Accounting - C1 - Introduction to Financial Statements

Internal users of accounting information

Managers who plan, organize, and run a business E.g. marketing, managers, production supervisors, finance directors, company officers

Net Income/Net Loss

Net income results when revenues exceed expenses Net loss results when expenses exceed revenues

Notes to the financial statements

Notes clarify information presented in the financial statements and provide additional detail.

Dividends

Payments of cash from a corporation to its stockholders Corporations make payments to stockholders on a regular basis as long as there is sufficient cash to cover required payments to creditors

Creditors

Persons or institutions to whom money is owed

Sarbanes-Oxley Act (SOX)

Regulations passed by Congress to reduce unethical corporate behavior.

Income Statement

Reports a company's revenues and expenses and resulting net income or loss for a period of time Helps users determine if the company's operations are profitable

Assets

Resources owned by a business E.g. cash, property, plant, and equipment, supplies, inventory

Common Stock

Term used to describe the total amount paid in by stockholders for the shares they purchase.

Retained Earnings

The amount of net income retained in the corporation

Expenses

The cost of assets consumed or services used in the process of generating revenues E.g. cost of goods sold; selling expenses, marketing expenses, interest expense, income tax expense

Revenue

The increase in assets or decrease in liabilities resulting from the sale of goods or the performance of services in the normal course of business E.g. sales revenue, service revenue, interest revenue

Accounting

The information system that identifies, records, and communicates the economy events of an organization of interested users

Auditor's Report

A report prepared by an independent outside auditor stating the auditor's opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.

Annual Report

A report prepared by corporate management that presents financial information including financial statements, a management discussion and analysis section, notes, and an independent auditor's report.

Management Discussion and Analysis (MD&A)

A section of the annual report that presents management's views on the company's ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations.

Liabilities

Amounts owed to creditors in the form of debts and other obligations

Certified Public Accountant

An individual who has met certain criteria and is thus allowed to perform audits of corporations.

The basic accounting equation

Assets = Liabilities + Stockholders' Equity

Supplies

Assets used in day-to-day operations

Inventory

Goods available for sale to customers

The four financial statements

Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows

External users of accounting information

Investors, creditors, labor unions, regulatory agencies, taxing authorities

Interrelationships of Statements (3 Statements)

1. The retained earnings statement uses the results of the income statement. Net income is added to the beginning amount of retained earnings to determine ending retained earnings. 2. The balance sheet and retained earnings statement are also interrelated. The ending amount on the retained earnings statement is the retained earnings amount on the balance sheet. 3. Finally, the statement of cash flows relates to information on the balance sheet. The statement of cash flows shows how the Cash account changed during the period. It shows the amount of cash at the beginning of the period, the sources and uses of cash during the period, and the cash at the end of the period. The ending amount of cash shown on the statement of cash flows must agree with the amount of cash on the balance sheet.

Partnership

A business in which two or more persons combine their assets and skills Simple to establish Shared control Broader skills and resources Tax advantages

Corporation

A business organized as a separate legal entity owned by stockholders (shareholders) Easier to transfer ownership Easier to raise funds No personal liability

Sole Proprietorship

A business owned by one person Simple to set up Owner-controlled Tax advantages

Statement of Cash Flows

A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time. Helps users determine if the company generates enough cash from operations to fund its investing activities

Balance Sheet

A financial statement that reports assets, liabilities, and owner's equity on a specific date. Helps users determine the company's policy toward dividends and growth

Retained Earnings Statement

A financial statement that summarizes the amounts and causes of changes in retained earnings for a specific time period. Helps users determine the company's policy toward dividends and growth

Claims to assets are subdivided into two categories

Claims of creditors = Liabilities Claims to assets = Stockholders' equity