Chapter 1 The Financial Statements
Explain and Apply underlying accounting
concepts, assumptions and principles.
LEARNING OBJECTIVES Apply the accounting equation to business
organizations.
Evaluate business operations through the
financial statements.
Construct financial statements and analyze the
relationships among them.
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01 Two Kinds of Accounting
Financial Accounting Management Accounting
• Financial • Financial & non-financial
• Historical • Historical & future
• overall • overall & segment
Investors
creditors
Government
agencies
company
The public
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02 Forms of Business Organization
Proprietorship Partnership LLC Corporation
1. Owner(s) Proprietor – one Partners – two or Members Stockholders –
owner more owners generally many
owners
2. Personal Proprietor is General partners Members are not Stockholders are
liability of personally liable are personally personally liable not personally
owner(s) for liable; limited liable
business debts partners are not
3. Tax Personal income Personal income Personal income Double taxation
tax tax tax • Corporate tax
• Personal tax
4. Equity From public by
funding Only from owners issuing stocks
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03 Professional Frameworks
• Generally Accepted Accounting Principles (GAAP)
• Financial accounting is governed by concepts and rules known as
generally accepted accounting principles (GAAP).
• Formulated by the Financial Accounting Standards Board (FASB)
• International Financial Reporting Standards (IFRS)
• Formulated by the International Accounting Standards Board
(IASB)
• increased demand by external users for comparability in
accounting reports, when companies wish to raise money from
lenders and investors in different countries.
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1. Conceptual Framework
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3. Assumptions and Principles
• Assumptions
Continuity
Entity Time Period Stable-Monetary-
(Going-Concern)
Assumption Assumption Unit Assumption
Assumption
• An organization • Entity will • Presumes that • Assume the
stands apart from continue to the life of a dollar’s
other operate for the company can be purchasing
organizations foreseeable divided into time power is stable
and individuals future periods, such as over time
as a separate months and
economic unit years.
• Principles
Revenue
Historical Cost Matching Full Disclosure
Recognition
Principle Principle Principle
Principle
• A company must • A company is
required to report
• Assets should be record its
• Recognize the details behind
recorded at their expenses
revenue when it financial
actual cost on the incurred to
is earned. statements that
date of purchase generate the
would impact
revenue reported.
users’ decisions.
• Balance sheets
• Reports financial position at a
specified moment in time
✓ Assets : economic
resources owned or
controlled by the entity
✓ Liabilities : outsider
Claims to the assets
✓ Owners’ equity :
owner’s claims to the assets
Paid-in capital
Retained earnings
others
• Assets = Liabilities + Owners’ equity
• Owners’ equity = Assets - Liabilities
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• Liquidity
Current assets Current liabilities
expected to be Debts payable
used or converted within one business
to cash within one cycle
business cycle
Long-term liabilities
debts payable after
Long-term assets one year
expected to benefit
the company
Owner’s equity
beyond just the
next fiscal year
Total assets Total liabilities and
equity
Working capital = current assets – current liabilities
Current ratio = current assets / current liabilities
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Debt ratio = total liabilities / total assets
• Statement of changes in Stockholder’s Equity
Stockholder’s equity, Sep.28.2013 48,150
Changes in owner’s investment 861
Other changes (6,809）
Net income 7,501
Dividends declared (1,525)
Stockholder’s equity, Sep,27,2014 48,178
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• Statement of retained earnings
Beginning retained earnings • Retained earnings: portion of net income
+ Net Income (-Net Loss) reinvested into the business
− Dividends declared • Explain changes in retained earnings for
= Ending retained earnings a period
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04 Financial statements
• Income statement
• Report performance
for a specified
period
• Revenues
− Expense
= Net income or
(net loss)
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• Relationships among the Financial Statements (in Millions of $)
• Assets = Liabilities + Owners’ equity
• Owners’ equity = paid-in capital +
(beginning retained earnings + net
income – dividends)
• Net income = revenue - expenses
Comprehensive accounting equation
• AssetsT1 = liabilitiesT1 + （paid-in capitalT1
+ retained earningsT0 + revenuesT1-T0 –
expensesT1-T0 – dividendsT1-T0）
• Statement of cash flow
• Reports cash and cash
equivalent changes for a
period
Operating cash flows
± Investing cash flows
± Financing cash flows
Increase (decrease) in cash
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