Chapter 1

Introduction to Accounting and

Financial Statements

© 2018 Swati Bhandarkar. All rights reserved. Distribution or duplication of

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 What we will study in this chapter

• Types and Forms of Businesses

• Purpose and Importance of Accounting
• Users of Accounting Information
• The Accounting Standard Setting Environment
• Generally Accepted Accounting Principles
• The Accounting Equation and its components
• Analyzing business transactions using the accounting
equation
• Understanding and preparing the basic Financial
Statements
 Business Forms and Types
Sole Proprietorship

Partnership

Corporation

Service … Services

Merchandising… Products

Manufacturing …Products
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Top 10 Corporations … Fortune 500
May 2015
Revenues Profits
RANK Company ($ billions) ($ millions)
1 Walmart 485.65 16,383
2 Exxon Mobil 382.60 32,520
3 Chevron 203.78 19,241
4 Berkshire Hathaway 194.67 19,872
5 Apple 182.80 39,510
6 General Motors 159.93 3,949
7 Philips 66 149.43 4,762
8 General Electric 148.32 15,233
9 Ford Motor 144.08 3,187
10 CVS Healthcare Bhandarkar 139.37 4,644
Top 10 Corporations … Fortune 500
May 2016
Revenues Profits
RANK Company ($ billions) ($ millions)
1 Walmart 482.13 14,694
2 Exxon Mobil 246.20 16,150
3 Apple 233.72 53,394
4 Berkshire Hathaway 210.82 24,083
5 Mckesson 181.24 1,476
6 United Health Group 157.11 5,813
7 CVS Health 153.29 5,237
8 General Motors 152.36 9,687
9 Ford Motor 149.56 7,373
10 A T &T 146.80 13,345
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Top 10 Corporations … Fortune 500
May 2017
RANK Company Revenues Profits
($ billions) ($ millions)
1 Walmart 485.87 13,643
2 Berkshire Hathaway 223.60 24,074
3 Apple 215.64 45,687
4 Exxon Mobil 205.00 7,840
5 Mckesson 192.49 2,258
6 United Health Group 184.84 7,017
7 CVS Health 177.53 5,317
8 General Motors 166.38 9,427
9 A T &T 163.79 12,976
10 Ford Motor 151.80 4,596
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Importance of Accounting

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 What is Accounting
is a
Accounting Identifies
system that

Records

information
Relevant Communicates
that is

Reliable
to help USERS
make better
Comparable decisions.
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Users of Financial Information

INTERNAL
• OFFICERS
• MANAGERS
• SALES STAFF
• CONTROLLERS
• INTERNAL
AUDITORS

EXTERNAL
• LENDERS
• SHAREHOLDERS
• CUSTOMERS
• GOVERNMENT
• EXTERNAL
AUDITORS
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 Types of Accounting
Financial Accounting (ACCT 2101)
Provides information primarily to External users via Financial
Statements.

Managerial Accounting (ACCT 2102)

Provides information exclusively to Internal users via Internal
Reports.

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 Accounting Standard Setting Environment
Financial Accounting is governed by concepts and rules
known as Generally Accepted Accounting Principles
(GAAP). GAAP aims to make information relevant,
reliable, and comparable.

Relevant Reliable
information information is
affects decisions Comparable trusted by users.
of users. information is
helpful in
contrasting
organizations.
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 Accounting Standard Setting Organizations
In the United States, the Securities and Exchange Commission (SEC), a
government agency, has the legal authority to establish reporting
requirements and set GAAP for companies that issue stock to the public.
The SEC delegates the task of developing GAAP to the Financial
Accounting Standards Board (FASB) and accepts the pronouncements of
the FASB.

The Financial Accounting Standards Board (FASB) is a private group that

sets both broad and specific accounting principles.

The International Accounting Standards Board (IASB) issues International

Financial Reporting Standards (IFRS) that identify preferred accounting
practices that can be accepted by companies globally.

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 Accounting Principles
MEASUREMENT PRINCIPLE (COST PRINCIPLE)
Accounting information should be based on actual cost

REVENUE RECOGNITION PRINCIPLE

Provides guidance on when a company must recognize revenue.

MATCHING PRINCIPLE (EXPENSE RECOGNITION)

Prescribes that a company must record its expenses incurred to generate the
revenue.

FULL DISCLOSURE PRINCIPLE

Requires a company to include all information in financial statements that
would impact users’ decisions.
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 Accounting Assumptions
GOING-CONCERN ASSUMPTION
Accounting information reflects a presumption that the business will continue
operating.

MONETARY UNIT ASSUMPTION

Transactions are expressed using “money” as a common denominator

TIME PERIOD ASSUMPTION

The life of a business can be divided into distinct time periods, such as months
and years.

BUSINESS ENTITY ASSUMPTION

A business is accounted for separately from its owner or other business entities.

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 Business Activities
FINANCING ACTIVITIES: Acquiring funds needed to operate the
business
 Borrowing ->
 Owner Investment->

INVESTING ACTIVITIES: Using funds acquired from Financing

Activities to acquire and dispose
 Resources ->

OPERATING ACTIVITIES: Using Assets acquired from Investing

Activities to operate the business and thereby generating
 Earnings->
 Costs->
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Assets

Resources
owned or
controlled
by a
company

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Liabilities

Creditors’
claims on
assets

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Equity

Owner’s
claim on
assets

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 Retained Earnings

Retained Earnings
Income that is not distributed
to shareholders

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 Revenues, Expenses, Dividends, Net
Income/Net Loss
Revenues
Assets earned from sale of services or products. Ex. Fees/ Fees
Earned, Service Revenue, Sales, Rent Revenue, Interest
Revenue……
Expenses
Assets used up in the process of earning Revenues Ex. Wages
Expense, Rent Expense, Utilities Expense…….

Net Income/Net Loss = Revenues – Expenses

Dividends
Distribution of corporations assets to shareholders
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 The Accounting Equation…..

Assets = Liabilities + Equity

RESOURCES = BORROW + INVEST + OPERATE BUSINESS

= +

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Determining Retained Earnings

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Determining Equity

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 Analyzing Business Transactions
Using the Accounting Equation…..

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 Financial Statements
Communicating Information to Users
1. Income Statement

[Link] of Retained Earnings

3. Balance Sheet

[Link] of Cash Flows

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 Income Statement
The Income Statement describes a company’s
profitability over a period of time due to the company’s
earnings activities.
Assets = Liabilities + Equity
Accounts Accounts Notes Common
Cash Receivable Supplies Equipment Payable Payable Stock Dividends Revenue Expenses
Bal $ 61,000 $ 2,000 $ 2,000 $ 20,000 $ 13,000 $ 10,000 $ 50,000 $ (2,000) $ 23,000 $ (9,000)

Universal Company
Income Statement
For the month ended Dec 31, 2….

Revenues
Consulting Revenue $23,000
Expenses
Salaries Expense 5,000
Rent Expense 4,000
Total Expenses 9,000
Net Income $14,000 Bhandarkar
 Statement of Retained Earnings
The Statement of Retained Earnings explains the changes in
Retained Earnings over a period of time.
Assets = Liabilities + Equity
Accounts Accounts Notes Common
Cash Receivable Supplies Equipment Payable Payable Stock Dividends Revenue Expenses
Bal $ 61,000 $ 2,000 $ 2,000 $ 20,000 $ 13,000 $ 10,000 $ 50,000 $ (2,000) $ 23,000 $ (9,000)

Universal Company Universal Company

Income Statement
Statement of Retained Earnings For the month ended Dec 31, 2….
For the month ended Dec 31, 2….
Revenues
Retained Earnings Dec 1, 2… $0 Consulting Revenue $23,000
Expenses
Plus Net Income 14,000 Salaries Expense 5,000
14,000 Rent Expense 4,000
Less Dividends 2,000 Total Expenses 9,000

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Retained Earnings Dec 31, $12,000 Net Income $14,000
 Balance Sheet
The Balance Sheet describes a company’s financial
position at a point in time.
Assets = Liabilities + Equity
Accounts Accounts Notes Common
Cash Receivable Supplies Equipment Payable Payable Stock Dividends Revenue Expenses
Bal $ 61,000 $ 2,000 $ 2,000 $ 20,000 $ 13,000 $ 10,000 $ 50,000 $ (2,000) $ 23,000 $ (9,000)

Universal Company
Universal Company Statement of Retained Earnings
Balance Sheet For the month ended Dec31, 2….
December 31, 2…
Retained Earnings Dec 1, 2… $0
Assets Liabilities
Plus Net Income 14,000
Cash $61,000 Accounts Payable $13,000 14,000
Accounts Receivable 2,000 Notes Payable 10,000 Less Dividends 2,000
Supplies 2,000 Total Liabilities 23,000 Retained Earnings Dec 31, $12,000
Equipment 20,000
Equity
Common Stock 50,000
Retained Earnings 12,000
Total Equity 62,000
Total Assets $85,000 Total Liabilities and Equity $85,000 Bhandarkar
 Statement of Cash Flows
Identifies cash inflows (receipts) and cash outflows
(payments) over a period of time.
Universal Company
Statement of Cash Flows
For the month ended Dec 31, 2….

Cash flows from operating activities:

Cash received from clients $ 21,000
Purchase of supplies (2,000)
Cash paid to employees (5,000)
Cash paid for rent (4,000)
Net cash provided by operating activities $ 10,000
Cash flows from investing activities:
Purchase of equipment (7,000)
Net cash used in investing activities (7,000)
Cash flows from financing activities:
Investment by Shareholders 50,000
Borrowed at bank 10,000
Dividends Paid (2,000)
Net cash provided by financing activities 58,000
Net increase in cash 61,000
Cash balance,Dec 1, 2… Bhandarkar -
Cash balance, Dec 31, 2.. $ 61,000
 APPLE INC. FINANCIAL STATEMENTS
FISCAL YEAR ENDED SEPTEMBER 26, 2015

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End of Chapter 1

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