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INTRODUCTION TO FINANCIAL STATEMENTS

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Financial Accounting, Sixth Edition

Stud! Stud! O"#$cti%$& O"#$cti%$&

1. 2. 3. 4.

Describe the primary forms of business organization. Identify the users and uses of accounting information. Explain the three principal types of business activity. Describe the content and purpose of each of the financial statements. Explain the meaning of assets! liabilities! and stoc"holders# e$uity! and state the basic accounting e$uation. Describe the components that supplement the financial statements in an annual report.

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Int(oduction Int(oduction to to Financial Financial Stat$)$nt& Stat$)$nt&

Fo()& Fo()&o* o* +u&in$&& +u&in$&& O(gani,ation O(gani,ation &ole proprietorship 'artnership (orporation U&$(& U&$(&and andU&$& U&$& o* o*Financial Financial In*o()ation In*o()ation Internal users External users Ethics in financial reporting

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$& )inancing Investing *perating

Co))unicating Co))unicating -ith -ithU&$(& U&$(& Income statement +etained earnings statement ,alance sheet &tatement of cash flo-s Interrelationships of statements *ther elements of an annual report

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Fo()& Fo()& o* o* +u&in$&& +u&in$&& O(gani,ation O(gani,ation

/(o0(i$to(&hi0

/a(tn$(&hi0

Co(0o(ation

0enerally o-ned by one person &imple to establish *-ner controlled .ax advantages

&imple to establish &hared control ,roader s"ills and resources .ax advantages

Easier to transfer o-nership Easier to raise funds /o personal liability

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SO 1 Describe the primary forms of business organization.

U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
4ho U&$& Accounting Data
Int$(nal U&$(&
2u)an R$&ou(c$& Taxing Autho(iti$&

Ext$(nal U&$(&
La"o( Union&

Financ$ Manag$)$nt Cu&to)$(& C($dito(& Ma(3$ting R$gulato(! Ag$nci$&

In%$&to(&

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SO 2 Identify the users and uses of accounting information.

U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
6u$&tion& A&3$d "! Int$(nal U&$(&
1. (an -e afford to give our employees a pay raise1
2.

U&$(
2u)an R$&ou(c$& Ma(3$ting Manag$)$nt Financ$

2hat price for our product -ill maximize net income1

3. 2hich product line is most profitable1

4. Is cash sufficient to pay dividends to the stoc"holders1

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SO 2 Identify the users and uses of accounting information.

U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
6u$&tion& A&3$d "! Ext$(nal U&$(&
1. Is the company earning satisfactory income1
2.

U&$(
In%$&to(& In%$&to(&

3o- does Disney compare in size and profitability -ith .ime 2arner1 2ill 4nited 5irlines be able to pay its debts as they come due1

3.

C($dito(&

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SO 2 Identify the users and uses of accounting information.

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U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
Ethic& In Financial R$0o(ting
4nited &tates regulators and la-ma"ers -ere very concerned that the economy -ould suffer if investors lost confidence in corporate accounting because of unethical financial reporting.

+ecent *inancial &candal& include6 En(on! 4o(ldCo)! 2$althSouth! AI:! and others. (ongress passed Sa("an$&-Oxl$! Act o* 2992. Effective financial reporting depends on sound ethical behavior.

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SO 2 Identify the users and uses of accounting information.

U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
Illu&t(ation 1St$0& in anal!,ing $thic& ca&$&

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SO 2 Identify the users and uses of accounting information.

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U&$(& U&$(& and and U&$& U&$& o* o* Financial Financial In*o()ation In*o()ation
6u$&tion
2hich of the follo-ing did not result from the &arbanes7 *xley 5ct1 a. .op management must no- certify the accuracy of financial information. b. 'enalties for fraudulent activity increased. c. Independence of auditors increased. d. .ax rates on corporations increased.

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SO 2 Identify the users and uses of accounting information.

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$&

5ll businesses are involved in three types of activity 8

financing! investing! and operating.

.he accounting in*o()ation &!&t$) "eeps trac" of the results of each of these business activities.

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SO 3 Explain the three principal types of business acti ity.

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$&

Financing Acti%iti$&
T-o 0(i)a(! &ou(c$& o* out&id$ *und& a($;
1< +o((o-ing )on$!

5mounts o-ed are called lia"iliti$&. 'arty to -hom amounts are o-ed are c($dito(&. Not$& 0a!a"l$ and "ond& 0a!a"l$ are different type of liabilities.

2< I&&uing &ha($& o* &toc3 *o( ca&h<

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'ayments to stoc"holders are called di%id$nd&.

SO 3 Explain the three principal types of business acti ity.

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$&

In%$&ting Acti%iti$&
/u(cha&$ o* ($&ou(c$& a co)0an! n$$d& o0$(at$<

to

(omputers! delivery truc"s! furniture! buildings! etc. +esources o-ned by a business are called a&&$t&.

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SO 3 Explain the three principal types of business acti ity.

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$&

O0$(ating Acti%iti$&
Onc$ a "u&in$&& ha& th$ a&&$t& it n$$d&, it can "$gin it& o0$(ation&<

R$%$nu$& 7 5mounts earned from the sale of products 9sales revenue! service revenue! and interest revenue:. In%$nto(! 7 0oods available for sale to customers. Account& ($c$i%a"l$ 7 +ight to receive money from a customer!in the future! as the result of a sale.

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SO 3 Explain the three principal types of business acti ity.

+u&in$&& +u&in$&& Acti%iti$& Acti%iti$&

O0$(ating Acti%iti$&

Ex0$n&$& 7 cost of assets consumed or services used. 9cost of goods sold! selling! mar"eting! administrative! interest! and income taxes expense:. Lia"iliti$& arising from expenses include accounts payable! interest payable! -ages payable! sales taxes payable! and income taxes payable. N$t inco)$ ; -hen revenues exceed expenses. N$t lo&& ; -hen expenses exceed revenues.
SO 3 Explain the three principal types of business acti ity.

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Co))unicating Co))unicating -ith -ith U&$(& U&$(&

(ompanies (ompaniesprepare preparefour fourfinancial financialstatements statementsfrom fromthe the summarized summarizedaccounting accountingdata6 data6

,alance &heet

Income &tatement

+etained Earnings &tatement

&tatement of (ash )lo-s

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

R$%i$- 6u$&tion
/et income -ill result during a time period -hen6
a. b. c. d.

assets exceed liabilities. assets exceed revenues. expenses exceed revenues. revenues exceed expenses.

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

Inco)$ Stat$)$nt
Illu&t(ation 1-'

+eports revenues and expenses for a specific 0$(iod o* ti)$. N$t inco)$ ; revenues exceed expenses. N$t lo&& ; expenses exceed revenues. 'ast net income provides information for 0($dicting *utu($ n$t inco)$.

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

Inco)$ Stat$)$nt
Illu&t(ation 1-'

R$tain$d Ea(ning& Stat$)$nt

Illu&t(ation 1-.

N$t inco)$ is needed to determine the $nding "alanc$ in ($tain$d $a(ning&.

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

&tatement sho-s amounts and cau&$& o* chang$& in retained earnings during the period. Ti)$ 0$(iod i& th$ &a)$ as that covered by the income statement. 4sers can $%aluat$ di%id$nd payment practices.

R$tain$d Ea(ning& Stat$)$nt

Illu&t(ation 1-.

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

+alanc$ Sh$$t
Illu&t(ation 1-5

R$tain$d Ea(ning& Stat$)$nt

Illu&t(ation 1-.

Ending "alanc$ in ($tain$d $a(ning& is needed in preparing the "alanc$ &h$$t.

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SO ! Describe the content and purpose of each of the financial statements.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

+alanc$ Sh$$t
Illu&t(ation 1-5

+eports assets and claims to assets at a specific 0oint in ti)$. A&&$t& = Lia"iliti$& > Stoc3hold$(&? E@uit!. <ists a&&$t& *i(&t! follo-ed by liabilities and stoc"holders# e$uity.

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SO " Explain the meaning of assets# liabilities# and stoc$holders% e&uity# and state the basic accounting e&uation.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

+alanc$ Sh$$t
Illu&t(ation 1-5

Stat$)$nt o* Ca&h Flo-&

Illu&t(ation 1-7

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SO " Explain the meaning of assets# liabilities# and stoc$holders% e&uity# and state the basic accounting e&uation.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

Stat$)$nt o* Ca&h Flo-&
Illu&t(ation 1-7

An&-$(&;

2here did cash come from during the period1 3o- -as cash used during the period1 2hat -as the change in the cash balance during the period1

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SO " Explain the meaning of assets# liabilities# and stoc$holders% e&uity# and state the basic accounting e&uation.

Co))unicating Co))unicating -ith -ith U&$(& U&$(&

R$%i$- 6u$&tion
2hich of the follo-ing financial statements is prepared as of a specific date1
a. b. c. d.

,alance sheet. Income statement. +etained earnings statement. &tatement of cash flo-s.

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SO " Explain the meaning of assets# liabilities# and stoc$holders% e&uity# and state the basic accounting e&uation.

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Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

4.&. companies that are publicly traded must provide shareholders -ith an annual ($0o(t. .he annual report al-ays includes6

)inancial statements. =anagement discussion and analysis. /otes to the financial statements. Independent auditor>s report.

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SO ' Describe the components that supplement the financial statements in an annual report.

Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

Manag$)$nt?& R$0o(t
Manag$)$nt di&cu&&ion and anal!&i& AMDBAC covers the companies ability to pay near7term obligations! its ability to fund operations and expansion! and its results of operations. =anagement must highlight *a%o(a"l$ o( un*a%o(a"l$ t($nd& and identify &igni*icant $%$nt& and unc$(tainti$& that affect these three factors.

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SO ' Describe the components that supplement the financial statements in an annual report.

Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

Manag$)$nt?& R$0o(t
Illu&t(ation 1-19

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SO ' Describe the components that supplement the financial statements in an annual report.

Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

Not$& to th$ Financial Stat$)$nt&

(larify the financial statements. 'rovide additional detail.

Not$& are essential to understanding a company#s operating performance and financial position.
Illu&t(ation 1-11

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SO ' Describe the components that supplement the financial statements in an annual report.

Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

Audito(?& R$0o(t
Audito(?& o0inion as to the *ai(n$&& of the presentation of the financial position and results of operations and their conformance -ith generally accepted accounting standards.
Illu&t(ation 1-12

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Oth$( Oth$( El$)$nt& El$)$nt& o* o* an an Annual Annual R$0o(t R$0o(t

&tate -hether each of the follo-ing items is most closely associated -ith the management discussion and analysis 9=D?5:! the notes to the financial statements! or the auditor#s report. 1. Descriptions of significant accounting policies6 2. 4n$ualified opinion6 3. Explanations of uncertainties and contingencies6 4. Description of ability to fund operations and expansion6 . Description of results of operations6 %. (ertified 'ublic 5ccountant 9('5:6 Not$& Audito(?& ($0o(t Not$& MDBA MDBA Audito(?& ($0o(t

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SO ' Describe the components that supplement the financial statements in an annual report.

D$! /oint&

Int$(national &tanda(d& ($*$(($d to a& Int$(national Financial R$0o(ting Standa(d& AIFRSC, a($ d$%$lo0$d "! th$ Int$(national Accounting Standa(d& +oa(d AIAS+C< Th$ Unit$d Stat$& and th$ int$(national &tanda(d-&$tting $n%i(on)$nt a($ 0(i)a(il! d(i%$n "! )$$ting th$ n$$d& o* in%$&to(& and c($dito(&< Th$ int$(nal cont(ol &tanda(d& a00lica"l$ to Sa("an$&-Oxl$! ASOEC a00l! onl! to la(g$ 0u"lic co)0ani$& li&t$d on U<S< $xchang$&<

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D$! /oint&

IFRS t$nd& to "$ &i)0l$( in it& accounting and di&clo&u($ ($@ui($)$nt&F &o)$ 0$o0l$ &a! )o($ G0(inci0l$&-"a&$d<H :AA/ i& )o($ d$tail$dF &o)$ 0$o0l$ &a! )o($ G(ul$&-"a&$d<H U<S< ($gulato(& ha%$ ($c$ntl! $li)inat$d th$ n$$d *o( *o($ign co)0ani$& that t(ad$ &ha($& in U<S< )a(3$t& to ($concil$ th$i( accounting -ith :AA/< Th$ th($$ )o&t co))on *o()& o* "u&in$&& o(gani,ation, 0(o0(i$to(&hi0&, 0a(tn$(&hi0&, and co(0o(ation&, a($ al&o *ound in count(i$& that u&$ IFRS< Th$ conc$0tual *(a)$-o(3 that und$(li$& IFRS i& %$(! &i)ila( to that u&$d to d$%$lo0 :AA/<

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Loo3ing into th$ Futu($

+oth th$ IAS+ and th$ FAS+ a($ ha(d at -o(3 d$%$lo0ing &tanda(d& that -ill l$ad to th$ $li)ination o* )a#o( di**$($nc$& in th$ -a! c$(tain t(an&action& a($ account$d *o( and ($0o(t$d< In *act, at on$ ti)$ th$ IAS+ &tat$d that no n$- )a#o( &tanda(d& -ould "$co)$ $**$cti%$ until 2998< Th$ )a#o( ($a&on *o( thi& 0olic! -a& to 0(o%id$ co)0ani$& th$ ti)$ to t(an&lat$ and i)0l$)$nt IFRS into 0(actic$, a& )uch ha& ha00$n$d in a %$(! &ho(t 0$(iod o* ti)$<

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4hich o* th$ *ollo-ing i& not a ($a&on -h! a &ingl$ &$t o* high-@ualit! int$(national accounting &tanda(d& -ould "$ "$n$*icialI aC M$(g$(& and ac@ui&ition acti%it!< "C Financial )a(3$t&< cC Multinational co(0o(ation&< dC :AA/ i& -id$l! con&id$($d to "$ a &u0$(io( ($0o(ting &!&t$)<

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Th$ Sa("an$&-Oxl$! Act d$t$()in$&; aC int$(national tax ($gulation&< "C int$(nal cont(ol &tanda(d& a& $n*o(c$d "! th$ IAS+< cC int$(nal cont(ol &tanda(d& o* U<S< 0u"licl! t(ad$d co)0ani$&< dC U<S< tax ($gulation&<

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IFRS i& con&id$($d to "$ )o($; aC 0(inci0l$&-"a&$d and l$&& (ul$&-"a&$d than :AA/< "C (ul$&-"a&$d and l$&& 0(inci0l$&-"a&$d than :AA/< cC d$tail$d than :AA/< dC Non$ o* th$ a"o%$<

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Co0!(ight Co0!(ight
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