1 kimmel, weygandt, kieso, trenholm kimmel financial accounting: tools for business decision making

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  • 1 Kimmel, Weygandt, Kieso, Trenholm KIMMEL Financial Accounting: Tools for Business Decision Making
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  • 2 After studying Chapter 1, you should be able to: 1.Describe the primary forms of business organization. 2.Identify the users and uses of accounting. 3.Explain the three principal types of business activity. 4.Describe the content and purpose of each of the financial statements. Chapter 1 Introduction to Financial Statements
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  • 3 After studying Chapter 1, you should be able to: 5.Explain the meaning of assets, liabilities, and shareholders equity and state the basic accounting equation. 6.Describe the components that supplement the financial statements in an annual report. 7.Explain the basic assumptions and principles underlying financial statements.
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  • 4 Forms of Business Organization Illustration 1-1
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  • 5 Users of Financial Information +Internal Users +Managers plan, organize and run a business
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  • 6 +External Users +Investors +Creditors +Others +Taxing authorities +Regulatory agencies +Customers +Labour unions +Economic planners Users of Financial Information Primary users
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  • Accounting Equation Assets = Liabilities + Shareholders Equity
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  • 8 Basic Terms +Assets - resources owned by a business +Liabilities - obligations of the business +Shareholders equity +Share capital - representing the primary ownership interest in a corporation +Retained earnings accumulated earnings of corporation that have not been distributed to shareholders
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  • 9 3 Types of Business Activity +Financing +Investing +Operating
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  • 10 Financing Activities +Borrowing money (debt) +Selling shares (equity) It takes money to make money!
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  • 11 Investing Activities +Obtaining the resources or assets needed to operate the business for the long-run +Examples +Purchase or sale of investments +Purchase or sale of capital assets
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  • 12 Operating Activities +Operating activities are the main activities for which the organization is in business Loblaw
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  • 13 +Revenues arise from sale of a product or service +Revenues result in an inflow of assets Revenues
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  • 14 +Expenses are the costs of assets consumed or services used to generate revenues +Examples +Cost of sales +Store operating expenses +General and administrative expenses +Interest expense Expenses
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  • 15 Revenue$10,000 Less: Expenses 3,000 Net earnings$ 7,000 (Net loss is the excess of expenses over revenues) Net Earnings +Net earnings are the excess of revenue over expenses
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  • Remember +Remaining liquid and solvent is as important as making a profit because... +A company can survive without earnings, but it cant survive very long without cash
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  • +Management Discussion and Analysis +Auditor's Report +Financial Statements +Statement of Earnings +Statement of Retained Earnings +Balance Sheet +Statement of Cash Flows +Notes to Financial Statements Elements of an
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  • 18 Management Discussion and Analysis +Covers three aspects of a company +Liquidity - ability to pay near-term obligations +Capital resources - ability to fund operations and expansions +Results of operations
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  • 19 Auditors Report +Auditor gives an unqualified opinion if the financial statements present the financial position, results of operations, and cash flows in accordance with generally accepted accounting principles (GAAP)
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  • 20 Financial Accounting Statements +Statement of Earnings +Reports the results of operations for a specific period of time +Statement of Retained Earnings +Reports the changes in retained earnings for a specific period of time +Balance Sheet +Reports the assets, liabilities, and shareholders equity as at a specific point in time +Statement of Cash Flows +Reports the cash receipts and payments for a specific period of time
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  • Want to Practice? Click HERE to Solve Click HERE to Solve DO IT DO IT From Page 15 From Page 15
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  • 22 Notes to Financial Statements +Provide additional information not included in body of statements +Do not have to be numeric +Examples +Description of accounting policies or explanation of uncertainties and contingencies +Statistics and supporting details
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  • 23 Assumptions and Principles +Assumptions +Monetary unit +Economic entity +Time period +Going concern +Generally accepted accounting principles +Cost +Full disclosure
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  • Illustration 1-10 Monetary Unit Assumption
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  • Illustration 1-10 Economic Entity Assumption
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  • Illustration 1-10 Time Period Assumption
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  • Illustration 1-10 Going Concern Assumption
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  • Illustration 1-11 Cost Principle
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  • Illustration 1-11 Full Disclosure Principle
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  • 30 Decision Checkpoints +Are the companys operations profitable? +What is the companys policy toward dividends and growth? +Does the company rely primarily on debt or shareholders equity to finance its assets? +Does the company generate sufficient cash from operations to fund its investing activities?
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  • 31 COPYRIGHT Copyright 2001 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.
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  • Do It - Page 15
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  • CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 1 st - Statement of Earnings Head up the statement name of company name of statement period of time covered
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  • Revenues Service revenue $22,200 CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 List the revenues
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  • Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses10,200 Earnings before income tax12,000 Income tax expense 5,200 CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001 List and total the expenses. Note that income tax is shown separately from other expenses
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  • 36 Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense 200 Total expenses10,200 Earnings before income tax12,000 Income tax expense 5,200 Net earnings $ 6,800 Subtract expenses from revenues to obtain net earnings (loss) CSU CORPORATION Statement of Earnings For the Year Ended December 31, 2001
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  • CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 2 nd Statement of Retained Earnings Head up the statement name of company name of statement period of time covered (same period as statement of earnings)
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  • CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1$ 0 Start with beginning retained earnings (same as ending retained earnings of prior period)
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  • CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1$ 0 Add: Net earnings6,800 6,800 Add net earnings (subtract loss) from the current year (see Statement of Earnings) Subtotal
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  • CSU CORPORATION Statement of Retained Earnings For the Year Ended December 31, 2001 Retained earnings, January 1$ 0 Add: Net earnings6,800 6,800 Less: Dividends 0 Retained earnings, December 31$ 6,800 Subtract current years dividends (if any) and total
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  • CSU CORPORATION Balance Sheet December 31, 2001 3 rd Balance Sheet Head up the statement name of company name of statement date (as at a specific point in time)
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  • CSU CORPORATION Balance Sheet December 31, 2001 Assets Cash$ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 List the assets and total
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  • CSU CORPORATION Balance Sheet December 31, 2001 Assets Cash$ 2,000 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,800 Liabilities and Shareholders Equity Liabilities Accounts payable$ 2,000 Notes payable 5,000 Total liabilities 7,000 List the liabilities and subtotal
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  • CSU CORPORATION Balance Sheet December 31, 2001 List shareholders equity. Subtotal Add to liabilities, total

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