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Lecture Financial accounting: Chapter 1 - Robert Libby, Patricia A. Libby, Daniel G. Short

Chapter 1 - Financial statements and business decisions. After studying this chapter, you should be able to: Recognize the information conveyed in each of the four basic financial statements and the way that it is used by different decision makers, identify the role of generally accepted accounting principles (GAAP) in determining the content of financial statements, distinguish the roles of managers and auditors in the accounting communication process; appreciate the importance of ethics, reputation, and legal liability in accounting. | Financial Statements and Business Decisions Chapter 1 Chapter 1: Financial Statements and Business Decisions Understanding the Business The Players Investors Creditors Managers The Business Operations 1. Purchase parts and labor 2. Manufacture product 3. Sell products to customers 4. Collect cash from customers and pay creditors Individuals and groups who provide the initial capital to a business are called investors. Creditors provide the company with resources but do not own a share of the company. For example, a bank may lend funds to the company that must be repaid in the future along with interest. The bank is a creditor of the company. Most companies hire managers to oversee the day-to-day operations of the business. The managers are responsible to the owners of the company. For a manufacturing company, business operations begin when materials are purchased from suppliers, and workers are paid for labor. The materials and workers are used to manufacture a product. That product is sold to customers of the company. Finally, cash is collected from the customers for the products sold which allows creditors and workers to be paid. The Accounting System Collects and processes financial information Reports information to decision makers Managers (internal decision makers) Investors and Creditors (external decision makers) The accounting system begins by collecting and processing financial information. This financial information is organized into reports that are distributed to decision-makers. The decision-makers may rely on the reports to make certain important determinations about the future. The Four Basic Financial Statements BALANCE SHEET – reports the amount of assets, liabilities, and stockholders’ equity of an accounting entity at a point in time. INCOME STATEMENT – reports the revenues less the expenses of the accounting period. STATEMENT OF RETAINED EARNINGS – reports the way that net income and distribution of dividends affected the . | Financial Statements and Business Decisions Chapter 1 Chapter 1: Financial Statements and Business Decisions Understanding the Business The Players Investors Creditors Managers The Business Operations 1. Purchase parts and labor 2. Manufacture product 3. Sell products to customers 4. Collect cash from customers and pay creditors Individuals and groups who provide the initial capital to a business are called investors. Creditors provide the company with resources but do not own a share of the company. For example, a bank may lend funds to the company that must be repaid in the future along with interest. The bank is a creditor of the company. Most companies hire managers to oversee the day-to-day operations of the business. The managers are responsible to the owners of the company. For a manufacturing company, business operations begin when materials are purchased from suppliers, and workers are paid for labor. The materials and workers are used to manufacture a product. That .