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- 1. 1-1 Prepared by Coby Harmon University of California, Santa Barbara Westmont College Copyright ©2015 Pearson Education Inc. All rights reserved.
- 2. 1-2 3 1. Explain why accounting is the language of business Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.
- 3. 1-3 LO 1 EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS Accounting is an information system Measures business activities Processes data into reports Communicates results to decision makers Is “the language of business” Copyright ©2015 Pearson Education Inc. All rights reserved.
- 4. 1-4 LO 1 Exhibit 1-1 | The Flow of Accounting Information Companies report their results EXPLAIN WHY ACCOUNTING IS THE LANGUAGE OF BUSINESS People make decisions Business transactions occur Copyright ©2015 Pearson Education Inc. All rights reserved.
- 5. 1-5 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Manage personal bank accounts Decide whether to rent or buy Budget monthly income and expenditures Copyright ©2015 Pearson Education Inc. All rights reserved.
- 6. 1-6 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Investors want to know how much they can earn on an investment Creditors want to know when they are going to be paid Copyright ©2015 Pearson Education Inc. All rights reserved.
- 7. 1-7 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations Internal Revenue Service (IRS) requires businesses, individuals, and other organizations to pay taxes U.S. Securities and Exchange Commission (SEC) requires public companies to provide financial reports Copyright ©2015 Pearson Education Inc. All rights reserved.
- 8. 1-8 LO 1 Who Uses Accounting Information? Individuals Investors and Creditors Regulatory Bodies Nonprofit Organizations File periodic reports with the IRS and state governments Copyright ©2015 Pearson Education Inc. All rights reserved.
- 9. 1-9 LO 1 Financial Accounting Managerial Accounting For decision makers outside the entity investors creditors government agencies the public Information for managers budgets forecasts projections Two Kinds of Accounting Copyright ©2015 Pearson Education Inc. All rights reserved.
- 10. 1-10 LO 1 Organizing a Business Proprietorship Partnership LLC Corporation 1. Owner(s) Proprietor-one owner Partners-two or more owners Members Stockholders- generally many owners 2. Personal liability of owner(s) for business debts Proprietor is personally liable General partners are personally liable; limited partners are not Members are not personally liable Stockholders are not personally liable Exhibit 1-2 | The Various Forms of Business Organization Copyright ©2015 Pearson Education Inc. All rights reserved.
- 11. 1-11 Proprietorship Single owner Tend to be small retail stores or solo providers of professional services Proprietor is personally liable for all the business’s debts Business records should not include the proprietor’s personal finances LO 1 Organizing a Business Copyright ©2015 Pearson Education Inc. All rights reserved.
- 12. 1-12 Partnership Two or more parties as co-owners Income and losses “flow through” to the partners Many include retail establishments, professional service firms, real estate, and oil and gas exploration companies General partnerships have mutual agency and unlimited liability A limited-liability partnership lessens risk to the partners LO 1 Organizing a Business Copyright ©2015 Pearson Education Inc. All rights reserved.
- 13. 1-13 Limited-Liability Company (LLC) Business (not the owner) is liable for the company’s debts May have one owner or many owners, called members Members have limited liability LLC’s income “flows through” to the members, just as if they were partners LO 1 Organizing a Business Copyright ©2015 Pearson Education Inc. All rights reserved.
- 14. 1-14 Corporation A business owned by the stockholders Able to raise large sums of capital from issuance of stock Formed under state law Legally distinct from its owners Stockholders have no personal obligation for the corporation’s debts LO 1 Organizing a Business continued Copyright ©2015 Pearson Education Inc. All rights reserved.
- 15. 1-15 Corporation Double taxation ► Corporation pays income tax ► Shareholders taxed on dividend distributions Stockholders elect the board of directors, which ► Sets policy ► Appoints officers LO 1 Organizing a Business Copyright ©2015 Pearson Education Inc. All rights reserved.
- 16. 1-16 3 2. Explain and apply underlying accounting concepts, assumptions, and principles Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.
- 17. 1-17 LO 2 EXPLAIN AND APPLY UNDERLYING ACCOUNTING CONCEPTS, ASSUMPTIONS, AND PRINCIPLES Accountants follow professional frameworks for measurement and disclosure of financial information. Generally Accepted Accounting Principles (GAAP) Financial Accounting Standards Board (FASB) formulates GAAP Copyright ©2015 Pearson Education Inc. All rights reserved.
- 18. 1-18 LO 2 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accounting’s Objective Exhibit 1-3 | Conceptual Foundations of Accounting Copyright ©2015 Pearson Education Inc. All rights reserved.
- 19. 1-19 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accounting’s Objective Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 To be relevant, information must Make a difference to the decision maker Help predict or confirm value Be material Copyright ©2015 Pearson Education Inc. All rights reserved.
- 20. 1-20 Fundamental Qualitative Characteristics Constraints Enhancing Qualitative Characteristics Accounting’s Objective Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 To make a faithful representation, the information must Be complete, neutral (free from bias), and free from error Focus on the economic substance of a transaction, event, or circumstance Faithful representation makes the information reliable to users Copyright ©2015 Pearson Education Inc. All rights reserved.
- 21. 1-21 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Comparability: Accounting information capable of being compared with information from other companies in the same period Copyright ©2015 Pearson Education Inc. All rights reserved.
- 22. 1-22 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Verifiability: Information capable of being checked for accuracy, completeness, and reliability Copyright ©2015 Pearson Education Inc. All rights reserved.
- 23. 1-23 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Timeliness: Information made available to users early enough to help them make decisions Copyright ©2015 Pearson Education Inc. All rights reserved.
- 24. 1-24 Constraints Enhancing Qualitative Characteristics Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Understandability: Information sufficiently transparent so that it makes sense to reasonably informed users of the information Copyright ©2015 Pearson Education Inc. All rights reserved.
- 25. 1-25 Exhibit 1-3 | Conceptual Foundations of Accounting LO 2 Cost Constraint: Cost of disclosure should not exceed the expected benefits to users Copyright ©2015 Pearson Education Inc. All rights reserved.
- 26. 1-26 LO 2 Assumptions and Principles Entity Assumption: Organization stands apart from other organizations and individuals as a separate economic unit Continuity (Going-Concern) Assumption: Entity will remain in operation for the foreseeable future Historical Cost Principle: Assets should be recorded at their actual cost Stable-Monetary-Unit Assumption: Effect of inflation is ignored, based on the assumption that the dollar’s purchasing power is relatively stable Copyright ©2015 Pearson Education Inc. All rights reserved.
- 27. 1-27 LO 2 International Financial Reporting Standards (IFRS) Developed by the IASB Used by many countries around the world Application of GAAP for public companies in the United States is overseen by the U.S. Securities and Exchange Commission (SEC) SEC is studying whether and how to require all U.S. public companies to adopt some version of IFRS Copyright ©2015 Pearson Education Inc. All rights reserved.
- 28. 1-28 LO 2 International Financial Reporting Standards (IFRS) Having a uniform set of high-quality global accounting standards makes financial statements more comparable across borders Most commonly used accounting practices are essentially the same under both U.S. GAAP and IFRS FASB is working hand-in-hand with the IASB toward convergence of standards Copyright ©2015 Pearson Education Inc. All rights reserved.
- 29. 1-29 3 3. Apply the accounting equation to business organizations Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.
- 30. 1-30 Assets and Liabilities APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS Financial statements are based on the accounting equation Exhibit 1-4 | The Accounting Equation Copyright ©2015 Pearson Education Inc. All rights reserved.
- 31. 1-31 Assets and Liabilities APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS LO 3 Assets Liabilities Owner’s Equity • Economic resources • Expected future benefit • Outsider claims • Expected future sacrifice • Insider claims • Stockholders’ interest in the assets Copyright ©2015 Pearson Education Inc. All rights reserved.
- 32. 1-32 LO 3 Assets Liabilities Cash and cash equivalents Inventories Property, plant, and equipment Accounts payable Federal and state income taxes payable Long-term debt Current portion of long- term debt Assets and Liabilities What are some of The Gap, Inc.’s assets and liabilities? Copyright ©2015 Pearson Education Inc. All rights reserved.
- 33. 1-33 Owners’ Equity APPLY THE ACCOUNTING EQUATION TO BUSINESS ORGANIZATIONS LO 3 Assets Liabilities Owner’s Equity The accounting equation can be written as Assets = Liabilities + Stockholders’ Equity Assets = Liabilities + Paid-in Capital + Retained Earnings Copyright ©2015 Pearson Education Inc. All rights reserved.
- 34. 1-34 Owners’ Equity LO 3 Assets Liabilities + = Paid-in Capital Stockholders’ Equity Paid-in capital: amount stockholders have invested in the corporation Common Stock Copyright ©2015 Pearson Education Inc. All rights reserved.
- 35. 1-35 Owners’ Equity LO 3 Assets Liabilities + = Paid-in Capital Retained earnings: amount earned and kept for use in the business Common Stock + Retained Earnings Stockholders’ Equity Copyright ©2015 Pearson Education Inc. All rights reserved.
- 36. 1-36 Owners’ Equity LO 3 Assets Liabilities + = + Paid-in Capital Revenues Stockholders’ Equity Retained Earnings Revenues: inflows of resources that increase retained earnings by delivering goods or services to customers Copyright ©2015 Pearson Education Inc. All rights reserved.
- 37. 1-37 Owners’ Equity LO 3 Assets Liabilities + = + Paid-in Capital Expenses - Revenues Stockholders’ Equity Retained Earnings Expenses: resource outflows that decrease retained earnings due to operations Copyright ©2015 Pearson Education Inc. All rights reserved.
- 38. 1-38 Owners’ Equity LO 3 Assets Liabilities + = + Paid-in Capital Expenses - Revenues Stockholders’ Equity Retained Earnings Dividends: distributions to stockholders (usually cash) generated by net income Dividends - Copyright ©2015 Pearson Education Inc. All rights reserved.
- 39. 1-39 Owners’ Equity LO 3 Expenses decrease Retained Earnings Revenues increase Dividends decrease Copyright ©2015 Pearson Education Inc. All rights reserved.
- 40. 1-40 Owners’ Equity LO 3 Exhibit 1-5 | The Components of Retained Earnings Copyright ©2015 Pearson Education Inc. All rights reserved.
- 41. 1-41 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. Requirements 1. Use these data to write Blue Diamond Corporation’s accounting equation. 2. How much in resources does Blue Diamond Corporation have to work with? 3. How much does Blue Diamond Corporation owe creditors? 4. How much of the company’s assets do the Blue Diamond Corporation stockholders actually own? Illustration Copyright ©2015 Pearson Education Inc. All rights reserved.
- 42. 1-42 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. What are the company’s total resources? Assets Liabilities + = Stockholders’ Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright ©2015 Pearson Education Inc. All rights reserved.
- 43. 1-43 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much in resources does Blue Diamond Corporation have to work with? Assets Liabilities + = Stockholders’ Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright ©2015 Pearson Education Inc. All rights reserved.
- 44. 1-44 LO 3 Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much does Blue Diamond Corporation owe creditors? Assets Liabilities + = Stockholders’ Equity + = (Amount in millions) $ 1,180 $ 360 600 220 $ 770 $ 210 560 $ 410 Illustration Copyright ©2015 Pearson Education Inc. All rights reserved.
- 45. 1-45 $ 1,180 LO 3 Illustration Blue Diamond Corporation has current assets of $360 million; property, plant, and equipment of $600 million; and other assets totaling $220 million. Current liabilities are $210 million and long- term liabilities total $560 million. How much of the company’s assets do the stockholders actually own? $ 360 600 220 Assets Liabilities + = Stockholders’ Equity $ 770 $ 210 560 $ 410 + = (Amount in millions) Copyright ©2015 Pearson Education Inc. All rights reserved.
- 46. 1-46 LO 3 Advance slide in presentation mode to reveal answers. Copyright ©2015 Pearson Education Inc. All rights reserved.
- 47. 1-47 3 4. Evaluate business operations through the financial statements Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.
- 48. 1-48 LO 4 Income Statement Statement of Retained Earnings Statement of Cash Flows EVALUATE BUSINESS OPERATIONS THROUGH THE FINANCIAL STATEMENTS Data flow from one financial statement to the next Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 49. 1-49 LO 4 The Income Statement Measures Operating Performance Income Statement Also called statement of operations Reports ► Revenues and gains ► Expenses and losses ► Bottom line of net income or net loss for the period Net Income = Total Revenues and Gains - Total Expenses and Losses Copyright ©2015 Pearson Education Inc. All rights reserved.
- 50. 1-50 LO 4 The Statement of Retained Earnings Shows What a Company Did with Its Net Income Retained Earnings Portion of net income reinvested into the business Net income increases retained earnings Net losses and dividends decrease retained earnings Net income (net loss) flows from the income statement to the statement of retained earnings Corporations not obligated to pay dividends Copyright ©2015 Pearson Education Inc. All rights reserved.
- 51. 1-51 LO 4 The Balance Sheet Measures Financial Position Balance Sheet Also called statement of financial position Reports three items: ► Assets ► Liabilities ► Stockholders’ equity Dated at the moment in time when the accounting period ends Copyright ©2015 Pearson Education Inc. All rights reserved.
- 52. 1-52 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes ► Cash and cash equivalents ► Short-term investments ► Accounts and notes receivable ► Inventory ► Prepaid expenses Assets on the Balance Sheet Cash is the liquid asset that’s the medium of exchange Cash equivalents include money-market accounts or other financial instruments that are easily convertible to cash Copyright ©2015 Pearson Education Inc. All rights reserved.
- 53. 1-53 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes ► Cash and cash equivalents ► Short-term investments ► Accounts and notes receivable ► Inventory ► Prepaid expenses Assets on the Balance Sheet Includes stocks and bonds of other companies that the company intends to sell within the next year Copyright ©2015 Pearson Education Inc. All rights reserved.
- 54. 1-54 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes ► Cash and cash equivalents ► Short-term investments ► Accounts receivable ► Inventory ► Prepaid expenses Assets on the Balance Sheet Amounts collectible from customers from the sale of goods and services Copyright ©2015 Pearson Education Inc. All rights reserved.
- 55. 1-55 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes ► Cash and cash equivalents ► Short-term investments ► Accounts receivable ► Inventory ► Prepaid expenses Assets on the Balance Sheet Merchandise that a company sells to customers Copyright ©2015 Pearson Education Inc. All rights reserved.
- 56. 1-56 LO 4 Current Assets Expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s operating cycle if longer than a year Includes ► Cash and cash equivalents ► Short-term investments ► Accounts receivable ► Inventory ► Prepaid expenses Assets on the Balance Sheet Amounts paid in advance for costs that include advertising, rent, insurance, and supplies Copyright ©2015 Pearson Education Inc. All rights reserved.
- 57. 1-57 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes ► Property and equipment ► Accumulated depreciation ► Long-term investments ► Intangibles Assets on the Balance Sheet Tangible assets that include land, buildings, computers, and equipment Copyright ©2015 Pearson Education Inc. All rights reserved.
- 58. 1-58 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes ► Property and equipment ► Accumulated depreciation ► Long-term investments ► Intangibles Assets on the Balance Sheet Amount of the historical cost of plant assets that has been allocated to expense in the income statement over time as the asset has been used in producing revenue Copyright ©2015 Pearson Education Inc. All rights reserved.
- 59. 1-59 LO 4 Long-term Assets Expected to benefit the company for long periods of time Includes ► Property and equipment ► Accumulated depreciation ► Long-term investments ► Intangibles Assets on the Balance Sheet Includes stocks and bonds of other companies that the company does not intend to sell within the next year Copyright ©2015 Pearson Education Inc. All rights reserved.
- 60. 1-60 LO 4 Long-term Assets Assets on the Balance Sheet Assets with no physical form, such as patents, trademarks, and goodwill Copyright ©2015 Pearson Education Inc. All rights reserved.
- 61. 1-61 LO 4 Exhibit 1-9 | The Gap, Inc., Partial Consolidated Balance Sheets Assets on the Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 62. 1-62 LO 4 Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes ► Accounts payable ► Income taxes payable ► Accrued expenses ► Current maturities of long-term debt Liabilities on the Balance Sheet Amounts owed to vendors and suppliers for purchases of inventory Copyright ©2015 Pearson Education Inc. All rights reserved.
- 63. 1-63 LO 4 Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes ► Accounts payable ► Income taxes payable ► Accrued expenses ► Current maturities of long-term debt Liabilities on the Balance Sheet Tax debts owed to the government Copyright ©2015 Pearson Education Inc. All rights reserved.
- 64. 1-64 LO 4 Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes ► Accounts payable ► Income taxes payable ► Accrued expenses ► Current maturities of long-term debt Liabilities on the Balance Sheet Includes other liabilities such as interest payable on borrowed money, accrued liabilities for salaries, utilities, and other expenses that are owed but have not been paid Copyright ©2015 Pearson Education Inc. All rights reserved.
- 65. 1-65 LO 4 Current Liabilities Debts payable in the next year or within the business’s operating cycle if longer than a year Includes ► Accounts payable ► Income taxes payable ► Accrued expenses ► Current maturities of long-term debt Liabilities on the Balance Sheet Portion of long-term liabilities that the company will have to pay off within the next year Copyright ©2015 Pearson Education Inc. All rights reserved.
- 66. 1-66 LO 4 Long-term Liabilities Debts due beyond one year or the company’s normal operating cycle if longer than a year Includes ► Long-term notes payable ► Bonds payable Liabilities on the Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 67. 1-67 LO 4 Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes ► Common stock ► Additional paid-in capital ► Retained earnings ► Treasury stock ► Accumulated other comprehensive income (loss) Equity on the Balance Sheet Amount represents the par value of the shares issued to stockholders Copyright ©2015 Pearson Education Inc. All rights reserved.
- 68. 1-68 LO 4 Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes ► Common stock ► Additional paid-in capital ► Retained earnings ► Treasury stock ► Accumulated other comprehensive income (loss) Amount of cash received on initial sale of the company’s stock in excess of the par value Equity on the Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 69. 1-69 LO 4 Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes ► Common stock ► Additional paid-in capital ► Retained earnings ► Treasury stock ► Accumulated other comprehensive income (loss) Portion of net income reinvested into the business Equity on the Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 70. 1-70 LO 4 Stockholders’ Equity Represents the stockholders’ ownership of the business’s assets Includes ► Common stock ► Additional paid-in capital ► Retained earnings ► Treasury stock ► Accumulated other comprehensive income (loss) Items of gain or loss that are allowed by the FASB to bypass the income statement and be recorded directly into stockholders’ equity Equity on the Balance Sheet Copyright ©2015 Pearson Education Inc. All rights reserved.
- 71. 1-71 3 6. Evaluate business decisions ethically Learning Objective Copyright ©2015 Pearson Education Inc. All rights reserved.
- 72. 1-72 EVALUATE BUSINESS DECISIONS ETHICALLY LO 6 Economics Legal Ethical Decision should maximize the economic benefits Proposition that free societies are governed by laws Recognizes that while certain actions might be both economically profitable and legal, they may still not be right Copyright ©2015 Pearson Education Inc. All rights reserved.
- 73. 1-73 LO 6 Decision 1. What is the issue? 2. Who are the stakeholders, and what are the consequences of the decision to each? 3. Weigh the alternatives. 4. Make the decision and be prepared to deal with the consequences. Copyright ©2015 Pearson Education Inc. All rights reserved.
- 74. 1-74 This work is protected by United States copyright law and is provided solely for the use of instructors in teaching their courses and assessing student learning. Dissemination or sale of any part of this work (including on the World Wide Web) will destroy the integrity of the work and is not permitted. The work and materials from it should never be made available to students except by instructors using the accompanying text in their classes. All recipients of this work are expected to abide by these restrictions and to honor the intended pedagogical purposes and the needs of other instructors who rely on these materials. Copyright Copyright ©2015 Pearson Education Inc. All rights reserved.