Chapter 1 -- Introduction to
Business Activities and Overview
of Financial Statements and the
Reporting Process
FINANCIAL ACCOUNTING
AN INTRODUCTION TO CONCEPTS,
METHODS, AND USES
12th Edition
Clyde P. Stickney and Roman L. Weil
Learning Objectives
1. Develop a general understanding of four
principal activities of business firms: (a)
establishing goals and strategies, (b) obtaining
financing, (c) making investments, and (d)
conducting operations.
2. Develop an understanding of the purpose and
content of the three principal financial
statements that business firms prepare to
measure and report the results of their business
activities: (a) balance sheet, (b) income
statement, and (c) statement of cash flows.
Learning Objectives
3. Develop a sensitivity to financial reporting
issues, including the following: (a) the potential
conflict of interest between management’s selfinterest for job security and career enhancement
with its responsibility to shareholders, (b) the
alternative approaches to establishing
accounting measurement and reporting
standards, and (c) the role of the independent
audit of a firm’s financial statements.
4. Develop a sensitivity to ethical issues in financial
reporting using a framework for thinking about
ethical questions.
Chapter Outline
1. Overview of business activities.
2. Principal financial statements.
3. Other items in financial reports
4. Financial reporting issues
5. Financial reporting process in the
United States.
Chapter Summary
List Four Principal Activities of
Business Firms:
1. Establishing goals and strategies,
2. Obtaining financing,
3. Making investments, and
4. Conducting operations.
Establishing Goals and Strategies
Maximize return to
shareholders
 Provide stimulating
lifelong work for
employees
 Contribute to and
integrate with
national goals and
policies

Considers
competitors
 Consider barriers
 Consider demand
 Consider regulation
 Recognize
management
process not an
individual process

Obtaining Financing and Making
Investments
 Financing
comes from two sources,
owners or creditors
 Investments are made in the
following:
– Land, buildings, equipment
– Patents, licenses, contractual rights
– Stock and bonds of other organizations
– Inventories
– Accounts Receivable
What are the Four Areas of
Conducting Operations?
Overview of Business Activities
Purpose and Content of the Three
Principal Financial Statements:
a) Balance sheet,
b) Income statement,
c) Statement of cash flows,
d) Notes to the financial statements,
including various supporting
schedules,
e) Opinion of the independent certified
public accountant.
Review Balance Sheet
 Snap
shot in time
 Asset, liabilities, owners’ equity
 Retained earnings
 Assets = Liabilities + Owners’
Equity
 Historical valuation
 Analysis of the balance sheet
Balance Sheet
Snapshot of investing and financing
activities at a moment in time.
 Basic Accounting Equation:
Assets = Liabilities + Shareholders’
Equity
which is the same idea as
Investing = Financing
Resources = Sources of Resources
Liabilities = Claims on Resources

Relationship between Balance
Sheet and Income Statement


The income statement links the
balance sheet at the beginning of
the period with the balance sheet
at the end of the period.
Retained Earnings is increased by
net income and decreased by
dividends.
Income Statement
 Indicates
earning or profit
 Reports amounts for a period of time
– Typically one year
 Explain
the following concepts
– Revenue
– Expenses
 How
is classification accomplished?
 How is the income statement related
to the balance sheet?
Income Statement
Results of the operating activities
of a firm for a specific time period.
 Basic Income Equation:
Net Income = Revenues - Expenses
 Revenues are the inflows of assets
from selling goods and services.
 Expenses are the outflows of assets
used in generating revenues.

Income Statement
Statement of Cash Flows
 Classification
–Operations
–Investing
–Financing
 Discuss
its relationship to
the Balance Sheet.
Who are Primary Participants in the
Reporting Process?
1. Business firms and their managers
2. Accounting standards setting and
regulatory bodies
3. Independent auditors
4. Security analysts and other users
of financial statements
Financial Reporting Issues
a) The multiple uses of financial accounting
reports
b) The alternative approaches to establishing
accounting measurement and reporting
standards
c) The role of the independent audit of a
business firm’s financial statements
d) The role of financial reporting in an
efficient capital market
Financial Reporting in the U.S.




Legal authority to set accounting standards lies
with the Securities and Exchange Commission
(SEC)
The SEC looks to the Financial Accounting
Standards Board (FASB), for leadership in
establishing standards
Pronouncements of the FASB are called
Generally Accepted Accounting Standards
(GAAP)
Since 1973, the FASB has issued 159
statements and several conceptual papers
Classification of Cash Flows



Operations: cash from customers
less cash paid in carrying out the
firm’s operating activities
Investing: cash paid to acquire
noncurrent assets less amounts
from any sale of noncurrent assets
Financing: cash from issues of
long-term debt or new capital less
dividends
Inflows and Outflows of Cash
Other Items in Annual Reports &
Financial Reporting Issues


Supporting schedules
and notes
Auditor’s opinion




Users and uses of
financial reports
Authority for
establishing
acceptable accounting
standards
The role of an audit of
a firm’s financial
statements
Efficiency of capital
markets
Auditor’s Opinion

Firms whose common stock is publicly
traded are required to get an opinion by
an independent auditor who:
1. Assesses the effectiveness of the firm’s
internal control system for measuring and
reporting business transactions
2. Assesses whether the financial statements
and notes present fairly a firm’s financial
position, results of operations, and cash flows
in accordance with generally accepted
accounting principles
The Opinion Letter



The first paragraph indicates the financial
statements covered by the opinion and that the
responsibility for the statements rests with
management.
The second paragraph affirms that the auditor
followed auditing standards and practices
generally accepted by the accounting profession
unless otherwise noted and described.
The third paragraph has the auditor’s opinion- unqualified or qualified.
Qualified opinions are either a disclaimer of opinion
or an adverse opinion.
The Four Participants in the
Financial Reporting Process.
1. Business firms and their
managers
2. Accounting standards
setting and regulatory
bodies
3. Independent auditors
4. Security analysts and
other users of financial
statements
SEC
Compilation of accounting
rules, procedures and
practices
FASB
Private sector body, for
leadership in establishing
accounting standards
GAAP
An agency of the federal
government, that has the
legal authority to set
acceptable accounting
methods and standards in
the U.S.
An International Perspective



The process of setting accounting
standards vary widely around the world
resulting in a diverse set of accounting
principles.
Globalization of economies has increased
the need for comparable and
understandable financial information.
The International Accounting Standards
Committee (IASC) issues
recommendations for minimum
standards.
Chapter Summary



This chapter provided a broad
overview of business activities and
how they are reflected in basic
financial statements.
The three basic financial
statements were introduced.
Further chapters examine the
concepts and procedures that
underlie each statement.
Rapid Review - True or False
The four principle business activities of a business firm are
(a) establishing goals and strategies
(b) obtaining financing
(c) making investments
(d) conducting operations
An income statement provides information about a firm’s cashgenerating ability.
An income statement provides information about a firm’s
profitability. Cash-generating ability information is
provided by the Statement of Cash Flows.
Most independent auditors’ opinions are unqualified.