CHAP 1 Introduction to Accounting and Business
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Transcript of CHAP 1 Introduction to Accounting and Business
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ChapterChapter11
Introduction to AccountingIntroduction to Accountingand Businessand Business
Accounting, 21st Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of Accounting
Pepperdine University
Copyright 2004 South-Western, a divisionof Thomson Learning. All rights reserved.
Task Force Image Galleryclip art included in thiselectronic presentation is used with the permission of
NVTech Inc.
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Like right now.
Some of the action has been automated,
so click the mouse when you see this
lighting bolt in the lower right-handcorner of the screen. You can point and
click anywhere on the screen.
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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.
ObjectivesObjectives
After studying thisAfter studying this
chapter, you shouldchapter, you should
be able to:be able to:
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7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
ObjectivesObjectives
8. Describe the financial statements of aproprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owners equity to
analyze the ability of a business to withstand
poor business conditions.
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Manufacturing BusinessManufacturing Business
ProductProduct
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparelCoca-Cola Beverages
Sony Stereos and television
Types of Businesses
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Merchandising BusinessMerchandising Business
ProductProduct
Wal-Mart General merchandise
Toys R Us Toys
Circuit City Consumer electronics
Lands End ApparelAmazon.com Internet books, music, video
retailer
Types of Businesses
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Service BusinessService Business
ProductProduct
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial adviceSprint Telecommunication
Types of Businesses
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There are three types of
business organizations
Proprietorship Partnership
Corporation
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Aproprietorshipis owned by one
individual.
Advantages Ease in organizing
Low cost of
organizingDisadvantage
Limited source of
financial resources Unlimited liability
Joes
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Apartnership isowned by two or
more individuals.
Advantages
More financialresources than a
proprietorship.
Additionalmanagement skills.
Disadvantage
Unlimited liability.
Joe and Martys
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A corporation is
organized under stateor federal statutes as a
separate legal entity.
Advantage The ability to obtain
large amounts of
resources by issuingstocks.
Disadvantage
Double taxation.
J & M, Inc.
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Business StrategiesBusiness Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain anadvantage over its competitors, and
in doing so, to maximize its profits.
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Business StrategiesBusiness Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a costlower than that of its competitors.
Wal-Mart
Southwest Airlines
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Business StrategiesBusiness Strategies
Under a differentialstrategy, a business
designs and produces products or services
that possess unique attributes orcharacteristics which customers are willing
to pay a premium price.
Maytag
Tommy Hilfiger
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Value Chain of a BusinessValue Chain of a Business
A value chain is the way a
business adds value for its
customers by processing inputsinto product or service.
InputsInputsBusinessBusiness
ProcessesProcesses
Products orProducts or
ServicesServices
CustomerCustomer
ValueValue
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A business stakeholderis a person or
entity having an interest in theeconomic performance of the business.
Business StakeholdersBusiness Stakeholders
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2Assessstakeholders
informational
needs.
The Process ofThe Process of
Providing InformationProviding InformationSTAKEHOLDERS
Internal:
Owners,
managers,employees
External:
Customers,
creditors,government1
Identify
stake-holders.
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Accounting
Information
System
Design the
accountinginformation
system to meet
stakeholders
needs.
34
Record
economic
data about
business
activities
and events.
The Process ofThe Process of
Providing InformationProviding Information
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Business EthicsBusiness Ethics
1. Avoid small ethical lapses.
2. Focus on your long-term
reputation.
3. You may expect to suffer
adverse personal
consequences for holdingto an ethical position.
Sound
Principles thatform the
foundation for
ethical
behavior
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Profession of AccountingProfession of Accounting
Accountants employed by a business firm or
a not-for-profit organization are said to beengaged inprivate accounting.
Accountants and their staff who provide
services on a fee basis are said to beemployed inpublic accounting.
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G
enerallyAcceptedG
enerallyAcceptedAccountingAccounting
Principles (G
AAP)Principles (G
AAP)
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TheThe business entity conceptbusiness entity concept
limits the economic data inlimits the economic data inthe 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 conceptis the
basis for entering the
exchange price, or costof an acquisition in the
accounting records.
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TheThe objectivity conceptobjectivity conceptrequires 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
conceptrequires that
economic data berecorded in dollars.
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The Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners Equity
The resourcesThe resources
owned by aowned by a
businessbusiness
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The Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners Equity
The rights of theThe rights of the
creditors, whichcreditors, which
represent debtsrepresent debtsof the businessof the business
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The Accounting EquationThe Accounting Equation
Assets = Liabilities + Owners Equity
The rights of theThe rights of the
ownersowners
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What is a business
transaction?
Abusiness transaction is an economic event orcondition that directly changes an entitys financial
condition or directly affects its results of operations.
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On November 1,
2005, Chris
Clark begins abusiness that will
be known as
NetSolutions.
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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 Owners Equity=
=
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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).).
Owners
Liabilities + Equity=
Bal. 5,000 20,000 25,000c. + 1,350 + 1,350
Bal. 5,000 1,350 20,000 1,350 25,000
=
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d. NetSolutions provided services tod. NetSolutions provided services to
customers, earning fees of $7,500
andcustomers, earning fees of $7,500
andreceived 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
AssetsOwners
Liabilities + Equity
Bal. 5,000 1,350 20,000 1,350 25,000Fees
earned
=
=
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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.
Owners
Liabilities + Equity=
Bal. 12,500 1,350 20,000 1,350 32,500
=
Bal.8,850 1,350 20,000 1,350 28,850
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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.
Owners
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
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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.
Owners
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
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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.
Owners
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
=
=
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Owners
withdrawals
Expenses
Decreased byDecreased by
Owners Equity
Effects ofTransactions on Owners EquityEffects ofTransactions on Owners Equity
Increased byIncreased by
Owners
investments
Revenues
Net
income
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Accounting reports, called
financialstatements,
provide summarizedinformation to the owner.
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Financial StatementsFinancial Statements
Income statementA summary of the revenue
and expenses for a specific period of time.
Statement of owners equityA summary of
the changes in the owners equity that haveoccurred during a specific period of time.
Balance sheetA list of the assets, liabilities,
and owners equity as of a specific date.
Statement of cash flowsA summary of the
cash receipts and disbursements for a specific
period of time.
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Fees earned $7 500 00
Operating expenses:
Rent expense
$2 12500Wages expense
80000
Supplies expense
45000Utilities expense
27500Miscellaneous expense
Total operating expenses 1 135 00
NetSolutions
Income Statement
For the Month Ended November 30, 2005
80000
Net income $3 050 00To the statementTo the statement
of owners equityof owners equity
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Chris Clark, capital, November 1, 2005 $ 0
NetSolutions
Statement of Owners Equity
For the Month Ended November 30, 2005
Investment on November 1 $25000 00
Net income for November 3 050 00
$28 05000Less withdrawals 2 00000
Increase in owners equity 26 05000
Chris Clark, capital, November 30, 2005 $26 05000
From the incomeFrom the income
statementstatement
To theTo the
balance sheetbalance sheet
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Assets Liabilities
NetSolutions
Balance Sheet
November 30, 2005
Cash $ 5 900 00 Accounts Payable $ 400 00
Supplies 550 00 Owners Equity
Land 20 000 00 Chris Clark, cap. 26 050 00
Total liabilities and
Total assets $26 450 00 owners equity $26 450 00
From theFrom the
statement ofstatement ofowners equityowners equity
This balance sheet presentedusing the account form
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When the balance sheet displays
the liabilities and owners equity
below the assets, the report form is
being used.
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Cash flows from operating activities:
Cash received from customers $ 7 50000
Deduct cash payments for expenses
and payments to creditors 4 60000
Net cash flow from operating activities 2 90000Cash flows from investing activities:
Cash payment for acquisition of land (2000000
Cash flows from financing activities:
Cash received as owners investment $25000 00
Deduct cash withdrawal by owner 2000 00
Net cash flow from financing activities 23 00000
Net cash flow and Nov. 30, 2005 cash bal. $ 5 90000
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Should matchShould match CashCash on the balance sheeton the balance sheet
)
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Statement of Cash FlowsStatement of Cash Flows
Cash Flows from Operating ActivitiesThis section
reports a summary of cash receipts and cash payments
from operations.
Cash Flows from Investing ActivitiesThis section
reports the cash transactions for the acquisition and sale
of relatively permanent assets.
Cash Flows from Financing ActivitiesThis sectionreports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.
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Ratio of liabilitiesto owners equity
= Total LiabilitiesTotal owners equity (or total
stockholders equity)
The ratio of liabilities to owners equity
allows owners like Chris Clark to analyzethe firms ability to withstand poor
business conditions.
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation
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Ratio of
liabilities to
owners equity =
$400
$26,050
Tools for FinancialTools for Financial
Analysis and InterpretationAnalysis and Interpretation
= 0.015Ratio of
liabilities to
owners equity
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The EndThe End
Chapter 1Chapter 1