Chapter 1 - Financial Statements and Business Decisions



  • recognize info in 4 basic financial statements
  • identity role of GAAP in determining financial statement content and accuracy

  • 10 posts
  • 0 subtopics
  • about 1 month ago by vince

Understanding the business

Sources of Financial resources:

  • Stockholders
    • Potential return: dividends, higher future stock prices
  • Creditors
    • Potential return: Interest

Financial statements

Serves both external decision makers (stockholders/investors, creditors) and internal decision makers (owners, managers).

  • This course focuses on the external decision makers.
  • Next level course (managerial accounting) focuses on the internal decision makers.

Business Activities

Operating Activities
- hiring, paying taxes, buy inventory etc.

Financial Activities
- getting money (capital) to start the business etc
- paying dividends

Investing Activities
- extra cash from the business can be used to buy long term assets (e.g. building, another company)

Four basic financial statements

  1. Balance Sheet
    • At a particular point in time
    • A = L + E
  2. Income Statement (also called profit and loss statement)
    • Revenues and expenses
    • could be yearly, quarterly, monthly etc
  3. Statement of stockholders equity (also called retained earnings)
    • shows changes in stockholders equity including
    • shows wealth of owner and stockholders and how it's changing over time
  4. Statement of cash flows
    • inflow and outflows of cash

GAAP is used in the United States

  • set of rules to make sure you're recording items accurately
  • rules are changing all the time based on meetings by the Financial Accounting Standards Board (FASB)