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CHAPTER 1  Accounting and the Business Environment
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CHAPTER 1 Accounting and the Business Environment

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  • 1. Accounting and the Business Environment Chapter 1
  • 2. Objective 1 Use accounting vocabulary
  • 3. is an information system that... measures business activities, processes information, and... communicates financial information. Accounting...
  • 4. is called the language of business. Accounting...
  • 5. External users make decisions about the entity. Internal users make decisions for the entity. Users of Accounting Information
  • 6. Management Accounting Financial Accounting Fields of Accounting
  • 7. Public Sector (SEC) Private Sector (FASB) Private Sector (AICPA) (IMA) GAAP The Authority Underlying Accounting
  • 8. AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants Standards of Professional Conduct
  • 9. Proprietorships Partnerships Corporations Types of Business Organizations
  • 10. Proprietorships What are some advantages? – total undivided authority – no restrictions on type of business – must be legal What are some disadvantages? – unlimited liability – limitation on size – fund raising power
  • 11. Partnerships What are some advantages?
  • 12. better credit standing – possibly – more brain power, but consultation with partners required What are some disadvantages? – unlimited personal liability for general partners – need for written partnership agreement
  • 13. Corporations What are some advantages? – separate legal existence – limited liability of stockholders – transferability of ownership relatively easy What are some disadvantages? – taxes – possible double taxation – extensive governmental regulation
  • 14. Objective 2 Apply Accounting Concepts and Principles
  • 15. To provide information useful for making investment and lending decisions Generally Accepted Accounting Principles What is the primary objective of financial reporting?
  • 16. The Entity Concept Example Assume that John decides to open up a gas station and coffee shop. The gas station made $250,000 in profits, while the coffee shop lost $50,000.
  • 17. The Entity Concept Example How much money did John make? At a first glance, we would assume that John made $200,000. However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.
  • 18. Information must be reasonably accurate. Information must be free from bias. Information must report what actually happened. Individuals would arrive at similar conclusions using same data. The Reliability (Objectivity) Principle
  • 19. Assets and services acquired should be recorded at their actual cost. The Cost Principle
  • 20. The entity will continue to operate in the future. The Going Concern Concept
  • 21. The dollar’s purchasing power is relatively stable. The Stable-Monetary-Unit Concept
  • 22. Objective 3 Use the Accounting Equation
  • 23. Economic Resources Claims to Economic Resources The Accounting Equation Assets = Liabilities + Owner’s Equity
  • 24. Assets What is an asset? It is something a company owns which has future economic value. – land – building – equipment – goodwill
  • 25. Liability What is a liability? It is something a company owes. – money – service – legal retainers – product – magazines
  • 26. Owner’s Equity What is owner’s equity? It is what’s left of the assets after liabilities have been deducted. – the same as net assets – the owner’s claim on the entity’s assets
  • 27. Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity
  • 28. Revenues What are revenues? They are amounts received or to be received from customers for sales of products or services. – sales – performance of services – rent – interest
  • 29. Expenses What are expenses? They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. – salaries and wages – utilities – supplies used – advertising
  • 30. Objective 4 Analyze Business Transactions
  • 31. Accounting for Business Transactions What is a transaction? It is any event that both affects the financial position of the business and can be reliably recorded.
  • 32. Accounting for Business Transactions 1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel. 2 Gillen purchases an office location, paying $20,000 in cash. 3 She buys office supplies, agreeing to pay $500 in 30 days. 4 She earns and collects $5,500 revenues.
  • 33. Accounting for Business Transactions 5 Gillen performs services, and the client agrees to pay $3,000 within one month. 6 During the month, she pays $3,300 for expenses incurred. 7 Gillen pays $300 to the store from which she purchased $500 worth of supplies. What is the effect of these transactions on the accounting equation?
  • 34. Owner’s Assets = Liabilities + Equity 1) Cash + $30,000 + $30,000 2) Cash – 20,000 Land + 20,000 3) Supplies + 500 + 500 4) Cash + 5,500 + 5,500 5) Receivable + 3,000 + 3,000 6) Cash – 3,300 – 3,300 7) Cash – 300 – 300 Totals + $35,400 + 200 + $35,200 Accounting for Business Transactions
  • 35. Accounting for Business Transactions Notice that the equation always stays in balance. Each transaction affects at least two accounts, sometimes more. Some transactions affect only one side of the equation; some affect both sides.
  • 36. Accounting for Business Transactions Other transactions that took place were as follows: The business collected $1,000 from the client. She sold some land at cost for $9,000. She withdrew $2,000 from the business.
  • 37. Objective 5 Prepare Financial Statements
  • 38. – are the final product of the accounting process. – tell how the business is performing and where it stands. Financial Statements...
  • 39. Financial Statements – income statement – statement of owner’s equity or retained earnings – balance sheet – statement of cash flows
  • 40. Objective 6 Evaluate Business Performance
  • 41. Relationships Among the Statements: Income Statement Revenue: Fees earned $8,500 Expenses: Salary expense $1,200 Utilities and telephone expense 400 Equipment rental expense 600 Office rent expense 1,100 3,300 Net income $5,200
  • 42. G. Gillen, capital, April 1, 20xx $ 0 Contribution of capital 30,000 Net income $ 5,200 Cash distributions – 2,000 G. Gillen, capital, April 30, 20xx $33,200 Relationships Among the Statements: Statement of Owner’s Equity
  • 43. Relationships Among the Statements: Balance Sheet Assets Cash $19,900 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets $ 33,400 Liabilities Accounts payable $ 200 Owner’s equity, G. Gillen, capital 33,200 Total liabilities and owner’s equity $33,400
  • 44. Relationships Among the Statements: Statement Of Cash Flows Cash flows from operating activities: Cash receipts from services rendered $6,500 Cash payments: Supplies $ 300 Operating expenses 3,300 3,600 Net cash flows from Operating activities $2,900 Cash flows from investing activities Purchase and sale of land ($11,000)
  • 45. Cash Flows from Financing Activities: Investment by Owner $30,000 Withdrawals 2,000 Net Cash Flows from Financing Activities $28,000 Cash at Beginning of Year 0 Cash at End of the Year $19,900 Relationships Among the Statements: Statement Of Cash Flows
  • 46. End of Chapter 1