Kế toán, kiểm toán - Introduction to financial statements

Introduction to FinancialStatementsKimmel ● Weygandt ● KiesoFinancial Accounting, Eighth Edition1CHAPTER OUTLINEIdentify the forms of business organization and the uses of accounting information.1Explain the three principal types of business activity.2LEARNING OBJECTIVESDescribe the four financial statements and how they are prepared.3LEARNING OBJECTIVELO 1 FORMS OF BUSINESS ORGANIZATIONIdentify the forms of business organization and the uses of accounting information.1USERS AND USES OF FINANCIAL INFORMATIONInternal UsersIllustration 1-1 Questions that internal users askLO 1 ACCOUNTING ACROSS THE ORGANIZATIONOwning a Piece of the BarThe original Clif Bar® energy bar was created in 1990 after six months of experimentation by Gary Erickson and his mother in her kitchen. Today, the company has almost 300 employees and is considered one of the leading Landor’s Breakaway Brands®. One of Clif Bar & Company’s proudest moments was the creation of an employee stock ownership plan (ESOP) in 2010. This plan gives its employees 20% ownership of the company. The ESOP also resulted in Clif Bar enacting an open-book management program, including the commitment to educate all employee-owners about its finances. Armed with basic accounting knowledge, employees are more aware of the financial impact of their actions, which leads to better decisions.LO 1 External UsersIllustration 1-2 Questions that external users askUSERS AND USES OF FINANCIAL INFORMATIONLO 1 ACCOUNTING ACROSS THE ORGANIZATIONSpinning the Career WheelHow will the study of accounting help you? A working knowledge of accounting is desirable for virtually every field of business. Some examples of how accounting is used in business careers include the following. General management: Managers of Ford Motors, Massachusetts General Hospital, California State University–Fullerton, a McDonald’s franchise, and a Trek bike shop all need to understand accounting data in order to make wise business decisions. Marketing: Marketing specialists at Procter & Gamble must be sensitive to costs and benefits, which accounting helps them quantify and understand. Making a sale is meaningless unless it is a profitable sale.LO 1 ACCOUNTING ACROSS THE ORGANIZATIONSpinning the Career WheelFinance: Do you want to be a banker for Citicorp, an investment analyst for Goldman Sachs, or a stock broker for Merrill Lynch? These fields rely heavily on accounting knowledge to analyze financial statements. In fact, it is difficult to get a good job in a finance function without two or three courses in accounting. Real estate: Are you interested in being a real estate broker for Prudential Real Estate? Because a third party—the bank—is almost always involved in financing a real estate transaction, brokers must understand the numbers involved: Can the buyer afford to make the payments to the bank? Does the cash flow from an industrial property justify the purchase price? What are the tax benefits of the purchase?LO 1 Ethics In Financial ReportingUnited States regulators and lawmakers were very concerned that the economy would suffer if investors lost confidence in corporate accounting because of unethical financial reporting.Recent financial scandals include: Enron, WorldCom, HealthSouth, AIG, and others.Congress passed Sarbanes-Oxley Act (SOX). Effective financial reporting depends on sound ethical behavior.USERS AND USES OF FINANCIAL INFORMATIONLO 1 USERS AND USES OF FINANCIAL INFORMATIONIllustration 1-3Steps in analyzing ethics casesLO 1 LO 1 ETHICS INSIGHTI Felt the Pressure—Would You? “I felt the pressure.” That’s what some of the employees of the now-defunct law firm of Dewey & LeBoeuf LLP indicated when they helped to overstate revenue and use accounting tricks to hide losses and cover up cash shortages. These employees worked for the former finance director and former chief financial officer (CFO) of the firm. Here are some of their comments: • “I was instructed by the CFO to create invoices, knowing they would not be sent to clients. When I created these invoices, I knew that it was inappropriate.” • “I intentionally gave the auditors incorrect information in the course of the audit.” Dewey & LeBoeuf LLP(continued)ETHICS INSIGHTI Felt the Pressure—Would You? What happened here is that a small group of lower-level employees over a period of years carried out the instructions of their bosses. Their bosses, however, seemed to have no concern as evidenced by various e-mails with one another in which they referred to their financial manipulations as accounting tricks, cooking the books, and fake income. Source: Ashby Jones, “Guilty Pleas of Dewey Staff Detail the Alleged Fraud,” Wall Street Journal (March 28, 2014).Dewey & LeBoeuf LLPLO 1 In choosing the organizational form for your outdoor guide service, you should consider the pros and cons of each. Identify each of the following organizational characteristics with the organizational form or forms with which it is associated.Corporation.Sole proprietorship and partnership.Corporation.SOLUTIONDO IT!Business Organization Forms11. Easier to raise funds. 4. Tax advantages.2. Simple to establish. 5. Easier to transfer ownership.3. No personal legal liability.Sole proprietorship and partnership.Corporation.LO 1 USERS AND USES OF FINANCIAL INFORMATIONReview QuestionWhich of the following did not result from the Sarbanes-Oxley Act?Top management must now certify the accuracy of financial information. Penalties for fraudulent activity increased. Independence of auditors increased.Tax rates on corporations increased.LO 1 LEARNING OBJECTIVEExplain the three principal types of business activity.2All businesses are involved in three types of activity —financing, investing, andoperating. The accounting information system keeps track of the results of each of these business activities.LO 2 FINANCING ACTIVITIESTwo primary sources of outside funds are: Borrowing money (debt)Amounts owed are called liabilities.Party to whom amounts are owed are creditors.Notes payable and bonds payable are different types of liabilities.Issuing (selling) shares of stock for cash (equity). Common stock is the term used to describe the amount paid by stockholders for shares they purchase.Payments to stockholders are called dividends.LO 2 INVESTING ACTIVITIESPurchase of resources a company needs to operate.Computers, delivery trucks, furniture, buildings.Resources owned by a business are called assets.Investments are another example of an investing activity.LO 2 OPERATING ACTIVITIESOnce a business has the assets it needs, it can begin its operations.Revenues - Amounts earned from the sale of products and other sources (sales revenue, service revenue, and interest revenue).Inventory - Goods available for sale to customers.Accounts receivable - Right to receive money from a customer as the result of a sale.LO 2 OPERATING ACTIVITIESOnce a business has the assets it needs, it can begin its operations.Expenses - cost of assets consumed or services used. (cost of goods sold, selling, marketing, administrative, interest, and income taxes expense).Liabilities arising from expenses include accounts payable, interest payable, wages payable, sales taxes payable, and income taxes payable. Net income – when revenues exceed expenses.Net loss – when expenses exceed revenues.LO 2 Classify each item as an asset, liability, common stock, revenue, or expense.Cost of renting property.Truck purchased.Notes payable.Issuance of ownership shares.Amount earned from providing service.Amounts owed to suppliers.Expense.Asset.Liabilities.Common stock.Revenue.Liabilities.SOLUTIONDO IT!Business Activities2LO 2 LEARNING OBJECTIVELO 3 Describe the four financial statements and how they are prepared.3Income StatementCompanies prepare four financial statements from the summarized accounting data:Statement of Cash FlowsRetained Earnings StatementBalance SheetINTERNATIONAL NOTE The primary types of financial statements required by International Financial Reporting Standards (IFRS) and U.S. generally accepted accounting principles (GAAP) are the same.LO 3 Reports revenues and expenses for a specific period of time.Net income – revenues exceed expenses.Net loss – expenses exceed revenues.Past net income provides information for predicting future net income.Illustration 1-4▼Helpful Hint The financial statement heading identifies the company, the type of statement, and the time period covered. Sometimes, another line indicates the unit of measure, e.g., “in thousands” or “in millions.”FINANCIAL STATEMENTSIncome StatementIllustration 1-4FINANCIAL STATEMENTSIncome StatementRetained Earnings StatementNet income is needed to determine the ending balance in retained earnings.Illustration 1-5LO 3 Statement shows amounts and causes of changes in retained earnings during the period.Time period is the same as that covered by the income statement.Users can evaluate dividend payment practices.Retained Earnings Statement▼Helpful Hint The heading of this statement identifies the company, the type of statement, and the time period covered by the statement.FINANCIAL STATEMENTSIllustration 1-5LO 3 Retained Earnings StatementEnding balance in retained earnings is needed in preparing the balance sheet.Balance SheetIllustration 1-7Illustration 1-5FINANCIAL STATEMENTSLO 3 Balance SheetReports assets and claims to assets at a specific point in time.Assets = Liabilities + Stockholders’ Equity.Lists assets first, followed by liabilities and stockholders’ equity.▼Helpful Hint The heading of a balance sheet must identify the company, the statement, and the date.FINANCIAL STATEMENTSIllustration 1-7LO 3 Illustration 1-8Statement of Cash FlowsBalance SheetFINANCIAL STATEMENTSIllustration 1-7LO 3 Provides answers to:Where did cash come from during the period? How was cash used during the period?What was the change in the cash balance during the period?Illustration 1-8▼Helpful Hint The heading identifies the company, the type of statement, and the time period covered by the statement. Negative numbers are shown in parentheses.FINANCIAL STATEMENTSStatement of Cash FlowsLO 3 Net income will result during a time period when:assets exceed liabilities.assets exceed revenues.expenses exceed revenues.revenues exceed expenses.FINANCIAL STATEMENTSReview QuestionLO 3 Which of the following financial statements is prepared as of a specific date? Balance sheet. Income statement. Retained earnings statement. Statement of cash flows.FINANCIAL STATEMENTSReview QuestionLO 3 PEOPLE, PLANET, AND PROFIT INSIGHTBeyond Financial StatementsShould we expand our corporate reports beyond the income statement, retained earnings statement, balance sheet, and statement of cash flows? Some believe we should take into account ecological and social performance, in addition to financial results, in evaluating a company. The argument is that a company’s responsibility lies with anyone who is influenced by its actions. In other words, a company should be interested in benefiting many different parties, instead of only maximizing stockholders’ interests. A socially responsible business does not exploit or endanger any group of individuals. It follows fair trade practices, provides safe environments for workers, and bears responsibility for environmental damage. Granted, measurement of these factors is difficult. How to report this information is also controversial. But many interesting and useful efforts are underway. Throughout this textbook, we provide additional insights into how companies are attempting to meet the challenge of measuring and reporting their contributions to society, as well as their financial results, to stockholders.LO 3 Financial StatementsCSU Corporation began operations on January 1, 2017. The following information is available for CSU on December 31, 2017:Accounts receivable 1,800 Retained earnings ? Supplies expense 200 Accounts payable 2,000Equipment 16,000 Cash 1,400Rent expense 9,000 Insurance expense 1,000 Dividends 600 Notes payable 5,000 Service revenue 17,000 Common stock 10,000 Supplies 4,000Prepare an income statement, a retained earnings statement, and a balance sheet.DO IT!3aLO 3 Prepare an income statement using the following accounts.Accounts receivable 1,800 Retained earnings ? Supplies expense 200 Accounts payable 2,000Equipment 16,000 Cash 1,400Rent expense 9,000 Insurance expense 1,000 Dividends 600 Notes payable 5,000 Service revenue 17,000 Common stock 10,000 Supplies 4,000Prepare a retained earnings statement using the following accounts.Accounts receivable 1,800 Retained earnings ? Supplies expense 200 Accounts payable 2,000Equipment 16,000 Cash 1,400Rent expense 9,000 Insurance expense 1,000 Dividends 600 Notes payable 5,000 Service revenue 17,000 Common stock 10,000 Supplies 4,000LO 3 Financial StatementsCSU Corporation began operations on January 1, 2017. The following information is available for CSU on December 31, 2017:Accounts receivable 1,800 Retained earnings ? Supplies expense 200 Accounts payable 2,000Equipment 16,000 Cash 1,400Rent expense 9,000 Insurance expense 1,000 Dividends 600 Notes payable 5,000 Service revenue 17,000 Common stock 10,000 Supplies 4,000Prepare an a balance sheet.DO IT!3aLO 3 LO 3 OTHER ELEMENTS OF AN ANNUAL REPORTU.S. companies that are publicly traded must provide shareholders with an annual report. The annual report always includes: Financial statements.Management discussion and analysis. Notes to the financial statements.Auditor's report. LO 3 Management Discussion and AnalysisManagement discussion and analysis (MD&A) presents management’s view on the company’s ability to pay near-term obligations, its ability to fund operations and expansion, and its results of operations. Management must highlight favorable or unfavorable trends and identify significant events and uncertainties that affect these three factors.ELEMENTS OF AN ANNUAL REPORTLO 3 Management Discussion and AnalysisELEMENTS OF AN ANNUAL REPORTILLUSTRATION 1-10Columbia Sportswear’smanagement discussion and analysisLO 3 LO 3 Notes to the Financial StatementsClarify the financial statements.Provide additional detail.Notes are essential to understanding a company’s operating performance and financial position.ELEMENTS OF AN ANNUAL REPORTILLUSTRATION 1-11Auditor’s ReportAuditor’s opinion as to the fairness of the presentation of the financial position and results of operations and their conformance with generally accepted accounting principles.Only certified public accountants (CPA) may perform audits.ELEMENTS OF AN ANNUAL REPORTLO 3 Auditor’s ReportELEMENTS OF AN ANNUAL REPORTILLUSTRATION 1-12Excerpt from auditor’s report onColumbia Sportswear’s financialstatementsLO 3 State whether each of the following items is most closely associated with the management discussion and analysis (MD&A), the notes to the financial statements, or the auditor’s report.Descriptions of significant accounting policies.Unqualified opinion.Explanations of uncertainties and contingencies.Description of ability to fund operations and expansion.Description of results of operations.Certified public accountant (CPA).NotesAuditor’s reportNotesMD&AMD&AAuditor’s reportSOLUTIONComponents of Annual ReportDO IT!3bLO 3 KEY POINTSSimilaritiesThe basic techniques for recording business transactions are the same for U.S. and international companies. Both international and U.S. accounting standards emphasize transparency in financial reporting. Both sets of standards are primarily driven by meeting the needs of investors and creditors.A Look at IFRSLEARNING OBJECTIVEDescribe the impact of international accounting standards on U.S. financial reporting.4LO 4 KEY POINTSSimilaritiesThe three most common forms of business organizations, proprietorships, partnerships, and corporations, are also found in countries that use international accounting standards. DifferencesInternational standards are referred to as International Financial Reporting Standards (IFRS), developed by the International Accounting Standards Board. Accounting standards in the United States are referred to as generally accepted accounting principles (GAAP) and are developed by the Financial Accounting Standards Board.A Look at IFRSLO 4 KEY POINTSDifferencesIFRS tends to be simpler in its accounting and disclosure requirements; some people say it is more “principles-based.” GAAP is more detailed; some people say it is more “rules-based.”The internal control standards applicable to Sarbanes-Oxley (SOX) apply only to large public companies listed on U.S. exchanges. There is continuing debate as to whether non-U.S. companies should have to comply with this extra layer of regulation.A Look at IFRSLO 4 LOOKING TO THE FUTUREBoth the IASB and the FASB are hard at work developing standards that will lead to the elimination of major differences in the way certain transactions are accounted for and reported.A Look at IFRSLO 4 A Look at IFRSIFRS PracticeWhich of the following is not a reason why a single set of high-quality international accounting standards would be beneficial?Mergers and acquisition activity.Financial markets.Multinational corporations.GAAP is widely considered to be a superior reporting system.LO 4 A Look at IFRSIFRS PracticeThe Sarbanes-Oxley Act determines:international tax regulations.internal control standards as enforced by the IASB.internal control standards of U.S. publicly traded companies.U.S. tax regulations.LO 4 A Look at IFRSIFRS PracticeIFRS is considered to be more:principles-based and less rules-based than GAAP.rules-based and less principles-based than GAAP.detailed than GAAP.None of the above.LO 4 “Copyright © 2016 John Wiley & Sons, Inc. 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