Libby6e Chapter 01sppt

Financial Statements and Business Decisions Chapter 1

McGraw-Hill/Irwin

© 2009 The McGraw-Hill Companies, Inc.

Understanding the Business The Players Investors

Creditors

Managers 1. Purchase parts and labor

2. Manufacture product

The Business Operatio ns 4. Collect cash from customers and pay creditors McGraw-Hill/Irwin

3. Sell products to customers

Slide 3

The Accounting System Accounting System

Financial Accounting System

Managerial Accounting System

Periodic financial statements and related disclosures

Detailed plans and continuous performance reports

External Decision Makers

Internal Decision Makers

Investors, creditors, suppliers, customers, etc.

Managers throughout the organization

McGraw-Hill/Irwin

Slide 4

The Four Basic Financial Statements 1. On a company’s BALANCE SHEET, all resources owned and amounts owed are listed in order of liquidity. The difference between the resources owned and the amounts owed, represents the stockholders’ equity in the business.what u have and wher u get it from 2. On a company’s INCOME STATEMENT, all the revenues earned from sales to customers are listed along with the expenses incurred to produce those revenues. 3. On a company’s STATEMENT OF RETAINED EARNINGS accumulated net earnings less the dividends paid to owners represent reinvestments in the core business. 4. On a company’s STATEMENT OF CASH FLOWS, all sources and uses of cash are listed. Cash is generated by the company’s operations. Cash is spent on investments in buildings, manufacturing equipment, and other assets. Financing activities involve amounts borrowed from long-term creditors and sale of stock to owners.inflows and outflows McGraw-Hill/Irwin

Slide 5

The Accounting Equation

A = L + SE (Assets)

Economic Resources

(Liabilities)

(Stockholders’ Equity)

Sources of Financing for Economic Resources Liabilities: From Creditors Stockholders’ Equity: From Stockholders

McGraw-Hill/Irwin

Slide 6

Relationships Among the Statements 1. Net income from the income statement results in an increase in ending retained earnings on the statement of retained earnings.

 

    Income Statement   Revenues $ 15,500   Expenses (8,500)   Net income $ 7,000                    

McGraw-Hill/Irwin

   

    Statement of Retained Earnings Beginning retained earnings $ 59,000 Net income 7,000 Dividends (2,500) Ending retained earnings $ 63,500    

Slide 7

Relationships Among the Statements 2. Ending retained earnings from the statement of retained earnings is one of the two components of stockholders’ equity on the balance sheet.

Statement of Retained Earnings   Beginning retained $   earnings 59,000 Net income   7,000 Dividends   (2,500) Ending retained earnings $   63,500            

Balance Sheet Cash

$ 14,000

Other assets Total assets Liabilities Stockholders' Equity Common stock

171,500 $ 185,500 $ 42,000   80,000

    McGraw-Hill/Irwin

   

   

Retained earnings Total liabilities and equity

63,500 $ 185,500

Slide 8

Relationships Among the Statements 3. The change in cash on the statement of cash flows is added to the beginning-of-year balance in cash to arrive at end-of-year cash on the balance sheet. Statement of Cash Flows   Cash flows from operating $   activities 21,000 Cash flows from investing   activities (16,000) Cash flows from financing   activities 3,500 Increase in cash $   8,500 Beginning cash balance   5,500 Ending cash balance $   14,000      

McGraw-Hill/Irwin

 

 

 

 

 

 

Balance Sheet Cash

$ 14,000

Other assets Total assets Liabilities Stockholders' Equity

171,500 $ 185,500 $ 42,000  

Common stock 80,000 Retained earnings Total liabilities and equity  

63,500 $ 185,500  

Slide 9

Management Uses of Financial Statements Marketing managers and credit managers use customers’ financial statements to decide whether to extend credit.

Purchasing managers use suppliers’ financial statements to decide whether suppliers have the resources to meet the demand for products.

Employees’ union and human resource managers use the company’s financial statements as a basis for contract negotiations regarding pay rates.

McGraw-Hill/Irwin

Slide 10

Generally Accepted Accounting Principles Securities Act of 1933 Securities and Exchange Act of 1934

The Securities and Exchange Commission (SEC) has been given broad powers to determine measurement rules for financial statements.

McGraw-Hill/Irwin

Slide 11

Generally Accepted Accounting Principles The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP.

Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP.

McGraw-Hill/Irwin

Slide 12

Generally Accepted Accounting Principles Companies incur the cost of preparing the financial statements and bear the following economic consequences . . .

 Effects on the selling price of stock.  Effects on the amount of bonuses received by managers and other employees.  Loss of competitive information to other companies.

McGraw-Hill/Irwin

Slide 13

Independent Auditors Auditors

express an opinion as to the fairness of the financial statement presentation. Independent auditors have responsibilities that extend to the general public. McGraw-Hill/Irwin

Overall, I believe these financial statements are fair.

Slide 14

End of Chapter 1

© 2009 The McGraw-Hill Companies, Inc.