Chapter 1
Learning objectives:
1. Describe what a business does and the various ways a business can be
organized.
2. Classify business transactions as operating, investing or financing activities.
3. Describe who uses accounting information and why accounting information is
important to them. Auditors, managers. Management, those with direct
financial interest (investors, creditors), those with an indirect financial
interest (tax authorities, economic planners etc.)
4. Four basic financial statements:
- The income Statement
- The Statement of Changes in Shareholders’ Equity
- The Balance Sheet (Statement of financial Position)
- The Statement of Cash Flows
Explain the purpose of each, and be able to use basic transaction analysis to
prepare each statement.
5. Identify the element of a real company’s financial statements
6. Describe the risks associated with being in business and the part that ethics
play in businesses.
Purpose of a business:
- Obtain the resources needed to start and run a business
- Add value
- Make profit
Tangible fixed assets: property, plant, equipment -> lasts for more than one year
(materiële vaste activa)
Operating: Transactions related to the general operations of the firm.
Investing: Transactions related to buying items the firm will use for more than a year.
Financing: Transactions that deal with how a business gets its funding.
Revenues: amounts a company earns from providing goods or services to its
customers.
Expenses: costs to earn those revenues.
Notes to the financial statements are information provided with the four basic
statements that describe the company’s major accounting policies and provide other
disclosures to help external users better understand the financial statements.
Balance sheet
A balance sheet shows a summary of each element of the accounting equation:
assets, liabilities, and shareholders’ equity.
Assets: economic resources owned or controlled by the business.
Liabilities: obligations of the business; amounts owed to creditors.
Shareholders’ equity: the owners’ claims to the assets of the company. There are
two types: contributed capital and retained earnings.
Retained earnings is the total of all net income amounts minus all dividends paid in
the life of the company. It is descriptively named, it is the earnings that have been
kept (retained) in the company. The amount of retained earnings represents the part
, of the owner’s claims that the company has earned. Retained earnings is not the
same as cash!
A fiscal year is a year in the life of a business. It may or may not coincide with the
calendar year.
Comparative balance sheets are the balance sheets from consecutive fiscal years for
a single company. The ending balance sheet for one fiscal year is the beginning
balance sheet for the next fiscal year.
The books are a company’s accounting records.
Statement of Financial Position is another name for the balance sheet.
Assets = liabilities
Income Statement
The income statement shows all revenues minus all expenses for an accounting
period: a month, a quarter or a year. The repayment of principal is not an expense!
Also notice that dividends, a corporation’s distribution to owners, are excluded from
the income statement!
Revenues – expenses = net income
Statement of Changes in Shareholders’ Equity
The statement of changes in shareholders’ equity starts with the beginning amount
of contributed capital and shows all changes during the accounting period. Then the
statement shows the beginning balance in retained earnings with its changes. The
usual changes to retained earnings are the increase due to net income and the
decrease due to dividends paid to shareholders.
Net income is the most common addition. Dividends are the most common
deductions.
Beginning Equity + contributions +/- net income/loss – dividends = ending equity
Statement of Cash Flows
The statement of cash flows shows all the cash collected and all the cash disbursed
during the period. Each cash amount is classified as one of three types:
1. Cash from operating activities: cash transactions that relate to the everyday,
routine transactions needed to run a business.
- Cash inflows: from customers who purchase products, from interest or
dividend income earned from bank deposits.
- Cash outflows: to suppliers for the purchase of inventory, to employees in
the form of salaries.
2. Cash from investing activities: transactions involving the sale and purchase of
long-term assets used in the business.
- Cash inflows: from sale of property and equipment.
- Cash outflows: To purchase plant and equipment, to purchase investments
in other firms.
3. Cash from financing activities: transactions related to how a business is
financed. Examples include contributions from owners and amounts borrowed
using loans.
- Cash inflows: from issuing long-term debt, from issuing stock.
- Cash outflows: to repay long-term debt principal, to pay dividends to
owners.
It’s a statement of all the cash that comes in and goes out.
Cash inflow -/- cash outflow = net cash flow
Learning objectives:
1. Describe what a business does and the various ways a business can be
organized.
2. Classify business transactions as operating, investing or financing activities.
3. Describe who uses accounting information and why accounting information is
important to them. Auditors, managers. Management, those with direct
financial interest (investors, creditors), those with an indirect financial
interest (tax authorities, economic planners etc.)
4. Four basic financial statements:
- The income Statement
- The Statement of Changes in Shareholders’ Equity
- The Balance Sheet (Statement of financial Position)
- The Statement of Cash Flows
Explain the purpose of each, and be able to use basic transaction analysis to
prepare each statement.
5. Identify the element of a real company’s financial statements
6. Describe the risks associated with being in business and the part that ethics
play in businesses.
Purpose of a business:
- Obtain the resources needed to start and run a business
- Add value
- Make profit
Tangible fixed assets: property, plant, equipment -> lasts for more than one year
(materiële vaste activa)
Operating: Transactions related to the general operations of the firm.
Investing: Transactions related to buying items the firm will use for more than a year.
Financing: Transactions that deal with how a business gets its funding.
Revenues: amounts a company earns from providing goods or services to its
customers.
Expenses: costs to earn those revenues.
Notes to the financial statements are information provided with the four basic
statements that describe the company’s major accounting policies and provide other
disclosures to help external users better understand the financial statements.
Balance sheet
A balance sheet shows a summary of each element of the accounting equation:
assets, liabilities, and shareholders’ equity.
Assets: economic resources owned or controlled by the business.
Liabilities: obligations of the business; amounts owed to creditors.
Shareholders’ equity: the owners’ claims to the assets of the company. There are
two types: contributed capital and retained earnings.
Retained earnings is the total of all net income amounts minus all dividends paid in
the life of the company. It is descriptively named, it is the earnings that have been
kept (retained) in the company. The amount of retained earnings represents the part
, of the owner’s claims that the company has earned. Retained earnings is not the
same as cash!
A fiscal year is a year in the life of a business. It may or may not coincide with the
calendar year.
Comparative balance sheets are the balance sheets from consecutive fiscal years for
a single company. The ending balance sheet for one fiscal year is the beginning
balance sheet for the next fiscal year.
The books are a company’s accounting records.
Statement of Financial Position is another name for the balance sheet.
Assets = liabilities
Income Statement
The income statement shows all revenues minus all expenses for an accounting
period: a month, a quarter or a year. The repayment of principal is not an expense!
Also notice that dividends, a corporation’s distribution to owners, are excluded from
the income statement!
Revenues – expenses = net income
Statement of Changes in Shareholders’ Equity
The statement of changes in shareholders’ equity starts with the beginning amount
of contributed capital and shows all changes during the accounting period. Then the
statement shows the beginning balance in retained earnings with its changes. The
usual changes to retained earnings are the increase due to net income and the
decrease due to dividends paid to shareholders.
Net income is the most common addition. Dividends are the most common
deductions.
Beginning Equity + contributions +/- net income/loss – dividends = ending equity
Statement of Cash Flows
The statement of cash flows shows all the cash collected and all the cash disbursed
during the period. Each cash amount is classified as one of three types:
1. Cash from operating activities: cash transactions that relate to the everyday,
routine transactions needed to run a business.
- Cash inflows: from customers who purchase products, from interest or
dividend income earned from bank deposits.
- Cash outflows: to suppliers for the purchase of inventory, to employees in
the form of salaries.
2. Cash from investing activities: transactions involving the sale and purchase of
long-term assets used in the business.
- Cash inflows: from sale of property and equipment.
- Cash outflows: To purchase plant and equipment, to purchase investments
in other firms.
3. Cash from financing activities: transactions related to how a business is
financed. Examples include contributions from owners and amounts borrowed
using loans.
- Cash inflows: from issuing long-term debt, from issuing stock.
- Cash outflows: to repay long-term debt principal, to pay dividends to
owners.
It’s a statement of all the cash that comes in and goes out.
Cash inflow -/- cash outflow = net cash flow
