McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA Learning Objective 1 Describe various organizational forms and business decision makers. 1-3 Organizational Forms Sole Proprietorship Business organization owned by one person. The owner is personally liable for all debts of the business. Partnership Business organization owned by two or more people. Each partner is personally liable for all debts of the business. Corporation 1-4 A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Organizational Forms Percentage of Organizational Forms in the U.S. 5% 3% Sole Proprietorships 20% Corporations 72% Partnerships Limited Liability Companies 1-5 Source: BizStats.com The Accounting System Business and Financing Activities Accounting System Accounting Reports External users (creditors, investors, etc.) Financial Managerial Internal users (managers, etc.) Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-6 Learning Objective 2 Describe the purpose, structure, and content of the four basic financial statements. 1-7 The Basic Accounting Equation Resources Owned . . . by the company Resources Owed . . . to creditors to stockholders Assets = Liabilities + Stockholders’ Equity Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. 1-8 Assets Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash Equipment Supplies 1-9 Furniture Liabilities Amounts owed by the business to creditors. Notes Payable 1-10 Accounts Payable Stockholders’ Equity Owners’ claim to the business resources. Contributed Capital Retained Earnings Stock Certificate 1-11 Revenues, Expenses and Net Income Revenues – Expenses = Net Income Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. 1-12 Expenses The costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Dividends Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. 1-13 Financial Statements Income Statement Statement of Retained Earnings Financial statements are typically prepared in this order. Balance Sheet Statement of Cash Flows 1-14 The Income Statement PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2010 Revenues Pizza Revenue $ 11,000 Total Revenue 11,000 Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income 1-15 $ 4,000 2,000 1,500 600 300 100 500 9,000 2,000 The unit of measurethe Reports assumption amount of states that revenues results of less business expenses activities forshould a period be reported in an of time. appropriate monetary unit. The Statement of Retained Earnings PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000 Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. 1-16 The Balance Sheet Reports at a point in time: 1. What a business owns (assets). 2. What it owes to creditors (liabilities). 3. What is left over for the owners of the company’s stock (stockholders’ equity). PIZZA AROMA, INC. Balance Sheet At September 30, 2010 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity 1-17 $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 The Statement of Cash Flows PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2010 Cash Flows from Operating Activities Cash collected from customers $ Cash paid to suppliers and employees Cash Provided by Operating Activities Cash Flows from Investing Activities Cash paid to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2010 Ending Cash Balance, Sept. 30, 2010 $ 1-18 10,000 (5,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 14,000 Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. Notes to the Financial Statements Notes help financial statement users understand how the amounts were derived and what other information may affect their decisions. 1-19 Relationships Among the Financial Statements PIZZA AROMA, INC. Income Statement For the Month Ended September 30, 2010 Revenues Pizza Revenue $ 11,000 Total Revenue 11,000 Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income $ 4,000 2,000 1,500 600 300 100 500 9,000 2,000 PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000 1-20 Net income flows from the Income Statement to the Statement of Retained Earnings. 1 Relationships Among the Financial Statements PIZZA AROMA, INC. Balance Sheet At September 30, 2010 Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet. 2 PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2010 Retained Earnings, Sept. 1, 2010 $ Add: Net Income 2,000 Subtract: Dividends (1,000) Retained Earnings, Sept. 30, 2010 $ 1,000 1-21 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 Relationships Among the Financial Statements PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2010 Cash Flows from Operating Activities Cash collected from customers $ Cash paid to suppliers and employees Cash Provided by Operating Activities Cash Flows from Investing Activities Cash paid to buy equipment Cash Used in Investing Activities Cash Flows from Financing Activities Capital contributed by stockholders Cash dividends paid to stockholders Cash borrowed from the bank Cash Provided by Financing Activities Change in Cash Beginning Cash Balance, Sept. 1, 2010 Ending Cash Balance, Sept. 30, 2010 $ PIZZA AROMA, INC. Balance Sheet At September 30, 2010 10,000 (5,000) 5,000 (40,000) (40,000) 30,000 (1,000) 20,000 49,000 14,000 14,000 Assets Cash Accounts Receivable Supplies Equipment Total Assets Liabilities Accounts Payable Notes Payable Total Liabilities Stockholders' Equity Contributed Capital Retained Earnings Total Stockholders' Equity Total Liabilities and Stockholders' Equity $ 14,000 1,000 3,000 40,000 $ 58,000 $ 7,000 20,000 27,000 30,000 1,000 31,000 $ 58,000 Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree. 3 1-22 Learning Objective 3 Explain how financial statements are used by decision makers. 1-23 Using Financial Statements Creditors Investors (1)Is the company generating enough cash to make payments on its loans? … SCF (1)What immediate return (through dividends) on my contributions? … SRE (2)Does the company have enough assets to cover its liabilities? … B/S 1-24 (2)What is the longterm return (through stock price increases resulting from the company’s profits)?.. I/S Learning Objective 4 Describe factors that contribute to useful financial information. 1-25 External Financial Reporting Main Goal: Provide useful financial information to external users for decision making. Useful Relevant 1-26 Faithful Faithful Representation Accounting Standards 1-27 World United States Where? FASB Who? IASB GAAP What? IFRS Ethical Conduct When faced with an ethical dilemma: Identify who will benefit from the situation and how others will be harmed. Identify the alternative courses of action. Choose the alternative that is the most ethical. 1-28 Chapter 1 Supplement Accounting Careers Overview of Career Choices in Accounting Private Accounting Public company Private company Nonprofit organization Multinational Mid-sized Small Public Accounting Type of Organization CPA firm Size of Organization "Big 4" (international partnerships): Deloitte & Touche, Ernst & Young, KPMG, PricewaterhouseCoopers Regional Local (partnership or proprietorship) Auditing (assurance services) Taxation General accounting Consulting such as forensic Budgeting (fraud) accounting, computer Cost accounting systems security, outsourcing, Taxation Functions and Specializations bookkeeping services, and Internal auditing industry specialization Others (e.g., finance, information (e.g., high tech, banking, systems, forecasting) mergers and acquisitions, and communications) $32,000-$47,500* $40,800-$57,500* depending on type, size, depending on size, geographic Starting Salaries geographic location, and location, and functional area or functional area specialization Chief Financial Officer (CFO), Senior Accountant, Controller, Treasurer, Typical Senior Positions Manager, Director of Accounting Partner 1-30 *Source: 2008 Robert Half Salary Guide. www.collegegrad.com/careers/all.shtml Chapter 1 Solved Exercises M1-13, E1-3, E1-6, E1-8, S1-6 (Req. 1) M1-13 Preparing a Statement of Retained Earnings Stone Culture Corporation was organized on January 1, 2009. For its first two years of operations, it reported the following: Net Income for 2009 $ 36,000 Net Income for 2010 45,000 Dividends for 2009 15,000 Dividends for 2010 20,000 Total assets at the end of 2009 125,000 Total assets at the end of 2010 242,000 On the basis of the data given, prepare a statement of retained earnings for 2009 (its first year of operations) and 2010. Show computations. 1-32 M1-13 Preparing a Statement of Retained Earnings STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2009 Retained Earnings, January 1, 2009 $ Add: Net Income 36,000 Subtract: Dividends (15,000) Retained Earnings, December 31, 2009 $ 21,000 STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2010 Retained Earnings, January 1, 2010 $ 21,000 Add: Net Income 45,000 Subtract: Dividends (20,000) Retained Earnings, December 31, 2010 $ 46,000 1-33 E1-3 Preparing a Balance Sheet DSW is a designer shoe warehouse, selling some of the most luxurious and fashionable shoes at prices that people can actually afford. Its balance sheet, at November 1, 2008, contained the following items (in thousands). Accounts Receivable 11,888 Cash 45,570 Contributed Capital Notes Payable Other Assets Other Liabilities 291,248 99,044 494,294 79,148 Property, Plant and Equipment 233,631 Retained Earnings 179,538 Total Assets 785,383 Total Liabilities & Stockholders' Equity ? Required: 1. Prepare the balance sheet as of November 1, solving for the missing amount. 2. As of November 1, did most of the financing for assets come from creditors or stockholders? 1-34 E1-3 Preparing a Balance Sheet DSW, Inc. Balance Sheet At November 1, 2008 (in thousands) Assets Cash Accounts Receivable $45,570 11,888 Property, Plant, and Equipment 233,631 Other Assets 494,294 Total Assets $785,383 Liabilities Accounts Payable $136,405 Notes Payable 99,044 Other Liabilities 79,148 Total Liabilities 314,597 Stockholders’ Equity Contributed Capital 291,248 Retained Earnings 179,538 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 1-35 470,786 $785,383 Most of the financing as of November 1 came from stockholders. The stockholders have financed $470,786 of the total assets and creditors have financed only $314,597 of the total assets of the company. E1-6 Preparing an Income Statement and Inferring Missing Values Regal Entertainment Group operates movie theaters and food concession counters throughout the United States. Its income statement for the quarter ended June 26, 2008, reported the following amounts (in thousands): Admissions Revenues $ 455,700 Net Income ? Concessions Expenses 25,500 Other Expenses 233,800 Concessions Revenues 188,900 Other Revenues 31,200 Film Rental Expenses 247,000 Rent Expense 90,000 Gen. & Admin. Expenses 65,700 Total Expenses ? Required: 1. Solve for the missing amounts and prepare an Income Statement for the quarter ended June 26, 2008. TIP: First put the items in the order they would appear on the Income Statement and then solve for the missing values. 2. What is Regal’s main source of revenue and biggest expense? 1-36 E1-6 Preparing an Income Statement and Inferring Missing Values REGAL ENTERTAINMENT GROUP Income Statement For the Quarter Ended June 26, 2008 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues $ 455,700 188,900 31,200 Total Revenues $ 675,800 Expenses Concessions Expenses Film Rental Expenses 247,000 General and Administrative Expenses 65,700 Rent Expense 90,000 Other Expenses Total Expenses Net Income 1-37 25,500 233,800 ? 662,000 ? $ 13,800 E1-6 Preparing an Income Statement and Inferring Missing Values REGAL ENTERTAINMENT GROUP Income Statement For the Quarter Ended June 26, 2008 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues $ 455,700 188,900 31,200 Total Revenues $ 675,800 Expenses Concessions Expenses Film Rental Expenses 247,000 General and Administrative Expenses 65,700 Rent Expense 90,000 Other Expenses Total Expenses Net Income 1-38 25,500 233,800 662,000 $ 13,800 E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations Review the chapter explanations of the income statement and the balance sheet equations. Apply these equations in each of the following independent cases to compute the two missing amounts for each case. Assume that it is the end of the first full year of operations for the company. TIP: First identify the numerical relations among the columns using the balance sheet and income statement equations. Then compute the missing amounts. Independent Cases A Total Revenues $ 100,000 $ B 80,000 D 50,000 1-39 Net Income (Loss) 82,000 $ 80,000 C E Total Expenses $ 12,000 86,000 81,000 Total Assets Total Liabilities 150,000 $ 70,000 $ 112,000 104,000 Stockholders' Equity 60,000 26,000 13,000 22,000 77,000 (6,000) 73,000 28,000 E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations R – E = NI Independent Cases A 1-40 Total Revenues $ Total Expenses 100,000 $ Net Income (Loss) A = L + SE Total Assets Total Liabilities Stockholders' Equity 82,000 $ 18,000 $ 150,000 $ 70,000 $ 80,000 B 92,000 80,000 12,000 112,000 52,000 60,000 C 80,000 86,000 (6,000) 104,000 26,000 78,000 D 50,000 37,000 13,000 99,000 22,000 77,000 E 75,000 81,000 (6,000) 101,000 73,000 28,000 E1-8 Inferring Values Using the Income Statement and Balance Sheet Equations R – E = NI Independent Cases A 1-41 Total Revenues $ Total Expenses 100,000 $ Net Income (Loss) A = L + SE Total Assets Total Liabilities Stockholders' Equity 82,000 $ 18,000 $ 150,000 $ 70,000 $ 80,000 B 92,000 80,000 12,000 112,000 52,000 60,000 C 80,000 86,000 (6,000) 104,000 26,000 78,000 D 50,000 37,000 13,000 99,000 22,000 77,000 E 75,000 81,000 (6,000) 101,000 73,000 28,000 S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet On September 30, Ashley and Jason started arguing about who is better off. Jason said he was better off because he owned a PlayStation console that he bought last year for $350. He figures that, if needed, he could sell it to a friend for $280. Ashley argued that she was better off because she had $1,000 cash in her bank account and a vintage car that she bought two years ago for $800 but could now sell for $1,400. Jason countered that Ashley still owed $250 on her car loan and that Jason’s dad promised to buy him a Porsche if he does really well in his accounting class. Jason said he had $6,000 cash in his bank account right now because he just received a $4,800 student loan. Ashley knows that Jason also owes a tuition installment of $800 for this term. Required: 1. Prepare a financial report that compares what Ashley and Jason each own and owe on September 30. Make a list of any decisions you had to make when preparing your report. 1-42 S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet Balance Sheet ASSETS What is owned Cash Console Car TOTAL What is owed LIABILITIES Car loan Tuition Payable Student Loan TOTAL “Net worth” EQUITY TOTAL 1-43 Ashley Jason $1,000 -0800 $1,800 $6,000 350 -0$6,350 $ 250 -0-0250 1,550 $1,800 $ -0800 4,800 5,600 750 $6,350 End of Chapter 1