Acct 401-FT-Fall 2014

Week 1 Summary Outline

(Module 1 available on Blackboard)
(This should not replace taking notes during the lecture, but should help you be more efficient)
Learning Objectives:
a. Identify financial statement stakeholders and their interests.
b. Describe the four financial statements and their purpose (including the accounting
equation).
c. Explain basic profitability analysis.
d. Describe analysis of the business environment.
e. Describe the accounting regulatory environment.
Content Outline:
Accounting Definition: The identification, measurement, recording, analysis, and
communication of the economic events for an entity.
In the above context, economic events can be viewed as events which change the quantity
or form of items which have value (for example (1) exchanging cash for a machine or (2)
selling a product in exchange for a promise to pay cash.
Stakeholders include all entities affected by a companys financial performance and
reports. Different stakeholders often have different priorities. Lenders are concerned
about available assets and cash to ensure they are repaid. Shareholders are concerned
about rate of return and risk (sometimes dividends too). Employees are interested in
company survival and job security. Local governments are concerned about collecting
taxes and jobs for people in the community. The different foci across shareholders often
cause different levels attention to selected financial statements and performance
measures.
The Income statement shows revenues and expenses for a period of time . . . usually
monthly (internal), quarterly and annual (external).
Balance sheet shows assets (what a company owns), liabilities (what a company owes to
others), and equity (the residual value to shareholders). A = L + E
The statement of stockholders equity reconciles beginning of the period equity to end of
the period equity.

The Statement of Cash Flows shows the sources and uses of cash from three activities:
operations, financing and investing.
Each of the 4 financial statements is articulated with at least one other financial statement
(e.g., net income from the income statement flows into retained earnings on the balance
sheet). See Exhibit 1.2.
Return on Assets = Profitability x Productivity, the ability to produce profits from sales x
the ability to generate sales from assets. This is, more specifically, return on sales (net
income/assets) times asset turnover (sales/assets?)
Return on equity is an overarching measure of profits as a % of equity. This can be
derived from the product of return on assets and financial leverage (ROA x FLEV) where
FLEV = Assets/Equity.
The business environment is often analyzed using Porters 5-Forces (see page 1-21) as
well as looking at broader factors (1-22:1-23). On average the economy and industry
conditions account for over 60% of company performance (lecture).