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INTRODUCTION TO FINANCIAL STATEMENTS
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Study Objectives
1. 2. 3. 4. Describe the primary forms of business organization. Identify the users and uses of accounting information. Explain the three principal types of business activity. Describe the content and purpose of each of the financial statements. 5. Explain the meaning of assets, liabilities, and stockholders equity, and state the basic accounting equation. 6. Describe the components that supplement the financial statements in an annual report.
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Users and Uses of Financial Information Internal users External users Ethics in financial reporting
Communicating with Users Income statement Retained earnings statement Balance sheet Statement of cash flows Interrelationships of statements Other elements of an annual report
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Partnership
Corporation
Simple to establish Shared control Broader skills and resources Tax advantages
Tax advantages
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Investors
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User
Human Resources
Marketing Management
Finance
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User
Investors
Investors
Creditors
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Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others. Congress passed Sarbanes-Oxley Act of 2002. Effective financial reporting depends on sound ethical behavior.
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Business Activities
All businesses are involved in three types of activity
The accounting information system keeps track of the results of each of these business activities.
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Business Activities
Financing Activities
Two primary sources of outside funds are:
1. Borrowing money
Amounts owed are called liabilities. Party to whom amounts are owed are creditors. Notes payable and bonds payable are different type of liabilities.
Business Activities
Investing Activities
Purchase of resources a company needs operate.
to
Computers, delivery trucks, furniture, buildings, etc. Resources owned by a business are called assets.
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Business Activities
Operating Activities
Once a business has the assets it needs, it can begin its operations.
Revenues - Amounts earned from the sale of products (sales revenue, service revenue, and interest revenue). Inventory - Goods available for sale to customers. Accounts receivable - Right to receive money from a customer,in the future, as the result of a sale.
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Business Activities
Operating Activities
Expenses - cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense). Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable.
Net income when revenues exceed expenses. Net loss when expenses exceed revenues.
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Balance Sheet
Income Statement
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Reports revenues and expenses for a specific period of time. Net income revenues exceed expenses. Net loss expenses exceed revenues. Past net income provides information for predicting future net income.
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Reports assets and claims to assets at a specific point in time. Assets = Liabilities + Stockholders Equity. Lists assets first, followed by liabilities and stockholders equity.
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SO 5 Explain the meaning of assets, liabilities, and stockholders equity, and state the basic accounting equation.
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SO 5 Explain the meaning of assets, liabilities, and stockholders equity, and state the basic accounting equation.
Answers:
Where did cash come from during the period? How was cash used during the period? What was the change in the cash balance during the period?
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SO 5 Explain the meaning of assets, liabilities, and stockholders equity, and state the basic accounting equation.
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SO 5 Explain the meaning of assets, liabilities, and stockholders equity, and state the basic accounting equation.
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Financial statements. Management discussion and analysis. Notes to the financial statements. Independent auditor's report.
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SO 6 Describe the components that supplement the financial statements in an annual report.
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SO 6 Describe the components that supplement the financial statements in an annual report.
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SO 6 Describe the components that supplement the financial statements in an annual report.
Notes are essential to understanding a companys operating performance and financial position.
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SO 6 Describe the components that supplement the financial statements in an annual report.
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SO 6
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SO 6 Describe the components that supplement the financial statements in an annual report.
Key Points
International standards referred to as International Financial Reporting Standards (IFRS), are developed by the International Accounting Standards Board (IASB). The United States and the international standard-setting environment are primarily driven by meeting the needs of investors and creditors. The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges.
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Key Points
IFRS tends to be simpler in its accounting and disclosure requirements; some people say more principles-based. GAAP is more detailed; some people say more rules-based. U.S. regulators have recently eliminated the need for foreign companies that trade shares in U.S. markets to reconcile their accounting with GAAP. The three most common forms of business organization, proprietorships, partnerships, and corporations, are also found in countries that use IFRS. The conceptual framework that underlies IFRS is very similar to that used to develop GAAP.
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Which of the following is not a reason why a single set of highquality international accounting standards would be beneficial? a) Mergers and acquisition activity. b) Financial markets. c) Multinational corporations. d) GAAP is widely considered to be a superior reporting system.
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The Sarbanes-Oxley Act determines: a) international tax regulations. b) internal control standards as enforced by the IASB. c) internal control standards of U.S. publicly traded companies. d) U.S. tax regulations.
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IFRS is considered to be more: a) principles-based and less rules-based than GAAP. b) rules-based and less principles-based than GAAP. c) detailed than GAAP. d) None of the above.
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Copyright
Copyright 2011 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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