CHAPTER 1 ANALYSIS OF FINANCIAL STATEMENTS.ppt

7/24/2019 CHAPTER 1 ANALYSIS OF FINANCIAL STATEMENTS.ppt

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Introduction to Analysis ofIntroduction to Analysis of

Financial StatementsFinancial Statements

Chapter 1Chapter 1



Study ObjectivesStudy Objectives

1.1. Describe the primary forms of businessDescribe the primary forms of businessorganiation.organiation.

!.!. Identify the users and uses of accountingIdentify the users and uses of accountinginformation.information.

".". #$plain the three principal types of#$plain the three principal types of

business activity. business activity.%.%. Describe the content and purpose of eachDescribe the content and purpose of each

of the financial statements.of the financial statements.



Study ObjectivesStudy Objectives

&.&. #$plain the meaning of assets' liabilities'#$plain the meaning of assets' liabilities'

and stoc(holders) e*uity' and state theand stoc(holders) e*uity' and state the

basic accounting e*uation. basic accounting e*uation.

+.+. Describe the components that supplementDescribe the components that supplement

the financial statements in an annualthe financial statements in an annual

report.report.



,,11 Forms of -usinessForms of -usiness

OrganiationOrganiation

Sole proprietorshipSole proprietorship

/artnership/artnership

CorporationCorporation



Sole /roprietorshipSole /roprietorship

-usiness o0ned by one person-usiness o0ned by one person

Simple to establishSimple to establish O0ner controlledO0ner controlled

a$ advantagesa$ advantages

O0ner personally liableO0ner personally liable

Financing difficultFinancing difficult



/artnership/artnership

0o or more o0ners0o or more o0ners

Simple to establishSimple to establish Shared controlledShared controlled

-roader s(ills 2 resources-roader s(ills 2 resources

a$ advantagesa$ advantages

/ersonal liability/ersonal liability



CorporationCorporation

Separate legal entity o0ned bySeparate legal entity o0ned by

stoc(holdersstoc(holders #asy to transfer o0nership#asy to transfer o0nership

3reater capital raising potential3reater capital raising potential

4o0er legal liability4o0er legal liability

5nfavorable ta$ treatment5nfavorable ta$ treatment



,,!! 5sers of Financial Information5sers of Financial Information

Internal Internal 6anagers 0ho plan'6anagers 0ho plan'

organie and run aorganie and run a

business business

7 6ar(eting managers6ar(eting managers

7 /roduction supervisors/roduction supervisors 7 Finance directorsFinance directors

7 Company officersCompany officers



5sers of Financial Information5sers of Financial Information

Internal Users Ask? Internal Users Ask?

Cash to pay bills8Cash to pay bills8 Cost per unit8Cost per unit8

3ive raises83ive raises8 9hich product is9hich product is

profitable8 profitable8




External External InvestorsInvestors

OthersOthers

7 :egulatory agencies:egulatory agencies

7 a$ authoritiesa$ authorities

7 CustomersCustomers 7 4abor 5nions4abor 5nions

7 #conomic planners#conomic planners

CreditorsCreditors




External Users Ask? External Users Ask?

#arning enough8#arning enough8 Compare to competition8Compare to competition8

9ill the company be able to pay bills9ill the company be able to pay bills

0hen due80hen due8



,,"" ypes of -usiness Activityypes of -usiness Activity

FinancingFinancing

InvestingInvesting

OperatingOperating



Financing ActivitiesFinancing Activities

-orro0ing creates-orro0ing creates liabilitiesliabilities

7 -an( loans-an( loans

7 Debt securitiesDebt securities 7 3oods on credit or payables3oods on credit or payables

Selling stoc( Selling stoc( createscreatesstockholders’ equitystockholders’ equity



Investing ActivitiesInvesting Activities

Obtaining resources orObtaining resources or

assetsassets to operate theto operate the

business business 7 4and4and

7 -uildings-uildings

7 ;ehicles;ehicles 7 ComputersComputers

7 FurnitureFurniture



Operating ActivitiesOperating Activities

/rimary activity of business/rimary activity of business

7 Selling goodsSelling goods

7 /roviding services/roviding services 7 6anufacturing6anufacturing

7 Cost of SalesCost of Sales

7 AdvertisingAdvertising 7 /aying employees/aying employees

7 /aying utilities/aying utilities



Operating ActivitiesOperating Activities

Revenue Revenue is generated from sales oris generated from sales or

servicesservices

Expenses Expenses are the cost of doing businessare the cost of doing business

If revenueIf revenue >> e$pensee$pense == Net Income Net Income

If revenueIf revenue << e$pensee$pense == Net Loss! Net Loss!



,,%% Describe Content and /urposeDescribe Content and /urpose

of Financial Statementsof Financial Statements Accountants communicate

0ith users through four

financial statements

Income StatementIncome Statement

:etained #arnings Statement:etained #arnings Statement -alance Sheet-alance Sheet

Statement of Cash Flo0sStatement of Cash Flo0s




:eports operating success or failure for a:eports operating success or failure for a

period. period.

Summaries revenues and e$penses forSummaries revenues and e$penses for period< period< month, quarter, or year.month, quarter, or year.

If revenueIf revenue >> e$pensee$pense == Net Income. Net Income.




Do this statement first! Do this statement first!



:etained #arnings Statement:etained #arnings Statement

Sho0s changes in retained earnings forSho0s changes in retained earnings for

period< period< month, quarter, or year month, quarter, or year

-eginning balance-eginning balance

AddAdd Net Income from income Net Income from income

statement!statement!

Deduct DividendsDeduct Dividends

#nding balance#nding balance




Do this statement second! Do this statement second!



-alance Sheet-alance Sheet

:eports:eports assetsassets and claims to assets.and claims to assets.

Claims of creditors'Claims of creditors' liabilitiesliabilities..

Claims of o0ners'Claims of o0ners' stockholders’ equitystockholders’ equity..

AssetsAssets = 4iabilities > Stoc(holders) #*uity= 4iabilities > Stoc(holders) #*uity

Specific date 7Specific date 7 one point in time!one point in time!




FromFrom

:etained:etained

#arnings#arningsStatementStatement




/rovides information about cash/rovides information about cash

receipts and cash paymentsreceipts and cash payments

Summaries for period<Summaries for period< month, quarter,month, quarter,

or year.or year.

Cash effects of operating' investing'Cash effects of operating' investing'and financing activities.and financing activities.




9here did the cash come from89here did the cash come from8

?o0 0as cash used during the period8?o0 0as cash used during the period8

9hat 0as the change in the cash9hat 0as the change in the cash

balance during the period8 balance during the period8

@ou can)t survive 0ithout cash@ou can)t survive 0ithout cash




AgreesAgrees

0ith0ith -alance-alance

SheetSheet



,&,& #$plain the 6eaning of#$plain the 6eaning of

Assets' 4iabilities' andAssets' 4iabilities' and

Stoc(holders) #*uity.Stoc(holders) #*uity.

State the -asic AccountingState the -asic Accounting

#*uation#*uation



AssetsAssets

:esources o0ned by the business:esources o0ned by the business

7 CashCash

7 Accounts receivableAccounts receivable 7 InventoriesInventories

7 -uilding-uilding

7 Furniture and fi$turesFurniture and fi$tures 7 #*uipment#*uipment

7 SuppliesSupplies



4iabilities4iabilities

Obligations or debts of businessObligations or debts of business

7 Botes payable Botes payable

7 Accounts payableAccounts payable

7 Interest payableInterest payable

7 Salaries payableSalaries payable 7 5nearned revenue5nearned revenue



Stoc(holders) #*uityStoc(holders) #*uity

O0nership claims on assetsO0nership claims on assets

/aidin capital/aidin capital

7 Common stock Common stock

:etained earnings:etained earnings



-asic Accounting #*uation-asic Accounting #*uation

Assets =Assets =4iabilities > Stoc(holders) #*uity4iabilities > Stoc(holders) #*uity



,,++ Components that SupplementComponents that Supplement

the Financial Statements in anthe Financial Statements in anAnnual :eportAnnual :eport

6anagements Discussion and Analysis6anagements Discussion and Analysis

Botes to Financial Statements Botes to Financial Statements

Auditor)s reportAuditor)s report



6anagement)s Discussion and6anagement)s Discussion and

Analysis covers three items<Analysis covers three items<1.1. 4i*uidity4i*uidity

!.!. Capital resourcesCapital resources

".". :esults of operations:esults of operations



6anagement)s Discussion and6anagement)s Discussion and

AnalysisAnalysis




#$planatory notes and supplementary#$planatory notes and supplementary

schedulesschedules

Clarifies information in financial statementsClarifies information in financial statements

#$pands 0ith additional detail#$pands 0ith additional detail

Describes accounting policiesDescribes accounting policies

#$plains uncertainties and contingencies#$plains uncertainties and contingencies






Auditor)s :eportAuditor)s :eport

Certified /ublic Accountant 7 C/ACertified /ublic Accountant 7 C/A

Auditor C/AE conducts independentAuditor C/AE conducts independent

e$amination of financial statementse$amination of financial statements

Fair representation8Fair representation8

Follo0Follo0 generally accepted accountinggenerally accepted accounting

principles principles 3AA/E83AA/E8

5n*ualified opinion5n*ualified opinion



Auditor)s :eportAuditor)s :eport



6onetary 5nit Assumption6onetary 5nit Assumption

Only 0hat can be e$pressed in moneyOnly 0hat can be e$pressed in money

Assumes unit of measure stays constantAssumes unit of measure stays constant

/hotoDiscG3etty Images /hotoDiscG3etty Images



#conomic #ntity Assumption#conomic #ntity Assumption

#conomic events identified 0ith unit#conomic events identified 0ith unit

Separately identified apart from o0ner Separately identified apart from o0ner



ime /eriod Assumptionime /eriod Assumption

Divide life of business into artificial time periodsDivide life of business into artificial time periods

6onthly' *uarterly' yearly6onthly' *uarterly' yearly



3oing Concern Assumption3oing Concern Assumption

Divide life of business into artificial time periodsDivide life of business into artificial time periods

6onthly' *uarterly' yearly6onthly' *uarterly' yearly



Cost /rincipleCost /rinciple

Assets must be recorded at costAssets must be recorded at cost

;erifiable vs. subjective;erifiable vs. subjective



Full Disclosure /rincipleFull Disclosure /rinciple

All circumstances and events that 0ouldAll circumstances and events that 0ouldma(e a difference to users must be disclosedma(e a difference to users must be disclosed



Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $,000

!o""on stoc# $10,000

etained earnings %

&'uip"ent $1(,000

)nsurance expense $1,000

Supplies $1,*00

Supplies expense $200!as+ $2,000

ividends $(00

CS5 begins onCS5 begins on

Han. 1' !&Han. 1' !&

For year endedFor year ended

Dec. "1' !&Dec. "1' !&'' prepare prepare

7 Income statementIncome statement

7 :etained earnings:etained earningsstatementstatement

7 -alance sheet-alance sheet







Notes payable $,000

!o""on stoc# $10,000

etained earnings %

&'uip"ent $1(,000


Supplies $1,*00


ividends $(00

Action step 1Action step 1<<

:eport the:eport the

revenues 2revenues 2

e$penses for ae$penses for a period of time' period of time'








Notes payable $,000

!o""on stoc# $10,000

etained earnings %

&'uip"ent $1(,000


Supplies $1,*00


ividends $(00

Action step 1Action step 1<<

:eport the:eport the

revenues 2revenues 2

e$penses for ae$penses for a period of time' period of time'




Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation

CS5 CorporationCS5 Corporation


For the @ear #nded December "1' !&For the @ear #nded December "1' !&

Create the headingCreate the heading

Bame of the Bame of the

statementstatement

Bame of the Bame of the

companycompany

/eriod/eriod

of timeof time







:evenues:evenues

Service revenueService revenue J1K'J1K'

4ist the revenues4ist the revenues

5se dollar signs to denote 5.S. currency5se dollar signs to denote 5.S. currency







:evenues:evenuesService revenueService revenue J1K'J1K'#$penses#$penses

:ent e$pense:ent e$pense JL'JL'

Insurance e$penseInsurance e$pense 1' 1'Supplies e$penseSupplies e$pense ! !otal e$pensesotal e$penses 1'! 1'!

MMMMMMMM MMMMMMMM

4ist the e$penses 2 underline subtotals4ist the e$penses 2 underline subtotals

MMMMMMMM MMMMMMMM







:evenues:evenuesService revenueService revenue J1K'J1K'#$penses#$penses

:ent e$pense:ent e$pense JL'JL'

Insurance e$penseInsurance e$pense 1' 1'Supplies e$penseSupplies e$pense ! !otal e$pensesotal e$penses 1'! 1'!

Bet Income Bet Income J +'NJ +'N

Calculate net income< revenues e$pensesCalculate net income< revenues e$penses

MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM

MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM







Notes payable $,000

!o""on stoc# $10,000

etained earnings %

&'uip"ent $1(,000


Supplies $1,*00


ividends $(00

Action step !Action step !<<

Sho0 amountsSho0 amounts

and causes ofand causes of

changes inchanges inretained earningsretained earnings

5se Bet Income5se Bet Income

from Incomefrom Income

StatementStatement

DividendsDividends







:etained earnings' Hanuary 1:etained earnings' Hanuary 1 J J

Add< Bet incomeAdd< Bet income +'N +'N

+'N+'N4ess< Dividends4ess< Dividends + +:etained earnings' Dec. "1:etained earnings' Dec. "1 J +'NJ +'N MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM

MMMMMMMM MMMMMMMM

MMMMMMMM MMMMMMMM







Notes payable $,000

!o""on stoc# $10,000

etained earnings $(,*00

&'uip"ent $1(,000


Supplies $1,*00


ividends $(00

Action step "Action step "<<

/resent assets and/resent assets and

claims to thoseclaims to those

assets at aassets at aspecific point inspecific point in

time on thetime on the


5se J+'N5se J+'N:etained earnings:etained earnings

from previousfrom previous

statementstatement

CS5 CO:/O:AIOBCS5 CO:/O:AIOB



CS5 CO:/O:AIOBCS5 CO:/O:AIOB-alance Sheet-alance Sheet

December "1' !&December "1' !&

AssetsAssetsCashCash J !'J !'

Accounts receivableAccounts receivable %' %'

SuppliesSupplies 1'N 1'N

#*uipment#*uipment 1+'1+'

otal assetsotal assets J!"'NJ!"'N4iabilities and Stoc(holders) #*uity4iabilities and Stoc(holders) #*uity

4iabilities4iabilities

Accounts payableAccounts payable J !'J !'

Botes payable Botes payable &'&'

otal liabilitiesotal liabilities K' K'

Stoc(holders) e*uityStoc(holders) e*uity

Common stoc( Common stoc( J1'J1'

:etained earnings:etained earnings +'N+'N

otal Stoc(holders) e*uityotal Stoc(holders) e*uity 1+'N1+'N

otal liabilities and stoc(holders) e*uityotal liabilities and stoc(holders) e*uity J!"'NJ!"'N

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CHAPTER 1 ANALYSIS OF FINANCIAL STATEMENTS.ppt