
Notes help financial statement users
understand how the amounts were
derived and what other information
may affect their decisions.

1-19


Relationships Among the Financial Statements

Net income
flows from the
Income
Statement to
the Statement
of Retained
Earnings.
11

1-20


Relationships Among the Financial Statements

Ending Retained
Earnings flows from
the Statement of
Retained Earnings to
the Balance Sheet.
22

1-21


Relationships Among the Financial Statements

Cash on the Balance Sheet and Cash at End
of Year on the Statement of Cash Flows agree.
33

1-22


Learning Objective 3

Explain how financial
statements are used by
decision makers.

1-23


Using Financial Statements
Creditors

Investors

(1)Is the company
generating enough
cash to make
payments on its
loans? … SCF

(1)What immediate
return (through
dividends) on my
contributions? … SRE

(2)Does the company
have enough
assets to cover its
liabilities? … B/S

1-24

(2)What is the longterm return (through
stock price increases
resulting from the
company’s profits)?.. I/S


Learning Objective 4

Describe factors that

contribute to useful financial
information.

1-25