A Framework for
Financial Accounting
Chapter #1
Luca Pacioli, attributed
to Jacopo de' Barbari,
circa 1495
Learning Objectives
LO1-1 Describe the two primary functions of financial
accounting.
LO1-2 Understand the business activities that financial
accounting measures.
LO1-3 Determine how financial accounting information is
communicated through financial statements.
Learning Objectives
LO1-4 Describe the role that financial accounting plays in the
decision-making process
LO1-5 Explain the term generally accepted accounting principles
(GAAP) and describe the role of GAAP in financial
accounting.
LO1-6 Identify career opportunities in accounting.
Learning Objective 1
LO1-1Describe the two primary functions of
financial accounting.
Decisions People Make About Companies
based on Accounting Data
Framework for Financial Accounting
Imagine each horse has
rider—either and
investor, an accountant
or a business—and the
carousel just keeps
turning.
Financial Accounting
• Financial accounting: information provided for
external users.
• The focus of this course.
• Managerial accounting: information provided
for internal users.
• Next Semester
• Tax Accounting
• Only for accounting majors
Learning Objective 2
LO1-2 Understand the business activities that
financial accounting measures.
“If this country is ever demoralized, it
will come from trying to live without
work.”
― Abraham Lincoln
The Accounting
Equation
Michelangelo, circa 1512
Assets = Liabilities + Stockholders’ Equity
• Assets = resources of the company.
• Liabilities = creditors’ claims to resources.
• Stockholders’ equity = owners’ claims to
resources.
Revenues, Expenses, and Dividends
• All profits of the company are claimed
solely by stockholders.
• Profit = Revenues – Expenses.

Profit is often referred to as net income.
• Revenues = Sales of products or services
to customers.
• Expenses = Costs of selling products or
services.
• Dividends = Distribution of profit to
stockholders.
Business Activities and Their Measurement
Activities Related to:
Measurement Category
Relationship
• Resources of the company
• Amounts owed
• Stockholders’ Investment
• Assets
• Liabilities
• Stockholders’ Equity
Accounting
Equation
(A = L + SE)
• Distributions to
stockholders
• Dividends
• Sales of products or
services
• Costs of providing sales
• Revenues
• Expenses
Net Income
(R − E = Nl)
Key Point
The measurement role of
accounting is to create a
record of the activities of a
company. To make this
possible, a company must
maintain an accurate record of
its assets, liabilities,
stockholders’ equity, revenues,
expenses, and dividends.
Pop Quiz
The resources of a company are referred to as:
a.
Liabilities
b. Revenues
c.
Assets
d. Expenses
Pop Quiz
The resources of a company are referred to as:
a.
Liabilities
b.
Revenues
c.
Assets
d.
Expenses
Assets are the resources of the company that will
benefit future operations. They include items
such as cash, inventory, supplies, buildings, and
equipment.
Pop Quiz
The amounts recorded when the company sells products or
provides services to customers are referred to as:
a.
Liabilities
b.
Revenues
c.
Assets
d.
Expenses
Pop Quiz
The amounts recorded when the company sells products or
provides services to customers are referred to as:
a.
Liabilities
b.
Revenues
c.
Assets
d.
Expenses
Revenues are recorded at the time the company
provides products or services to customers.
Business Structures
Sole proprietorship: business is owned by one person
Free Library of Philadelphia
Business Structures
Partnership: business is owned by two or more persons
Business Structures
Corporation: business is legally separate from its owners
• Limited liability of stockholders
(photo courtesy of Free Library of Philadelphia)
Business Activities
Financing activities: transactions the company has with investors and creditors
(photo courtesy of Free Library of Philadelphia)
Business Activities
• Investing activities: transactions involving the purchase and sale of
resources that provide benefit for several years
Frankford Arsenal Photo compliments of Nat’l Park Service
Business Activities
Operating activities: transactions that relate to the primary operations
of the company
(photo courtesy of Library of Congress
LO1-3 Determine how financial accounting information is
communicated through financial statements.
“It is a capital mistake to theorize before one has data.
Insensibly one begins to twist facts to suit theories,
instead of theories to suit facts.”
”Sherlock Holmes”
( Arthur Conan Doyle)
© The Sherlock Holmes Museum
221b Baker Street, London,
England
Communicating Through Financial Statements
• Primary financial statements
• Income statement
• Statement of stockholders’ equity
• Balance sheet
• Statement of cash flows
Income Statement
• Reports the company’s revenues and
expenses over an interval of time
• If revenues > expenses, then net income
• If revenues < expenses, then net loss
Key Point: The income statement compares
revenues and expenses for the current period to
assess the company’s ability to earn a profit from
running its operations.
Vintage Photo compliments of Henry Disston IV
Odessa Travel Agency
Income Statement
For the month ended December 31, 20XX
Revenues
Travel revenue
5000
Passport Services
31000
Total Revenue
36000
Expenses
Rent expense
12000
Travel expense
9200
Salaries expense
8000
Utilities expense
1400
Tax expense
2100
Gifts and Felicitations
300
Total expenses
33000
Statement of Stockholders’ Equity
Summarizes the changes in stockholders’
equity over an interval of time
Stockholders’ Equity = Common Stock + Retained Earnings
Earned and kept
Investment
External
Source
Company
Value
Internal
Source
Odessa Travel Services
Statement of Stockholders’ Equity
For the month ended December 31
Common
Stock
Beginning balance (Jan. 1)
14000
Issuance of common stock
11000
Add: Net income for the period
Less: Dividends
Ending balance (Dec. 31)
$25,000
Retained
Earnings
Total Stockholders’
Equity
9500
2350011000
3000
3000
(1200)
(1200)
11300
36300
Balance Sheet
Presents the financial position of the
company on a particular date
Financial position:
Resources = Claims to Resources
Assets
=
Liabilities &
Stockholders’ Equity
Odessa Travel Agency
Balance Sheet
December 31, 20XX
Assets
Liabilities
Cash
$ 8500 Accounts payable
Accounts receivable
Less Allowance for Uncollectible Accounts
3200
Salaries payable
1100
700
Utilities payable
700
Accounts Receivable at NRV
2500 Taxes payable
3100 Mortgage payable
Supplies
Less Accumulated Depreciation
17000
Equipment, net
3800
Total liabilities
2100
15,000
22700
41000
Other assets (prepaid expenses)
3900
Total assets
Stockholders’ Equity
59000 Common stock
25,000
Retained earnings
11300
Total stockholders’ equity
36300
Total liabilities and
stockholders’ equity
59000
Pop Quiz
Which of the following accounts would appear in a
company’s income statement?
a.
Accounts Payable
b.
Cash
c.
Dividends
d.
Rent Expense
Pop Quiz
Which of the following accounts would appear in a
company’s income statement?
a.
Accounts Payable
b.
Cash
c.
Dividends
d.
Rent Expense
The income statement is a financial statement that reports
the company’s revenues and expenses over an interval of
time. The only item from the list that would appear in the
income statement would be Rent Expense.
Pop Quiz
Which relationship is reflected in the balance
sheet?
a. Revenues − Expenses = Net income
b. Assets = Liabilities + Stockholders’ Equity
c. Assets − Liabilities = Net Income
d. Assets = Revenues + Dividends
Pop Quiz
Which relationship is reflected in the balance
sheet?
a. Revenues − Expenses = Net income
b. Assets = Liabilities + Stockholders’ Equity
c. Assets − Liabilities = Net Income
d. Assets = Revenues + Dividends
The balance sheet reflects the financial position of a company on a particular
date. The company’s financial position is summarized by showing that resources
(Assets) equal claims to resources (Liabilities + Stockholders’ Equity).
Statement of Cash Flows
Measures activities involving cash receipts and
cash payments over an interval of time
Operating
cash flows
Investing
cash flows
Financing
cash flows
cash transactions
involving revenues
and expenses
cash transactions
involving purchase
and sale of
long-term assets
cash transactions
involving lenders
and stockholders
Odessa Travel Services
Statement of Cash Flows
For the year ended December 31, 20XX
Cash Flows from Operating Activities
Cash Inflows:
From customers
31000
For Vendors and other expenses
(33000)
Cash outflows:
Net cash flows from operating activities
(2000)
Cash Flows from Investing Activities
Purchase equipment
(18000)
Net cash flows from Investing activities
(18000)
Cash Flows from Financing Activities
Issue common stock
11000
Borrow from bank
15000
Pay dividends
(1200)
Net cash flows from financing activities
Net increase in cash
4800
Cash at the beginning of the period
3700
Cash at the end of the period
$ 8500
24800
Pop Quiz
The cash collected from a customer would be recorded as which
type of activity in the Statement of Cash Flows?
a. Operating Activity
b. Business Activity
c. Investing Activity
d. Financing Activities
Pop Quiz
The cash collected from a customer would be recorded as which
type of activity in the Statement of Cash Flows?
a. Operating Activity
b. Business Activity
c. Investing Activity
d. Financing Activities
Operating activities include revenue and expense
transactions. Collecting cash from customers
represents activity related to revenues.
How it all fits together…
Key Point
All transactions that affect revenues or expenses reported
in the income statement ultimately affect the balance
sheet through the balance in retained earnings.
LO 1-4
Describe the role
that financial
accounting plays
in the decisionmaking process.
Financial Accounting Information is used for
Investing and Lending Decisions
Learning Objective 5
LO1-5Explain the term generally accepted
accounting principles (GAAP) and describe
the role of GAAP in financial accounting.
Photo courtesy of Baseball Hall of Fame
Rules of Financial Accounting
Investors &
Creditors
make their decisions
based on
Financial Accounting
Information
Should be based on
formal standards
Generally Accepted Accounting Principles
(GAAP)
Current Standard Setting
United States
Financial Accounting
Standards Board (FASB)
Governed by the
Securities and Exchange
Commission (SEC)
www.sechistorical.org
Current Standard Setting
Global
International Accounting
Standards Board
Key Point
The rules of financial accounting are called generally accepted
accounting principles (GAAP). The Financial Accounting
Standards Board (FASB) is an independent, private body that
has primary responsibility for the establishment of GAAP in
the United States.
Role of Auditors
Trained individuals hired by a company as an
independent party to express a professional opinion
of the extent to which financial statements are
prepared in accordance with GAAP.
Role of auditors
Help ensure that
management has in fact
appropriately applied GAAP
in preparing the company’s
financial statements
Help investors and
creditors in their decisions
by adding credibility to the
financial statements.
Excerpts the Independent Auditor’s Report of…
DICK’S SPORTING GOODS, INC.
Report of Independent Auditors
To the Board of Directors and Stockholders of
Dick’s Sporting Goods, Inc.
Pittsburgh, Pennsylvania
We have audited the accompanying consolidated balance sheets of Dick’s Sporting Goods, Inc. and subsidiaries
(the “Company”) as of January 31, 2015, and February 1, 2014, and the related consolidated statements of
income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in
the period ended January 31, 2015. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
In our opinion, such consolidated financial statements present fairly, in all material respects, the
financial position of Dick’s Sporting Goods, Inc. and subsidiaries as of January 31, 2015, and
February 1, 2014, and the results of their operations and their cash flows for each of the three
years in the period ended January 31, 2015, in conformity with accounting principles generally
accepted in the United States of America.
Objectives of Financial Accounting
Financial accounting should provide information that:
1. Is useful to investors and creditors in making decisions.
2. Helps to predict cash flows.
3. Tells about economic resources, and claims and changes in them
Pop Quiz
Auditors are independent parties that help:
a. To establish accounting rules in the U.S.
b. To ensure management has appropriately
prepared the company’s financial statements
c. Investors and creditors in their decisions by
adding credibility to the financial statements.
d. Both b. and c. are correct
Pop Quiz
Auditors are independent parties that help:
a. To establish accounting rules in the U.S.
b. To ensure management has appropriately prepared the
company’s financial statements
c. Investors and creditors in their decisions by adding credibility
to the financial statements.
d. Both b. and c. are correct
Auditors are hired by a company as an independent party to express a
professional opinion of the extent to which financial statements are
prepared in accordance with GAAP.
Learning Objective 6
LO1-6
Identify accounting career opportunities.
Public Accounting
(Big 4 and Non-Big 4)
Private
Accounting
Who are the clients?
Corporations
Governments
Nonprofit organizations
Individuals
Your particular employer
What are the
traditional career
opportunities?
Auditors
Tax preparers/planners
Business consultants
Financial accountants
Managerial accountants
Internal auditors
Tax preparers
Payroll managers
What other career
opportunities are
available?
Financial Planners/Advisors/Analysts
Information technology developers
Forensic accountants
Information risk managers
Investment bankers
Environmental accountants
Tax lawyers
Information managers
Management advisors
Tax planners
Acquisition specialists
FBI agents
Sports agents