Introduction accounting, 21st edition warren reeve fess

1. ChapterChapter 11
Introduction to AccountingIntroduction to Accounting
and Businessand Business
Accounting, 21st
Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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3. 1. Describe the nature of a business.
2. Describe the role of accounting in business.
3. Describe the importance of business ethics and the
basic principles of proper ethical conduct.
4. Describe the profession of accounting.
5. Summarize the development of accounting
principles and relate them to practice.
6. State the accounting equation and define each
element of the equation.
ObjectivesObjectivesObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:

4. 7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
ObjectivesObjectivesObjectivesObjectives
8. Describe the financial statements of a
proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to
analyze the ability of a business to withstand
poor business conditions.

5. Manufacturing BusinessManufacturing BusinessManufacturing BusinessManufacturing Business
ProductProductProductProduct
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television
Types of Businesses

6. Merchandising BusinessMerchandising BusinessMerchandising BusinessMerchandising Business
ProductProductProductProduct
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video
retailer
Types of Businesses

7. Service BusinessService BusinessService BusinessService Business
ProductProductProductProduct
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication
Types of Businesses

8. There are three types of
business organizations
There are three types of
business organizations
 Proprietorship
 Partnership
 Corporation

9. A proprietorship
is owned by one
individual.
A proprietorship
is owned by one
individual.
Advantages
• Ease in organizing
• Low cost of
organizing
Disadvantage
• Limited source of
financial resources
• Unlimited liability
Joe’s

10. A partnership is
owned by two or
more individuals.
A partnership is
owned by two or
more individuals.
Advantages
• More financial
resources than a
proprietorship.
• Additional
management skills.
Disadvantage
• Unlimited liability.
Joe and Marty’s

11. A corporation is
organized under state
or federal statutes as a
separate legal entity.
A corporation is
organized under state
or federal statutes as a
separate legal entity.
Advantage
• The ability to obtain
large amounts of
resources by issuing
stocks.
Disadvantage
• Double taxation.
J & M, Inc.

12. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.

13. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Wal-Mart
Southwest Airlines

14. Business StrategiesBusiness StrategiesBusiness StrategiesBusiness Strategies
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger

15. Value Chain of a BusinessValue Chain of a BusinessValue Chain of a BusinessValue Chain of a Business
A value chain is the way a
business adds value for its
customers by processing inputs
into product or service.
InputsInputs
BusinessBusiness
ProcessesProcesses
Products orProducts or
ServicesServices
CustomerCustomer
ValueValue

16. A business stakeholder is a person or
entity having an interest in the
economic performance of the business.
Business StakeholdersBusiness StakeholdersBusiness StakeholdersBusiness Stakeholders

17. 2
Assess
stakeholders’
informational
needs.
The Process ofThe Process of
Providing InformationProviding Information
The Process ofThe Process of
Providing InformationProviding Information
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
1
Identify
stake-
holders.

18. Accounting
Information
System
Design the
accounting
information
system to meet
stakeholders’
needs.
34
Record
economic
data about
business
activities
and events.
The Process ofThe Process of
Providing InformationProviding Information
The Process ofThe Process of
Providing InformationProviding Information

19. 5
Prepare
accounting
reports for
stakeholders.
STAKEHOLDERS
Internal:
Owners,
managers,
employees
External:
Customers,
creditors,
government
Accounting
Information
System
The Process ofThe Process of
Providing InformationProviding Information
The Process ofThe Process of
Providing InformationProviding Information

20. Business EthicsBusiness EthicsBusiness EthicsBusiness Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holding
to an ethical position.
Sound
Principles that
form the
foundation for
ethical
behavior
Sound
Principles that
form the
foundation for
ethical
behavior

21. Profession of AccountingProfession of AccountingProfession of AccountingProfession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants employed by a business firm or
a not-for-profit organization are said to be
engaged in private accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.
Accountants and their staff who provide
services on a fee basis are said to be
employed in public accounting.

22. Generally AcceptedGenerally Accepted
AccountingAccounting
Principles (GAAP)Principles (GAAP)
Generally AcceptedGenerally Accepted
AccountingAccounting
Principles (GAAP)Principles (GAAP)

23. TheThe business entity conceptbusiness entity concept
limits the economic data inlimits the economic data in
the accounting system tothe accounting system to
data related directly to thedata related directly to the
activities of the business.activities of the business.
TheThe business entity conceptbusiness entity concept
limits the economic data inlimits the economic data in
the accounting system tothe accounting system to
data related directly to thedata related directly to the
activities of the business.activities of the business.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.
The cost concept is the
basis for entering the
exchange price, or cost
of an acquisition in the
accounting records.

24. TheThe objectivity conceptobjectivity concept
requires that the accountingrequires that the accounting
records and reports be basedrecords and reports be based
upon objective evidence.upon objective evidence.
TheThe objectivity conceptobjectivity concept
requires that the accountingrequires that the accounting
records and reports be basedrecords and reports be based
upon objective evidence.upon objective evidence.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.
The unit-of-measure
concept requires that
economic data be
recorded in dollars.

25. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The resourcesThe resources
owned by aowned by a
businessbusiness
The resourcesThe resources
owned by aowned by a
businessbusiness

26. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of theThe rights of the
creditors, whichcreditors, which
represent debtsrepresent debts
of the businessof the business
The rights of theThe rights of the
creditors, whichcreditors, which
represent debtsrepresent debts
of the businessof the business

27. The Accounting EquationThe Accounting EquationThe Accounting EquationThe Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of theThe rights of the
ownersowners
The rights of theThe rights of the
ownersowners

28. What is a business
transaction?
A business transaction is an economic event or
condition that directly changes an entity’s financial
condition or directly affects its results of operations.

29. On November 1,
2005, Chris
Clark begins a
business that will
be known as
NetSolutions.

30. a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.account in the name of NetSolutions.
a. Chris Clark deposits $25,000 in a banka. Chris Clark deposits $25,000 in a bank
account in the name of NetSolutions.account in the name of NetSolutions.
Chris Clark, Capital
25,000 Investment
by Chris
Clark
Cash
25,000a.
Assets Owner’s Equity=
=

31. b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.b. NetSolutions exchanged $20,000 for land.
Chris Clark, Capital
25,000
Cash + Land
25,000Bal.
Assets Owner’s Equity=
=
b. –20,000 +20,000
Bal. 5,000 20,000 25,000

32. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the
supplier in the near future (supplier in the near future (on accounton account).).
c. During the month, NetSolutions purchasedc. During the month, NetSolutions purchased
supplies for $1,350 and agreed to pay thesupplies for $1,350 and agreed to pay the
supplier in the near future (supplier in the near future (on accounton account).).
Owner’s
Liabilities + Equity=
Bal. 5,000 20,000 25,000
c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=

33. d. NetSolutions provided services tod. NetSolutions provided services to
customers, earning fees of $7,500 andcustomers, earning fees of $7,500 and
received the amount in cash.received the amount in cash.
d. NetSolutions provided services tod. NetSolutions provided services to
customers, earning fees of $7,500 andcustomers, earning fees of $7,500 and
received the amount in cash.received the amount in cash.
Bal. 12,500 1,350 20,000 1,350 32,500
d. + 7,500 + 7,500
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
Owner’s
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000
Fees
earned
=
=

34. e. – 3,650 –2,125
– 800
– 450
– 275
Wages
Rent
Util.
Misc.
Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
e. NetSolutions paid the followinge. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
e. NetSolutions paid the followinge. NetSolutions paid the following
expenses: wages, $2,125; rent, $800;expenses: wages, $2,125; rent, $800;
utilities, $450; and miscellaneous, $275.utilities, $450; and miscellaneous, $275.
Owner’s
Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850

35. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
f. NetSolutions paid $950 tof. NetSolutions paid $950 to
creditors during the month.creditors during the month.
f. NetSolutions paid $950 tof. NetSolutions paid $950 to
creditors during the month.creditors during the month.
Owner’s
Liabilities + Equity=
Bal. 8,850 1,350 20,000 1,350 28,850
f. – 950 – 950
=
Bal. 7,900 1,350 20,000 400 28,850

36. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
g. At the end of the month, the costg. At the end of the month, the cost
of supplies on hand is $550, soof supplies on hand is $550, so
$800 of supplies were used.$800 of supplies were used.
g. At the end of the month, the costg. At the end of the month, the cost
of supplies on hand is $550, soof supplies on hand is $550, so
$800 of supplies were used.$800 of supplies were used.
Owner’s
Liabilities + Equity=
Bal. 7,900 1,350 20,000 400 28,850
g. – 800 – 800
=
Bal. 7,900 550 20,000 400 28,050
Supplies
expense

37. Accounts Chris Clark,
Cash + Supplies + Land Payable Capital
Assets
h. At the end of the month, Chrish. At the end of the month, Chris
withdrew $2,000 in cash from thewithdrew $2,000 in cash from the
business for personal use.business for personal use.
h. At the end of the month, Chrish. At the end of the month, Chris
withdrew $2,000 in cash from thewithdrew $2,000 in cash from the
business for personal use.business for personal use.
Owner’s
Liabilities + Equity
Bal. 7,900 550 20,000 400 28,050
h. –2,000 –2,000
Bal. 5,900 550 20,000 400 26,050
With-
drawal
=
=

38. Owner’s
withdrawals
Expenses
Decreased byDecreased by
Owner’s Equity
Effects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s EquityEffects of Transactions on Owner’s Equity
Increased byIncreased by
Owner’s
investments
Revenues
Net
income

39. Accounting reports, called
financial statements,
provide summarized
information to the owner.
Accounting reports, called
financial statements,
provide summarized
information to the owner.

40. Financial StatementsFinancial StatementsFinancial StatementsFinancial Statements
• Income statement—A summary of the revenue
and expenses for a specific period of time.
• Statement of owner’s equity—A summary of
the changes in the owner’s equity that have
occurred during a specific period of time.
• Balance sheet—A list of the assets, liabilities,
and owner’s equity as of a specific date.
• Statement of cash flows—A summary of the
cash receipts and disbursements for a specific
period of time.

41. Fees earned $7 500 00
Operating expenses:
Rent expense
$2 125 00Wages expense
800 00
Supplies expense
450 00Utilities expense
275 00Miscellaneous expense
Total operating expenses 1 135 00
NetSolutions
Income Statement
For the Month Ended November 30, 2005
800 00
Net income $3 050 00To the statementTo the statement
of owner’s equityof owner’s equity
To the statementTo the statement
of owner’s equityof owner’s equity

42. Chris Clark, capital, November 1, 2005 $ 0
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Investment on November 1 $25 000 00
Net income for November 3 050 00
$28 050 00
Less withdrawals 2 000 00
Increase in owner’s equity 26 050 00
Chris Clark, capital, November 30, 2005 $26 050 00
From the incomeFrom the income
statementstatement
From the incomeFrom the income
statementstatement
To theTo the
balance sheetbalance sheet
To theTo the
balance sheetbalance sheet

43. Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owner’s Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owner’s equity $26 450 00
From theFrom the
statement ofstatement of
owner’s equityowner’s equity
From theFrom the
statement ofstatement of
owner’s equityowner’s equity
This balance sheet presented
using the account form

44. When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form
is being used.
When the balance sheet displays
the liabilities and owner’s equity
below the assets, the report form
is being used.

45. Cash flows from operating activities:
Cash received from customers $ 7 500 00
Deduct cash payments for expenses
and payments to creditors 4 600 00
Net cash flow from operating activities 2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land (20 000 00
Cash flows from financing activities:
Cash received as owner’s investment $25 000 00
Deduct cash withdrawal by owner 2 000 00
Net cash flow from financing activities 23 000 00
Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should matchShould match CashCash on the balance sheeton the balance sheetShould matchShould match CashCash on the balance sheeton the balance sheet
)

46. Statement of Cash FlowsStatement of Cash FlowsStatement of Cash FlowsStatement of Cash Flows
Cash Flows from Operating Activities—This section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing Activities—This section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing Activities—This section
reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.

47. Ratio of liabilities
to owner’s equity
=
Total Liabilities
Total owner’s equity (or total
stockholders’ equity)
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
The ratio of liabilities to owner’s equity
allows owners like Chris Clark to analyze
the firm’s ability to withstand poor
business conditions.
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation

48. Ratio of
liabilities to
owner’s equity
=
$400
$26,050
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation
= 0.015
Ratio of
liabilities to
owner’s equity

49. The EndThe End
Chapter 1Chapter 1