1、Chapter 1,Financial Statements and Business Decisions,Understanding the Business,Understanding the Business,Investors purchase stock (or ownership) in businesses hoping to gain in two ways:,Understanding the Business,The Business Operations,Manufacturers either make the parts needed to produce its p
2、roducts or buy the parts from suppliers.,Manufacturer,Final Product,Customer,The Accounting System,Collects and processes financial information,Managers (internal decision makers),Investors and Creditors (external decision makers),The Accounting System,Accounting System,Learning Objectives,Recognize
3、 the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers (investors, creditors, and managers).,LO1,The Four Basic Financial Statements,Financial statements summarize the financial activities of the business.,The Four Basic Fina
4、ncial Statements,Companies can prepare financial statements at the end of the year, quarter or month.,Financial statements prepared at the end of the year are called annual reports.,2011,X,Lets look at MAXIDRIVE CORP.s financial statements.,The Balance Sheet reports the financial position of an enti
5、ty at a particular point in time.,Assets are listed by their ease of conversion into cash.,Assets are economic resources owned by the business as a result of past transactions.,Liabilities are debts or obligations of the business that result from past transactions.,Equity is the amount of financing
6、provided by owners of the business and earnings.,The Balance Sheet,Basic Accounting Equation Balance Sheet Equation,Assets = Liabilities + Stockholders Equity,Use $ on the first item in a group and on the group total.,Assets = Liabilities + Stockholders Equity,The Income Statement reports the revenu
7、es minus expenses of the accounting period.,Revenues are earnings from the sale of goods or services to customers.,Revenue is recognized in the period in which goods and services are sold, not necessarily the period in which cash is received.,Revenues,(1) When will the revenue from this transaction
8、be recognized?,Earnings from the sale of goods or services.,Revenues,Earnings from the sale of goods or services.,(2) When will the revenue from this transaction be recognized?,Expenses are the dollar amount of resources used up by the entity to earn revenues during a period.,An expense is recognize
9、d in the period in which goods and services are used, not necessarily the period in which cash is paid.,Expenses,An expense is recognized in the period in which goods and services are used,(1) When will the expense for this transaction be recognized?,Expenses,(2) When will the expense for this trans
10、action be recognized?,An expense is recognized in the period in which goods and services are used,If expenses exceed revenues, we report net loss.,Statement of Retained Earnings,Income of the enterprise.,Stockholders,Dividends,Retained by enterprise,Retained Earnings,The Statement of Retained Earnin
11、gs reports the way that net income and the distribution of dividends affect the financial position of the company during a period.,Statement of Cash Flows,Because revenues reported do not always equal cash collected. . .,. . . and expenses reported do not always equal cash paid . . .,net income is u
12、sually not equal to the change in cash for the period.,The Statement of Cash Flows reports the inflows and outflows of cash during the period in the categories of operating, investing, and financing.,Cash flows directly related to earning income are shown in the operating section.,Cash flows related
13、 to the acquisition or sale of productive assets are shown in the investing section.,Cash flows from or to investors or creditors are shown in the financing section.,The statement ends with a reconciliation of Cash.,Relationship Among the Financial Statements,Net income from the income statement inc
14、reases ending retained earnings on the statement of retained earnings.,Relationship Among the Financial Statements,Ending retained earnings from the statement of retained earnings is one of the components of stockholders equity on the balance sheet.,Relationship Among the Financial Statements,The ch
15、ange in cash on the statement of cash flows added to the beginning of the year balance in cash equals the ending balance in cash on the balance sheet.,Notes,Notes provide supplemental information about the financial condition of a company. Three basic types of notes: Description of accounting rules
16、applied. Presentation of additional detail about an item on the financial statements. Provide additional information about an item not on the financial statements.,Price/Earnings Ratio,This ratio is one method for estimating the value of a company.,Learning Objectives,Identify the role of generally
17、accepted accounting principles (GAAP, 公认会计准则) in determining the content of financial statements.,LO2,Decision makers need to understand accounting measurement rules.,Responsibilities for the Accounting Communication Process,Effective communication means that the recipient understands what the sende
18、r intends to convey.,How are Generally Accepted Accounting Principles Determined?,Our accounting system has a long and distinguished history. An Italian monk named Luca Pacioli, published the first elements of double-entry bookkeeping in 1494. Prior to 1933, the management of most companies were fre
19、e to choose the accounting principles used to keep track of its transactions.,The Securities and Exchange Commission (SEC) has been given broad powers to determine measurement rules for financial statements.,Securities Act of 1933 Securities and Exchange Act of 1934,Generally Accepted Accounting Pri
20、nciples (GAAP),Generally Accepted Accounting Principles (GAAP),Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP.,The SEC has worked closely with the accounting profession to work out the detailed rules that have become known as GAAP.,The Equivale
21、nts in China,SEC:CSRC (China Securities Regulatory Commission, 中国证券监督管理委员会，证监会)FASB:CICPA (Chinese Institute of Certified Public Accountants，中国注册会计师协会),International Perspective,Since 2002, there has been substantial movement to develop international financial reporting standards by the Internationa
22、l Accounting Standards Board (IASB).,Learning Objectives,Appreciate the importance of ethics, reputation, and legal liability in accounting.,LO3,Ethics, Reputation, and Legal Liability,The American Institute of Certified Public Accountants requires that all members adhere to a professional code of e
23、thics.,A CPAs reputation for honesty and competence is his/her most important asset.,Like lawyers, CPAs have liability for malpractice.,Ethics, Reputation, and Legal Liability,http:/www.icmr.icfai.org/casestudies/catalogue/Business%20Ethics/BECG027.htm,How about a real life example?,Warning: real life is messy! Microsoft Corporation 2010 Annual Report,End of Chapter 1,Reading: Chapter 1 Overview four financial statements Get familiar with the main categories in each financial statement. Role & history of GAAP The importance of ethics HW1 & Project are due next week,Summary,
