CHAPTER 1 Accounting and the Business Environment

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CHAPTER 1 Accounting and the Business Environment

  1. 1. Accounting and the Business Environment Chapter 1
  2. 2. Objective 1 Use accounting vocabulary
  3. 3. is an information system that... measures business activities, processes information, and... communicates financial information. Accounting...
  4. 4. is called the language of business. Accounting...
  5. 5. External users make decisions about the entity. Internal users make decisions for the entity. Users of Accounting Information
  6. 6. Management Accounting Financial Accounting Fields of Accounting
  7. 7. Public Sector (SEC) Private Sector (FASB) Private Sector (AICPA) (IMA) GAAP The Authority Underlying Accounting
  8. 8. AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants Standards of Professional Conduct
  9. 9. Proprietorships Partnerships Corporations Types of Business Organizations
  10. 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. 11. Partnerships What are some advantages?
  12. 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. 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. 14. Objective 2 Apply Accounting Concepts and Principles
  15. 15. To provide information useful for making investment and lending decisions Generally Accepted Accounting Principles What is the primary objective of financial reporting?
  16. 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. 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. 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. 19. Assets and services acquired should be recorded at their actual cost. The Cost Principle
  20. 20. The entity will continue to operate in the future. The Going Concern Concept
  21. 21. The dollar’s purchasing power is relatively stable. The Stable-Monetary-Unit Concept
  22. 22. Objective 3 Use the Accounting Equation
  23. 23. Economic Resources Claims to Economic Resources The Accounting Equation Assets = Liabilities + Owner’s Equity
  24. 24. Assets What is an asset? It is something a company owns which has future economic value. – land – building – equipment – goodwill
  25. 25. Liability What is a liability? It is something a company owes. – money – service – legal retainers – product – magazines
  26. 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. 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. 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. 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. 30. Objective 4 Analyze Business Transactions
  31. 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. 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. 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. 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. 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. 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. 37. Objective 5 Prepare Financial Statements
  38. 38. – are the final product of the accounting process. – tell how the business is performing and where it stands. Financial Statements...
  39. 39. Financial Statements – income statement – statement of owner’s equity or retained earnings – balance sheet – statement of cash flows
  40. 40. Objective 6 Evaluate Business Performance
  41. 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. 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. 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. 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. 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. 46. End of Chapter 1

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