CH.1 The Financial Statements
Businesses
•Businesses try to create value by selling a product or service
•Many businesses, and what we focus on in this class, are trying to make a profit
-For example, a business buys or makes products at a cost (expense) and incurs other costs
(expenses) operating the business
• the business will sell their products/services at a higher value (revenue) than what it costs
Accounting
•Accounting is the process that measures, records, and communicates a company’s business
activities to decision makers
•the language of business
•how the activities of a company are measured and then communicated through
Financial vs. Managerial Accounting
•People inside a company and outside of a company use accounting information
•But each group has different needs
•Financial accounting focuses on measuring, recording, and communicating a company’s
business activities to external users
Corporations
•Corporation- separate legal entity apart from the owners (often referred to as stockholders or
shareholders)
•An investor can contribute cash to a corporation in exchange for ownership
•A share or a stock represents a piece of ownership
•Most well-known companies = corporations
•Amazon, Google, Apple, Microsoft, Nike, Disney
•All types of entities can be shareholders (owners) of a corporation
•Public corporations are corporations that sell their shares of ownership on the open market (to
the public)
Financial Statements
•Financial statements are business documents companies use to communicate the results of
their activities to various people and groups
•For example, managers, investors, creditors, and regulatory agencies
*4 basic financial statements: The income statement, The balance sheet, The statement of cash
flows, The statement of retained earnings.
Income Statement
●They report a company’s revenues, expenses, and net income or net losses.
