chapter 1 analysis of financial statements.ppt
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7/24/2019 CHAPTER 1 ANALYSIS OF FINANCIAL STATEMENTS.ppt
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Introduction to Analysis ofIntroduction to Analysis of
Financial StatementsFinancial Statements
Chapter 1Chapter 1
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Study ObjectivesStudy Objectives
1.1. Describe the primary forms of businessDescribe the primary forms of businessorganiation.organiation.
!.!. Identify the users and uses of accountingIdentify the users and uses of accountinginformation.information.
".". #$plain the three principal types of#$plain the three principal types of
business activity. business activity.%.%. Describe the content and purpose of eachDescribe the content and purpose of each
of the financial statements.of the financial statements.
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Study ObjectivesStudy Objectives
&.&. #$plain the meaning of assets' liabilities'#$plain the meaning of assets' liabilities'
and stoc(holders) e*uity' and state theand stoc(holders) e*uity' and state the
basic accounting e*uation. basic accounting e*uation.
+.+. Describe the components that supplementDescribe the components that supplement
the financial statements in an annualthe financial statements in an annual
report.report.
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,,11 Forms of -usinessForms of -usiness
OrganiationOrganiation
Sole proprietorshipSole proprietorship
/artnership/artnership
CorporationCorporation
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Sole /roprietorshipSole /roprietorship
-usiness o0ned by one person-usiness o0ned by one person
Simple to establishSimple to establish O0ner controlledO0ner controlled
a$ advantagesa$ advantages
O0ner personally liableO0ner personally liable
Financing difficultFinancing difficult
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/artnership/artnership
0o or more o0ners0o or more o0ners
Simple to establishSimple to establish Shared controlledShared controlled
-roader s(ills 2 resources-roader s(ills 2 resources
a$ advantagesa$ advantages
/ersonal liability/ersonal liability
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CorporationCorporation
Separate legal entity o0ned bySeparate legal entity o0ned by
stoc(holdersstoc(holders #asy to transfer o0nership#asy to transfer o0nership
3reater capital raising potential3reater capital raising potential
4o0er legal liability4o0er legal liability
5nfavorable ta$ treatment5nfavorable ta$ treatment
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,,!! 5sers of Financial Information5sers of Financial Information
Internal Internal 6anagers 0ho plan'6anagers 0ho plan'
organie and run aorganie and run a
business business
7 6ar(eting managers6ar(eting managers
7 /roduction supervisors/roduction supervisors 7 Finance directorsFinance directors
7 Company officersCompany officers
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5sers of Financial Information5sers of Financial Information
Internal Users Ask? Internal Users Ask?
Cash to pay bills8Cash to pay bills8 Cost per unit8Cost per unit8
3ive raises83ive raises8 9hich product is9hich product is
profitable8 profitable8
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5sers of Financial Information5sers of Financial Information
External External InvestorsInvestors
OthersOthers
7 :egulatory agencies:egulatory agencies
7 a$ authoritiesa$ authorities
7 CustomersCustomers 7 4abor 5nions4abor 5nions
7 #conomic planners#conomic planners
CreditorsCreditors
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5sers of Financial Information5sers of Financial Information
External Users Ask? External Users Ask?
#arning enough8#arning enough8 Compare to competition8Compare to competition8
9ill the company be able to pay bills9ill the company be able to pay bills
0hen due80hen due8
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,,"" ypes of -usiness Activityypes of -usiness Activity
FinancingFinancing
InvestingInvesting
OperatingOperating
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Financing ActivitiesFinancing Activities
-orro0ing creates-orro0ing creates liabilitiesliabilities
7 -an( loans-an( loans
7 Debt securitiesDebt securities 7 3oods on credit or payables3oods on credit or payables
Selling stoc( Selling stoc( createscreatesstockholders’ equitystockholders’ equity
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Investing ActivitiesInvesting Activities
Obtaining resources orObtaining resources or
assetsassets to operate theto operate the
business business 7 4and4and
7 -uildings-uildings
7 ;ehicles;ehicles 7 ComputersComputers
7 FurnitureFurniture
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Operating ActivitiesOperating Activities
/rimary activity of business/rimary activity of business
7 Selling goodsSelling goods
7 /roviding services/roviding services 7 6anufacturing6anufacturing
7 Cost of SalesCost of Sales
7 AdvertisingAdvertising 7 /aying employees/aying employees
7 /aying utilities/aying utilities
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Operating ActivitiesOperating Activities
Revenue Revenue is generated from sales oris generated from sales or
servicesservices
Expenses Expenses are the cost of doing businessare the cost of doing business
If revenueIf revenue >> e$pensee$pense == Net Income Net Income
If revenueIf revenue << e$pensee$pense == Net Loss! Net Loss!
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,,%% Describe Content and /urposeDescribe Content and /urpose
of Financial Statementsof Financial Statements Accountants communicate
0ith users through four
financial statements
Income StatementIncome Statement
:etained #arnings Statement:etained #arnings Statement -alance Sheet-alance Sheet
Statement of Cash Flo0sStatement of Cash Flo0s
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Income StatementIncome Statement
:eports operating success or failure for a:eports operating success or failure for a
period. period.
Summaries revenues and e$penses forSummaries revenues and e$penses for period< period< month, quarter, or year.month, quarter, or year.
If revenueIf revenue >> e$pensee$pense == Net Income. Net Income.
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Income StatementIncome Statement
Do this statement first! Do this statement first!
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:etained #arnings Statement:etained #arnings Statement
Sho0s changes in retained earnings forSho0s changes in retained earnings for
period< period< month, quarter, or year month, quarter, or year
-eginning balance-eginning balance
AddAdd Net Income from income Net Income from income
statement!statement!
Deduct DividendsDeduct Dividends
#nding balance#nding balance
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:etained #arnings Statement:etained #arnings Statement
Do this statement second! Do this statement second!
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-alance Sheet-alance Sheet
:eports:eports assetsassets and claims to assets.and claims to assets.
Claims of creditors'Claims of creditors' liabilitiesliabilities..
Claims of o0ners'Claims of o0ners' stockholders’ equitystockholders’ equity..
AssetsAssets = 4iabilities > Stoc(holders) #*uity= 4iabilities > Stoc(holders) #*uity
Specific date 7Specific date 7 one point in time!one point in time!
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-alance Sheet-alance Sheet
FromFrom
:etained:etained
#arnings#arningsStatementStatement
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Statement of Cash Flo0sStatement of Cash Flo0s
/rovides information about cash/rovides information about cash
receipts and cash paymentsreceipts and cash payments
Summaries for period<Summaries for period< month, quarter,month, quarter,
or year.or year.
Cash effects of operating' investing'Cash effects of operating' investing'and financing activities.and financing activities.
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Statement of Cash Flo0sStatement of Cash Flo0s
9here did the cash come from89here did the cash come from8
?o0 0as cash used during the period8?o0 0as cash used during the period8
9hat 0as the change in the cash9hat 0as the change in the cash
balance during the period8 balance during the period8
@ou can)t survive 0ithout cash@ou can)t survive 0ithout cash
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Statement of Cash Flo0sStatement of Cash Flo0s
AgreesAgrees
0ith0ith -alance-alance
SheetSheet
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,&,& #$plain the 6eaning of#$plain the 6eaning of
Assets' 4iabilities' andAssets' 4iabilities' and
Stoc(holders) #*uity.Stoc(holders) #*uity.
State the -asic AccountingState the -asic Accounting
#*uation#*uation
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AssetsAssets
:esources o0ned by the business:esources o0ned by the business
7 CashCash
7 Accounts receivableAccounts receivable 7 InventoriesInventories
7 -uilding-uilding
7 Furniture and fi$turesFurniture and fi$tures 7 #*uipment#*uipment
7 SuppliesSupplies
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4iabilities4iabilities
Obligations or debts of businessObligations or debts of business
7 Botes payable Botes payable
7 Accounts payableAccounts payable
7 Interest payableInterest payable
7 Salaries payableSalaries payable 7 5nearned revenue5nearned revenue
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Stoc(holders) #*uityStoc(holders) #*uity
O0nership claims on assetsO0nership claims on assets
/aidin capital/aidin capital
7 Common stock Common stock
:etained earnings:etained earnings
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-asic Accounting #*uation-asic Accounting #*uation
Assets =Assets =4iabilities > Stoc(holders) #*uity4iabilities > Stoc(holders) #*uity
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,,++ Components that SupplementComponents that Supplement
the Financial Statements in anthe Financial Statements in anAnnual :eportAnnual :eport
6anagements Discussion and Analysis6anagements Discussion and Analysis
Botes to Financial Statements Botes to Financial Statements
Auditor)s reportAuditor)s report
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6anagement)s Discussion and6anagement)s Discussion and
Analysis covers three items<Analysis covers three items<1.1. 4i*uidity4i*uidity
!.!. Capital resourcesCapital resources
".". :esults of operations:esults of operations
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6anagement)s Discussion and6anagement)s Discussion and
AnalysisAnalysis
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Botes to Financial Statements Botes to Financial Statements
#$planatory notes and supplementary#$planatory notes and supplementary
schedulesschedules
Clarifies information in financial statementsClarifies information in financial statements
#$pands 0ith additional detail#$pands 0ith additional detail
Describes accounting policiesDescribes accounting policies
#$plains uncertainties and contingencies#$plains uncertainties and contingencies
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Botes to Financial Statements Botes to Financial Statements
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Auditor)s :eportAuditor)s :eport
Certified /ublic Accountant 7 C/ACertified /ublic Accountant 7 C/A
Auditor C/AE conducts independentAuditor C/AE conducts independent
e$amination of financial statementse$amination of financial statements
Fair representation8Fair representation8
Follo0Follo0 generally accepted accountinggenerally accepted accounting
principles principles 3AA/E83AA/E8
5n*ualified opinion5n*ualified opinion
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Auditor)s :eportAuditor)s :eport
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6onetary 5nit Assumption6onetary 5nit Assumption
Only 0hat can be e$pressed in moneyOnly 0hat can be e$pressed in money
Assumes unit of measure stays constantAssumes unit of measure stays constant
/hotoDiscG3etty Images /hotoDiscG3etty Images
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#conomic #ntity Assumption#conomic #ntity Assumption
#conomic events identified 0ith unit#conomic events identified 0ith unit
Separately identified apart from o0ner Separately identified apart from o0ner
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ime /eriod Assumptionime /eriod Assumption
Divide life of business into artificial time periodsDivide life of business into artificial time periods
6onthly' *uarterly' yearly6onthly' *uarterly' yearly
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3oing Concern Assumption3oing Concern Assumption
Divide life of business into artificial time periodsDivide life of business into artificial time periods
6onthly' *uarterly' yearly6onthly' *uarterly' yearly
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Cost /rincipleCost /rinciple
Assets must be recorded at costAssets must be recorded at cost
;erifiable vs. subjective;erifiable vs. subjective
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Full Disclosure /rincipleFull Disclosure /rinciple
All circumstances and events that 0ouldAll circumstances and events that 0ouldma(e a difference to users must be disclosedma(e a difference to users must be disclosed
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $,000
!o""on stoc# $10,000
etained earnings %
&'uip"ent $1(,000
)nsurance expense $1,000
Supplies $1,*00
Supplies expense $200!as+ $2,000
ividends $(00
CS5 begins onCS5 begins on
Han. 1' !&Han. 1' !&
For year endedFor year ended
Dec. "1' !&Dec. "1' !&'' prepare prepare
7 Income statementIncome statement
7 :etained earnings:etained earningsstatementstatement
7 -alance sheet-alance sheet
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $,000
!o""on stoc# $10,000
etained earnings %
&'uip"ent $1(,000
)nsurance expense $1,000
Supplies $1,*00
Supplies expense $200!as+ $2,000
ividends $(00
Action step 1Action step 1<<
:eport the:eport the
revenues 2revenues 2
e$penses for ae$penses for a period of time' period of time'
Income StatementIncome Statement
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $,000
!o""on stoc# $10,000
etained earnings %
&'uip"ent $1(,000
)nsurance expense $1,000
Supplies $1,*00
Supplies expense $200!as+ $2,000
ividends $(00
Action step 1Action step 1<<
:eport the:eport the
revenues 2revenues 2
e$penses for ae$penses for a period of time' period of time'
Income StatementIncome Statement
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation
CS5 CorporationCS5 Corporation
Income StatementIncome Statement
For the @ear #nded December "1' !&For the @ear #nded December "1' !&
Create the headingCreate the heading
Bame of the Bame of the
statementstatement
Bame of the Bame of the
companycompany
/eriod/eriod
of timeof time
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation
CS5 CorporationCS5 Corporation
Income StatementIncome Statement
For the @ear #nded December "1' !&For the @ear #nded December "1' !&
:evenues:evenues
Service revenueService revenue J1K'J1K'
4ist the revenues4ist the revenues
5se dollar signs to denote 5.S. currency5se dollar signs to denote 5.S. currency
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation
CS5 CorporationCS5 Corporation
Income StatementIncome Statement
For the @ear #nded December "1' !&For the @ear #nded December "1' !&
:evenues:evenuesService revenueService revenue J1K'J1K'#$penses#$penses
:ent e$pense:ent e$pense JL'JL'
Insurance e$penseInsurance e$pense 1' 1'Supplies e$penseSupplies e$pense ! !otal e$pensesotal e$penses 1'! 1'!
MMMMMMMM MMMMMMMM
4ist the e$penses 2 underline subtotals4ist the e$penses 2 underline subtotals
MMMMMMMM MMMMMMMM
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation
CS5 CorporationCS5 Corporation
Income StatementIncome Statement
For the @ear #nded December "1' !&For the @ear #nded December "1' !&
:evenues:evenuesService revenueService revenue J1K'J1K'#$penses#$penses
:ent e$pense:ent e$pense JL'JL'
Insurance e$penseInsurance e$pense 1' 1'Supplies e$penseSupplies e$pense ! !otal e$pensesotal e$penses 1'! 1'!
Bet Income Bet Income J +'NJ +'N
Calculate net income< revenues e$pensesCalculate net income< revenues e$penses
MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM
MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $,000
!o""on stoc# $10,000
etained earnings %
&'uip"ent $1(,000
)nsurance expense $1,000
Supplies $1,*00
Supplies expense $200!as+ $2,000
ividends $(00
Action step !Action step !<<
Sho0 amountsSho0 amounts
and causes ofand causes of
changes inchanges inretained earningsretained earnings
5se Bet Income5se Bet Income
from Incomefrom Income
StatementStatement
DividendsDividends
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 Corporation
CS5 CorporationCS5 Corporation
:etained #arnings Statement:etained #arnings Statement
For the @ear #nded December "1' !&For the @ear #nded December "1' !&
:etained earnings' Hanuary 1:etained earnings' Hanuary 1 J J
Add< Bet incomeAdd< Bet income +'N +'N
+'N+'N4ess< Dividends4ess< Dividends + +:etained earnings' Dec. "1:etained earnings' Dec. "1 J +'NJ +'N MMMMMMMM MMMMMMMM MMMMMMMM MMMMMMMM
MMMMMMMM MMMMMMMM
MMMMMMMM MMMMMMMM
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Do It /roblem< CS5 CorporationDo It /roblem< CS5 CorporationService revenue $17,000
Accounts receivable $4,000
Accounts payable $2,000
Building rental expense $9,000
Notes payable $,000
!o""on stoc# $10,000
etained earnings $(,*00
&'uip"ent $1(,000
)nsurance expense $1,000
Supplies $1,*00
Supplies expense $200!as+ $2,000
ividends $(00
Action step "Action step "<<
/resent assets and/resent assets and
claims to thoseclaims to those
assets at aassets at aspecific point inspecific point in
time on thetime on the
-alance Sheet-alance Sheet
5se J+'N5se J+'N:etained earnings:etained earnings
from previousfrom previous
statementstatement
CS5 CO:/O:AIOBCS5 CO:/O:AIOB
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CS5 CO:/O:AIOBCS5 CO:/O:AIOB-alance Sheet-alance Sheet
December "1' !&December "1' !&
AssetsAssetsCashCash J !'J !'
Accounts receivableAccounts receivable %' %'
SuppliesSupplies 1'N 1'N
#*uipment#*uipment 1+'1+'
otal assetsotal assets J!"'NJ!"'N4iabilities and Stoc(holders) #*uity4iabilities and Stoc(holders) #*uity
4iabilities4iabilities
Accounts payableAccounts payable J !'J !'
Botes payable Botes payable &'&'
otal liabilitiesotal liabilities K' K'
Stoc(holders) e*uityStoc(holders) e*uity
Common stoc( Common stoc( J1'J1'
:etained earnings:etained earnings +'N+'N
otal Stoc(holders) e*uityotal Stoc(holders) e*uity 1+'N1+'N
otal liabilities and stoc(holders) e*uityotal liabilities and stoc(holders) e*uity J!"'NJ!"'N
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