Business Activities and Overview

of Financial Statements and the

Reporting Process

FINANCIAL ACCOUNTING
AN INTRODUCTION TO CONCEPTS,
METHODS, AND USES
 Learning Objectives

1.
1. Develop a general understanding of four
principal activities of business firms: (a)
establishing goals and strategies, (b) obtaining
financing, (c) making investments, and (d)
conducting operations.

2.
2. Develop an understanding of the purpose and
content of the three principal financial
statements that business firms prepare to
measure and report the results of their business
activities: (a) balance sheet, (b) income
statement, and (c) statement of cash flows.
 Learning Objectives
3.
3. Develop a sensitivity to financial reporting
issues, including the following: (a) the potential
conflict of interest between management’s self-
interest for job security and career enhancement
with its responsibility to shareholders, (b) the
alternative approaches to establishing
accounting measurement and reporting
standards, and (c) the role of the independent
audit of a firm’s financial statements.

4.
4. Develop a sensitivity to ethical issues in financial
reporting using a framework for thinking about
ethical questions.
 Chapter Outline
1.
1. Overview
Overview of
of business
business activities.
activities.
2.
2. Principal
Principal financial
financial statements.
statements.
3.
3. Other
Other items
items in
in financial
financial reports
reports
4.
4. Financial
Financial reporting
reporting issues
issues
5.
5. Financial
Financial reporting
reporting process
process in
in the
the
United
United States.
States.
Chapter
Chapter Summary
Summary
 List Four Principal Activities of
Business Firms:

1.
1. Establishing
Establishing goals
goals and
and strategies,
strategies,
2.
2. Obtaining
Obtaining financing,
financing,
3.
3. Making
Making investments,
investments, and
and
4.
4. Conducting
Conducting operations.
operations.
 Establishing Goals and Strategies

 Maximize return to  Considers

shareholders competitors
 Provide stimulating  Consider barriers
lifelong work for  Consider demand
employees  Consider regulation
 Contribute to and
 Recognize
integrate with management
national goals and process not an
policies individual process
 Obtaining Financing and Making
Investments
 Financing comes from two sources,
owners or creditors
 Investments are made in the
following:
– Land, buildings, equipment
– Patents, licenses, contractual rights
– Stock and bonds of other organizations
– Inventories
– Accounts Receivable
What are the Four Areas of
Conducting Operations?
Overview of Business Activities
 Purpose and Content of the Three
Principal Financial Statements:
a) Balance sheet,
b) Income statement,
c) Statement of cash flows,
d) Notes to the financial statements,
including various supporting
schedules,
e) Opinion of the independent certified
public accountant.
 Review Balance Sheet

 Snap shot in time

 Asset, liabilities, owners’ equity

 Retained earnings

 Assets = Liabilities + Owners’

Equity
 Historical valuation

 Analysis of the balance sheet

 Balance Sheet
 Snapshot of investing and financing
activities at a moment in time.
 Basic Accounting Equation:

Assets = Liabilities + Shareholders’

Equity
which is the same idea as
Investing = Financing
Resources = Sources of Resources
Liabilities = Claims on Resources
 Relationship between Balance
Sheet and Income Statement

 The income statement links the

balance sheet at the beginning of
the period with the balance sheet
at the end of the period.
 Retained Earnings is increased by
net income and decreased by
dividends.
 Income Statement
 Indicatesearning or profit
 Reports amounts for a period of time
– Typically one year
 Explain the following concepts
– Revenue
– Expenses
 How is classification accomplished?
 How is the income statement related
to the balance sheet?
 Income Statement
 Results of the operating activities
of a firm for a specific time period.
 Basic Income Equation:

Net Income = Revenues - Expenses

 Revenues are the inflows of assets
from selling goods and services.
 Expenses are the outflows of assets
used in generating revenues.
Income Statement
 Statement of Cash Flows

 Classification

–Operations
–Investing
–Financing
 Discussits relationship to
the Balance Sheet.
Who are Primary Participants in the
Reporting Process?

1. Business firms and their managers

2. Accounting standards setting and
regulatory bodies
3. Independent auditors
4. Security analysts and other users
of financial statements
 Financial Reporting Issues

a) The multiple uses of financial accounting

reports
b) The alternative approaches to establishing
accounting measurement and reporting
standards
c) The role of the independent audit of a
business firm’s financial statements
d) The role of financial reporting in an
efficient capital market
 Classification of Cash Flows
 Operations: cash from customers
less cash paid in carrying out the
firm’s operating activities
 Investing: cash paid to acquire
noncurrent assets less amounts
from any sale of noncurrent assets
 Financing: cash from issues of
long-term debt or new capital less
dividends
Inflows and Outflows of Cash
 Other Items in Annual Reports &
Financial Reporting Issues
 Supporting schedules  Users and uses of
and notes financial reports
 Auditor’s opinion  Authority for
establishing
acceptable accounting
standards
 The role of an audit of
a firm’s financial
statements
 Efficiency of capital
markets
 The Four Participants in the
Financial Reporting Process.
1. Business firms and their
managers

2. Accounting standards
setting and regulatory
bodies

3. Independent auditors

4. Security analysts and

other users of financial
statements
 Compilation of accounting
rules, procedures and
SEC practices

Private sector body, for

leadership in establishing
FASB accounting standards

An agency of the federal

government, that has the
GAAP legal authority to set
acceptable accounting
methods and standards in
the U.S.
 An International Perspective
 The process of setting accounting
standards vary widely around the world
resulting in a diverse set of accounting
principles.
 Globalization of economies has increased
the need for comparable and
understandable financial information.
 The International Accounting Standards
Committee (IASC) issues
recommendations for minimum
standards.
 Chapter Summary
 This chapter provided a broad
overview of business activities and
how they are reflected in basic
financial statements.

 The three basic financial

statements were introduced.

 Further chapters examine the

concepts and procedures that
underlie each statement.
 Rapid Review - True or False
The four principle business activities of a business firm are
(a) establishing goals and strategies (b) obtaining financing
(c) making investments (d) conducting operations

An income statement provides information about a firm’s cash-

generating ability.

An income statement provides information about a firm’s

profitability. Cash-generating ability information is
provided by the Statement of Cash Flows.

Most independent auditors’ opinions are unqualified.