Introduction to

Financial Statements

Chapter
1-1 Financial Accounting, Fifth Edition
 Introduction
Introduction to
to Financial
Financial Statements
Statements

Users and
Uses of Business Communicating
Financial Activities with Users
Information

Internal users Financing Income

External Investing statement
users Operating Retained
earnings
statement
Balance sheet
Statement of
cash flows
Interrelation-
ships of
statements
Chapter
1-2
 Internal Users
External Users

•Lenders •External Auditors •Managers •Sales Staff

•Shareholders •Customers •Officers •Budget Officers

•Governments •Internal Auditors •Controllers

Chapter
1-3
 Users
Users and
and Uses
Uses of
of Financial
Financial Information
Information
Common Questions Asked? User
1. Can we afford to give our
employees a pay raise?
2. Did the company earn a
satisfactory income?
3. Which product line is most
profitable?
4. Is cash sufficient to pay
dividends to the stockholders?
5. What price for our product
will maximize net income?
6. Will the company be able to
pay its short-term debts?
Chapter
1-4
 Business
Business Activities
Activities

All businesses are involved in three types of

activity —
financing,
investing,
and operating.

The accounting information system keeps track

of the results of each of these business
activities.

Chapter
1-5 SO 3 Explain the three principal types of business activity.
 Business
Business Activities
Activities

Financing Activities
Two primary sources of outside funds are:
1. Borrowing money
 Amounts owed are called liabilities.

 Party to whom amount is owed are creditors.

2. Issuing shares of stock for cash.

 Payments to stockholders are called dividends.

Chapter
1-6 SO 3 Explain the three principal types of business activity.
 Business
Business Activities
Activities

Investing Activities
Purchase of resources a company needs
to operate.
1. Computers, delivery trucks, furniture, buildings,
etc.
2. Resources owned by a business are called
assets.

Chapter
1-7 SO 3 Explain the three principal types of business activity.
 Business
Business Activities
Activities

Operating Activities
Once a business has the assets it needs,
it can begin its operations.

Revenues - Amounts earned from the sale of

products (sales revenue, service revenue, and
interest revenue).

Inventory - Goods available for sale to customers.

Accounts receivable - Right to receive money from a

customer,in the future, as the result of a sale.

Chapter
1-8 SO 3 Explain the three principal types of business activity.
 Business
Business Activities
Activities

Operating Activities
Once a business has the assets it needs,
it can begin its operations.
Expenses - cost of assets consumed or services
used. (cost of goods sold, selling, marketing,
administrative, interest, and income taxes expense).
Liabilities arising from expenses include accounts
payable, interest payable, wages payable, sales taxes
payable, and income taxes payable.
Net income – revenues exceed expenses.
Net loss – expenses exceed revenues.
Chapter
1-9 SO 3 Explain the three principal types of business activity.
 Communicating
Communicating with
with Users
Users

Companies
Companies prepare
prepare four
four financial
financial statements
statements from
from
the
the summarized
summarized accounting
accounting data:
data:

Retained Statement
Income Balance
Earnings of Cash
Statement Sheet
Statement Flows

Chapter
1-10
 Communicating
Communicating with
with Users
Users

Review Question
Net income will result during a time period when:
a. assets exceed liabilities.
b. assets exceed revenues.
c. expenses exceed revenues.
d. revenues exceed expenses.

Chapter
1-11
 Communicating
Communicating with
with Users
Users

Income Statement
Illustration 1-5

Reports revenues and

expenses for a specific
period of time.

Net income – revenues

exceed expenses.

Net loss – expenses

exceed revenues.

Chapter
1-12
 Communicating
Communicating with
with Users
Users
Retained Earnings
Income Statement
Illustration 1-5
Statement Illustration 1-6

Net income is needed to

determine the ending balance in
stockholder’s equity.

Chapter
1-13
 Communicating
Communicating with
with Users
Users
Retained Earnings
Statement Illustration 1-6

Statement indicates the

reasons why retained
earnings has increased
or decreased during the
period.

Chapter
1-14
 Communicating
Communicating with
with Users
Users

Balance Sheet Retained Earnings

Illustration 1-8
Statement Illustration 1-6

The ending balance in retained

earnings is needed in preparing
the balance sheet

Chapter
1-15
 Communicating
Communicating with
with Users
Users

Balance Sheet Reports the assets,

liabilities, and
Illustration 1-8

stockholder’s equity at
a specific date.

Assets listed at the

top, followed by
liabilities and
stockholder’s equity.

Total assets must equal

total liabilities and
stockholder’s equity.

Chapter
1-16
 Communicating
Communicating with
with Users
Users

Statement of Cash Flows

Illustration 1-9

Answers:
1. Where did cash come
from during the
period?

2. How was cash used

during the period?

3. What was the change

in the cash balance
during the period?

Chapter
1-17
 Communicating
Communicating with
with Users
Users

Review Question
Which of the following financial statements is
prepared as of a specific date?
a. Balance sheet.
b. Income statement.
c. Owner's equity statement.
d. Statement of cash flows.

Chapter
1-18