Lecture 1

Introduction to Financial Statements

Objectives

Forms of business organizations

Users and uses of accounting information
Principle types of business activity
Content and purpose of financial statements
Fundamental Accounting Equation and definitions
Annual financial statements - supplements

(c) J. Cherubini

Goucher College

Forms of Business
Organizations
Sole proprietorship
o One owner: all responsibilities, duties, rights

Partnership
o Multiple owners: all responsibilities, duties, rights

Corporation
o Separate legal entity owned by stockholders

(c) J. Cherubini

Goucher College

Users and uses of Accounting

Information
Internal Users
o Use to run the company (BUS120)

External Users *our focus*

o Use to evaluate the business

Ethics in financial reporting

Ethics and Sarbanes-Oxley

(c) J. Cherubini

Goucher College

Principle Types of
Business Activity
Financing Activities
Investing Activities
Operating Activities

(c) J. Cherubini

Goucher College

Financing Activities
Issuing Equity
o Selling Stock
o Ownership rights

Issuing Debt
o Selling corporate bonds
o Less risk

(c) J. Cherubini

Goucher College

Investing Activities
Purchase of Long-term Assets
o Buildings
o Equipment

Selling of Long-term Assets

o Not an everyday occurrence

Purchase/Sale of other companies stock

(c) J. Cherubini

Goucher College

Operating Activities
How a business makes its money
Revenue from sale of goods & services, and
interest on investments
Expenses resulting from running of business and
cost of goods
Revenues can be in cash or on account (Accounts
receivable, Accounts payable) which are IOUs

(c) J. Cherubini

Goucher College

Content and Purpose of Financial

Statements

Income Statement (I/S)

Balance Sheet (B/S)
Statement of Cash Flows (CFS)
Statement of Owners Equity (O/E)
Retained Earnings Statement

(c) J. Cherubini

Goucher College

Income Statement
Through Statement, for entire year
Lists Revenues and Expenses
Can be set up multiple ways for different uses
(financial/managerial) but Net Income will still be
the same

(c) J. Cherubini

Goucher College

10

Balance Sheet
Snapshot Statement, at specific date
Lists Assets, Liabilities, and Owners Equity

(c) J. Cherubini

Goucher College

11

Statement of Cash Flows

Can be derived from I/S and B/S
Works backwards from Net Income
Classifies cash flows into 3 categories:
o Cash Flow from Operating Activities
o Cash Flow from Investing Activities
o Cash Flow from Financing Activities

(c) J. Cherubini

Goucher College

12

Statement of Owners
Equity
Most information already included in Balance
Sheet
Specifically used for public companies with
multiple classes of stock
Outlines number of shares, value of shares, along
with Earnings and growth rates

(c) J. Cherubini

Goucher College

13

Retained Earnings
Statement
Rarely a separate Statement
Simple Equation:
o
o
o
o

Beginning Retained Earnings

+ Net Income (From I/S)
- Dividends Paid
=Ending Retained Earnings

(c) J. Cherubini

Goucher College

14

Fundamental Accounting
Equation

Assets = Liabilities + Owners Equity

Assets
Liabilities
Owners Equity
Revenues
Expenses

(c) J. Cherubini

Goucher College

15

Interrelationship of
Statements
Statement of Cash Flows can be derived from
Income Statement and Balance Sheet
Net Income Dividends = Increase in Retained
Earnings

(c) J. Cherubini

Goucher College

16

Annual Financial
Statements
Management Discussion & Analysis
Notes to Financial Statements
Independent Auditors Report

(c) J. Cherubini

Goucher College

17

Questions?
Comments?
Concerns?

(c) J. Cherubini

Goucher College

18