Ch. 1.1 Notes: Financial Statements and Business Decisions Flashcards
Stockholders….
Own part of the company. Or if they are the sole owner then the whole company.
Creditors lend…
money to businesses. Banks are an example of a creditor.
Creditors make money on the loans by…
Charging interest.
Stockholders hope to receive a portion of what the company earns in the form of cash payments called…
Dividends.
And eventually sell the stock (their share of the company) at a higher price than they paid.
Stock prices usually rise when…
creditors and investors expect the company to do well in the future.
Stockholders and creditors often judge future performance based on information in the company’s…
Financial statements.
——— need information about the company’s business activities to manage the operating, investing, and financing of the firm.
Internal Decision Makers.
e.g. managers
——— need information about the same business activities to assess whether the company will be able to pay back its debts with interest and pay dividends.
External Decision Makers.
e.g. stockholders and creditors
What is an accounting system?
All businesses must have an accounting system.
An accounting system collects and processes financial information about an organization’s business activities and reports that information to decision makers.
What business activities are conducted in a business?
- Financing activities: borrowing or paying back money to lenders and receiving additional funds from stockholders are paying them dividends.
- Investing activities: buying or selling items such as plant and equipment used in the production of products.
- operating activities: the day-to-day process of purchasing ingredients from suppliers, manufacturing products, delivering them to customers, collecting cash from customers, and paying suppliers.
Define financing activities.
Borrowing or paying back money to lenders and receiving additional funds from stockholders or paying them dividends.
Define investing activities.
Buying or selling items such as plant and equipment used in the production of products.
Define operating activities.
The day-to-day process of purchasing raw ingredients from suppliers, manufacturing products, delivering them to customers, collecting cash from customers, and paying suppliers.
Developing accounting information for internal decision makers is called…
Managerial or management accounting.
For a financial accounting course, the focus of discussion is on the perspectives of…
Investors, creditors, and preparers of financial statements.
Can managers within a firm make direct use of financial statements?
Yes. For example, marketing managers and credit managers use customers’ financial statements to decide whether to extend credit to their customers.
Supply chain managers analyze suppliers’ financial statements to see whether the suppliers have the resources to meet demand and invest in future development.
Both the employees’ unions and company human resource managers use financial statements as a basis for contract negotiations over pay rates.
Financial statement figures even serve as a basis for calculating employee bonuses.
What are the four basic financial statements?
- balance sheet
- income statement
- statement of stockholder’s equity
- statement of cashflows
Define balance sheet
Le-Nature’s reports the economic resources it owns and the sources of financing for those resources.
Define income statement.
Le-Nature’s reports its ability to sell goods for more than their cost to produce and sell.
Define statement of stockholder’s equity.
Le-Nature’s reports additional contributions from or payments to investors and the amount of income the company reinvested for future growth.
Define statement of cash flows.
Le-Nature’s reports it’s ability to generate cash and how it was used.
When can the four basic financial statements be prepared and for what time span?
- can be prepared at any point in time; e.g. end of the year, quarter, or month.
- can apply to any time span; e.g. one year, one quarter, one month.
Financial statements prepared for external users (investors and creditors) at the end of each quarter is known as…
Quarterly Reports
Financial statements prepared for external users (investors and creditors) at the end of the year is known as…
Annual Reports
What is the purpose of a balance sheet?
To report the financial position (amount of assets, liabilities, and stockholders’ equity) of an accounting entity at a particular point in time.
Structure of the heading for a balance sheet:
- Name of Entity: Le-Nature’s Inc.
- Title of the statement: Balance Sheet
- Specific date of the statement: At December 31, 2015.
- Unit of measure: in millions of dollars
On the balance sheet, the ———- itself, not the ———, is viewed as owning the resources it uses and being responsible for its debt.
business entity
Business owners
———- is like a financial snapshot indicating the entity’s financial position at a specific point in time. In Le-Nature’s case it is December 31, 2015.
The balance sheet
Financial reports are normally denominated in the currency of the country in which they are located. U.S. companies report in ————. Mexican companies report in———.
U.S. dollars
Mexican pesos
Companies that report in millions of dollars can round up the last 6 digits to the nearest million dollars. The listing of Cash $10.6 on Le-Nature’s balance sheet actually means….
$10,600,000
What is the basic accounting equation?
Assets = Liabilities + Stockholders’ Equity
The basic accounting equation is often called…
The balance sheet equation
Define Assets
Economic resources (e.g. cash, inventory, buildings)
Define Liabilities
Financing from creditors (e.g. amounts owes to suppliers, employees, banks)
Define Stockholders’ Equity
Financing from stockholders (e.g. common stock, retained earnings)
The basic accounting equation shows what we mean when we refer to a company’s financial position:
The economic resources that the company owns and the sources of financing for those resources.
-How assets, liabilities, and stockholders’ equity are connected.
General notes: the exact items listed as assets on a company’s balance sheet depends on the nature of its operations. The four items listed by Le Nature’s are the economic resources needed to manufacture and sell beverages to retailers and vending companies.
- Cash: Le Nature’s first needs cash to purchase land on which to build factories and install production machinery ( property, plant, and equipment)
- Inventories: purchasing ingredients and producing beverages
- Accounts Receivable: sells beverages on credit and received promises to pay, which is collected in cash later.
———- and ————- are the sources of financing for the company’s economic resources.
Liabilities
Stockholders’ Equity
Liabilities indicate…
- The amount of financing provided by creditors.
- they are the company’s debts and obligations.
Under the category of Liabilities, Le-Nature’s lists two items:
- accounts payable
- notes payable
Accounts payable: the purchase of goods or services from suppliers on credit without a formal written contract (or a note)
Notes payable to banks: result from cash borrowing based on a formal written debt contract with banks.
Stockholders’ equity indicates…
The amount of financing provided by the owners of the business and reinvesting earnings.
A corporation is a business that is incorporated under the laws of a particular state. The owners are called ———— —- ————-. Ownership is represented by ———- —- ———— ——-. that is usually can be bought and sold freely. The corporation operates as a separate legal entity, separate and apart from its owners. The stockholders enjoy limited liability; they are liable for the debts of the corporation only to the extent of their investments.
Stockholders or shareholders
Shares of capital stock
What is common stock?
The investment of cash and other assets in the business by the stockholders.
What is retained earnings?
The amount of earnings (profit) reinvested in the business (and thus not distributed to stockholders in the form of dividends).
Total stockholders’ equity is the sum of the…
Common stock + retained earnings
Assessment of Le-Nature’s ——- is important to its creditors, Wells Fargo bank and others, and its stockholders because ——— provide a basis for judging whether the company has sufficient resources available to operate. ——- are also important because they could be sold for cash in the event that Le-Nature’s goes out of business.
Assets
What provides a basis for judging whether the company has sufficient resources available to operate?
Assets
Le-Nature’s —— are important because creditors and stockholders are concerned about whether the company has sufficient sources of cash to pay its ——. Le-Nature’s —— are also relevant to Wells Fargo bank’s decision to lend money to the company because existing creditors share its claim against Le-Nature’s assets. If a business does not pay its creditors, the creditors may force the sale of assets sufficient to meet their claims. The sale of the assets often fail to cover all of the company’s ——, and some creditors may take a loss.
Debts
Why is Le-Nature’s stockholders’ equity important to Wells Fargo Bank?
Because creditors’ claim legally comes before those of owners.
If Le-Nature’s goes out of business and its assets are sold, the proceeds of that sale must be used to pay back creditors before the stockholders receive any money. Thus, creditors consider stockholders’ equity a protective “cushion.”
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Accounts Payable
Liabilities
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Accounts Receivable
Assets
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Cash
Assets
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Common stock
Stockholders’ Equity
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Property, plant, and equipment
Assets
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Inventories
Assets
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Notes Payable
Liabilities
Self study quiz: mark each balance sheet item in the following list as an asset (A), liability (L), or stockholders’ equity (SE) item:
Retained earnings
Stockholders’ Equity
The income statement is also known as…
Statement of income
Statement of earnings
Statement of operations
Statement of comprehensive income
While the term profit is used widely for this measure of performance, accountants prefer to use the technical term ——- ——- or ——— ———.
Net income
Net earnings
Le-Nature’s net income measures its success in…
Selling beverages for more than the cost to generate those sales.
