Spiceland_FA_5e_Ch001_PPT (1).pptx

Financial Accounting Fifth Edition A Framework for Financial 1 Accounting CHAPTER Spiceland Thomas...

Financial Accounting Fifth Edition A Framework for Financial 1 Accounting CHAPTER Spiceland Thomas Herrmann Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-1 Part A ACCOUNTING AS A MEASUREMENT/COMMUNICATION PROCESS Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-2 Learning Objective 1 LO1-1 Describe the two primary functions of financial accounting. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-3 Illustration 1-1 Decisions People Make About Companies Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-4 Financial Accounting Accounting information provided to external users is referred to as financial accounting, which is the focus of this book. The two functions of financial accounting are  to measure business activities of a company, and  to communicate those measurements to external parties for decision-making purposes. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-5 Illustration 1-2 Framework for Financial Accounting Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-6 Learning Objective 2 LO1-2 Understand the business activities that financial accounting measures. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-7 Business Structures A corporation is a company that is legally separate from its owners. The advantage of being legally separate is that the stockholders have limited liability. A sole proprietorship is a business owned by one person. A partnership is a business owned by two or more persons.  Neither sole proprietorships nor partnerships offer limited liability. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-8 Business Activities Financing activities: transactions the company has with investors and creditors Investing activities: transactions involving the purchase and sale of resources that are expected to benefit the company for several years Operating activities: transactions that relate to the primary operations of the company Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-9 Assets, Liabilities, and Stockholders’ Equity Illustration 1-3 – The Accounting Equation Assets = resources of the company. Liabilities = creditors’ claims to resources. Stockholders’ equity = owners’ claims The accounting equation illustrates a to resources fundamental model of business valuation. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-10 Revenues, Expenses, and Dividends Revenues are the amounts recognized when the company sells products or provides services to customers. Expenses are the costs of providing products and services and other business activities during the current period. Net income is the difference between revenues and expenses. Other common names for net income include earnings or profit. Dividends are distributions to stockholders, usually in the form of cash Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-11 Illustration 1-4 Business Activities and Their Measurement Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-12 Concept Check 1-1 The resources of a company are referred to as: a. Liabilities b. Revenues c. Assets d. Expenses Assets are the resources of the company that will benefit future operations. They include items such as cash, inventory, supplies, buildings, and equipment. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-13 Concept Check 1-2 The amounts recorded when the company sells products or provides services to customers are referred to as: a. Liabilities b. Revenues c. Assets d.Revenues Expensesare recorded at the time the company provides products or services to customers. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-14 Learning Objective 3 LO1-3 Determine how financial accounting information is communicated through financial statements. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-15 Communicating through Financial Statements Financial statements are periodic reports published by the company for the purpose of providing information to external users. Primary financial statements  Income statement  Statement of stockholders’ equity  Balance sheet  Statement of cash flows Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-16 Income Statement Reports the company’s revenues and expenses over an interval of time  If revenues > expenses, then net income  If revenues < expenses, then net loss Key Point: The income statement compares revenues and expenses for the current period to assess the company’s ability to earn a profit from Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-17 Illustration 1-5 Income Statement for Eagle Soccer Academy EAGLE SOCCER ACADEMY Income Statement For the month ended December 31, 2021 Revenues Service revenue $7,200 Expenses Rent expense 500 Supplies expense 1,000 Salaries expense 3,100 Utilities expense 900 Interest expense 100 Other expenses 400 Total expenses 6,000 Net income $1,200 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of 1-18 McGraw-Hill Education. Statement of Stockholders’ Equity Summarizes the changes in stockholders’ equity over an interval of time Stockholders’ Equity = Common Stock + Retained Earnings External Company Internal Source Value Source Copyright ©2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-19 Illustration 1-6 Statement of Stockholders’ Equity for Eagle Soccer Academy EAGLE SOCCER ACADEMY Statement of Stockholders’ Equity For the month ended Total December 31, 2021 Commo Retain Stockhold n ed ers’ Beginning balance (Dec. Stock- $ Earnin $ - Equity $ - 1) 0- 0-gs 0- Issuance of common stock 25,00 25,00 Add: Net income for 0 1,200 0 the period *Beginning balances are zero only because this is the first month of operations for Eagle. Less: beginning Normally, Dividends balances for Common Stock and Retained (200) 1,200 Earnings equal ending Ending balances frombalance the previous(Dec. period.31) $25,0 $1,00 00 0 (200) 1-20 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Balance Sheet Presents the financial position of the company on a particular date Financial position: Resources = Claims to Resources Liabilities & Assets = Stockholders’ Equity Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-21 Illustration 1-7 Balance Sheet for Eagle Soccer Academy EAGLE SOCCER ACADEMY Balance Sheet December 31, 2021 Asset Liabiliti Cash s $ Accounts es $ Accounts payable 2,300 6,900 receivable Salaries payable Supplies Utilities payable 300 2,700 Equipment, net Interest payable Other assets Notes payable 900 1,300 Other liabilities Total 100 23,600 Stockholders’ liabilities Equitystock Common 25,00 5,500 10,000 Retained earnings 0 Total 400 stockholders’ equity 1,000 Total $40,0 Total $40,00 26,00 assets 00 liabilities and 14,000 00 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-22 Concept Check 1-3 Which of the following accounts would appear in a company’s income statement? a. Accounts Payable b. Cash c. Dividends d.The Rent Expense income statement is a financial statement that reports the company’s revenues and expenses over an interval of time. Accounts Payable (liability) and Cash (asset) would appear in the balance sheet, and Dividends Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-23 Concept Check 1-4 Which relationship is reflected in the balance sheet? a. Revenues − Expenses = Net income b. Assets = Liabilities + Stockholders’ Equity c. Assets − Liabilities = Net Income d. Assets = Revenues + Dividends The balance sheet reflects the financial position of a company on a particular date. The company’s financial position is summarized by showing that resources (Assets) equal claims to resources (Liabilities + Stockholders’ Equity). Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-24 Statement of Cash Flows Measures activities involving cash receipts and cash payments over an interval of time Operating Investing Financing cash flows cash flows cash flows cash cash transactions cash transactions transactions for the purchase with lenders involving and sale of investments and stockholders revenue and and long-term assets expense Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-25 Illustration 1-8 Statement of Cash Flows for Eagle Soccer Academy EAGLE SOCCER ACADEMY Statement of Cash Flows For the month ended December 31, Cash Flows from 2021 Operating Cash inflows: Activities From customers $ Cash outflows: 4,900 For salaries For rent (2,800) Net cash flows from operating $ activities Cash Flows from Investing (3,900) (6,000) Purchase equipmentActivities (24,000 Net cash flows from investing ) (24,000 activities ) Cash Flows from Financing Activities Issue common stock 25,000 Borrow from bank 10,000 Pay dividends (200) Net cash flows from financing 34,800 activities 6,900 Net increase in cash -0- Cash at the beginning of the period $ 6,900 Cash©2019 Copyright at the end of McGraw-Hill the period Education. All rights reserved. No reproduction or distribution without the prior written 1-26 consent of McGraw-Hill Education. Concept Check 1-5 The cash collected from a customer would be recorded as which type of activity in the statement of cash flows? a. Operating Activity b. Business Activity c. Investing Activity d.Operating Financing Activity activities include revenue and expense transactions. Collecting cash from customers represents activity related to revenues. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-27  Illustration 1-9 Links among Financial Statements EAGLE SOCCER ACADEMY EAGLE SOCCER ACADEMY Income Revenues Statement $7,200 Statement of Stockholders’ Expenses 6,000 Net Income $1,200 Equity Total Commo Retaine Stockhold n d ers’ Notice that the amount Beginning balance (Dec. Stock $ - Earning $ - Equity $ - of net income in the income statement appears 1) 0- s 0- in the statement of 0- stockholders’ equity. Notice that the ending Issuances balance in the statement Add: Net income 25,00 25,00 of stockholders’ equity reappears in the balance Less: Dividends 0 1,200 0 sheet. Ending balance (Dec. EAGLE SOCCER 31)ACADEMY EAGLE SOCCER1,200 (200) Balance Sheet $25,0 ACADEMY 00 Statement $1,00of Cash (200) Cash flows from operating activities$ (3,900) Cash $ Liabilities $14,00 Flows 0 $26,0 Other assets 6,900 Stockholders’ equity 0 Cash flows from investing activities (24,000) Total liabilities and Cash flows from financing activities 0034,800 Total assets 33,100 stockholders’ equity 26,000 Net increase in cash 6,900 $40,000 $40,000 Cash at the beginning of the year -0- Cash at the end of the year $ 6,900 Notice that the amount of cash in the balance sheet reappears as the ending cash Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written balance inconsent the ofstatement of cash flows. McGraw-Hill Education. 1-28 Key Point All transactions that affect revenues or expenses reported in the income statement ultimately affect the balance sheet through the balance in retained earnings. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-29 Other Information Reported to Outsiders The financial statements are a key component of a company’s annual report. Two other important components of the annual report are (1) management’s discussion and analysis and (2) note disclosures to the financial statements. The management discussion and analysis (MD&A) section typically includes management’s views on significant events, trends, and uncertainties pertaining to the company’s operations and resources. Note disclosures offer additional information either to explain the information Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written presented in the financial statements or to 1-30 consent of McGraw-Hill Education. Learning Objective 4 LO1-4 Describe the role that financial accounting plays in the decision- making process. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-31 Illustration 1-10 Pathways Commission Visualization: "THIS is Accounting!" Accounting serves an important role in a prosperous society by measuring economic activity and communicating useful information to help investors and credits make good decisions. The practice of accounting requires judgment and critical thinking skills. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-32 Illustration 1-11 Relationship between Changes in Stock Prices and Changes in Net Income over a 20-Year Period *Amounts in this chart represent the investment growth based on the median stock return of each group each year. Companies included in this analysis are all U.S. companies with listed stocks, which averages about 6,000 companies per year. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-33 Part B FINANCIAL ACCOUNTING INFORMATION Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-34 Learning Objective 5 LO1-5 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-35 Financial Accounting Standards Make their decisions based Financial Investors on Accounting & Information Creditors Should be based on formal standards Generally Accepted Accounting Principles (GAAP) Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-36 Standard Setting Today United States Global Financial Accounting International Accounting Standards Board (FASB) Standards Board (IASB) Governed by the Securities and Exchange Commission (SEC) Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-37 Key Point The rules of financial accounting are called Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB) is an independent, private body that has primary responsibility for the establishment of GAAP in the United States. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-38  Importance of Auditors Trained individuals hired by a company as an independent party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP and are free of material misstatement. Role of auditors Help ensure that Play a major role in management has in fact investors’ and creditors’ appropriately applied GAAP decisions by adding in preparing the company’s credibility to the financial financial statements. statements. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-39 Illustration 1-12 Excerpts from the Independent Auditor’s Report of Dick’s Sporting DICK’S SPORTING Goods, Inc. GOODS, INC. Report To the Board of Directors of Independent and Stockholders of Dick’s Sporting Goods, Inc. Auditors Pittsburgh, Pennsylvania We have audited the accompanying consolidated balance sheets of Dick's Sporting Goods, Inc., and subsidiaries (the "Company") as of January 28, 2017, and January 30, 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for each of the three years in the period ended January 28, 2017. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Dick's Sporting Goods, Inc., and subsidiaries as of January 28, 2017, and January 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 2017, in conformity with accounting Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written principles generally consent of McGraw-Hill accepted in the United States of America. Education. 1-40 Illustration 1-13 Objectives of Financial Accounting Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-41 Concept Check 1-6 Auditors are independent parties that help: a. To establish accounting rules in the U.S. b. To ensure management has appropriately prepared the company’s financial statements c. Investors and creditors in their decisions by adding credibility to the financial statements. d. Auditors Both b.are and c.byare hired correctas an independent a company party to express a professional opinion of the extent to which financial statements are prepared in compliance with GAAP. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-42 Part C CAREERS IN ACCOUNTING Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-43 Learning Objective 6 LO1-6 Identify career opportunities in accounting. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-44 Illustration 1-14 Some of the Career Options in Accounting Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-45 Learning Objective 7 LO1-7 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-46 Appendix Conceptual Framework Fundamental qualitative characteristics Enhancing qualitative characteristics Cost constraint Underlying assumptions Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-47 Illustration 1-15 Qualitative Characteristics of Useful Financial Information QUALITATIVE CHARACTERISTICS Overriding Decision objective Usefulness Fundamenta Relevan Faithful ce representation characterist Confirmat Predict Freedom Components ory value ive Materialit Completen Neutrality from error value y ess Aspects Comparabi Verifiabilit Timeliness Understandabili Enhancing lity (Consisten y ty characterist cy) Cost effectiveness Constraint (Benefits exceed costs) Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-48 Key Point To be useful for decision making, accounting information should have relevance and faithful representation. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-49 Illustration 1-16 Assumptions That Underlie GAAP GAAP Underlying assumptions Economi Monetar Periodic Going c y ity concern entity unit Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-50 Concept Check 1-7 Which of the following assumptions indicates that the life of a company can be divided into artificial time periods for periodic reporting? a. Economic Entity b. Periodicity c. Going Concern d. Monetary Unit The periodicity assumption states that the economic life of an enterprise (presumed to be indefinite) can be divided into artificial time periods for periodic financial reporting. Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-51 End of Chapter 1 Copyright ©2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1-52