Expenses

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Expenses

Chapter 1

AN INTRODUCTION

TO FINANCIAL

STATMENTS

2


Study Objectives

1. Describe the primary forms of

business organization.

2. Identify the users and uses of

accounting information.

3. Explain the three principal types of

business activity.

4. Describe the content and purpose of

each of the financial statements.

3


Study Objectives

5. Explain the meaning of assets,

liabilities, and stockholders’ equity,

and state the basic accounting

equation.

6. Describe the components that

supplement the financial statements in

an annual report.

4


11

Forms of Business

Organization

• Sole proprietorship

• Partnership

• Corporation

5


Sole Proprietorship

• Business owned by

one person

• Simple to establish

• Owner controlled

• Tax advantages

• Owner personally

liable

• Financing difficult

6


Partnership

• Two or more owners

• Simple to establish

• Shared control

• Broader skills &

resources

• Tax advantages

• Personal liability

7


Corporation

• Separate legal entity

owned by

stockholders

• Easy to transfer

ownership

• Greater capital

raising potential

• Lower legal liability

• Unfavorable tax

treatment

8


211

Users of Financial Information

Internal

• Managers who plan,

organize and run a

business

• Marketing managers

• Production

supervisors

• Finance directors

• Company officers

9


Users of Financial Information

Internal Users Ask?

10


Users of Financial Information

External

• Investors

• Creditors

• Others

• Regulatory agencies

• Tax authorities

• Customers

• Labor Unions

• Economic planners

11


Users of Financial Information

External Users Ask?

12


311

Types of Business Activity

• Financing

• Investing

• Operating

13


Financing Activities

• Borrowing creates

liabilities

• Bank loans

• Debt securities

• Goods on credit or

payables

• Selling stock creates

stockholders’

equity

14


Investing Activities

• Obtaining resources

or assets to operate

the business

• Land

• Buildings

• Vehicles

• Computers

• Furniture

• Equipment

15


Operating Activities

• Primary activity of

business

• Selling goods

• Providing services

• Manufacturing

• Cost of Sales

• Advertising

• Paying employees

• Paying utilities

16


Operating Activities

• Revenues are the increases in assets

resulting from the sale of a product or

service

Expenses are the cost of assets

consumed or services used in

generating revenue.

• If revenue > expense = Net Income

• If revenue < expense = Net Loss!

17


Review

Which is not one of the three forms of

business organization?

a. Sole proprietorship.

b. Creditorship.

c. Partnership.

d. Corporation.

18


Review

Which is not one of the three forms of

business organization?

a. Sole proprietorship.

b. Creditorship.

c. Partnership.

d. Corporation.

19


Review

Which is an advantage of corporations

relative to partnerships and sole

proprietorships?

a. Lower taxes.

b. Harder to transfer ownership

c. Reduced legal liability for investors.

d. Most common form of business

organization.

20


Review

Which is an advantage of corporations

relative to partnerships and sole

proprietorships?

a. Lower taxes.

b. Harder to transfer ownership

c. Reduced legal liability for investors.

d. Most common form of business

organization.

21


Review

Which is not one of the three primary

business activities?

a. Financing.

b. Operating.

c. Advertising.

d. Investing.

22


Review

Which is not one of the three primary

business activities?

a. Financing.

b. Operating.

c. Advertising.

d. Investing.

23


411

Content and Purpose of Financial Statements

• Accountants

communicate with users

through four financial

statements

24


Four Financial Statements

• Income Statement

• Retained Earnings Statement

• Balance Sheet

• Statement of Cash Flows

25


Income Statement

• Reports operating success or failure for

a period.

• Summarizes revenues and expenses

for period: month, quarter, year.

• If revenue > expense = Net Income.

26


Income Statement

Do this statement first!

27


Retained Earnings Statement

• Shows changes in retained earnings for

period: month, quarter, year

• Beginning balance

• Add Net Income from income

statement.

• Deduct Dividends

• Ending balance

28


Retained Earnings Statement

Do this statement second!

29


Balance Sheet

• Reports assets and claims to assets.

• Claims of creditors, liabilities.

• Claims of owners, stockholders’ equity.

• Assets = Liabilities + Stockholders’

Equity

• Specific date – one point in time!

30


Balance Sheet

From

Retained

Earnings

Statement

31


Statement of Cash Flows

• Provides information about cash

receipts and cash payments

• Summarizes for period: month,

quarter, year.

• Cash effects of operating, investing,

and financing activities.

32


Statement of Cash Flows

• Where did the cash come from?

• How was cash used during the period?

• What was the change in the cash

balance during the period?

• A company cannot survive without cash!

33


Statement of Cash Flows..

Agrees

with

Balance

Sheet

34


511

Assets

• Resources owned by

the business

• Cash

• Accounts receivable

• Inventories

• Furniture and

fixtures

• Equipment

• Supplies

35


Liabilities

• Obligations or debts of business

• Notes payable

• Accounts payable

• Interest payable

• Salaries payable

• Unearned revenue

36


Stockholders’ Equity

• Ownership claims on assets

• Paid-in capital

• Common stock

• Retained earnings

37


Basic Accounting Equation

Assets =

Liabilities + Stockholders’ Equity

38


Review

Which of the following is not a correct

representation of the accounting equation?

a. Assets = Liabilities + Stockholders’ Equity

b. Assets - Liabilities = Stockholders’ Equity

c. Assets + Stockholders’ Equity = Liabilities

d. Assets - Stockholders’ Equity = Liabilities

39


Review

Which of the following is not a correct

representation of the accounting equation?

a. Assets = Liabilities + Stockholders’ Equity

b. Assets - Liabilities = Stockholders’ Equity

c. Assets + Stockholders’ Equity = Liabilities

d. Assets - Stockholders’ Equity = Liabilities

40


Review

Using the accounting equation, answer the

following question.

If Liabilities = $10,000 and

Stockholders’ Equity = $20,000

Then Assets =

$30,000

$30,000 = $10,000 + $20,000

41


Using the accounting equation, answer the

following question.

If Assets = $75,000

Review

And Liabilities = $35,000

Then Stockholders’ Equity =

$40,000

$75,000 = $35,000 + $40,000

42


611

Supplements to the Financial

Statements in an Annual Report

• Management Discussion and

Analysis

• Notes to Financial Statements

• Auditor’s report

43


Auditor’s Report

• Certified Public Accountant – CPA

• Auditor (CPA) conducts independent

examination of financial statements

• Fair representation?

• Follow generally accepted accounting

principles (GAAP)?

• Unqualified opinion

44


Auditor’s Report

45


Do It Problem: CSU Corporation

Service revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $5,000

Common stock $10,000

Retained earnings ?

Equipment $16,000

Insurance expense $1,000

Supplies $1,800

Supplies expense $200

Cash $1,400

Dividends $600

• CSU begins on

Jan. 1, 2007

• For year ended

Dec. 31, 2007,

prepare

• Income

statement

• Retained

earnings

statement

• Balance sheet

46


Do It Problem: CSU Corporation

Service revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $5,000

Common stock $10,000

Retained earnings ?

Equipment $16,000

Insurance expense $1,000

Supplies $1,800

Supplies expense $200

Cash $1,400

Dividends $600

• Action step 1:

Report the

revenues &

expenses for a

period of time,

Income

Statement

47


Do It Problem: CSU Corporation

Service revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $5,000

Common stock $10,000

Retained earnings ?

Equipment $16,000

Insurance expense $1,000

Supplies $1,800

Supplies expense $200

Cash $1,400

Dividends $600

• Action step 1:

Report the

revenues &

expenses for a

period of time,

Income

Statement

48


Do It Problem: CSU Corporation

Create the heading

Name of the

company

CSU Corporation

Income Statement

For the Year Ended December 31, 2007

Period

of time

Name of the

statement

49


Do It Problem: CSU Corporation

CSU Corporation

Income Statement

For the Year Ended December 31, 2007

Revenues

Service revenue $17,000

List the revenues

Use dollar signs to denote U.S. currency

50


Do It Problem: CSU Corporation

CSU Corporation

Income Statement

For the Year Ended December 31, 2007

Revenues

Service revenue $17,000

Expenses

Rent expense $9,000

Insurance expense 1,000

Supplies expense ________ 200

Total expenses 10,200

List the expenses & underline sub-totals


Do It Problem: CSU Corporation

CSU Corporation

Income Statement

For the Year Ended December 31, 2007

Revenues

Service revenue $17,000

Expenses

Rent expense $9,000

Insurance expense 1,000

Supplies expense ________ 200

Total expenses 10,200

Net Income $ 6,800

________

________

Calculate net income: revenues - expenses


Do It Problem: CSU Corporation

Service revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $5,000

Common stock $10,000

Retained earnings ?

Equipment $16,000

Insurance expense $1,000

Supplies $1,800

Supplies expense $200

Cash $1,400

Dividends $600

• Action step 2:

Show amounts

and causes of

changes in

retained

earnings

• Use Net Income

from Income

Statement

• Dividends

53


Do It Problem: CSU Corporation

CSU Corporation

Retained Earnings Statement

For the Year Ended December 31, 2007

Retained earnings, January 1 $ 0

Add: Net income 6,800

6,800

Less: Dividends 600

Retained earnings, Dec. 31 $ 6,200

________

54


Do It Problem: CSU Corporation

Service revenue $17,000

Accounts receivable $4,000

Accounts payable $2,000

Building rental expense $9,000

Notes payable $5,000

Common stock $10,000

Retained earnings $6,200

Equipment $16,000

Insurance expense $1,000

Supplies $1,800

Supplies expense $200

Cash $1,400

Dividends $600

• Action step 3:

Present assets

and claims to

those assets at

a specific point

in time on the

Balance Sheet

• Use $6,200

Retained

earnings from

previous

statement!

55


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information contained herein.

57

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