CHAPTER 1
INTRODUCTION TO FINANCIAL STATEMENTS
CHAPTER LEARNING OBJECTIVES
1. Identify the forms of business organization and the uses of accounting information. A
sole proprietorship is a business owned by one person. A partnership is a business owned by
two or more people associated as partners. A corporation is a separate legal entity for which
evidence of ownership is provided by shares of stock. Internal users are managers who need
accounting information to plan, organize, and run business operations. The primary external
users are investors and creditors. Investors (stockholders) use accounting information to
decide whether to buy, hold, or sell shares of a company’s stock. Creditors (suppliers and
bankers) use accounting information to assess the risk of granting credit or loaning money to
a business. Other groups who have an indirect interest in a business are taxing authorities,
customers, labor unions, and regulatory agencies.
2. Explain the three principal types of business activity. Financing activities involve
collecting the necessary funds to support the business. Investing activities involve acquiring
the resources necessary to run the business. Operating activities involve putting the
resources of the business into action to generate a profit.
3. Describe the four financial statements and how they are prepared. An income statement
presents the revenues and expenses of a company for a specific period of time. A retained
earnings statement summarizes the changes in retained earnings that have occurred for a
specific period of time. A balance sheet reports the assets, liabilities, and stockholders’ equity
of a business at a specific date. A statement of cash flows summarizes information
concerning the cash inflows (receipts) and outflows (payments) for a specific period of time.
Assets are resources owned by a business. Liabilities are the debts and obligations of the
business. Liabilities represent claims of creditors on the assets of the business. Stockholders’
equity represents the claims of owners on the assets of the business. Stockholders’ equity is
subdivided into two parts: common stock and retained earnings. The basic accounting
equation is Assets = Liabilities + Stockholders’ Equity. Within the annual report, the
management discussion and analysis provides management’s interpretation of the company’s
results and financial position as well as a discussion of plans for the future. Notes to the
financial statements provide additional explanation or detail to make the financial statements
more informative. The auditor’s report expresses an opinion as to whether the financial
statements present fairly the company’s results of operations and financial position.
*4. Explain the career opportunities in accounting. Accounting offers many different jobs in
fields such as public and private accounting, governmental, and forensic accounting.
Accounting is a popular major because there are many different types of jobs, with unlimited
potential for career advancement
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