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- 1. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-1 Financial Accounting John Wild 3rd Edition Information for Decisions
- 2. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-2 Chapter 1 Accounting in Business
- 3. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-3 Identifies Records Communicates Relevant Reliable Comparable Importance of Accounting Accounting is a system that information that is to help users make better decisions.
- 4. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-4 Identifying Business Activities Recording Business Activities Communicating Business Activities Accounting Activities
- 5. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-5 Users of Accounting Information External Users •Lenders •Shareholders •Governments •Consumer Groups •External Auditors •Customers Internal Users •Managers •Officers •Internal Auditors •Sales Staff •Budget Officers •Controllers
- 6. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-6 Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers.
- 7. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-7 Opportunities in Accounting Financial •Preparation •Analysis •Auditing •Regulatory •Consulting •Planning •Criminal investigation Managerial •General accounting •Cost accounting •Budgeting •Internal auditing •Consulting •Controller •Treasurer •Strategy Taxation •Preparation •Planning •Regulatory •Investigations •Consulting •Enforcement •Legal services •Estate planning Accounting- related •Lenders •Consultants •Analysts •Traders •Directors •Underwriters •Planners •Appraisers •FBI investigators •Market researchers •Systems designers •Merger services •Business valuation •Human services •Litigation support •Entrepreneurs
- 8. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-8 Accounting Jobs by Area Private accounting 60% Public accounting 25% Government, not-for-profit, & education 15%
- 9. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-9 Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics Ethics—A Key Concept
- 10. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-10 Identify ethical concerns Analyze options Make ethical decision Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences. Guidelines for Ethical Decisions
- 11. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-11 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Generally Accepted Accounting Principles Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations.
- 12. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-12 The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles.
- 13. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-13 Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence.
- 14. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-14 Principles of Accounting Revenue Recognition Principle 1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner.
- 15. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-15 Business Entity Forms Sole Proprietorship Partnership Corporation
- 16. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-16 * Proprietorships and partnerships that are set up as LLC’s provide limited liability. Characteristics of Businesses Characteristic Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no no yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes * *
- 17. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-17 Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation
- 18. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-18 Assets Liabilities & Equity Accounting Equation Liabilities Equity Assets = +
- 19. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-19 Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets
- 20. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-20 Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors’ claims on assets Liabilities
- 21. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-21 Owner’s claim on assets Dividends Contributed Capital Retained Earnings Equity
- 22. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-22 Liabilities Equity Assets = + Expanded Accounting Equation Revenues Expenses Common Stock Dividends _ + _ Retained Earnings
- 23. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-23 The accounting equation must remain in balance after each transaction. Liabilities Equity Assets = + Transaction Analysis Equation
- 24. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-24 The accounts involved are: (1) Cash (asset) (2) Common Stock (equity) J. Scott invests $20,000 cash to start the business. Transaction Analysis
- 25. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-25 Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000 $ 20,000 $ 20,000 $ - $ - $ - $ - $ 20,000 $ 20,000 $ = 20,000 $ J. Scott invests $20,000 cash to start the business.
- 26. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-26 The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.
- 27. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-27 Transaction Analysis Purchased supplies paying $1,000 cash. Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000 $ 20,000 $ (2) (1,000) 1,000 $ 19,000 $ 1,000 $ - $ - $ - $ 20,000 $ 20,000 $ = 20,000 $
- 28. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-28 The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.
- 29. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-29 Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000 $ 20,000 $ (2) (1,000) 1,000 $ (3) (15,000) 15,000 $ 4,000 $ 1,000 $ 15,000 $ - $ - $ 20,000 $ 20,000 $ = 20,000 $ Purchased equipment for $15,000 cash.
- 30. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-30 The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.
- 31. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-31 Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000 $ 20,000 $ (2) (1,000) 1,000 $ (3) (15,000) 15,000 $ (4) 200 1,000 1,200 $ 4,000 $ 1,200 $ 16,000 $ 1,200 $ - $ 20,000 $ 21,200 $ = 21,200 $ Purchased Supplies of $200 and Equipment of $1,000 on account.
- 32. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-32 The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Transaction Analysis Borrowed $4,000 from 1st American Bank.
- 33. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-33 Transaction Analysis Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock (1) 20,000 $ 20,000 $ (2) (1,000) 1,000 $ (3) (15,000) 15,000 $ (4) 200 1,000 1,200 $ (5) 4,000 4,000 $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 25,200 $ = 25,200 $ Borrowed $4,000 from 1st American Bank.
- 34. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-34 Assets = Liabilities + Equity Cash Supplies Equipment Accounts Payable Notes Payable Common Stock Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 25,200 $ = 25,200 $ Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and dividends.
- 35. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-35 The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Provided consulting services receiving $3,000 cash.
- 36. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-36 Assets = Liabilities + Cash Supplies Equipment Accounts Payable Notes Payable Common Stock Revenue Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (6) 3,000 3,000 $ 11,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $ 28,200 $ = 28,200 $ Equity Transaction Analysis Provided consulting services receiving $3,000 cash.
- 37. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-37 The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction Analysis Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity.
- 38. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-38 Transaction Analysis Assets = Liabilities + Cash Supplies Equipment Accounts Payable Notes Payable Common Stock Revenue Expenses Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (6) 3,000 3,000 $ (7) (800) (800) $ 10,200 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ 3,000 $ (800) $ 27,400 $ = 27,400 $ Equity Remember that expenses decrease equity. Paid salaries of $800 to employees.
- 39. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-39 The accounts involved are: (1) Cash (asset) (2) Dividends (equity) Transaction Analysis Dividends of $500 are paid to shareholders. Remember that the Dividend account actually increases. But, equity decreases because dividends reduce equity.
- 40. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-40 Transaction Analysis Assets = Liabilities + Cash Supplies Equipment Accounts Payable Notes Payable Common Stock Dividends Revenue Expenses Bal. 8,000 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (6) 3,000 3,000 $ (7) (800) (800) $ (8) (500) (500) $ 9,700 $ 1,200 $ 16,000 $ 1,200 $ 4,000 $ 20,000 $ (500) $ 3,000 $ (800) $ 26,900 $ = 26,900 $ Equity Remember that withdrawals decrease equity. Dividends of $500 are paid to shareholders.
- 41. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-41 Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1. Income Statement 2. Statement of Retained Earnings 3. Balance Sheet 4. Statement of Cash Flows
- 42. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-42 Net income is the difference between Revenues and Expenses. Revenues: Consulting revenue 3,000 $ Expenses: Salaries expense 800 Net income 2,200 $ Scott Company Income Statement For Month Ended December 31, 2004 The income statement describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Income Statement
- 43. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-43 The net income of $2,200 increases Retained Earnings by $2,200. Retained Earnings, Dec. 1, 2004 - $ Plus: Net income 2,200 Less: Dividends 500 Retained Earnings, Dec. 31, 2004 1,700 $ Scott Company Statement of Retained Earnings For Month Ended December 31, 2004 Revenues: Consulting revenue 3,000 $ Expenses: Salaries expense 800 Net income 2,200 $ Scott Company Income Statement For Month Ended December 31, 2004 Statement of Retained Earnings
- 44. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-44 Cash 9,700 $ Accounts payable 1,200 $ Supplies 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200 Common stock 20,000 Retained earnings 1,700 Total assets 26,900 $ Total liabilities and equity 26,900 $ Assets Liabilities & Equity Scott Company Balance Sheet December 31, 2004 The Balance Sheet describes a company’s financial position at a point in time. Balance Sheet Retained Earnings, Dec. 1, 2004 - $ Plus: Net income 2,200 Less: Dividends 500 Retained Earnings, Dec. 31, 2004 1,700 $ Scott Company Statement of Retained Earnings For Month Ended December 31, 2004
- 45. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-45 Cash flows from operating activities: Cash received from clients 3,000 $ Purchase of supplies (1,000) Cash paid to employees (800) Net cash provided by operating activities 1,200 $ Cash flows from investing activities: Purchase of equipment (15,000) Net cash used in investing activities (15,000) Cash flows from financing activities: Investment by owner 20,000 Borrowed at bank 4,000 Withdrawal by owner (500) Net cash provided by financing activities 23,500 Net increase in cash 9,700 $ Cash balance, December 1, 2004 - Cash balance, December 31, 2004 9,700 $ Statement of Cash Flows For Month Ended December 31, 2004 Scott Company Statement of Cash Flows
- 46. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-46 ROA is viewed as an indicator of operating efficiency. Return on Assets (ROA) Net income Average total assets Return on assets =
- 47. McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 1-47 End of Chapter 1