Lo Ppt01

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Lo Ppt01

  1. 1. Uses of Accounting Information and the Financial Statements <ul><li>Multimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University </li></ul>Chapter 1
  2. 2. Learning Objectives <ul><li>Define accounting , identify business goals and activities, and describe the role of accounting in making informed decisions. </li></ul><ul><li>Identify the many users of accounting information in society. </li></ul><ul><li>Explain the importance of business transactions, money measure, and separate entity to accounting measurement. </li></ul><ul><li>Identify the three basic forms of business organization </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  3. 3. Learning Objectives (cont’d) <ul><li>Define financial position , state the accounting equation, and show how they are affected by simple transactions. </li></ul><ul><li>Identify the four financial statements. </li></ul><ul><li>State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP. </li></ul><ul><li>Define ethics and describe the ethical responsibilities of accountants. </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  4. 4. Accounting as an Information System <ul><li>Objective 1 </li></ul><ul><ul><li>Define accounting , identify business goals and activities, and describe the role of accounting in making informed decisions </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  5. 5. Accounting Copyright © Houghton Mifflin Company. All rights reserved. 1– … is an information system that measures processes communicates financial information about an identifiable, economic entity
  6. 6. Accounting Copyright © Houghton Mifflin Company. All rights reserved. 1– … supplies the information decision makers need to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activities
  7. 7. Accounting … <ul><li>Is a link between business activities and decision makers </li></ul><ul><ul><li>Decision makers use accounting information to make informed decisions about available alternatives </li></ul></ul><ul><li>Measures business activities by recording data about them for future use </li></ul><ul><li>Is communicated to decision makers through reports </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  8. 8. Accounting as an Information System Copyright © Houghton Mifflin Company. All rights reserved. 1– Input Output Accounting System
  9. 9. Business Goals, Activities, and Performance Measures <ul><li>Business </li></ul><ul><ul><li>An economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its owners </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  10. 10. Business Goals <ul><li>Profitability </li></ul><ul><ul><li>The ability to earn enough income to attract and hold investment capital </li></ul></ul><ul><li>Liquidity </li></ul><ul><ul><li>Having enough cash available to pay debts when they are due </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  11. 11. Business Activities <ul><li>Financing Activities </li></ul><ul><li>Investing Activities </li></ul><ul><li>Operating Activities </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  12. 12. Financing Activities <ul><li>Activities associated with obtaining adequate funds, or capital, to begin and continue operations </li></ul><ul><ul><li>Owner investments </li></ul></ul><ul><ul><li>Paying a return to owners </li></ul></ul><ul><ul><li>Obtaining loans from creditors </li></ul></ul><ul><ul><li>Repaying amounts to creditors, plus interest </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  13. 13. Investing Activities <ul><li>Activities associated with spending funds to begin and continue operations </li></ul><ul><ul><li>Buying resources such as land, buildings, and equipment needed in the operation of the business </li></ul></ul><ul><ul><li>Selling these resources when no longer needed </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  14. 14. Operating Activities <ul><li>Activities associated with the course of running a business </li></ul><ul><ul><li>Selling goods and services </li></ul></ul><ul><ul><li>Employing managers and workers </li></ul></ul><ul><ul><li>Buying goods and services </li></ul></ul><ul><ul><li>Paying taxes </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  15. 15. Performance Measures <ul><li>Indicators </li></ul><ul><ul><li>Used to determine whether </li></ul></ul><ul><ul><ul><li>Managers are achieving their business goals </li></ul></ul></ul><ul><ul><ul><li>Business activities are well managed </li></ul></ul></ul><ul><li>Include </li></ul><ul><ul><li>Earned income </li></ul></ul><ul><ul><li>Cash flow </li></ul></ul><ul><ul><li>Ratio of expenses to revenue </li></ul></ul><ul><ul><li>Ratio of money owed to total resources controlled </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  16. 16. Financial and Management Accounting <ul><li>Accounting’s role is divided into two categories </li></ul><ul><ul><li>Management accounting </li></ul></ul><ul><ul><li>Financial accounting </li></ul></ul><ul><li>The functions of both categories overlap </li></ul><ul><li>Primary difference between the two is the principal users of the information </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  17. 17. Management Accounting <ul><li>Focuses on internal decision makers </li></ul><ul><ul><li>Managers and employees </li></ul></ul><ul><li>Reporting format is flexible and based on the type of information needed, such as budgets and sales forecasts </li></ul><ul><li>Used to report past performance and expected future performance </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  18. 18. Financial Accounting <ul><li>Focuses on external decision makers </li></ul><ul><ul><li>Stockholders </li></ul></ul><ul><ul><li>Banks and other creditors </li></ul></ul><ul><ul><li>Government regulators </li></ul></ul><ul><li>Financial information of company is reported in the financial statements </li></ul><ul><ul><li>Used to report directly on goals of profitability and liquidity </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  19. 19. Bookkeeping versus Accounting <ul><li>Bookkeeping </li></ul><ul><ul><li>Repetitive, mechanical process of recording financial transactions and keeping financial records </li></ul></ul><ul><li>Accounting </li></ul><ul><ul><li>Bookkeeping a small part of accounting </li></ul></ul><ul><ul><li>Includes design of an information system to meet users’ needs </li></ul></ul><ul><ul><li>Goals include the analysis, interpretation, and use of information </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  20. 20. Processing Accounting Information <ul><li>Ways in which accounting information is processed: </li></ul><ul><li>Bookkeeping </li></ul><ul><li>Computer </li></ul><ul><li>Management information system (MIS) </li></ul><ul><li>MIS </li></ul><ul><ul><li>Provides information needed to run a business </li></ul></ul><ul><ul><li>Consists of interconnected subsystems </li></ul></ul><ul><ul><li>Most important subsystem is the accounting information system </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  21. 21. Discussion <ul><li>What is the difference between profitability and liquidity ? </li></ul><ul><ul><li>Profitability </li></ul></ul><ul><ul><ul><li>Earning enough income (revenues minus expenses) to attract and hold investors </li></ul></ul></ul><ul><ul><li>Liquidity </li></ul></ul><ul><ul><ul><li>Having enough funds available (cash) to pay debts when they are due </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  22. 22. Decision Makers: The Users of Accounting Information <ul><li>Objective 2 </li></ul><ul><ul><li>Identify the many users of accounting information in society </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  23. 23. Decision Makers <ul><li>… fall into three categories </li></ul><ul><li>Those who manage a business </li></ul><ul><ul><li>Finance </li></ul></ul><ul><ul><li>Investment </li></ul></ul><ul><ul><li>Operations and Production </li></ul></ul><ul><ul><li>Marketing </li></ul></ul><ul><ul><li>Human Resources </li></ul></ul><ul><ul><li>Information Systems </li></ul></ul><ul><ul><li>Accounting </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  24. 24. Decision Makers (cont’d) <ul><li>Those with a Direct Financial Interest </li></ul><ul><ul><li>Investors </li></ul></ul><ul><ul><li>Creditors </li></ul></ul><ul><li>Those with an Indirect Financial Interest </li></ul><ul><ul><li>Tax Authorities </li></ul></ul><ul><ul><li>Regulatory Agencies </li></ul></ul><ul><ul><li>Labor Unions </li></ul></ul><ul><ul><li>Financial Advisors </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>Economic Planners </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  25. 25. Management <ul><li>Managers are internal users of accounting information </li></ul><ul><ul><li>Make key decisions using accounting information </li></ul></ul><ul><ul><li>Basic management functions require accounting information for decision making </li></ul></ul><ul><ul><ul><li>Financing the business </li></ul></ul></ul><ul><ul><ul><li>Investing resources </li></ul></ul></ul><ul><ul><ul><li>Producing goods and services </li></ul></ul></ul><ul><ul><ul><li>Marketing goods and services </li></ul></ul></ul><ul><ul><ul><li>Managing employees </li></ul></ul></ul><ul><ul><ul><li>Providing information to decision makers </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  26. 26. Users With a Direct Financial Interest <ul><li>… are external users of accounting information </li></ul><ul><li>Investors </li></ul><ul><ul><li>Put money into a business in order to make money (by purchasing and selling stocks and receiving dividends) </li></ul></ul><ul><ul><li>Use financial statements to judge the prospects for profitable investments </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  27. 27. Users With a Direct Financial Interest (cont’d) <ul><li>Creditors </li></ul><ul><ul><li>Loan money to a business in order to make money (by charging interest) </li></ul></ul><ul><ul><li>Use financial statements to judge whether a company will have enough cash to </li></ul></ul><ul><ul><ul><li>Pay interest charges </li></ul></ul></ul><ul><ul><ul><li>Repay debt at appropriate time </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  28. 28. Users With an Indirect Financial Interest <ul><li>… are external users of accounting information </li></ul><ul><li>Tax authorities </li></ul><ul><ul><li>Use accounting information to determine amount of tax due </li></ul></ul><ul><ul><li>Procedures for tax reporting mandated by law </li></ul></ul><ul><li>Government regulatory agencies </li></ul><ul><ul><li>Federal, state, and local levels </li></ul></ul><ul><ul><li>Securities and Exchange Commission (SEC) </li></ul></ul><ul><ul><ul><li>Regulates the issuing, buying, and selling of stocks in the U.S. </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  29. 29. Users With an Indirect Financial Interest (cont’d) <ul><li>Other groups </li></ul><ul><ul><li>Labor unions </li></ul></ul><ul><ul><li>Those advising investors and creditors </li></ul></ul><ul><ul><ul><li>Financial analysts and advisors </li></ul></ul></ul><ul><ul><ul><li>Brokers </li></ul></ul></ul><ul><ul><ul><li>Underwriters </li></ul></ul></ul><ul><ul><ul><li>Lawyers </li></ul></ul></ul><ul><ul><ul><li>Financial press </li></ul></ul></ul><ul><ul><li>Consumer groups </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><ul><li>General public </li></ul></ul><ul><ul><li>Economic planners </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  30. 30. Government and Not-for-Profit Organizations <ul><li>Include </li></ul><ul><ul><li>Hospitals </li></ul></ul><ul><ul><li>Universities </li></ul></ul><ul><ul><li>Professional organizations </li></ul></ul><ul><ul><li>Charities </li></ul></ul><ul><li>Have the same categories of decision makers as profit-oriented organizations </li></ul><ul><ul><li>Managers </li></ul></ul><ul><ul><li>Those with a direct financial interest </li></ul></ul><ul><ul><li>Those with an indirect financial interest </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  31. 31. Discussion Copyright © Houghton Mifflin Company. All rights reserved. 1– <ul><li>How do management accounting and financial accounting differ? </li></ul><ul><ul><li>Focus on internal users </li></ul></ul><ul><ul><li>Focus on external users as well as internal users </li></ul></ul><ul><ul><li>Specific information </li></ul></ul><ul><ul><li>All types of information </li></ul></ul><ul><ul><li>Communicated in financial statements </li></ul></ul><ul><ul><li>Communicated in format most suitable to purpose </li></ul></ul>Financial Accounting <ul><li>Management Accounting </li></ul>
  32. 32. Accounting Measurement <ul><li>Objective 3 </li></ul><ul><ul><li>Explain the importance of business transactions, money measure, and separate entity to accounting measurement </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  33. 33. Accounting Measurement <ul><li>Four Basic Questions </li></ul><ul><ul><li>What is measured? </li></ul></ul><ul><ul><ul><li>Business transactions affecting the financial position of the business entity </li></ul></ul></ul><ul><ul><li>When should the measurement be made? </li></ul></ul><ul><ul><ul><li>Discussed in Chapter 2, The Recognition Issue </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  34. 34. Accounting Measurement (cont’d) <ul><ul><li>What value should be placed on what is measured? </li></ul></ul><ul><ul><ul><li>Discussed in Chapter 2, The Valuation Issue </li></ul></ul></ul><ul><ul><li>How should what is measured be classified? </li></ul></ul><ul><ul><ul><li>Discussed in Chapter 2, The Classification Issue </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  35. 35. Business Transactions <ul><li>… are economic events that affect the financial position of a business entity </li></ul><ul><ul><li>Involve an exchange of value </li></ul></ul><ul><ul><ul><li>Purchase </li></ul></ul></ul><ul><ul><ul><li>Sale </li></ul></ul></ul><ul><ul><ul><li>Payment </li></ul></ul></ul><ul><ul><ul><li>Collection </li></ul></ul></ul><ul><ul><li>Events that have the same effect as an exchange of value </li></ul></ul><ul><ul><ul><li>Loss from fire, flood, theft </li></ul></ul></ul><ul><ul><ul><li>Physical wear and tear on equipment </li></ul></ul></ul><ul><ul><ul><li>Accumulation of interest </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  36. 36. Money Measure <ul><li>Recording of all business transactions in terms of money </li></ul><ul><li>Money is the only factor common to all business transactions </li></ul><ul><li>Basic unit of money determined by the country in which business resides </li></ul><ul><li>Exchange rates are used to translate transactions from one currency to another </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  37. 37. Money Measure (cont’d) <ul><li>Exchange Rate </li></ul><ul><ul><li>The value of one currency in terms of another </li></ul></ul><ul><ul><li>Changes daily </li></ul></ul><ul><li>Example: </li></ul><ul><ul><li>Assume the price of one British pound is 1.61 U.S. dollars. How many British pounds would one U.S. dollar buy? </li></ul></ul><ul><ul><ul><ul><li>1 British pound ÷ 1.61 U.S. dollars </li></ul></ul></ul></ul><ul><ul><ul><ul><li>= 0.62 British pounds per U.S. dollar </li></ul></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  38. 38. Separate Entity <ul><li>A business is distinct from its </li></ul><ul><ul><li>Owner(s) </li></ul></ul><ul><ul><li>Creditors </li></ul></ul><ul><ul><li>Customers </li></ul></ul><ul><li>Its financial records and reports should refer only to its own financial affairs </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  39. 39. <ul><li>Identify each of the following as most closely related to a </li></ul>Discussion Copyright © Houghton Mifflin Company. All rights reserved. 1– <ul><ul><li>business transaction, </li></ul></ul><ul><ul><li>separate entity, or </li></ul></ul><ul><ul><li>money measure </li></ul></ul><ul><li>Partnership </li></ul><ul><li>U.S. dollar </li></ul><ul><li>Payment of an expense </li></ul><ul><li>Corporation </li></ul><ul><li>Sale of an asset </li></ul>(b) (c) (a) (b) (a)
  40. 40. Forms of Business Organization <ul><li>Objective 4 </li></ul><ul><ul><li>Identify the three basic forms of business organization </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  41. 41. Forms of Business Enterprises <ul><li>Three basic forms of business enterprises </li></ul><ul><ul><li>Sole proprietorship </li></ul></ul><ul><ul><li>Partnership </li></ul></ul><ul><ul><li>Corporation </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  42. 42. Separate Entities <ul><li>All three forms of businesses are economically separate entities from their owners </li></ul><ul><ul><li>Financial records and reports refer to the financial affairs of the business only </li></ul></ul><ul><li>Only the corporation is a legally separate entity from its owners </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  43. 43. Sole Proprietorships <ul><li>Business owned by one person </li></ul><ul><ul><li>The owner </li></ul></ul><ul><ul><ul><li>Receives all profits or losses </li></ul></ul></ul><ul><ul><ul><li>Is liable for all obligations of the business </li></ul></ul></ul><ul><li>Not incorporated </li></ul><ul><li>Life of business ends when the owner </li></ul><ul><ul><li>Decides to stop operating business </li></ul></ul><ul><ul><li>Dies </li></ul></ul><ul><ul><li>Is incapacitated </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1 –
  44. 44. Partnerships <ul><li>Business owned by more than one person </li></ul><ul><ul><li>The partners share all profits or losses according to an agreed upon formula </li></ul></ul><ul><ul><li>At least one partner is liable for all obligations of the business </li></ul></ul><ul><li>Not incorporated </li></ul><ul><li>Life of business ends when </li></ul><ul><ul><li>Ownership changes </li></ul></ul><ul><ul><ul><li>A partner leaves the business or dies </li></ul></ul></ul><ul><ul><ul><li>A new partner is admitted </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1 –
  45. 45. The Corporation as a Separate Entity <ul><li>Legally and economically separate from its owners </li></ul><ul><ul><li>Business unit chartered by the state and legally separate from owners (incorporated) </li></ul></ul><ul><ul><li>Owners (stockholders) do not directly control operations </li></ul></ul><ul><ul><li>Elected board of directors run the corporation </li></ul></ul><ul><ul><li>Owners’ risk of loss limited to amount paid for shares of stock – owners are not liable for the obligations of the business </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  46. 46. Sole Proprietorships and Partnerships versus Corporations <ul><li>Separate economic entity </li></ul><ul><li>Not separate legal entity </li></ul><ul><li>Owner(s) directly control operations </li></ul><ul><li>No economic separation between owner(s) and the business – owners liable for obligations of the business </li></ul><ul><li>Ownership cannot be transferred </li></ul><ul><li>Life of business is limited </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1– <ul><li>Separate economic entity </li></ul><ul><li>Separate legal entity </li></ul><ul><li>Owner do not directly control operations – elected board of directors runs corporation </li></ul><ul><li>Owner’s risk of loss (liability) limited to amount paid for shares of stock </li></ul><ul><li>Ownership can be transferred </li></ul><ul><li>Life of business is unlimited </li></ul>Sole Proprietorships and Partnerships Corporations
  47. 47. Discussion <ul><li>How do a sole proprietorship, partnership, and corporation differ? </li></ul><ul><ul><li>Sole proprietorship </li></ul></ul><ul><ul><li>One owner </li></ul></ul><ul><ul><ul><li>OOwner legally obligated to pay company liabilities </li></ul></ul></ul><ul><ul><li>Partnership </li></ul></ul><ul><ul><ul><li>MMultiple owners (partners) </li></ul></ul></ul><ul><ul><ul><li>PPartners legally obligated to pay company liabilities </li></ul></ul></ul><ul><ul><li>Corporation </li></ul></ul><ul><ul><ul><li>OOwned by stockholders </li></ul></ul></ul><ul><ul><ul><li>SStockholders not legally obligated to pay company liabilities </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  48. 48. Financial Position and the Accounting Equation <ul><li>Objective 5 </li></ul><ul><ul><li>Define financial position , state the accounting equation, and show how they are affected by simple transactions </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  49. 49. Financial Position Copyright © Houghton Mifflin Company. All rights reserved. 1– The economic resources that belong to a company and the claims against those resources at a point in time Economic Resources = Equities
  50. 50. Developing the Accounting Equation Copyright © Houghton Mifflin Company. All rights reserved. 1– Economic Resources = Equities <ul><li>Two types of equities </li></ul><ul><ul><li>Creditor’s equities and owner's equities, </li></ul></ul><ul><ul><li>therefore, </li></ul></ul>Economic Resources = Creditor’s Equities + Owner’s Equities In accounting terminology Economic resources are called assets Creditor’s equities are called liabilities Assets Liabilities
  51. 51. Accounting Equation <ul><li>Assets = Liabilities + Owner’s Equity </li></ul><ul><li>Two sides of equation are always in balance </li></ul><ul><li>Assets </li></ul><ul><ul><li>Economic resources owned by a company that are expected to benefit future operations </li></ul></ul><ul><li>Liabilities </li></ul><ul><ul><li>Obligations of a business to pay cash, transfer assets, or provide services to other entities in the future </li></ul></ul><ul><ul><li>Represent claims of creditors to the assets of the business </li></ul></ul><ul><li>Owner’s Equity </li></ul><ul><ul><li>Represents the claims by owners to the assets of the business </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  52. 52. Owner’s Equity <ul><li>Equals the residual interest in a company’s assets after deducting all liabilities </li></ul><ul><li>Also called residual equity or net assets </li></ul><ul><li>Defined by rearranging the accounting equation </li></ul><ul><li>Assets = Liabilities + Owner’s Equity </li></ul><ul><li>Owner’s Equity = Assets – Liabilities </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  53. 53. Transactions That Affect Owner’s Equity <ul><li>Owner’s investments </li></ul><ul><ul><li>Assets the owner puts into the business </li></ul></ul><ul><li>Owner’s withdrawals </li></ul><ul><ul><li>Assets the owner takes out of the business </li></ul></ul><ul><li>Revenues </li></ul><ul><ul><li>Increases in owner’s equity that result from operating a business </li></ul></ul><ul><li>Expenses </li></ul><ul><ul><li>Decreases in owner’s equity that result from operating a business </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1 –
  54. 54. Illustrative Transactions for Shannon Realty Copyright © Houghton Mifflin Company. All rights reserved. 1– Effects of Transactions on the Accounting Equation
  55. 55. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital 1.+$50,000 +$50,000 Owner’s Investments <ul><li>Deposited $50,000 in a bank account in the name of Shannon Realty </li></ul>A = $50,000 L + OE = $50,000 Notice that the accounting equation Assets = Liabilities + Owner's Equity, or A = L + OE, is always in balance
  56. 56. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Building Land 1. $50,000 $50,000 2. -35,000 + $10,000 +$25,000 Purchase of Assets with Cash <ul><li>Purchased a lot for $10,000 and a small building on a lot for $25,000 </li></ul>This transaction only affects one side of the accounting equation – Assets Whenever a transaction affects only one side of the accounting equation, the total on each side of the equal sign remains unchanged A = $50,000 L + OE = $50,000 bal. $15,000 $10,000 $25,000 $50,000
  57. 57. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Supplies Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. +$500 +$500 Purchase of Assets by Incurring a Liability <ul><li>Purchased office supplies for $500 on credit </li></ul>A = $50,500 L + OE = $50,500 bal. $15,000 $500 $10,000 $25,000 $500 $50,000
  58. 58. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Supplies Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 Payment of a Liability <ul><li>Paid $200 of the $500 owed for supplies </li></ul>A = $50,300 L + OE = $50,300 bal. $14,800 $500 $10,000 $25,000 $300 $50,000
  59. 59. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Supplies Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. +1,500 +1,500 Revenues <ul><li>Earned and received a commission of $1,500 in cash </li></ul>A = $51,800 L + OE = $51,800 bal. $16,300 $500 $10,000 $25,000 $300 $51,500
  60. 60. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. +$2,000 +2,000 Revenues <ul><li>Earned a commission of $2,000 to be received at a later date </li></ul>A = $53,800 L + OE = $53,800 bal. $16,300 $2,000 $500 $10,000 $25,000 $300 $53,500
  61. 61. Copyright © Houghton Mifflin Company. All rights reserved. 1– Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. +1,000 -1,000 Collection of Accounts Receivable <ul><li>Received $1,000 from client for commission earned earlier in the month </li></ul>A = $53,800 L + OE = $53,800 bal. $17,300 $1,000 $500 $10,000 $25,000 $300 $53,500
  62. 62. Copyright © Houghton Mifflin Company. All rights reserved. 1– Expenses Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 <ul><li>Paid $1,000 to rent equipment for office </li></ul>A = $52,800 L + OE = $52,800 bal. $16,300 $1,000 $500 $10,000 $25,000 $300 $52,500
  63. 63. Copyright © Houghton Mifflin Company. All rights reserved. 1– Expenses Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -400 <ul><li>Paid $400 in wages to part-time helper </li></ul>A = $52,400 L + OE = $52,400 bal. $15,900 $1,000 $500 $10,000 $25,000 $300 $52,100
  64. 64. Copyright © Houghton Mifflin Company. All rights reserved. 1– Expenses Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -400 10. +300 -300 <ul><li>Recorded utilities expense of $500 incurred in December but not yet paid </li></ul>A = $52,400 L + OE = $52,400 bal. $15,900 $1,000 $500 $10,000 $25,000 $600 $51,800
  65. 65. Owner’s Withdrawals Copyright © Houghton Mifflin Company. All rights reserved. 1 – Cash John Shannon, Capital Supplies A/R Building Land A/P 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. 1,500 1,500 6. $2,000 2,000 7. 1,000 -1,000 8. -1,000 -1,000 9. -400 -400 10. 300 -300 11. -600 -600 bal. $15,300 $1,000 $500 $10,000 $25,000 $600 $51,200 <ul><li>Withdrew $600 in cash from Shannon Realty and deposited it in a personal account </li></ul>A = $51,800 L + OE = $51,800
  66. 66. Discussion <ul><li>What does the accounting equation represent? </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1– and the claims against those resources at a point in time <ul><li>The economic resources owned by a company </li></ul>Assets = Liabilities + Owner’s Equity
  67. 67. Communications Through Financial Statements <ul><li>Objective 6 </li></ul><ul><ul><li>Identify the four financial statements </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  68. 68. Communications Through Financial Statements <ul><li>Four Major Financial Statements </li></ul><ul><ul><li>Income Statement </li></ul></ul><ul><ul><li>Statement of Owner’s Equity </li></ul></ul><ul><ul><li>Balance Sheet </li></ul></ul><ul><ul><li>Statement of Cash Flows </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  69. 69. Income Statement <ul><li>Summarizes revenues earned and expenses incurred over a period of time </li></ul><ul><li>Dated “For the Month Ended …” </li></ul><ul><li>Purpose to measure a company’s performance over a period of time </li></ul><ul><li>Shows whether or not a company achieved its profitability goal </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  70. 70. Income Statement (cont’d) <ul><li>Considered by many to be most important financial statement </li></ul><ul><li>Also called the capital statement </li></ul><ul><li>First financial statement to be prepared in a sequence </li></ul><ul><li>Net income figure used to prepare statement of owner’s equity </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  71. 71. Income Statement Copyright © Houghton Mifflin Company. All rights reserved. 1– Net income figure used to prepare statement of owner’s equity Date reflects revenues and expenses incurred over a period of time
  72. 72. Statement of Owner’s Equity <ul><li>Shows changes in owner’s equity over a period of time </li></ul><ul><li>Dated “For the Month Ended …” </li></ul><ul><li>Uses net income figure from income statement </li></ul><ul><li>End of period balance in Capital account used to prepare balance sheet </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  73. 73. Copyright © Houghton Mifflin Company. All rights reserved. 1 – Statement of Owner’s Equity Date reflects changes in John Shannon, Capital, over a period of time Net income figure from income statement Ending balance of John Shannon, Capital, used to prepare the balance sheet
  74. 74. Balance Sheet <ul><li>Shows the financial position of a company on a certain date </li></ul><ul><li>Dated as of a certain date </li></ul><ul><li>Also called the statement of financial position </li></ul><ul><li>Presents view of business as holder of assets that are equal to the claims against those assets </li></ul><ul><li>Claims consist of liabilities and owner’s equity </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  75. 75. Balance Sheet Copyright © Houghton Mifflin Company. All rights reserved. 1– Date reflects account balances as of a certain date Balance in Cash account used in statement of cash flows John Shannon, Capital, from statement of owner’s equity
  76. 76. Statement of Cash Flows <ul><li>Shows cash flows into and out of a business over a period of time </li></ul><ul><li>Dated “For the Month Ended …” </li></ul><ul><li>Focuses on whether the business met its liquidity goal </li></ul><ul><li>Explains how the Cash account changed during the period </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  77. 77. Copyright © Houghton Mifflin Company. All rights reserved. 1 – Statement of Cash Flows Begins with net income from income statement Cash at end of month same as Cash account balance on balance sheet Date reflects cash flows over a period of time
  78. 78. Discussion <ul><li>The balance sheet is often referred to as the statement of financial position. What does financial position mean? </li></ul><ul><ul><li>Financial position is the resources, or assets, owned by a business as of a certain date </li></ul></ul><ul><ul><li>These resources are offset by claims against them and stockholders’ equity, as shown on the balance sheet </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  79. 79. Generally Accepted Accounting Principles <ul><li>Objective 7 </li></ul><ul><ul><li>State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  80. 80. Generally Accepted Accounting Principles (GAAP) <ul><li>The conventions, rules, and procedures necessary to define accounting practice at a particular time </li></ul><ul><li>Developed to provide guidelines for financial accounting </li></ul><ul><li>Are altered as better methods evolve or circumstances change </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  81. 81. <ul><li>Examination of a company's financial statements </li></ul><ul><li>Prepared by independent certified public accountant (CPA) </li></ul><ul><li>CPA should have no compromising ties with company </li></ul><ul><li>Ascertains that financial statements prepared in accordance with GAAP </li></ul><ul><li>Implies that investors and creditors can rely on financial statements </li></ul><ul><li>Summary of financial affairs of a business </li></ul><ul><li>Prepared by management of company </li></ul><ul><li>Management has an interest in company performance; not independent </li></ul><ul><li>Should be prepared in accordance with GAAP </li></ul>Financial Statements, GAAP, and the Independent CPA’s Report (Audit) Copyright © Houghton Mifflin Company. All rights reserved. 1– Financial Statements Audit
  82. 82. Organizations That Influence Current Practice <ul><li>Financial Accounting Standards Board (FASB) </li></ul><ul><ul><li>Most important body for developing and issuing rules on accounting practice </li></ul></ul><ul><ul><li>Issues Statements of Financial Accounting Standards (SFAS) </li></ul></ul><ul><li>American Institute of Certified Public Accountants (AICPA) </li></ul><ul><ul><li>Professional association of certified public accountants </li></ul></ul><ul><ul><li>Influences accounting practice through activities of senior technical committees </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  83. 83. Organizations That Influence Current Practice (cont’d) <ul><li>Securities and Exchange Commission (SEC) </li></ul><ul><ul><li>Federal agency set up to protect the public by regulating the issuing, buying, and selling of stocks and bonds </li></ul></ul><ul><ul><li>Has legal power to set and enforce accounting policies for companies whose securities are offered for sale to the general public </li></ul></ul><ul><li>Government Accounting Standards Board (GASB) </li></ul><ul><ul><li>Established under same governing body as Financial Accounting Standards Board (FASB) </li></ul></ul><ul><ul><li>Responsible for issuing accounting standards for state and local governments </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  84. 84. Organizations That Influence Current Practice (cont’d) <ul><li>International Accounting Standards Board (IASB) </li></ul><ul><ul><li>An independent board, cooperating with national accounting standard setters, to develop high quality, understandable, and enforceable global accounting standards </li></ul></ul><ul><ul><li>Has published over 30 standards in a series of pronouncements called International Financial Reporting Standards (IFRS) </li></ul></ul><ul><li>Internal Revenue Service (IRS) </li></ul><ul><ul><li>Branch of the Department of Treasury </li></ul></ul><ul><ul><li>Administers the Internal Revenue Code enacted by Congress </li></ul></ul><ul><ul><li>Interprets and enforces U.S. tax laws governing the assessment and collection of revenues from income taxes </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  85. 85. Discussion <ul><li>What are GAAP? </li></ul><ul><ul><li>Generally accepted accounting principles </li></ul></ul><ul><ul><li>The conventions, rules, and procedures necessary to define accounting practice at a particular time </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1– <ul><li>What organization has the greatest influence on GAAP? </li></ul><ul><ul><li>Financial Accounting Standards Board (FASB) </li></ul></ul>
  86. 86. Professional Ethics and the Accounting Profession <ul><li>Objective 8 </li></ul><ul><ul><li>Define ethics and describe the ethical responsibilities of accountants </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  87. 87. Ethics <ul><li>… is the code of conduct that applies to everyday life </li></ul><ul><li>Addresses whether actions are right or wrong </li></ul><ul><li>Ethical actions are the product of individual decisions </li></ul><ul><li>Certain actions may be unethical but not illegal </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  88. 88. Professional Ethics <ul><li>… is the code of conduct that applies to the practice of a profession </li></ul><ul><li>Accountants have a responsibility to their employers, clients, and society to uphold highest ethical standards </li></ul><ul><li>AICPA and each state have adopted codes of professional conduct for certified public accountants </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  89. 89. Ethical Principles <ul><li>Integrity </li></ul><ul><ul><li>Requires honesty, frankness, and placing service and public trust before personal gain </li></ul></ul><ul><li>Objectivity </li></ul><ul><ul><li>Requires impartiality and intellectual honesty </li></ul></ul><ul><li>Independence </li></ul><ul><ul><li>Requires that an accountant avoid all relationships that impair, or appear to impair, his or her objectivity </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  90. 90. Ethical Principles (cont’d) <ul><li>Due care </li></ul><ul><ul><li>Accountants required to carry out professional responsibilities competently and diligently </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  91. 91. Institute of Management Accountants (IMA) <ul><li>Code of Professional Conduct for Management Accountants </li></ul><ul><ul><li>Emphasizes: </li></ul></ul><ul><ul><ul><li>Competence </li></ul></ul></ul><ul><ul><ul><li>Confidentiality </li></ul></ul></ul><ul><ul><ul><li>Integrity </li></ul></ul></ul><ul><ul><ul><li>Independence </li></ul></ul></ul><ul><ul><ul><li>Objectivity </li></ul></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  92. 92. Discussion <ul><li>To whom do accountants have an ethical responsibility? </li></ul><ul><ul><li>Employers </li></ul></ul><ul><ul><li>Clients </li></ul></ul><ul><ul><li>Society </li></ul></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1– <ul><li>What does due care mean? </li></ul><ul><ul><li>The act of carrying out professional responsibilities with competence and diligence </li></ul></ul>
  93. 93. Time for Review <ul><li>Define accounting , identify business goals and activities, and describe the role of accounting in making informed decisions </li></ul><ul><li>Identify the many users of accounting information in society </li></ul><ul><li>Explain the importance of business transactions, money measure, and separate entity to accounting measurement </li></ul><ul><li>Identify the three basic forms of business organization </li></ul>Copyright © Houghton Mifflin Company. All rights reserved. 1–
  94. 94. <ul><li>Define financial position , state the accounting equation, and show how they are affected by simple transactions </li></ul><ul><li>Identify the four financial statements </li></ul><ul><li>State the relationship of generally accepted accounting principles (GAAP) to financial statements and the independent CPA’s report, and identify the organizations that influence GAAP </li></ul><ul><li>Define ethics and describe the ethical responsibilities of accountants </li></ul>and Finally … Copyright © Houghton Mifflin Company. All rights reserved. 1–

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