Professional Documents
Culture Documents
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Chapter 1
Stakeholders
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001
Business Background
Business owners (called investors or stockholders) look for two sources of possible gain:
Sell ownership interest in the future for more than they paid. Receive a portion of the companys earnings in cash (dividends).
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Business Background
Creditors lend money to a company for a specific length of time and gain by charging interest on the money loaned.
Loan
Danas Diner
Interest
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Balance Sheet
Income Statement
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X
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001
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MAXIDRIVE CORP. Balance Sheet At December 31, 20A (In thousands of dollars) Assets Cash $ 4,895 Accounts receivable 5,714 Inventories 8,517 Plant 1. Name of entity and equipment 7,154 (the separate-entity assumption) 981 Land Total Title of statement $ 27,261 2. assets Liabilities and Stockholders' Equity 3. Specific date Liabilities
(financial snapshot at a specific Accounts payable $ 7,156 point in time) Notes payable 9,000 4. Unit measure Total liabilities $ 16,156 (thousands Equity of dollars) Stockholders'
Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 2,000 9,105 11,105 $ 27,261
The McGraw-Hill Companies, Inc., 2001
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transactions. transactions.
Liabilities Liabilities
q Debts or obligations of the business that result from past q Debts or obligations of the business that result from past
transactions. transactions.
operations. operations.
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Economic resources =
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MAXIDRIVE CORP. Balance Sheet At December 31, 20A (In thousands of dollars) Assets Cash $ 4,895 Accounts receivable 5,714 Inventories 8,517 Plant and equipment 7,154 Land 981 Total assets $ 27,261 Liabilities and Stockholders' Equity companys bank Amount of cash in the Cash Liabilities account. Accounts payable $ 7,156 Accounts Amounts owed by customers from prior Notes payablesales. receivable 9,000 Total liabilities Partial and completed but unsold$ 16,156
Stockholders' Equity product. Contributed capital $ 2,000 Plant and Factories and production machinery. Retained earnings 9,105 equipment Total stockholders' equity 11,105
Inventories
Land Property on which factories are located. Total liabilities and stockholders' equity $ 27,261
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001
MAXIDRIVE CORP. Balance Sheet At December 31, 20A (In thousands of dollars) Assets Cash Accounts receivable Accounts Amounts Inventories owed to suppliers for prior payable purchases. Plant and equipment Notes Amounts owed on written debt Land payable contracts. Total assets Liabilities and Stockholders' Equity Liabilities Accounts payable Notes payable Total liabilities Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
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MAXIDRIVE CORP. Balance Sheet At December 31, 20A (In thousands of dollars) Assets Cash Accounts receivable Inventories Plant and equipment Land Total assets Liabilities and Stockholders' Equity Liabilities Contributed Amounts invested in the business by Accounts payable capital stockholders. $ 4,895 5,714 8,517 7,154 981 $ 27,261
Retained earnings
Notes payable Past earnings not distributed to Total liabilities stockholders. Stockholders' Equity Contributed capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
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MAXIDRIVE CORP. Balance Sheet At December 31, 20A (In thousands of dollars) Assets
Cash Accounts receivable Inventories Plant and equipment Land Total assets Liabilities and Stockholders' Equity Liabilities Accounts payable Notes payable $ 7,156 9,000
MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A (In thousands of dollars) Revenues Sales revenue $ 37,436 1. Name of entity Expenses statement 2. Title of 3. Specific date Cost of goods sold(Unlike the balance26,980 this $ sheet, statement covers a specified Selling, general and administrativeperiod of time.) 3,624 4. Unit measure (in thousands of dollars) Research and development 1,982 Interest expense 450 Total expenses 33,036 Pretax income Income tax expense Net income
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MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A The income statement is divided into (In thousands of dollars)
! Revenues "
Sales revenue $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense 450 Total expenses 33,036 Pretax income Income tax expense Net income $ 4,400 1,100 $ 3,300
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MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A (In thousands of dollars) Revenues Sales revenue $ 37,436 Expenses Revenues are earnings from the sale of goods Cost of goods sold $ 26,980 or services. Selling, general and administrative 3,624 Research and development in the period in which 1,982 Revenue is recognized Interest expense 450 goods and services are sold, not necessarily the period Total expenses in which cash is received. 33,036 Pretax income Income tax expense Net income
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!Revenues
Earnings from the sale of goods or services.
When will the revenue from this transaction be recognized?
$1,000 sale made on May 25th. Cash from sale collected on June 10th.
May 2001
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June 2001
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!Revenues
Earnings from the sale of goods or services.
When will the revenue from this transaction be recognized? $1,000 revenue recognized in May May 2001
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June 2001
The McGraw-Hill Companies, Inc., 2001
MAXIDRIVE CORP. Expenses are the dollar amount of resources used Income Statement up by the entity to earn revenues during a period. For the Year Ended December 31, 20A (In thousands of dollars) An expense is recognized in the period in which goods Revenues and services are used, not necessarily the period in which cash is paid. Sales revenue $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense 450 Total expenses 33,036 Pretax income Income tax expense Net income
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MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A (In thousands of dollars) Revenues Cost of The cost of the products sold this goods sold Sales revenue period. $ 37,436 Expenses Selling, Operating expenses not directly related Cost of goods sold $ 26,980 general and to production. Selling, general and administrative 3,624 administrative Research and development 1,982 Research and Expenses incurred to develop new Interest expense 450 development products. Total expenses 33,036 Interest Pretax income The cost of using borrowed funds.4,400 $ expense Income tax Income taxes on current periods pretax 1,100 Income tax expense Net income $ 3,300 expense income. The McGraw-Hill Companies, Inc., 2001 Irwin/McGraw-Hill
" Expenses
The dollar amount of resources used up by the entity to earn revenues during a period.
X May 2001
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June 2001
The McGraw-Hill Companies, Inc., 2001
" Expenses
The dollar amount of resources used up by the entity to earn revenues during a period.
May 2001
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June 2001
The McGraw-Hill Companies, Inc., 2001
MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A (In thousands of dollars) Revenues Sales revenue $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense 450 When revenues exceed expenses, Total expenses 33,036 Pretax income we report net income. Income tax expense Net income
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MAXIDRIVE CORP. Income Statement For the Year Ended December 31, 20A (In thousands of dollars) Revenues Sales revenue $ 37,436 Expenses Cost of goods sold $ 26,980 Selling, general and administrative 3,624 Research and development 1,982 Interest expense 450 Total expenses 33,036 Pretax income $ 4,400 When expense Income taxexpenses exceed revenues, 1,100 we report net loss. Net income $ 3,300
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by
Stockholders
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Retained Earnings
The McGraw-Hill Companies, Inc., 2001
MAXIDRIVE CORP. Statement of Retained Earnings For the Year Ended December 31, 20A (In thousands of dollars) Retained earnings, January 1, 20A $ 6,805 Net incomeentity 3,300 1. Name of for 20A Dividendsstatement (1,000) 2. Title of for 20A Retained earnings, December 31, 20A $ 9,105 3. Specific date (Like the income statement, this statement covers a specified period of time.) 4. Unit measure (in thousands of dollars)
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MAXIDRIVE CORP. Statement of Retained Earnings For the Year Ended December 31, 20A (In thousands of dollars) Retained earnings, January 1, 20A Net income for 20A Dividends for 20A Retained earnings, December 31, 20A $ 6,805 3,300 (1,000) $ 9,105
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Notes
Notes provide supplemental information about the financial condition of a company. Three types . . .
Describe accounting rules applied. Present additional detail about an item on the financial statements. Provide additional information about an item not on the financial statements.
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001
The Securities and Exchange Commission (SEC) has been given broad powers to determine measurement rules for financial statements.
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Currently, the Financial Accounting Standards Board (FASB) is recognized as the body to formulate GAAP.
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! Affect the selling price of stock. " Affect the amount of bonuses received by managers and other employees. # Cause a loss of competitive advantage.
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Independent Auditors
$ Auditors express an opinion as to the fairness of the financial statement presentation. $ Independent auditors have responsibilities that extend to the general public.
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Independent Auditors
An audit involves . . .
$Examining the financial reports to ensure compliance with GAAP. $Examining the underlying transactions incorporated into the financial statements. $Expressing an opinion as to the fairness of presentation of financial information.
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2001
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End of Chapter 1
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