FINANCIAL ACCOUNTING - California State University, …

1 The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillFINANCIAL ACCOUNTINGR obert LibbyPatricia A. LibbyDaniel G. Short The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillChapter 1 FINANCIAL Statements and Business Decisions The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillThe Objectives of FINANCIAL AccountingFinancial statements are the primary means of communicating FINANCIAL information to parties outside the business SheetIncome StatementStakeholders The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillBusiness BackgroundBusiness owners (called investorsor stockholders) look for two sources of possible gain:Sellownershipinterest in thefuture for morethan they aportion of thecompany s earnings in cash(dividends). The McGraw-Hill Companies, Inc.

2 , 2001 Irwin/McGraw-HillBusiness BackgroundCreditorslend money to a company for a specific length of time and gain by charging intereston the money sDinerLoanInterest The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillUnderstanding Business OperationsManufacturers either make the parts needed to produce its products or buy the parts from The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillUnderstanding Business OperationsAll businesses have an ACCOUNTING system that ..Collects and processesfinancial informationabout an (internal)Investors(external) The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillUnderstanding Business OperationsAccounting SystemFinancial ACCOUNTING System(preparation of four basicfinancial statements).Managerial ACCOUNTING System(preparation of detailed plans,forecasts and reports).

3 External Decision Makers(investors, creditors,suppliers, customers, etc.).Internal Decision Makers(managers throughout theorganization). The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillInformation Conveyed in FINANCIAL StatementsThe four basic FINANCIAL statements ..Income StatementBalance SheetStatement of Cash FlowsStatement of Retained Earnings The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillInformation Conveyed in FINANCIAL StatementsMost companies prepare FINANCIAL statements at the end of the quarter (called quarterly reports) and the end of the year (called annual reports).2001X The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillLet s look at MAXIDRIVE CORP. s FINANCIAL statements. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE SheetAt December 31, 20A(In thousands of dollars)Asse tsCash4,895$ Accounts receivable5,714 Inventories8,517 Plant and equipment7,154 Land981 total assets27,261$ Liabilities and Stockholders' EquityLiabilitiesAccounts payable7,156$ Notes payable9,000 total liabilities16,156$ Stockholders' EquityContributed capital2,000$ Retained earnings9,105 total stockholders' equity11,105 total liabilities and stockholders' equity27,261$ 1.

4 Name of entity(the separate-entity assumption)2. Title of statement3. Specific date( FINANCIAL snapshot at a specificpoint in time)4. Unit measure(thousands of dollars) The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillThe Balance SheetBody of the StatementAssets Economic benefits owned by the business as a result of past Debts or obligations of the business that result from past Equity Amount of financing provided by owners of the business and of the StatementAssetsAssets Economic benefits owned by the business as a result of past Debts or obligations of the business that result from past EquityStockholders Equity Amount of financing provided by owners of the business and operations. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillThe Balance SheetBasic ACCOUNTING EquationEconomic Sources of financing.

5 ResourcesLiabilities: from creditorsEquity: from = Liabilities + Stockholders EquityAssets = Liabilities + Stockholders Equity The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE SheetAt De ce mbe r 31, 20A(In thousands of dollars)Asse tsCash4,895$ Accounts receivable5,714 Inventories8,517 Plant and equipment7,154 Land981 total assets27,261$ Liabilities and Stockholders' EquityLiabilitiesAccounts payable7,156$ Notes payable9,000 total liabilities16,156$ Stockholders' EquityContributed capital2,000$ Retained earnings9,105 total stockholders' equity11,105 total liabilities and stockholders' equity27,261$ Assets are listed by their ease ofconversion into of cash in the company s bank receivableAmounts owed by customers from prior sales.

6 InventoriesPartial and completed but unsold and equipmentFactories and production on which factories are located. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE SheetAt De ce mbe r 31, 20A(In thousands of dollars)Asse tsCash4,895$ Accounts receivable5,714 Inventories8,517 Plant and equipment7,154 Land981 total assets27,261$ Liabilities and Stockholders' EquityLiabilitiesAccounts payable7,156$ Notes payable9,000 total liabilities16,156$ Stockholders' EquityContributed capital2,000$ Retained earnings9,105 total stockholders' equity11,105 total liabilities and stockholders' equity27,261$ Accounts payable Amounts owed to suppliers for prior payableAmounts owed on written debt contracts.

7 The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE SheetAt De ce mbe r 31, 20A(In thousands of dollars)Asse tsCash4,895$ Accounts receivable5,714 Inventories8,517 Plant and equipment7,154 Land981 total assets27,261$ Liabilities and Stockholders' EquityLiabilitiesAccounts payable7,156$ Notes payable9,000 total liabilities16,156$ Stockholders' EquityContributed capital2,000$ Retained earnings9,105 total stockholders' equity11,105 total liabilities and stockholders' equity27,261$ Contributed capitalAmounts invested in the business by earningsPast earnings not distributed to stockholders. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE SheetAt De ce mbe r 31, 20A(In thousands of dollars)Asse tsCash4,895$ Accounts receivable5,714 Inventories8,517 Plant and equipment7,154 Land981 total assets27,261$ Liabilities and Stockholders' EquityLiabilitiesAccounts payable7,156$ Notes payable9,000 total liabilities16,156$ Stockholders' EquityContributed capital2,000$ Retained earnings9,105 total stockholders' equity11,105 total liabilities and stockholders' equity27,261$ Use $on the first item in a groupand on the group = Liabilities + Stockholders Equity The McGraw-Hill Companies, Inc.

8 , 2001 Irwin/McGraw-HillMAXIDRIVE StatementFor the Year Ended December 31, 20A(In thousands of dollars)RevenuesSales revenue37,436$ ExpensesCost of goods sold26,980$ Selling, general and administrative3,624 Research and development1,982 Interest expense450 total expenses33,036 Pretax income4,400$ Income tax expense1,100 Ne t income3,300$ 1. Name of entity2. Title of statement 3. Specific date (Unlike the balance sheet, thisstatement covers a specified period of time.)4. Unit measure (in thousands of dollars) The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE StatementFor the Year Ended December 31, 20A(In thousands of dollars)RevenuesSales revenue37,436$ ExpensesCost of goods sold26,980$ Selling, general and administrative3,624 Research and development1,982 Interest expense450 total expenses33,036 Pretax income4,400$ Income tax expense1,100 Ne t income3,300$ The income statement is divided into three major captions.

9 !"# The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE StatementFor the Year Ended December 31, 20A(In thousands of dollars)RevenuesSales revenue37,436$ ExpensesCost of goods sold26,980$ Selling, general and administrative3,624 Research and development1,982 Interest expense450 total expenses33,036 Pretax income4,400$ Income tax expense1,100 Ne t income3,300$ Revenues are earnings from the sale of goods or is recognized in the period in whichgoods and services are sold, not necessarilythe period in which cash is received. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillThe Income StatementJune 2001 Cash from salecollected on June 2001$1,000 sale madeon May !!RevenuesRevenuesWhen will the revenue from thistransaction be recognized?

10 Earnings from the sale of goods or services. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillThe Income StatementMay 2001$1,000 revenue$1,000 revenuerecognized in Mayrecognized in MayEarnings from the sale of goods or will the revenue from thistransaction be recognized?June 2001!!RevenuesRevenues The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-HillMAXIDRIVE StatementFor the Year Ended December 31, 20A(In thousands of dollars)RevenuesSales revenue37,436$ ExpensesCost of goods sold26,980$ Selling, general and administrative3,624 Research and development1,982 Interest expense450 total expenses33,036 Pretax income4,400$ Income tax expense1,100 Ne t income3,300$ Expenses are the dollar amount of resources usedup by the entity to earn revenues during a expense is recognized in the period in whichgoods and services are used, not necessarilythe period in which cash is paid.