ACCT101Chapter 1Financial Statements and Business Decisions1-2Understanding the BusinessOwner-ManagersFounders of the business who also function as managers are called Owner- Mangers.Creditors (债权人)Creditors lend money for a specific period of time and gain by charging interest on the money they lend.InvestorsInvestors buy ownership in the company in the form of stock.1-3Understanding the BusinessInvestors purchase stock (or ownership) in businesses hoping to gain in two ways:Sell ownership interest in the future for more than they paid.Receive a portion of the companys earnings in cash (dividends).1-4Understanding the BusinessOwner-ManagersFounders of the business who also function as managers are called Owner- Mangers.CreditorsCreditors lend money for a specific period of time and gain by charging interest on the money they lend.InvestorsInvestors buy ownership in the company in the form of stock.1-5The Business OperationsManufacturers either make the parts needed to produce its products or buy the parts from suppliers.ManufacturerFinal ProductCustomer1-6The Accounting SystemCollects and processes financial informationReports information to decision makersManagers (internal decision makers)Investors and Creditors (external decision makers)1-7The Accounting SystemAccounting SystemFinancial Accounting System Periodic financial statements and related disclosuresManagerial Accounting System Detailed plans and continuous performance reportsExternal Decision Makers Investors, creditors, suppliers, customers, etc.Internal Decision Makers Managers throughout the organization1-8Learning ObjectivesRecognize 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).1-9The Four Basic Financial StatementsIncome Statement(损益表)Balance Sheet(资产负债表)Statement of Cash Flows(现金流量表)Statement of Retained Earnings(留存收益表)Financial statements summarize the financial activities of the business.1-10The Four Basic Financial StatementsCompanies 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. 2011X1-11Lets look at MAXIDRIVE CORP.s financial statements.1-121. Name of entity 2. Title of statement 3. Specific date 4. Unit of measureThe Balance Sheet reports the financial position of an entity at a particular point in time.1-13Assets are listed Assets are listed by their ease ofby their ease of conversion into conversion into cash.cash.AssetsAssets are are economic economic resources resources owned by the owned by the business as a business as a result of past result of past transactions.transactions.1-14LiabilitiesLiabilities are are debts or debts or obligations of obligations of the business the business that result from that result from past past transactions.transactions.1-15EquityEquity is the is the amount of amount of financing financing provided by provided by owners of the owners of the business and business and earnings.earnings.1-16The Balance SheetBasic Accounting Equation Balance Sheet EquationAssets = Liabilities + Stockholders EquityEconomic ResourcesSources of Financing for Economic Resources1-17Use Use $ $ on the on the first item in a first item in a groupgroup and on the and on the group total.group total.Assets = Liabilities + Stockholders Equity1-181. Name of entity 2. Title of statement 3. Specific period of time (Unlike the balancesheet, this statement covers a specifiedperiod of time.) 4. Unit of measure1-19 The The Income StatementIncome Statement reports the reports the revenues minus expenses of the revenues minus expenses of the accounting period.accounting period.1-20Revenues 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.1-21RevenuesJune 2011Cash from sale collected on June 10th. XMay 2011$1,000 sale made on May 25th. X(1) When will the revenue from this transaction be recognized? Earnings from the sale of goods or services.1-22RevenuesEarnings from the sale of goods or services.(2) When will the revenue from this transaction be recognized? July 2011Goods are delivered on July 1st. XMay 2011Receive cash $6,000 on May 15th. X1-23Expenses are the dollar amount of resources used up by the entity to earn revenues during a period.An expense is recognized in the period in which goods and services are used, not necessarily the period in which cash is paid.1-241-25ExpensesMay 2011June 2011May 11 paid $75 cash for newspaper ad. XAd appears on June 8th. XAn expense is recognized in the period in which goods and services are used(1) When will the expense for this(1) When will the expense for this transaction be recognized?transaction be recognized?1-26Expenses(2) When will the expense