Chapter 1                                                Uses of                                              Accounting  ...
Accounting      … is an information system that                 measures                 processes               communica...
Accounting            …supplies the information         decision makers need to make                reasoned choices      ...
Accounting …• Is a link between business activities and  decision makers    – Decision makers use accounting      informat...
Accounting as an Information System           Input                        Output                    Accounting SystemCopy...
Business Goals, Activities, and        Performance Measures• Business   – An economic unit that aims to sell goods      an...
Business Goals• Profitability   – The ability to earn enough income to     attract and hold investment capital• Liquidity ...
Business Activities             • Financing Activities             • Investing Activities             • Operating Activiti...
Financing Activities• Activities associated with obtaining  adequate funds, or capital, to begin and  continue operations ...
Investing Activities• Activities associated with spending  funds to begin and continue operations    – Buying resources su...
Operating Activities• Activities associated with the course of  running a business   – Selling goods and services   – Empl...
Performance Measures•    Indicators    –   Used to determine whether        1. Managers are achieving their business goals...
Financial and Management Accounting•    Accounting’s role is divided into two     categories    1. Management accounting  ...
Management Accounting• Focuses on internal decision makers   – Managers and employees• Reporting format is flexible and ba...
Financial Accounting• Focuses on external decision makers   – Stockholders   – Banks and other creditors   – Government re...
Bookkeeping versus Accounting    Bookkeeping                    Accounting  – Repetitive,                 – Bookkeeping a ...
Decision Makers          … fall into three categories1. Those who manage a business   –   Finance   –   Investment   –   O...
Decision Makers (cont’d)2. Those with a Direct Financial Interest    – Investors    – Creditors3. Those with an Indirect F...
Management• Managers are internal users of accounting  information   – Make key decisions using accounting information   –...
Users With a Direct Financial Interest     … are external users of accounting                 information• Investors   – P...
Users With a Direct          Financial Interest (cont’d)• Creditors   – Loan money to a business in order to make     mone...
Users With an Indirect              Financial Interest     … are external users of accounting                 information•...
Users With an Indirect           Financial Interest (cont’d)• Other groups   – Labor unions   – Those advising investors a...
Government and Not-for-Profit             Organizations• Include   –   Hospitals   –   Universities   –   Professional org...
Business Transactions   … are economic events that affect the    financial position of a business entity   – Involve an ex...
Money Measure• Recording of all business transactions  in terms of money• Money is the only factor common to all  business...
Separate Entity• A business is distinct from its   – Owner(s)   – Creditors   – Customers• Its financial records and repor...
Forms of Business Enterprises• Three basic forms of business  enterprises   – Sole proprietorship   – Partnership   – Corp...
Sole Proprietorships• Business owned by one person        – The owner                • Receives all profits or losses     ...
Partnerships• Business owned by more than one person        – The partners share all profits or losses according          ...
The Corporation as a               Separate Entity• Legally and economically separate from its  owners   – Business unit c...
Financial Position  The economic resources that belong              to a companyand the claims against those resources    ...
Developing the Accounting Equation      Economic Resources = Equities      Two types of equities         Creditor’s equiti...
Accounting Equation       Assets = Liabilities + Owner’s Equity      Two sides of equation are always in balance• Assets  ...
Owner’s Equity• Equals the residual interest in a company’s  assets after deducting all liabilities• Also called residual ...
Transactions That Affect Owner’s Equity• Owner’s investments        – Assets the owner puts into the business• Owner’s wit...
Illustrative Transactions for Shannon Realty            Effects of Transactions          on the Accounting EquationCopyrig...
Owner’s Investments1. Deposited $50,000 in a bank account in the name of   Shannon Realty                Assets           ...
Purchase of Assets with Cash 2. Purchased a lot for $10,000 and a small building on a lot    for $25,000                  ...
Purchase of Assets               by Incurring a Liability 3. Purchased office supplies for $500 on credit                 ...
Payment of a Liability 4. Paid $200 of the $500 owed for supplies                  Assets                           =   Li...
Revenues 5. Earned and received a commission of $1,500 in cash                  Assets                           =   Liab....
Revenues 6. Earned a commission of $2,000 to be received at a later    date                       Assets                  ...
Collection of Accounts Receivable 7. Received $1,000 from client for commission earned earlier    in the month            ...
Expenses 8. Paid $1,000 to rent equipment for office                        Assets                           =   Liab.    ...
Expenses 9. Paid $400 in wages to part-time helper                        Assets                           =   Liab.    + ...
Expenses 10. Recorded utilities expense of $500 incurred in December     but not yet paid                        Assets   ...
Owner’s Withdrawals 11. Withdrew $600 in cash from Shannon Realty and     deposited it in a personal account              ...
Communications Through Financial          Statements• Four Major Financial Statements   – Income Statement   – Statement o...
Income Statement• Summarizes revenues earned and  expenses incurred over a period of time• Dated “For the Month Ended …”• ...
Income Statement (cont’d)• Considered by many to be most important  financial statement• Also called the capital statement...
Income Statement                                 Date reflects                                                 revenues an...
Statement of Owner’s Equity• Shows changes in owner’s equity over  a period of time• Dated “For the Month Ended …”• Uses n...
Statement of Owner’s Equity                                                              Date reflects changes in John Sha...
Balance Sheet• Shows the financial position of a company on  a certain date• Dated as of a certain date• Also called the s...
Balance Sheet                                                            Date reflects account                            ...
Statement of Cash Flows• Shows cash flows into and out of a  business over a period of time• Dated “For the Month Ended …”...
Statement of Cash Flows                                                                    Date reflects                  ...
Generally Accepted Accounting          Principles (GAAP)• The conventions, rules, and procedures  necessary to define acco...
Financial Statements, GAAP, and the Independent CPA’s Report (Audit)    Financial Statements                              ...
Ethics  … is the code of conduct that applies to                everyday life• Addresses whether actions are right or wron...
Professional Ethics  … is the code of conduct that applies to         the practice of a profession• Accountants have a res...
Ethical Principles• Integrity   – Requires honesty, frankness, and placing service     and public trust before personal ga...
Institute of Management Accountants                 (IMA)• Code of Professional Conduct for  Management Accountants   – Em...
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Accounting & Finance

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Accounting & Finance

  1. 1. Chapter 1 Uses of Accounting Information and the Financial StatementsMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State University
  2. 2. Accounting … is an information system that measures processes communicates financial information about an identifiable, economic entityCopyright © Houghton MifflinCompany. All rights reserved. 1–2
  3. 3. Accounting …supplies the information decision makers need to make reasoned choices among alternative uses of scarce resources in the conduct of business and economic activitiesCopyright © Houghton MifflinCompany. All rights reserved. 1–3
  4. 4. Accounting …• Is a link between business activities and decision makers – Decision makers use accounting information to make informed decisions about available alternatives• Measures business activities by recording data about them for future use• Is communicated to decision makers through reportsCopyright © Houghton MifflinCompany. All rights reserved. 1–4
  5. 5. Accounting as an Information System Input Output Accounting SystemCopyright © Houghton MifflinCompany. All rights reserved. 1–5
  6. 6. Business Goals, Activities, and Performance Measures• Business – An economic unit that aims to sell goods and services to customers at prices that will provide an adequate return to its ownersCopyright © Houghton MifflinCompany. All rights reserved. 1–6
  7. 7. Business Goals• Profitability – The ability to earn enough income to attract and hold investment capital• Liquidity – Having enough cash available to pay debts when they are dueCopyright © Houghton MifflinCompany. All rights reserved. 1–7
  8. 8. Business Activities • Financing Activities • Investing Activities • Operating ActivitiesCopyright © Houghton MifflinCompany. All rights reserved. 1–8
  9. 9. Financing Activities• Activities associated with obtaining adequate funds, or capital, to begin and continue operations – Owner investments – Paying a return to owners – Obtaining loans from creditors – Repaying amounts to creditors, plus interestCopyright © Houghton MifflinCompany. All rights reserved. 1–9
  10. 10. Investing Activities• Activities associated with spending funds to begin and continue operations – Buying resources such as land, buildings, and equipment needed in the operation of the business – Selling these resources when no longer neededCopyright © Houghton MifflinCompany. All rights reserved. 1–10
  11. 11. Operating Activities• Activities associated with the course of running a business – Selling goods and services – Employing managers and workers – Buying goods and services – Paying taxesCopyright © Houghton MifflinCompany. All rights reserved. 1–11
  12. 12. Performance Measures• Indicators – Used to determine whether 1. Managers are achieving their business goals 2. Business activities are well managed• Include – Earned income – Cash flow – Ratio of expenses to revenue – Ratio of money owed to total resources controlledCopyright © Houghton MifflinCompany. All rights reserved. 1–12
  13. 13. Financial and Management Accounting• Accounting’s role is divided into two categories 1. Management accounting 2. Financial accounting• The functions of both categories overlap• Primary difference between the two is the principal users of the informationCopyright © Houghton MifflinCompany. All rights reserved. 1–13
  14. 14. Management Accounting• Focuses on internal decision makers – Managers and employees• Reporting format is flexible and based on the type of information needed, such as budgets and sales forecasts• Used to report past performance and expected future performanceCopyright © Houghton MifflinCompany. All rights reserved. 1–14
  15. 15. Financial Accounting• Focuses on external decision makers – Stockholders – Banks and other creditors – Government regulators• Financial information of company is reported in the financial statements – Used to report directly on goals of profitability and liquidityCopyright © Houghton MifflinCompany. All rights reserved. 1–15
  16. 16. Bookkeeping versus Accounting Bookkeeping Accounting – Repetitive, – Bookkeeping a small mechanical process part of accounting of recording financial – Includes design of an transactions and information system keeping financial to meet users’ needs records – Goals include the analysis, interpretation, and use of informationCopyright © Houghton MifflinCompany. All rights reserved. 1–16
  17. 17. Decision Makers … fall into three categories1. Those who manage a business – Finance – Investment – Operations and Production – Marketing – Human Resources – Information Systems – AccountingCopyright © Houghton MifflinCompany. All rights reserved. 1–17
  18. 18. Decision Makers (cont’d)2. Those with a Direct Financial Interest – Investors – Creditors3. Those with an Indirect Financial Interest – Tax Authorities – Regulatory Agencies – Labor Unions – Financial Advisors – Customers – Economic PlannersCopyright © Houghton MifflinCompany. All rights reserved. 1–18
  19. 19. Management• Managers are internal users of accounting information – Make key decisions using accounting information – Basic management functions require accounting information for decision making • Financing the business • Investing resources • Producing goods and services • Marketing goods and services • Managing employees • Providing information to decision makersCopyright © Houghton MifflinCompany. All rights reserved. 1–19
  20. 20. Users With a Direct Financial Interest … are external users of accounting information• Investors – Put money into a business in order to make money (by purchasing and selling stocks and receiving dividends) – Use financial statements to judge the prospects for profitable investmentsCopyright © Houghton MifflinCompany. All rights reserved. 1–20
  21. 21. Users With a Direct Financial Interest (cont’d)• Creditors – Loan money to a business in order to make money (by charging interest) – Use financial statements to judge whether a company will have enough cash to • Pay interest charges • Repay debt at appropriate timeCopyright © Houghton MifflinCompany. All rights reserved. 1–21
  22. 22. Users With an Indirect Financial Interest … are external users of accounting information• Tax authorities – Use accounting information to determine amount of tax due – Procedures for tax reporting mandated by law• Government regulatory agencies – Federal, state, and local levels – Securities and Exchange Commission (SEC) • Regulates the issuing, buying, and selling of stocks inCopyright © U.S. the Houghton MifflinCompany. All rights reserved. 1–22
  23. 23. Users With an Indirect Financial Interest (cont’d)• Other groups – Labor unions – Those advising investors and creditors • Financial analysts and advisors • Brokers • Underwriters • Lawyers • Financial press – Consumer groups – Customers – General public – Economic plannersCopyright © Houghton MifflinCompany. All rights reserved. 1–23
  24. 24. Government and Not-for-Profit Organizations• Include – Hospitals – Universities – Professional organizations – Charities• Have the same categories of decision makers as profit-oriented organizations – Managers – Those with a direct financial interest – Those with an indirect financial interestCopyright © Houghton MifflinCompany. All rights reserved. 1–24
  25. 25. Business Transactions … are economic events that affect the financial position of a business entity – Involve an exchange of value • Purchase • Sale • Payment • Collection – Events that have the same effect as an exchange of value • Loss from fire, flood, theft • Physical wear and tear on equipment • Accumulation of interestCopyright © Houghton MifflinCompany. All rights reserved. 1–25
  26. 26. Money Measure• Recording of all business transactions in terms of money• Money is the only factor common to all business transactions• Basic unit of money determined by the country in which business resides• Exchange rates are used to translate transactions from one currency to anotherCopyright © Houghton MifflinCompany. All rights reserved. 1–26
  27. 27. Separate Entity• A business is distinct from its – Owner(s) – Creditors – Customers• Its financial records and reports should refer only to its own financial affairsCopyright © Houghton MifflinCompany. All rights reserved. 1–27
  28. 28. Forms of Business Enterprises• Three basic forms of business enterprises – Sole proprietorship – Partnership – CorporationCopyright © Houghton MifflinCompany. All rights reserved. 1–28
  29. 29. Sole Proprietorships• Business owned by one person – The owner • Receives all profits or losses • Is liable for all obligations of the business• Not incorporated• Life of business ends when the owner – Decides to stop operating business – Dies – Is incapacitatedCopyright © Houghton Mifflin Company. All rights reserved. 1–29
  30. 30. Partnerships• Business owned by more than one person – The partners share all profits or losses according to an agreed upon formula – At least one partner is liable for all obligations of the business• Not incorporated• Life of business ends when – Ownership changes • A partner leaves the business or dies • A new partner is admittedCopyright © Houghton Mifflin Company. All rights reserved. 1–30
  31. 31. The Corporation as a Separate Entity• Legally and economically separate from its owners – Business unit chartered by the state and legally separate from owners (incorporated) – Owners (stockholders) do not directly control operations – Elected board of directors run the corporation – Owners’ risk of loss limited to amount paid for shares of stock – owners are not liable for the obligations of the businessCopyright © Houghton MifflinCompany. All rights reserved. 1–31
  32. 32. Financial Position The economic resources that belong to a companyand the claims against those resources at a point in time Economic Resources = EquitiesCopyright © Houghton MifflinCompany. All rights reserved. 1–32
  33. 33. Developing the Accounting Equation Economic Resources = Equities Two types of equities Creditor’s equities and owners equities, therefore, Assets Liabilities Economic Resources = Creditor’s Equities + Owner’s Equities In accounting terminology Economic resources are called assets Creditor’s equities are called liabilitiesCopyright © Houghton MifflinCompany. All rights reserved. 1–33
  34. 34. Accounting Equation Assets = Liabilities + Owner’s Equity Two sides of equation are always in balance• Assets – Economic resources owned by a company that are expected to benefit future operations• Liabilities – Obligations of a business to pay cash, transfer assets, or provide services to other entities in the future – Represent claims of creditors to the assets of the business• Owner’s Equity – Represents the claims by owners to the assets of the businessCopyright © Houghton MifflinCompany. All rights reserved. 1–34
  35. 35. Owner’s Equity• Equals the residual interest in a company’s assets after deducting all liabilities• Also called residual equity or net assets• Defined by rearranging the accounting equation Assets = Liabilities + Owner’s Equity Owner’s Equity = Assets – LiabilitiesCopyright © Houghton MifflinCompany. All rights reserved. 1–35
  36. 36. Transactions That Affect Owner’s Equity• Owner’s investments – Assets the owner puts into the business• Owner’s withdrawals – Assets the owner takes out of the business• Revenues – Increases in owner’s equity that result from operating a business• Expenses – Decreases in owner’s equity that result from operating a businessCopyright © Houghton Mifflin Company. All rights reserved. 1–36
  37. 37. Illustrative Transactions for Shannon Realty Effects of Transactions on the Accounting EquationCopyright © Houghton MifflinCompany. All rights reserved. 1–37
  38. 38. Owner’s Investments1. Deposited $50,000 in a bank account in the name of Shannon Realty Assets = Liab. + Owner’s Equity John Shannon, Cash Capital1.+$50,000 +$50,000 A = $50,000 L + OE = $50,000 Notice that the accounting equation Assets = Liabilities + Owners Equity, or A = L + OE, is always in balanceCopyright © Houghton MifflinCompany. All rights reserved. 1–38
  39. 39. Purchase of Assets with Cash 2. Purchased a lot for $10,000 and a small building on a lot for $25,000 Assets = Liab. + Owner’s Equity John Shannon, Cash Land Building Capital 1. $50,000 $50,000 2. -35,000 + $10,000 +$25,000bal. $15,000 $10,000 $25,000 $50,000 A = $50,000 L + OE = $50,000 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 unchangedCopyright © Houghton MifflinCompany. All rights reserved. 1–39
  40. 40. Purchase of Assets by Incurring a Liability 3. Purchased office supplies for $500 on credit Assets = Liab. + Owner’s Equity John Shannon, Cash Supplies Land Building A/P Capital 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. +$500 +$500bal. $15,000 $500 $10,000 $25,000 $500 $50,000 A = $50,500 L + OE = $50,500Copyright © Houghton MifflinCompany. All rights reserved. 1–40
  41. 41. Payment of a Liability 4. Paid $200 of the $500 owed for supplies Assets = Liab. + Owner’s Equity John Shannon, Cash Supplies Land Building A/P Capital 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200bal. $14,800 $500 $10,000 $25,000 $300 $50,000 A = $50,300 L + OE = $50,300Copyright © Houghton MifflinCompany. All rights reserved. 1–41
  42. 42. Revenues 5. Earned and received a commission of $1,500 in cash Assets = Liab. + Owner’s Equity John Shannon, Cash Supplies Land Building A/P Capital 1. $50,000 $50,000 2. -35,000 $10,000 $25,000 3. $500 $500 4. -200 -200 5. +1,500 +1,500bal. $16,300 $500 $10,000 $25,000 $300 $51,500 A = $51,800 L + OE = $51,800Copyright © Houghton MifflinCompany. All rights reserved. 1–42
  43. 43. Revenues 6. Earned a commission of $2,000 to be received at a later date Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 +2,000bal. $16,300 $2,000 $500 $10,000 $25,000 $300 $53,500 A = $53,800 L + OE = $53,800Copyright © Houghton MifflinCompany. All rights reserved. 1–43
  44. 44. Collection of Accounts Receivable 7. Received $1,000 from client for commission earned earlier in the month Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 -1,000bal. $17,300 $1,000 $500 $10,000 $25,000 $300 $53,500 A = $53,800 L + OE = $53,800Copyright © Houghton MifflinCompany. All rights reserved. 1–44
  45. 45. Expenses 8. Paid $1,000 to rent equipment for office Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 -1,000bal. $16,300 $1,000 $500 $10,000 $25,000 $300 $52,500 A = $52,800 L + OE = $52,800Copyright © Houghton MifflinCompany. All rights reserved. 1–45
  46. 46. Expenses 9. Paid $400 in wages to part-time helper Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 -400bal. $15,900 $1,000 $500 $10,000 $25,000 $300 $52,100 A = $52,400 L + OE = $52,400Copyright © Houghton MifflinCompany. All rights reserved. 1–46
  47. 47. Expenses 10. Recorded utilities expense of $500 incurred in December but not yet paid Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 -40010. +300 -300bal. $15,900 $1,000 $500 $10,000 $25,000 $600 $51,800 A = $52,400 L + OE = $52,400Copyright © Houghton MifflinCompany. All rights reserved. 1–47
  48. 48. Owner’s Withdrawals 11. Withdrew $600 in cash from Shannon Realty and deposited it in a personal account Assets = Liab. + Owner’s Equity John Shannon, Cash A/R Supplies Land Building A/P Capital 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 -40010. 300 -30011. -600 -600bal. $15,300 $1,000 $500 $10,000 $25,000 $600 $51,200 A = $51,800 L + OE = $51,800 Copyright © Houghton Mifflin Company. All rights reserved. 1–48
  49. 49. Communications Through Financial Statements• Four Major Financial Statements – Income Statement – Statement of Owner’s Equity – Balance Sheet – Statement of Cash FlowsCopyright © Houghton MifflinCompany. All rights reserved. 1–49
  50. 50. Income Statement• Summarizes revenues earned and expenses incurred over a period of time• Dated “For the Month Ended …”• Purpose to measure a company’s performance over a period of time• Shows whether or not a company achieved its profitability goalCopyright © Houghton MifflinCompany. All rights reserved. 1–50
  51. 51. Income Statement (cont’d)• Considered by many to be most important financial statement• Also called the capital statement• First financial statement to be prepared in a sequence• Net income figure used to prepare statement of owner’s equityCopyright © Houghton MifflinCompany. All rights reserved. 1–51
  52. 52. Income Statement Date reflects revenues and expenses incurred over a period of time Shannon Realty Income Statement For the Month Ended December 31, 20xx Revenues Commissions earned $3,500 Expenses Equipment rental expense $1,000 Wages expense 400 Utilities expense 300 Total expenses 1,700 Net income $1,800 Net income figure used to prepare Copyright © Houghton Mifflin statement of owner’s equity Company. All rights reserved. 1–52
  53. 53. Statement of Owner’s Equity• Shows changes in owner’s equity over a period of time• Dated “For the Month Ended …”• Uses net income figure from income statement• End of period balance in Capital account used to prepare balance sheetCopyright © Houghton MifflinCompany. All rights reserved. 1–53
  54. 54. Statement of Owner’s Equity Date reflects changes in John Shannon, Capital, over a period of time Shannon Realty Statement of Owner’s Equity For the Month Ended December 31, 20xx John Shannon, Capital, December 1, 20xx $ 0 Add: Investments by John Shannon $50,000 Net income for the month 1,800 51,800 Subtotal 51,800 Less: Withdrawals by John Shannon 600 John Shannon, Capital, December 31, 20xx $51,200 Ending balance of John Shannon, Capital, used to Net income figure from prepare the balance sheet income statement Copyright © Houghton Mifflin Company. All rights reserved. 1–54
  55. 55. Balance Sheet• Shows the financial position of a company on a certain date• Dated as of a certain date• Also called the statement of financial position• Presents view of business as holder of assets that are equal to the claims against those assets• Claims consist of liabilities and owner’s equityCopyright © Houghton MifflinCompany. All rights reserved. 1–55
  56. 56. Balance Sheet Date reflects account balances as of a certain date Shannon Realty Balance Sheet December 31, 20xx Assets Liabilities Cash $15,300 Accounts payable $ 600 Accounts receivable 1,000 Supplies 500 Owner’s Equity Land 10,000 Building 25,000 John Shannon, Capital 51,200 Total liabilities Total assets $51,800 and owner’s equity $51,800 Balance in Cash account used in John Shannon, Capital, from statement of cash statement of owner’s equity Copyright © Houghton flows Mifflin Company. All rights reserved. 1–56
  57. 57. Statement of Cash Flows• Shows cash flows into and out of a business over a period of time• Dated “For the Month Ended …”• Focuses on whether the business met its liquidity goal• Explains how the Cash account changed during the periodCopyright © Houghton MifflinCompany. All rights reserved. 1–57
  58. 58. Statement of Cash Flows Date reflects Shannon Realty cash flows over Statement of Cash Flows a period of For the Month Ended December 31, 20xx time Cash flows from operating activities Net income $ 1,800 Adjustments to reconcile net income to net cash flows from operating activities Increase in accounts receivable ($1,000) Begins Increase in supplies (500) with net Increase in accounts payable 600 (900) income Net cash flows from operating activities $ 900 from Cash flows from investing activities Purchase of land ($10,000) income Purchase of building (25,000) statement Net cash flows from investing activities (35,000) Cash flows from financing activities Investments by John Shannon $50,000 Withdrawals by John Shannon (600) Net cash flows from financing activities 49,400 Net increase (decrease) in cash $15,300 Cash at beginning of month 0 Cash at end of month Cash at end of month $15,300 same as Cash account balance on balance sheet Copyright © Houghton Mifflin Company. All rights reserved. 1–58
  59. 59. Generally Accepted Accounting Principles (GAAP)• The conventions, rules, and procedures necessary to define accounting practice at a particular time• Developed to provide guidelines for financial accounting• Are altered as better methods evolve or circumstances changeCopyright © Houghton MifflinCompany. All rights reserved. 1–59
  60. 60. Financial Statements, GAAP, and the Independent CPA’s Report (Audit) Financial Statements Audit• Summary of financial affairs of a • Examination of a companys business financial statements• Prepared by management of • Prepared by independent company certified public accountant (CPA)• Management has an interest in • CPA should have no company performance; not compromising ties with independent company• Should be prepared in • Ascertains that financial accordance with GAAP statements prepared in accordance with GAAP • Implies that investors and creditors can rely on financialCopyright © Houghton Mifflin statementsCompany. All rights reserved. 1–60
  61. 61. Ethics … is the code of conduct that applies to everyday life• Addresses whether actions are right or wrong• Ethical actions are the product of individual decisions• Certain actions may be unethical but not illegalCopyright © Houghton MifflinCompany. All rights reserved. 1–61
  62. 62. Professional Ethics … is the code of conduct that applies to the practice of a profession• Accountants have a responsibility to their employers, clients, and society to uphold highest ethical standards• AICPA and each state have adopted codes of professional conduct for certified public accountantsCopyright © Houghton MifflinCompany. All rights reserved. 1–62
  63. 63. Ethical Principles• Integrity – Requires honesty, frankness, and placing service and public trust before personal gain• Objectivity – Requires impartiality and intellectual honesty• Independence – Requires that an accountant avoid all relationships that impair, or appear to impair, his or her objectivityCopyright © Houghton MifflinCompany. All rights reserved. 1–63
  64. 64. Institute of Management Accountants (IMA)• Code of Professional Conduct for Management Accountants – Emphasizes: • Competence • Confidentiality • Integrity • Independence • ObjectivityCopyright © Houghton MifflinCompany. All rights reserved. 1–64

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