Spiceland_FA_6e_Chap01_PPT.pptx

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

Financial Accounting Sixth Edition A Framework for Financial 1 Accounting CHAPTER Spiceland Thomas Herrmann Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-1 PART A ACCOUNTING AS A MEASUREMENT/COMMUNICATION PROCESS Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-2 Learning Objective 1 LO1-1 Describe the two primary functions of financial accounting. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-3 Illustration 1-1 Decisions People Make About Companies Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-5 Illustration 1-2 Framework for Financial Accounting Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-6 Key Point The functions of financial accounting are to measure business activities of a company and to communicate information about those activities to investors and creditors and other outside users for decision-making purposes. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-7 Learning Objective 2 LO1-2 Understand the business activities that financial accounting measures. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-9  Types of Business Organizations 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 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-10 Assets, Liabilities, and Stockholders’ Equity Illustration 1-3 – The Accounting Equation Assets = total resources of the company. Liabilities = amounts owed to creditors. Stockholders’ equity = owners’ claims to resources The accounting equation illustrates a fundamental model of business valuation. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-11 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 cash payments to stockholders. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-12 Illustration 1-4 Business Activities and Their Measurement Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-13 Key Point The measurement role of accounting is to create a record of the activities of a company. To make this possible, a company must maintain an accurate record of its assets, liabilities, stockholders’ equity, revenues, expenses, and dividends. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-14 Concept Check 1-1 The total 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, supplies, inventory for sale to customers, buildings, land, and investments. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-15 McGraw-Hill. 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. Expenses Revenues are recorded when the company sells products or provides services to customers. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-16 McGraw-Hill. Learning Objective 3 LO1-3 Determine how financial accounting information is communicated through financial statements. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-17 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-18 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-19 Illustration 1-5 Income Statement for Eagle Soccer Academy EAGLE SOCCER ACADEMY Income Statement For the month ended December 31, 2024 2021 Revenues Service revenue $72,000 Expenses Rent expense 5,000 Supplies expense 10,000 Salaries expense 31,000 Utilities expense 9,000 Interest expense 1,000 Other expenses 2,000 Total expenses 58,000 Net income Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of $14,000 1-20 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. McGraw-Hill. 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-21 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, 2024 Commo Retain Stockhold n ed ers’ Beginning balance (Dec. $Stock $Earnin - $Equity- 1) gs -0- 0- 0- Issuance of common stock 200,00 200,0 Add: Net income for 0 14,000 00 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 (4,000 14,00 Earnings equal ending Ending balances frombalance the previous(Dec. period.31) $200,0 ) 0 00 $ Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-22 Common Mistake Dividends represent the payment of cash but are not considered an expense in running the business. Students sometimes mistakenly include the amount of dividends as an expense in the income statement, rather than as a distribution of net income in the statement of stockholders’ equity. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-23 Key Point The statement of stockholders’ equity reports information related to changes in common stock and retained earnings each period. The change in retained earnings equals net income less dividends for the period. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-24 Balance Sheet Presents the financial position of the company on a particular date Financial position: Resources = Claims to Resources Liabilities + Assets = Stockholders’ Equity Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-25 Illustration 1-7 Balance Sheet for Eagle Soccer Academy EAGLE SOCCER ACADEMY Balance Sheet December 31, 2024 Asset Liabiliti Cash s $137,00 Accounts es $ Accounts payable 23,000 0 receivable Salaries payable Supplies Utilities payable 3,000 27,000 Equipment, net Interest payable Other assets Notes payable 9,000 13,000 Other liabilities Total 1,000 118,000 Stockholders’ liabilities Common Equity stock 200,00 55,000 Retained earnings 100,00 0 0 Total stockholders’ equity 10,000 Total $350,0 4,000 $350,0 Total 210,0 assets 00 liabilities and 140,00 001-26 00 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 0 McGraw-Hill. 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. Rent The 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 would appear in the statement of stockholders’ equity. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-27 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-28 McGraw-Hill. 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-29 McGraw-Hill. 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 2024 Operating Cash inflows: Activities From customers $ Cash outflows: 49,000 For salaries For rent (28,000 Net cash flows from operating $(39,00 ) activities Cash Flows from Investing 0) Purchase equipmentActivities (120,00 (60,000 Net cash flows from investing 0) ) (120,00 activities 0) Cash Flows from Financing Activities Issue common stock 200,00 Borrow from bank 0 Pay dividends 100,00 Net cash flows from financing 0 296,00 activities 0 (4,000) Net increase in cash Cash at the beginning of the period 137,00 0 Cash at Copyright theMcGraw-Hill. ©2022 end of the period All rights reserved. No reproduction or distribution without the prior written consent of 1-30 McGraw-Hill. -0- 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. Financing Activity Operating activities include revenue and expense transactions. Collecting cash from customers represents activity related to revenues. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-31  Illustration 1-9 Links among Financial Statements EAGLE SOCCER ACADEMY EAGLE SOCCER ACADEMY Income Revenues Statement $72,000 Statement of Stockholders’ Expenses 58,000 Net Income $14,000 Equity Total Commo Retaine Stockhold n d ers’ Notice that the amount of net income in the Beginning balance (Dec. Stock $ - Earning $ - Equity $ 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 200,00 200,00 of stockholders’ equity reappears in the balance Less: Dividends 0 14,000 0 sheet. Ending balance (Dec. EAGLE SOCCER 31)ACADEMY EAGLE SOCCER 14,000 (4,000) Balance Sheet $200,0 ACADEMY (4,000) Statement 00 $10,00of Cash $210,0 Cash flows from operating activities$ (39,000) Cash $137,0 Liabilities $140,0 Other assets 00 Stockholders’ equity 00 Flows 0 Cash flows from investing 00 activities (120,000) Total liabilities and Cash flows from financing activities 296,000 Total assets 213,00 stockholders’ equity 210,00 Net increase in cash 137,000 $350,000 $350,000 Cash at the beginning of the year -0- 0 0 Cash at the end of the year $137,000 Notice that the amount of cash in the balance sheet reappears as the ending cash Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of balance in the statement of cash flows. McGraw-Hill. 1-32 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-33 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 presented in the financial statements or to provide information not Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-34 Learning Objective 4 LO1-4 Describe the role that financial accounting plays in the decision- making process. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-35 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 creditors make good decisions. The practice of accounting requires judgment and critical Reprinted with permission from the American Accounting thinking skills. Association. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction McGraw-Hill. or distribution without the prior written consent of 1-36 Key Point Financial accounting serves an important role by providing information useful in investment and lending decisions. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-37 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-38 Key Point No single piece of company information better explains companies’ stock price performance than does financial accounting net income. A company’s debt level is an important indicator of management’s ability to respond to business situations and the possibility of bankruptcy. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-39 PART B FINANCIAL ACCOUNTING INFORMATION Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-40 Learning Objective 5 LO1-5 Explain the term generally accepted accounting principles (GAAP) and describe the role of GAAP in financial accounting. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-41 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-42 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-43 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-44  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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-45 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 February 1, 2020, and February 2, 2019, 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 February 1, 2020and the related notes (collectively referred to as the “financial statements”). In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 1, 2020, and February 2, 2019, and the results of their operations and their cash flows for each of the three years in the period ended February 1, 2020, in conformity with Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of accounting principles generally McGraw-Hill. accepted in the United States of America. 1-46 Illustration 1-13 Objectives of Financial Accounting Financial accounting should provide information that: 1. Is useful to investors and creditors in making decisions. 2. Helps to predict cash flows. 3. Tells about economic resources, claims to resources, and changes in resources and claims. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-47 Key Point The primary objective of financial accounting is to provide useful information to investors and creditors in making decisions. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-48 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. Both b. and c. are correct Auditors are 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. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-49 PART C CAREERS IN ACCOUNTING Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-50 Learning Objective 6 LO1-6 Identify career opportunities in accounting. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-51 Illustration 1- Some 14 of the Career Options in Accounting Public Accounting Private Accounting (Big 4 and Non-Big 4) Who are the Corporations Your particular clients? Governments employer Nonprofit organizations Individuals What are the Auditors Financial accountants traditional career Tax preparers/planners Managerial accountants opportunities? Business consultants Internal auditors Tax preparers Payroll managers What other career Financial planners Information managers opportunities are Information technology Management advisors available? developers Tax planners Financial analysts Acquisition specialists Forensic accountants FBI agents Information risk managers Sports agents Investment bankers Environmental accountants Financial advisors Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-52 Tax lawyers McGraw-Hill. Learning Objective 7 LO1-7 Explain the nature of the conceptual framework used to develop generally accepted accounting principles. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-53 APPENDIX CONCEPTUAL FRAMEWORK Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-54 Conceptual Framework The conceptual framework: Is established by the FASB. Provides standard setters with a benchmark for creating a consistent set of financial reporting rules now and in the future. Provides others with a written framework so that everyone understands the underlying concepts that accountants are to consider in preparing and interpreting financial accounting information. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of 1-55 McGraw-Hill. Key Point The conceptual framework provides an underlying foundation for the development of accounting standards and interpretation of accounting information. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-56 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-57 Key Point (Fundamental Characteristics) To be useful for decision making, accounting information should have relevance and faithful representation. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-58 Key Point (Enhancing Characteristics) Four characteristics of financial reporting enhance its usefulness. These characteristics include comparability, verifiability, timeliness, and understandability. Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-59 Illustration 1-16 Assumptions That Underlie GAAP GAAP Underlying assumptions Economi Monetar Periodic Going c y ity concern entity unit Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-60 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 ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-61 End of Chapter 1 Copyright ©2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill. 1-62