GB 112 Exam 1 Days 3-4

· Describe the information conveyed in each of the four basic financial statements.

o Balance Sheet: reports the assets, liabilities, and stockholder's equity of an accounting entity at a point in time. o Income Statement: reports revenues less expenses during an accounting period. o Statement of Stockholders' Equity: reports the changes in each of the company's stockholders' equity accounts during an accounting period. o Statement of Cash Flows: reports inflows and outflows of cash during an accounting period.

Balance Sheet

o Balance Sheet: reports the assets, liabilities, and stockholder's equity of an accounting entity at a point in time. § Assets, liabilities, stockholder's equity § The accounting equation: Assets = Liabilities + Stockholder's Equity · Assets: economic recourses owned by the entity (organization). · Liabilities: indicate the amount of financing provided by creditors. This is the company's debts or obligation. · Stockholder's Equity: indicated amount of financing provided by owners of the business and reinvested earnings § Time period covered in this statement: annual reports (yearly) and quarterly reports (quarterly)

Income Statement

o Income Statement: reports revenues less expenses during an accounting period. § Revenues, expenses, net income § Net Income = revenue - expenses · Revenues: amounts expected to be received for goods/services that have been given to customers (whether or not the customer has paid) · Expenses: dollar amount of recourses the entity used to earn revenues during the period. (expenses paid in one period can be paid for in another) · Net Income: Excess of total revenues. If total expenses exceed total revenue, a net loss is reported. § Time period covered in this statement: accounting period (financial statement covers 1 year)

Recognize the way that each statement is used by different decision makers (investors, creditors, and managers).

o Marketing managers and credit managers use customers' financial statements to decide whether to extend credit. Creditors and investors use financial statements to decide whether or not to invest into the company. The statement shows if they will be receiving their money back with plus interest.

Statement Of Cash Flows

o Statement of Cash Flows: reports inflows and outflows of cash during an accounting period. § Cash Flows from Operating Activities, Cash Flows from Investing Activities, Cash Flows from Financial Activities § (+/-) cash flows from operating activities (+/-) cash flows from investing activities (+/-) cash flows from financing activities = change in cash. § Cash flows from operating activities are cash flows that are directly related to earning income. (paying people/bills) § Cash flows from investing activities: include cash flows related to the purchase or sale of equipment/operating services. § Cash flow from financing activities are cash flows directly related to the financing of the enterprise itself (involve payment of money to investors and creditors) § Time period covered in this statement: accounting period (financial statement covers 1 year)

Statement of Stockholder's Equity

o Statement of Stockholders' Equity: reports the changes in each of the company's stockholders' equity accounts during an accounting period. § Common stock and retained earnings § Ending (or Total) retained earnings = beginning retained earnings + net income - dividends · Beginning-of-the-year Retained Earnings: beginning balance · Net Income: revenue - expenses · Dividends: is a distribution of profits by a corporation to its shareholders · End-of-the-year Retained Earnings: profits that have accumulated in the company over time. § Time period covered in this statement: accounting period (financial statement covers 1 year)

· Identify the role of generally accepted accounting principles (GAAP) in determining financial statement content and how companies ensure the accuracy of their financial statements.

o The Securities and Exchange Commission (SEC) has been given broad powers to determine measurement rules for financial statements which have become known as GAAP. § GAAP: the measurement and disclosure rules used to develop the information in financial statements. § Financial Accounting Standards Board (FASB) is the body that formulates GAAP