McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Brandy Mackintosh Lindsay Heiser McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved Learning Objective 1-1 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 legal entity. Owners of corporations (stockholders) are not personally liable for debts of the corporation. Organizational Forms Source: IRS.gov. 1-5 The Accounting System Operating, Investing and Financing Activities Accounting System Accounting Reports External users (creditors, investors, etc.) Financial Managerial Internal users (managers, supervisors etc.) Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-6 Learning Objective 1-2 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 The financial reports of a business are assumed to include the results of only that business’s activities. 1-8 Assets Economic 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 Measurable 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 doing 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, 2013 Revenues $ 12,000 Pizza Revenue 12,000 Total Revenue Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income 1-15 5,000 2,000 1,500 600 300 100 500 10,000 $ 2,000 The unit of measure assumption Reports the states that amount of results of revenues business less activities expenses should be for a period reported in an appropriate of time. monetary unit. The Statement of Retained Earnings PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 $ 2,000 (1,000) $ 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, 2013 Assets Cash Accounts Receivable Supplies Equipment Total Assets $ 14,000 1,000 3,000 40,000 $ 58,000 Liabilities Accounts Payable Notes Payable Total Liabilities $ 7,000 20,000 27,000 Stockholders’ Equity Contributed Capital 30,000 Retained Earnings 1,000 Total Stockholders’ Equity 31,000 Total Liabilities and Stockholders’ Equity $ 58,000 BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity 1-17 The Statement of Cash Flows PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2013 Cash Flows from Operating Activities Cash received from customers Cash paid to employees and suppliers Cash Provided by Operating Activities Cash Flows from Investing Activities Cash used 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, 2013 Ending Cash Balance, Sept. 30, 2013 1-18 $ 11,000 (6,000) 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, 2013 Revenues Pizza Revenue Total Revenue $ 12,000 12,000 Expenses Supplies Expense Wages Expense Rent Expense Utilities Expense Insurance Expense Advertising Expense Income Tax Expense Total Expenses Net Income 5,000 2,000 1,500 600 300 100 500 10,000 $ 2,000 PIZZA AROMA, INC. Statement of Retained Earnings For the Month Ended September 30, 2013 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 1-20 $ 2,000 (1,000) $ 1,000 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, 2013 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, 2013 Retained Earnings, Sept. 1, 2013 Add: Net Income Subtract: Dividends Retained Earnings, Sept. 30, 2013 1-21 $ 2,000 (1,000) $ 1,000 Assets Cash Accounts Receivable Supplies Equipment Total Assets $ 14,000 1,000 3,000 40,000 $ 58,000 Liabilities Accounts Payable Notes Payable Total Liabilities $ 7,000 20,000 27,000 Stockholders’ Equity 30,000 Contributed Capital 1,000 Retained Earnings 31,000 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 58,000 Relationships Among the Financial Statements PIZZA AROMA, INC. Balance Sheet At September 30, 2013 PIZZA AROMA, INC. Statement of Cash Flows For the Month Ended September 30, 2013 Cash Flows from Operating Activities Cash received from customers Cash paid to employees and suppliers Cash Provided by Operating Activities Cash Flows from Investing Activities Cash used 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, 2013 Ending Cash Balance, Sept. 30, 2013 $ 11,000 (6,000) 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 $ 14,000 1,000 3,000 40,000 $ 58,000 Liabilities Accounts Payable Notes Payable Total Liabilities $ 7,000 20,000 27,000 Stockholders’ Equity 30,000 Contributed Capital 1,000 Retained Earnings 31,000 Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity $ 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 1-3 Explain how financial statements are used by decision makers. 1-23 Using Financial Statements Creditors 1-24 Investors 1. Is the company generating enough cash to make payments on its loans? … SCF 1. What is the immediate return 2. Does the company have enough assets to cover its liabilities? … B/S 2. What is the longterm return (through (through dividends) on my contributions? … SRE stock price increases resulting from the company’s profits)?.. I/S Learning Objective 1-4 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 Careers That Depend on Accounting Knowledge McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved 1-30 Chapter 1 Solved Exercises M1-12, E1-3, E1-6, E1-8, S1-6 (Req. 1) McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved M1-12 Preparing a Statement of Retained Earnings Stone Culture Corporation was organized on January 1, 2012. For its first two years of operations, it reported the following: Net Income for 2012 Net Income for 2013 Dividends for 2012 Dividends for 2013 Total assets at the end of 2012 Total assets at the end of 2013 $ 40,000 45,000 15,000 20,000 125,000 242,000 On the basis of the data given, prepare a statement of retained earnings for 2012 (its first year of operations) and 2013. Show computations. 1-32 M1-12 Preparing a Statement of Retained Earnings STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2012 Retained Earnings, January 1, 2012 $ Add: Net Income 40,000 Subtract: Dividends (15,000) Retained Earnings, December 31, 2012 $ 25,000 STONE CULTURE CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2013 Retained Earnings, January 1, 2013 $ 25,000 Add: Net Income 45,000 Subtract: Dividends (20,000) Retained Earnings, December 31, 2013 $ 50,000 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 January 29, 2011, contained the following items (listed alphabetically, amounts in thousands). Accounts Payable $ 149,722 Accounts Receivable 12,514 Cash 93,617 Contributed Capital Notes Payable 314,382 95,589 Other Assets 692,375 Other Liabilities 122,822 Property, Plant, and Equipment 210,391 Retained Earnings 326,382 Total Assets Total Liabilities and Stockholders’ Equity 1,008,897 ? Required: 1. 2. 1-34 Prepare the balance sheet as of January 29, 2011 solving for the missing amount. As of January 29, did most of the financing for assets come from creditors or stockholders? E1-3 Preparing a Balance Sheet DSW, Inc. Balance Sheet At January 29, 2011 (In thousands) Assets Cash Accounts Receivable Property, Plant, and Equipment Other Assets Total Assets Liabilities Accounts Payable Notes Payable Other Liabilities Total Liabilities Stockholders’ Equity Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity 1-35 $ 93,617 12,514 210,391 692,375 $ 1,008,897 $ 149,722 95,589 122,822 368,133 314,382 326,382 640,764 $ 1,008,897 Most of the financing as of January 29 came from stockholders. The stockholders have financed $640,764 of the total assets and creditors have financed only $368,133 of the total assets of the company. E1-6 Preparing an Income Statement and Inferring Missing Values Cinemark Holdings, Inc. operates movies and food concession counters throughout the United States. Its income statement for the quarter ended March 31, 2011, reported the following amounts (listed alphabetically in thousands): Admissions Revenues Concessions Expenses Concessions Revenues Film Rental Expenses Gen. & Admin. Expenses $ 311,692 23,282 146,681 165,153 179,047 Net Income Other Expenses Other Revenues Rent Expense Total Expenses $ ? 24,265 24,763 66,426 ? Required: 1. Solve for the missing amounts and prepare an Income Statement for the quarter ended March 31, 2011. 2. What are Cinemark’s main source of revenue and two biggest expenses? 1-36 E1-6 Preparing an Income Statement and Inferring Missing Values Cinemark Holdings, Inc. Income Statement For the Quarter Ended March 31, 2011 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues Total Revenues Expenses Concessions Expenses Film Rental Expenses Gen. and Admin. Expenses Rent Expense Other Expenses Total Expenses Net Income 1-37 $ 311,692 146,681 24,763 $ 483,136 23,282 165,153 179,047 66,426 24,265 458,173 ? $ 24,963? E1-6 Preparing an Income Statement and Inferring Missing Values Cinemark Holdings, Inc. Income Statement For the Quarter Ended March 31, 2011 (in thousands) Revenues Admissions Revenues Concessions Revenues Other Revenues Total Revenues Expenses Concessions Expenses Film Rental Expenses Gen. and Admin. Expenses Rent Expense Other Expenses Total Expenses Net Income 1-38 $ 311,692 146,681 24,763 $ 483,136 23,282 165,153 179,047 66,426 24,265 458,173 $ 24,963 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 $110,000 B 80,000 D 50,000 1-39 Net Income (Loss) $82,000 80,000 C E Total Expenses $150,000 12,000 86,000 81,000 Total Assets Total Liabilities $70,000 112,000 104,000 Stockholders’ Equity 70,000 26,000 20,000 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 1-40 Total Revenues Total Expenses Net Income (Loss) A = L + SE Total Assets Total Liabilities Stockholders’ Equity A $110,000 $82,000 $28,000 $150,000 $70,000 $80,000 B 92,000 80,000 12,000 112,000 42,000 70,000 C 80,000 86,000 (6,000) 104,000 26,000 78,000 D 50,000 30,000 20,000 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 $250. He figures that, if needed, he could sell it to a friend for $180. Ashley argued that she was better off because she had $1,000 cash in her bank account and a piece of art 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. 1-41 S1-6 (Req. 1) Critical Thinking: Developing a Balance Sheet Balance Sheet ASSETS What is owned Cash Console Art TOTAL What is owed LIABILITIES Car loan Tuition Payable Student Loan TOTAL “Net worth” EQUITY TOTAL 1-42 Ashley Jason $1,000 -0800 $1,800 $6,000 250 -0$6,250 $ 250 -0-0250 1,550 $1,800 $ -0800 4,800 5,600 650 $6,250 End of Chapter 1 1-43