CH 01

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Chapter 1 -- Introduction to Business

and Overview of the Financial
Statements and the Reporting Process
FINANCIAL ACCOUNTING
AN INTRODUCTION TO CONCEPTS,
METHODS, AND USES
10th Edition
Clyde P. Stickney and Roman L. Weil

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Learning Objectives
1. Develop a general understanding of four

principal activities of business firms.
2. Develop a general understanding of the
purpose and content of the three principal
financial statements.
3. Develop a sensitivity to financial reporting
issues.
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Chapter Outline
1. Four principal activities of business.

2. The purpose and content of the three
principal financial statements.
3. Financial reporting issues.
Chapter Summary
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1. Four principal activities of business
firms:
(a). Establishing goals and strategies,

(b). Obtaining financing,
(c). Making investments, and
(d). Conducting operations.
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2. The purpose and content of the three
principal financial statements:
(a). Balance sheet,

(b). Income statement,
(c). Statement of cash flows,
(d). Notes to the financial statements,
including various supporting schedules,
(e). Opinion of the independent certified
public accountant.
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3. Financial reporting issues:
(a). The multiple uses of financial accounting

reports,
(b). The alternative approaches to establishing
accounting measurement and reporting
standards,
(c). The role of the independent audit of a
business firm’s financial statements, and
(d). The role of financial reporting in an efficient
capital market.
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1.a. Establishing Goals and Strategies
 Maximize the return to owners of the firm,

 Provide a stimulating and stable lifetime
working environment for employees, and
 Contribute to and integrate with national
goals and policies.
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1.b. Obtaining Financing
 There are two principal sources of financing:

 Owners provide funds to a firm and in
return have a claim on the firm’s future
increases in value.
 Creditors provide funds to a firm and in
return typically require periodic
payments including interest fees.
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1.c. Making Investments
 Investments are the necessary items needed to

carry out business activities.
 Investments may be tangible like land,
buildings, equipment, inventories.
 Or investments may be intangible like
patents, licenses and other rights.
 Other examples are common shares or bonds
of other firms, inventories, accounts
receivable from customers and cash.
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1.d. Carrying Out Operations
 The operating activities of a firm:

 Purchasing – acquiring raw materials for
use or products for sale to customers.
 Production – combines raw materials,
labor and other assets to create the output
of the firm.
 Marketing – selling and distribution of the
product.
 Administration – support for the above
activities.
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Fig 1.1 -- Overview of
Business Activities
Investing Financing
Operating
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2.a. Balance Sheet
 Snapshot of the investing and financing

activities at a moment in time.
 The Basic Accounting Equation:
Assets = Liabilities + Shareholders’ Equity
which is the same ideas as
Investing = Financing
Resources = Sources of Resources
Resources = Claims on Resources
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Exhibit 1.1 --
Balance
Sheet
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2.b. Income Statement
 Results of the operating activities of a firm for

a specific time period.
 Basic Income Equation:
Net Income = Revenues - Expenses
 Revenues are the inflows of assets from selling
goods and services.
 Expenses are the outflows of assets used in
generating revenues.
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Exhibit 1.2 -- Income Statement
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Relation between Balance Sheet
and Income Statement
 The income statement links the balance sheet

at the beginning of the period with the
balance sheet at the end of the period.
 Retained Earnings is increased by net income
and decreased by dividends.
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2.c. Statement of Cash Flows
 Reports details of the where cash came from

and where it went to.
 Cash flows are classified into:
 Operating,
 Investing, or
 Financing.
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Classification of Cash Flows
 Operations: cash from customers less cash

paid in carrying out the firm’s operating
activities.
 Investing: cash paid to acquire noncurrent
assets less amounts from any sale of
noncurrent assets.
 Financing: cash from issues of long-term debt
or new capital less dividends.
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Exhibit 1.3 --
Cash Flows
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Figure 1.2 -- Inflows and Outflows
Inflows Outflows
Sales
SalesofofGoods
Goods Acquisition
Operating ororServices Acquisitionofof
Services Goods
GoodsororServices
Services
totoCustomers
Customers for Operations
for Operations
Sales
Salesofof Pool Acquisition
Acquisitionofof
Investing Noncurrent Poolofof Noncurrent
Noncurrent Cash
Cash Noncurrent
Assets
Assets Assets
Assets
Dividends
Dividendsand
and
Issue
IssueofofDebt
Debt Reduction in Debt
Reduction in Debt
Financing and Shareholders’
and Shareholders’ ororShareholders’
Shareholders’
Equity
Equity Equity
Equity
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Other Items in Annual Reports
 Supporting schedules and notes.
 Auditor’s opinion.
 Users and uses of financial reports.
 Authority for establishing acceptable
accounting standards.
 The role of an audit of a firm’s financial
statements.
 Efficiency of capital markets.
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Financial Reporting in the U.S.
 Legal authority to set accounting standards lies
with an agency of the federal government, the
Securities and Exchange Commission (SEC).
 The SEC looks to a private body, the Financial
Accounting Standards Board (FASB), for
leadership in establishing standards.
 Pronouncements of the FASB are called Generally
Accepted Accounting Standards (GAAP).
 Since its founding in 1973, the FASB has issued
135 statements and several conceptual papers.
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An International Perspective
 The process of setting accounting standards
vary widely around the world resulting in a
diverse set of accounting principles.
 Globalization of economies has increased the
need for comparable and understandable
financial information.
 The International Accounting Standards
Committee (IASC) issues recommendations
for minimum standards.
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Chapter Summary
 This chapter provides a broad overview of
business activities and how they are reflected
in the basic financial statements.
 The three basic financial statements are
introduced.
 Further chapters examine the concepts and
procedures that underlie each statement.

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1-1

Chapter 1 -- Introduction to Business

Clyde P. Stickney and Roman L. Weil

1. Develop a general understanding of four

1. Four principal activities of business.

(a). Establishing goals and strategies,

(a). Balance sheet,

(a). The multiple uses of financial accounting

1.a. Establishing Goals and Strategies

 Maximize the return to owners of the firm,

 There are two principal sources of financing:

 Investments are the necessary items needed to

 The operating activities of a firm:

Fig 1.1 -- Overview of

 Snapshot of the investing and financing

 Results of the operating activities of a firm for

 The income statement links the balance sheet

 Reports details of the where cash came from

 Operations: cash from customers less cash

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