Financial Accounting Chapter 1

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Stockholders
investors
Creditor
lenders (banks)
– make money on loans by charging interest
Dividends
cash payments that stockholders hope to receive; a portion of what the company earned
Internal Decision Makers
managers
– need info about the company’s business activities to manage the operating, investing, and financing activities of the firm
External Decision Makers
stockholders and creditors
– need info about these same business activities to assess whether the company will be able to pay back its debts with interest and pay dividends
Accounting System
collects and processes (analyzes, measures, and records) financial info about an organization and reports that info to decision makers
Business Activities
1) Financing Activities = borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends
2) Investing Activities = buying or selling items such as plant and equipment used in the production of beverages
3) Operating Activities = the day-to-day process of purchasing raw tea and other ingredients from suppliers, manufacturing beverages, delivering them to customers, collecting cash from customers, and paying suppliers
Financial Accounting
– for external decision makers
– four basic financial statements and related disclosures that are periodically produced by that system
Focus
– investors, creditors, and preparers of financial statements
– marketing managers and credit managers use customers’ financial statements to decided whether to extend credit to their customers
– supply chain managers analyze suppliers’ financial statements to see whether the suppliers have the resources to meet demand and invest in future development
– human resource managers use financial statements as a basis for contract negotiations over pay rates
Four Basic Financial Statements
1) Balance Sheet
2) Income Statement
3) Statement of Stockholders’ Equity
4) Statement of Cash Flows
Balance Sheet
reports the amount of assets, liabilities, and stockholders’ equity of an account entity at a point in time
– Assets = Liabilities + Stockholders’ Equity
Assets
the economic resources owned by the entity
Liabilities
indicate the amount of financing provided by creditors
– amounts owed to suppliers, employees, banks
– ____ payable
Stockholders’ Equity
indicates the amount of financing provided by owners of the business and reinvested earnings
a) Common Stock = investment of cash and other assets in the business by the stockholders
b) Retained Earnings = amount of earnings (profits) reinvested in the business
Income Statement
reports the accountant’s primary measure of performance of a business, revenues less expenses during the accounting period
– Revenues – Expenses = Net Income
Revenues
cash and promises received from delivery of goods and services
– EARNED
Expenses
resources used to earn period’s revenues
– represent the dollar amount of resources the entity used to earn revenues during the period
– PAID
Net Income
revenues earned minus expenses incurred
(+R, +SE) = +NI
(+E, -SE) = -NI
Statement of Stockholders’ Equity
reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period
*Beginning Retained Earnings + Net Income – Dividends = Ending Retained Earnings
– Ex:
RETAINED EARNINGS
Beginning Retained Earnings: $43.1
Net Income: $22.9
Dividends: $2
Ending Retained Earnings: $64
COMMON STOCK
Statement of Cash Flows
reports inflows and outflows (receipts and payments) of cash during the accounting period in the categories of operating, investing, and financing

a) Operating activities – directly related to normal business activities. (Directly related to earning income)
b) Investing activities – acquisitions and sales of plant and equipment, intangibles, and other investment assets.
c) Financing activities – involves dealings with the company owners and lenders. (Involve the receipt or payment of money to investors and creditors)

Ex:
Cash flows from operating activities ($87.5)
Cash flows from investing activities ($125.5)
Cash flows from financing activities ($47)
Net increase (decrease) in cash = $9.0 (87.5+47-125.5)
Cash balance December 31, 2011 = $1.6 (last period’s cash on the balance sheet
Cash balance December 31, 2012 = $10.6 (9+1.6)

Categories: Financial Accounting