Copyright © 2016 by McGraw-Hill Education
Chapter 1
Business Decisions and Financial
Accounting
PowerPoint Author:
Brandy Mackintosh, CA
Copyright © 2016 by McGraw-Hill Education
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
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 presently
controlled by the company that
have measurable value and are
expected to benefit the company
by producing cash inflows or
reducing cash outflows
in the future
Equipment
Cash
Supplies
1-9
Furniture
Liabilities
Measurable amounts
that the company
owes to creditors
Notes
Payable
1-10
Accounts
Payable
Stockholders’ Equity
Owners’ claim to the
business resources.
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, utilities, and
supplies used in the
office.
Dividends
Distributions of a
company’s earnings to its
stockholders as a return
on their investment.
Common Stock
(equity paid in by stockholders)
Retained Earnings
(equity earned by the company)
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
SONICGATEWAY INC.
Income Statement (Projected)
For the Month Ended September 30, 2015
Revenues
$ 9,000
Sales Revenue
3,000
Service Revenue
12,000
Total Revenues
Expenses
Salaries and Wages Expense
Rent Expense
Utilities Expense
Insurance Expense
Advertising Expense
Income Tax Expense
Total Expenses
Net Income
1-15
5,000
2,500
1,600
300
100
500
10,000
$ 2,000
The unit of
measure
assumption
Reports
the
states that
amount
results ofof
revenues
business
activities
less
should be
expenses
reported
in an
for
a period
appropriate
of time.
monetary
unit.
The Statement of Retained Earnings
SONICGATEWAY, INC.
Statement of Retained Earnings (Projected)
For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015 $
0
Add: Net Income
2,000
Subtract: Dividends
(1,000)
Retained Earnings, September 30, 2015 $ 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).
SONICGATEWAY, INC.
Balance Sheet (Projected)
At September 30, 2015
Assets
Cash
Accounts Receivable
Supplies
Equipment
Software
Total Assets
$ 13,000
2,500
500
14,000
6,000
$ 36,000
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
$ 5,000
20,000
25,000
Stockholders’ Equity
Common Stock
10,000
Retained Earnings
1,000
Total Stockholders’ Equity
11,000
Total Liabilities and Stockholders’ Equity $ 36,000
BASIC ACCOUNTING EQUATION
Assets = Liabilities + Stockholders’ Equity
1-17
The Statement of Cash Flows
SONICGATEWAY, INC.
Statement of Cash Flows (Projected)
For the Month Ended September 30, 2015
Cash Flows from Operating Activities
Cash received from customers
$ 9,500
Cash paid to employees and suppliers
(5,500)
Cash Provided by Operating Activities
4,000
Cash Flows from (Used in) Investing Activities
Cash used to buy equipment and software
(20,000)
Cash from (Used in) Investing Activities
(20,000)
Cash Flows from Financing Activities
Cash received for stock issuance
10,000
Cash dividends paid to stockholders
(1,000)
Cash borrowed from the bank
20,000
Cash Provided by Financing Activities
29,000
Change in Cash
13,000
Beginning Cash Balance, September 1, 2015
Ending Cash Balance, September 30, 2015
$ 13,000
1-18
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
SONICGATEWAY, INC.
Income Statement
For the Month Ended September 30, 2015
Revenues
Sales Revenue
Service Revenue
Total Revenues
Expenses
Salaries and Wages Expense
Rent Expense
Utilities Expense
Insurance Expense
Advertising Expense
Income Tax Expense
Total Expenses
Net Income
$ 9,000
3,000
12,000
5,000
2,500
1,600
300
100
500
10,000
$ 2,000
SONICGATEWAY, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015 $
Add: Net Income
2,000
Subtract: Dividends
(1,000)
Retained Earnings, September 30, 2015 $ 1,000
1-20
1
Net income
from the income
statement is a
component in
determining
ending Retained
Earnings on the
Statement of
Retained
Earnings.
Relationships Among the Financial Statements
SONICGATEWAY, INC.
Balance Sheet
At September 30, 2015
2
Ending Retained
Earnings from the
Statement of Retained
Earnings is then
reported on the
Balance Sheet.
SONICGATEWAY, INC.
Statement of Retained Earnings
For the Month Ended September 30, 2015
Retained Earnings, September 1, 2015 $
Add: Net Income
2,000
Subtract: Dividends
(1,000)
Retained Earnings, September 30, 2015 $ 1,000
1-21
Assets
Cash
Accounts Receivable
Supplies
Equipment
Software
Total Assets
$ 13,000
2,500
500
14,000
6,000
$ 36,000
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
$ 5,000
20,000
25,000
Stockholders’ Equity
10,000
Common Stock
1,000
Retained Earnings
11,000
Total Stockholders’ Equity
$
36,000
Total Liabilities and Stockholders’ Equity
Relationships Among the Financial Statements
SONICGATEWAY, INC.
Balance Sheet
At September 30, 2015
SONICGATEWAY, INC.
Statement of Cash Flows
For the Month Ended September 30, 2015
Cash Flows from Operating Activities
Cash Flows from (Used in) Investing Activities
Cash Flows from Financing Activities
Change in Cash
Beginning Cash Balance, Sept. 1, 2015
Ending Cash Balance, Sept. 30, 2015
$ 4,000
(20,000)
29,000
13,000
0
$ 13,000
Assets
Cash
Accounts Receivable
Supplies
Equipment
Software
Total Assets
$ 13,000
2,500
500
14,000
6,000
$ 36,000
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
$ 5,000
20,000
25,000
Stockholders’ Equity
10,000
Common Stock
1,000
Retained Earnings
11,000
Total Stockholders’ Equity
$
36,000
Total Liabilities and Stockholders’ Equity
3
1-22
Cash on the Balance Sheet is equal to the ending
Cash reported on the Statement of Cash Flows.
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
Copyright © 2016 by McGraw-Hill Education
1-30
Chapter 1
Solved Exercises
M1-12, E1-3, E1-6, E1-8, S1-6 (Req. 1)
Copyright © 2016 by McGraw-Hill Education
M1-12 Preparing a Statement of Retained Earnings
Stone Culture Corporation was organized on January 1, 2014.
For its first two years of operations, it reported the following:
Net Income for 2014
Net Income for 2015
Dividends for 2014
Dividends for 2015
Total assets at the end of 2014
Total assets at the end of 2015
$ 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 2014 (its first year of operations) and 2015.
1-32
M1-12 Preparing a Statement of Retained Earnings
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2014
Retained Earnings, January 1, 2014
$
Add: Net Income
40,000
Subtract: Dividends
(15,000)
Retained Earnings, December 31, 2014
$ 25,000
STONE CULTURE CORPORATION
Statement of Retained Earnings
For the Year Ended December 31, 2015
Retained Earnings, January 1, 2015
$ 25,000
Add: Net Income
45,000
Subtract: Dividends
(20,000)
Retained Earnings, December 31, 2015
$ 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 February 2, 2013, contained the following items (listed
alphabetically, amounts in thousands).
Accounts Payable
$
275,300
Accounts Receivable
114,800
Cash
313,200
Common Stock
841,600
Equipment
440,300
Inventory
393,800
Notes Payable
128,200
Retained Earnings
Total Assets
Total Liabilities and Stockholders’ Equity
17,000
1,262,100
?
Required:
1.
2.
1-34
Prepare the balance sheet as of February 2, 2013 solving for the
missing amount.
As of February 2, did most of the financing for assets come from
creditors or stockholders?
E1-3 Preparing a Balance Sheet
DSW, Inc.
Balance Sheet
At February 2, 2013
(In thousands)
Assets
Cash
Accounts Receivable
Inventory
Equipment
Total Assets
Liabilities
Accounts Payable
Notes Payable
Total Liabilities
Stockholders’ Equity
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
1-35
$
313,200
114,800
393,800
440,300
$ 1,262,100
$
275,300
128,200
403,500
841,600
17,000
858,600
$ 1,262,100
Most of the financing
as of February 2 came
from stockholders.
The stockholders
have financed
$858,600 of the total
assets and creditors
have financed only
$403,500 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 September 30, 2013, reported the following amounts
(listed alphabetically in thousands):
Admissions Revenues $ 479,600 Office Expenses
Concessions Expenses
39,000 Salaries & Wages Expense
Concessions Revenues
308,000 Rent Expense
Film Rental Expenses
254,800 Total Expenses
Net Income
?
$254,700
73,300
85,100
?
Required:
1. Solve for the missing amounts and prepare an Income Statement
for the quarter ended September 30, 2013.
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 September 30, 2013
(in thousands)
Revenues
Admissions Revenues
Concessions Revenues
Total Revenues
Expenses
Office Expenses
Film Rental Expenses
Rent Expenses
Concessions Expense
Salaries and Wages Expenses
Total Expenses
Net Income
1-37
$ 479,600
308,000
$ 787,600
254,700
254,800
85,100
39,000
73,300
?
706,900
?
$ 80,700
E1-6 Preparing an Income Statement and Inferring Missing Values
Cinemark Holdings, Inc.
Income Statement
For the Quarter Ended September 30, 2013
(in thousands)
Revenues
Admissions Revenues
Concessions Revenues
Total Revenues
Expenses
Office Expenses
Film Rental Expenses
Rent Expenses
Concessions Expense
Salaries and Wages Expenses
Total Expenses
Net Income
1-38
$ 479,600
308,000
$ 787,600
254,700
254,800
85,100
39,000
73,300
706,900
$ 80,700
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