Financial Accounting for Managers

Financial Accounting for Managers. Chapter 1 A Framework for Financial Accounting.

Part A. Accounting as a Measurement/Communication Process..

Learning Objective 1. L O 1.1 Describe the two primary functions of financial accounting..

Illustration 1-1 Decisions People Make About Companies.

Financial Accounting. Accounting information provided to external users is referred to as financial accounting..

Illustration 1-2 Framework for Financial Accounting.

Key Point 1. The two primary functions of financial accounting are to measure business activities of a company and to communicate information about those activities for decision-making purposes..

Learning Objective 2. L O 1.2 Understand the business activities that financial accounting measures..

Business Activities. Financing activities: transactions the company has with investors and creditors. Investing activities: transactions involving the purchase and sale of resources that are expected to benefit the company for several years. Operating activities: transactions that relate to the primary operations of the company..

Illustration 1-4 The Accounting Equation. A chart features the accounting equation..

Revenues, Expenses, and Dividends. Revenues are the amounts recognized when the company sells products or provides services to customers. Expenses are the costs of providing products and services and other business activities during the current period. Net income is the difference between revenues and expenses. Other common names for net income include earnings or profit. Dividends are cash payments to stockholders. Dividends are not expenses..

Illustration 1-6 Business Activities and Their Measurement.

Key Point 2. The measurement role of accounting is to create a record of the activities of a company. To make this possible, a company must maintain an accurate record of its assets, liabilities, stockholders’ equity, revenues, expenses, and dividends..

Types of Business Organizations. A corporation is a company that is legally separate from its owners. The advantage of being legally separate is that the stockholders have limited liability..

Concept Check 1-1 1. The total resources of a company are referred to as: a. Liabilities. b. Revenues. c. Assets. d. Expenses..

Concept Check 1-1 2. The total resources of a company are referred to as: a. Liabilities. b. Revenues. c. Assets. d. Expenses..

Concept Check 1-2 1. The amounts recorded when the company sells products or provides services to customers are referred to as: a. Liabilities. b. Revenues. c. Assets. d. Expenses..

Concept Check 1-2 2. The amounts recorded when the company sells products or provides services to customers are referred to as: a. Liabilities. b. Revenues. c. Assets. d. Expenses..

Learning Objective 3. L O 1.3 Determine how financial accounting information is communicated through financial statements..

Communicating through Financial Statements. Primary financial statements include: Income statement. Statement of stockholders’ equity. Balance sheet. Statement of cash flows. Statement of comprehensive income (when necessary)..

Income Statement. Reports the company’s revenues and expenses over an interval of time (for example., a month, quarter, or year). If revenues > expenses, then net income. If revenues < expenses, then net loss..

Illustration 1-7 Income Statement for Eagle Robotics.

Statement of Stockholders’ Equity. Summarizes the changes in stockholders’ equity over an interval of time..

Illustration 1-9 Statement of Stockholders’ Equity for Eagle Robotics.

Common Mistake. Dividends represent the payment of cash but are not considered an expense in running the business. Students sometimes mistakenly include the amount of dividends as an expense in the income statement, rather than as a distribution of net income in the statement of stockholders’ equity..

Key Point 3. The statement of stockholders’ equity reports information related to changes in common stock and retained earnings each period. The change in retained earnings equals net income less dividends for the period..

Balance Sheet. Presents the financial position of the company on a particular date..

Illustration 1-10 Balance Sheet for Eagle Robotics.

Key Point 4. The balance sheet demonstrates that the company’s resources (assets) equal creditors’ claims (liabilities) plus owners’ claims (stockholders’ equity) to those resources on a particular date..

Concept Check 1-3 1. Which of the following accounts would appear in a company’s income statement? a. Accounts Payable. b. Cash. c. Dividends. d. Rent Expense..

Concept Check 1-3 2. Which of the following accounts would appear in a company’s income statement? a. Accounts Payable. b. Cash. c. Dividends. d. Rent Expense..

Concept Check 1-4 1. Which relationship is reflected in the balance sheet? a. Revenues − Expenses = Net Income. b. Assets = Liabilities + Stockholders’ Equity. c. Assets − Liabilities = Net Income. d. Assets = Revenues + Dividends..

Concept Check 1-4 2. Which relationship is reflected in the balance sheet? a. Revenues − Expenses = Net Income. b. Assets = Liabilities + Stockholders’ Equity. c. Assets − Liabilities = Net Income. d. Assets = Revenues + Dividends..

Statement of Cash Flows. Measures activities involving cash receipts and cash payments over an interval of time..

Illustration 1-11 Statement of Cash Flows for Eagle Robotics.

Key Point 5. The statement of cash flows reports cash transactions from operating, investing, and financing activities for the period..

Concept Check 1-5 1. The cash collected from a customer would be recorded as which type of activity in the statement of cash flows? a. Operating Activity. b. Business Activity. c. Investing Activity. d. Financing Activity..

Concept Check 1-5 2. The cash collected from a customer would be recorded as which type of activity in the statement of cash flows? a. Operating Activity. b. Business Activity. c. Investing Activity. d. Financing Activity..

Statement of Comprehensive Income. Measures changes in equity that arise from non-owner sources..

Illustration 1-12 Links among Financial Statements.

Key Point 6. All transactions that affect revenues or expenses reported in the income statement ultimately affect the balance sheet through the balance in retained earnings..

Part B. The Demand for Financial Accounting Information..

Learning Objective 4. L O 1.4 Describe the role that financial accounting plays in the decision-making process..

Illustration 1-13 Pathways Commission Visualization: "THIS is Accounting!".

Illustration 1-14 Professional User Perceptions of Financial Statement Usefulness.

Key Point 7. Financial accounting serves an important role by providing information useful in investment and lending decisions..

Illustration 1-15 Relationship between Changes in Stock Prices and Changes in Net Income over a 10-Year Period.

Key Point 8. No single piece of company information better explains companies’ stock price performance than does financial accounting net income. A company’s debt level is an important indicator of management’s ability to respond to business situations and the possibility of bankruptcy..

Learning Objective 5. L O 1.5 Explain the need for accounting standards and the demand by investors and creditors for audited financial statements..

Financial Accounting Standards. A financial statement titled ‘Financial Accounting Standards’..