Financial Accounting 13th Edition - Chapter 1 PDF

Financial Accounting Thirteenth Edition Chapter 1 The Financial Statements Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Walt Disney Com...

Financial Accounting Thirteenth Edition Chapter 1 The Financial Statements Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Walt Disney Company Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objectives 1.1 Explain why accounting is critical to business. 1.2 Explain and apply underlying accounting concepts, assumptions and principles. 1.3 Apply the accounting equation to business organizations. 1.4 Construct financial statements and analyze the relationships among them. 1.5 Evaluate business decisions ethically. 1.6 Identify tools and technologies used in accounting and business Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 1 Explain why accounting is critical to business Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain Why Accounting is Critical to Business Accounting is an information system that: – Measures business activities – Processes data into financial statements and reports – Communicates results to decision makers The process by which a company’s financial statements are prepared is called the accounting cycle Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-1 The Flow of Accounting Information Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Describe the Decision Makers Who Use Accounting Individuals Investors and creditors Regulatory bodies Nonprofit organizations Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Describe the Two Types of Accounting and Who Uses Each Type Financial Accounting Managerial Accounting For decision makers outside For managers inside the entity the entity – Budgets – Investors – Forecasts – Creditors – Projections – Government agencies – The public Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-2 The Various Forms of Business Organization Blank Proprietorship Partnership LLC Corporation 1. Owner(s) Proprietor—one Partners—two or Members Stockholders— owner more owners generally many owners 2. Personal Proprietor is General partners Members are not Stockholders are liability of personally liable are personally personally liable not personally owner(s) for liable; limited liable business’s partners are not debts Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain How Businesses Are Organized (1 of 5) Proprietorship Single owner Tend to be small retail stores or solo providers of professional services Personally liable for all business’s debts Distinct entity for accounting purpose Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain How Businesses Are Organized (2 of 5) Partnership Two or more parties as co-owners Income and losses “flow through” to partners Many are small or medium-sized companies General partnerships have mutual agency and unlimited liability In limited-liability partnerships, only liable up to the investment put in Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain How Businesses Are Organized (3 of 5) Limited-Liability Company Business (not owners) is liable for debts May have one owner or many, called members Members have limited liability Income “flows through” to members Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain How Businesses Are Organized (4 of 5) Corporation Owned by stockholders (shareholders) Able to raise large sums of capital by issuing stock Formed under state law Legally distinct from its owners Stockholders have no personal obligation for the corporation’s debts, limited liability Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Explain How Businesses Are Organized (5 of 5) Corporation Double taxation – Corporation pays income tax – Shareholders taxed on dividends Stockholders elect board of directors, which – Sets policy – Appoints officers Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 2 Explain and apply underlying accounting concepts, assumptions, and principles. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Professional Frameworks Generally Accepted Accounting Principles (GAAP) Formulated by the Financial Accounting Standards Board (FASB) International Financial Reporting Standards (IFRS) Formulated by the International Accounting Standards Board (IASB) Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-3 Conceptual Foundation of Accounting Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Assumptions and Principles Entity Assumption An organization stands apart from other organizations and individuals as a separate economic unit Continuity (Going-Concern) Assumption Entity will continue to operate for the foreseeable future Historical Cost Principle Assets should be recorded at their actual cost on the date of purchase Stable-Monetary-Unit Assumption Assume the dollar’s purchasing power is stable over time Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 3 Apply the accounting equation to business organizations Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Apply the Accounting Equation to Business Organizations Assets are economic resources that are expected to produce a benefit in the future. Liabilities are debts owed to people and organizations outside of the business (creditors). Equity (also called capital, owners’ equity, or stockholders’ equity for a corporation) represents the owners’ claims. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-4 The Accounting Equation The accounting equation shows the relationship among a company’s assets, liabilities, and equity. The two sides must be equal. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Assets and Liabilities Assets – Cash and cash equivalents – Inventories – Property, plant, and equipment Liabilities – Accounts payable – Income taxes payable – Long-term debt Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Equity (1 of 2) The accounting equation can be rewritten as: Assets – Liabilities Stockholders’ Equity A corporation’s equity has two main parts: – Paid-in capital – Retained earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Equity (2 of 2) Paid-in capital – The amount stockholders have invested in the business. – Common stock is the basic component. Retained Earnings – The amount of earned income kept for use in the business. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-5 The Components of Retained Earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Components of Retained Earnings Revenues Inflow of resources from delivering goods or services Increase retained earnings Expenses Outflow of resources due to the cost of operations Decrease retained earnings Dividends Distribution of assets to stockholders Decrease retained earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 4 Construct financial statements and analyze the relationships among them Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Construct Financial Statements and Analyze the Relationships Among Them Data flows from one financial statement to the next. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-6 Information Reported in the Financial Statements Question Financial statement Answer Revenues 1. How well did the Income statement company perform during (also called the  Expenses Start fraction Revenues minus Expenses over Net income, or Net loss end fraction the year? Statement of operations) Net income or Net loss  Beginning retained earnings 2. Why did the company’s  Net Income or  Net Loss  retained earnings change Statement earnings of retained  Dividends declared Start fraction Beginning retained earnings + Net income or minus Net loss minus Dividends declared over Ending retained earning end fraction. during the year? Ending retained earnings 3. What is the company’s Balance sheet (also called financial position at fiscal the Statement of financial Assets = Liabilities + year end? position) Stockholders’ Equity Net Operating cash flows 4. How much cash did the  Net Investing cash flows company generate and Statement of cash flows  Net Financing cash flows Start fraction Net Operating cash flows plus or minus Net Investing cash flows plus or minus Net Financing cash flows over Increase, decrease in cash end fraction. spend during the year? Increase decrease  in cash Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Income Statement The income statement reports revenues and expenses for the period. Also called the statement of operations The bottom line in the statement is the net income (loss) for the period Net income Total Revenues & Gains – Total Expenses & Losses Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-7 The Walt Disney Company, Consolidated Statements of Income Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Statement of Retained Earnings (1 of 2) Portion of net income reinvested into the business Net income increases retained earnings Net losses and dividends decrease retained earnings Net income (net loss) flows from the income statement to the statement of retained earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Statement of Retained Earnings (2 of 2) Beginning retained earnings Add: Net income (loss) Less: Dividends declared Ending retained earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-8 The Walt Disney Company, Consolidated Statements of Retained Earnings Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Balance Sheet Also called the statement of financial position Reports three items: – Assets – Liabilities – Stockholders’ equity Reflects the company’s position at a specific moment in time Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Assets Current assets – expected to be used or converted to cash within one business cycle – Examples: cash and cash equivalents, receivables, inventories, and prepaid expenses Long-term assets – expected to benefit the company beyond just the next fiscal year – Examples: property, plant, and equipment, long-term investments, and intangible assets Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Liabilities Current liabilities – debts due within one year – Examples: accounts payable, salaries payable, short-term notes payable, accrued liabilities Long-term liabilities – debts payable after one year – Examples: long-term notes payable, long-term bonds payable Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Equity (Stockholders’ Equity) Represents the stockholders’ ownership of the business’s assets Examples: common stock, additional paid-in capital, retained earnings, treasury stock, accumulated other comprehensive income (loss) Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-9 The Walt Disney Company, Consolidated Balance Sheets Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved The Statement of Cash Flows Reports cash receipts and cash payments Three types of activities: – Operating activities: cash flows from selling goods and services to customers – Investing activities: cash flows from purchasing and selling long-term assets – Financing activities: cash flows from borrowing or repaying funds or equity transactions Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-10 The Walt Disney Company, Consolidated Statements of Cash Flows Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-11 Relationships Among the Financial Statements (in Millions of $) (1 of 3) Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-11 Relationships Among the Financial Statements (in Millions of $) (2 of 3) Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-11 Relationships Among the Financial Statements (in Millions of $) (3 of 3) Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 5 Evaluate business decisions ethically Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Evaluate Business Decisions Ethically Three factors influence business and accounting decisions. Economic – Decision should maximize the economic benefits Legal – Free societies are governed by laws written to provide clarity and prevent abuse of others’ rights Ethical – Recognizes that even when economically profitable and legal, some actions still may not be right Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved AICPA Code of Professional Conduct The American Institute of Certified Public Accountants (AICPA) provides the industry a Code of Professional Conduct with these principles: – Responsibilities – Public Interest – Integrity – Objectivity and Independence – Due Care – Scope and Nature of Services Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Learning Objective 6 Identify tools and technologies used in accounting and business Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Identify Tools and Technologies Used in Accounting and Business Tools and technologies allow accountants to make better decisions through: More accurate data More timely data More visual data Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Spreadsheets Generated by a software program – Examples: Microsoft Excel, Google Sheets, Apple Numbers Allows data to be organized in rows and columns Data can be entered, results calculated, and graphs generated Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Data Analytics The process of taking raw data and putting it together to produce useful insights Can be used to: – Discover trends or insights – Identify process improvements – Analyze complex tax questions – Make better investment decisions – Help build models Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Artificial Intelligence (AI) and Machine Learning Artificial intelligence is the science that studies ways to build programs and machines that can creatively solve problems in a human-like manner. – Examples: Siri, Alexa, and the technology used to classify images on Pinterest Machine learning is a subset of AI based on the idea that we can provide data to machines and let them learn for themselves without explicitly programming them. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Robotic Process Automation (RPA) Software bots are being developed to do rote, routine work. Frees accountants to do things like analyzing and interpreting data and trends. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Technology Risks Technology used properly can facilitate better decisions. Technology used improperly can lead to catastrophic decisions. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Introduction to Excel Microsoft Excel is the most widely used program in business for spreadsheets. – Allows numbers to be added, subtracted and more Google Sheets and Apple Numbers can perform many of the same tasks in similar ways. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Exhibit 1-12 Home Screen of Microsoft Excel for Windows Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved Copyright This work is protected by United States copyright laws and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright © 2022, 2019, 2017 Pearson Education, Inc. All Rights Reserved