oChapter 1: INTRODUCTION TO ACCOUNTING AND BUSINESS...accounting and ethics in business. 2....

ACCOUNTING 2-MANAGERIAL ACCOUNTING

o Chapter 1: INTRODUCTION TO ACCOUNTING

AND BUSINESS

Teacher Version

Learning Objectives

1. Describe the nature of a business and the role of accounting and ethics in business.

2. Summarize the development of accounting principles and relate them to practice.

3. State the accounting equation and define each element of the equation.

4. Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

5. Describe the financial statements of a corporation and explain how they interrelate.

6. Describe and illustrate the use of the ratio of liabilities to stockholders’ equity in evaluating a company’s financial condition.

Nature of Business and Accounting

o A BUSINESS is an ORGANIZATION in which

basic resources (INPUTS) such as materials

and labor, are ASSEMBLED and PROCESSED

to provide goods or services (OUTPUTS) to

customers.

Nature of Business and Accounting

o The objective of most businesses is to EARN a

PROFIT.

o Profit is the DIFFERENCE between the

amounts RECEIVED from customers for

goods or services and the amounts PAID for

the INPUTS used to provide the goods or

services.

TYPES OF BUSINESSES

SERVICE BUSINESSES SERVICE PROVIDED

DELTA AIR LINES TRANSPORTATION SERVICES

WALT DISNEY COMPANY ENTERTAINMENT SERVICES

MERCHANDISING BUSINESSES PRODUCT PROVIDED

WALMART GENERAL MERCHANDISE

AMAZON.COM INTERNET BOOKS, MUSIC, VIDEOS

MANUFACTURING BUSINESSES PRODUCT PROVIDED

FORD MOTOR COMPANY CARS, TRUCKS, VANS

DELL PERSONAL COMPUTERS

The Role of Accounting in Business

o ACCOUNTING can be defined as an

information system that provides REPORTS to

users about the ECONOMIC ACTIVITIES

and CONDITION of a BUSINESS.


The Role of Accounting in Business

o The process by which accounting provides

information to users is as follows:

IDENTIFY USERS

ASSESS USERS’ INFORMATION NEEDS

DESIGN THE ACCOUNTING INFORMATION

SYSTEM TO MEET USERS’ NEEDS

RECORD ECONOMIC DATA ABOUT BUSINESS

ACTIVITIES AND EVENTS

PREPARE ACCOUNTING REPORTS FOR USERS


MANAGERIAL Accounting

o The area of accounting that provides internal

users with information is called

MANAGERIAL ACCOUNTING or

MANAGEMENT ACCOUNTING .

o MANAGERIAL accountants employed by a

business are employed in PRIVATE

accounting.


FINANCIAL Accounting

o The area of accounting that provides external users with information is called FINANCIAL ACCOUNTING.

o The objective of financial accounting is to provide RELEVANT and TIMELY information for the DECISION-MAKING needs of users OUTSIDE of the business.

o General-purpose FINANCIAL STATEMENTS are one type of financial accounting report that is distributed to EXTERNAL users.

Role of Ethics in Accounting and Business

o The objective of accounting is to provide

relevant, timely information for user

DECISION MAKING.

o Accountants must behave in an ETHICAL

manner so that the information they provide

users will be TRUSTWORTHY and, thus,

USEFUL for decision making.

o ETHICS are MORAL principles that guide

the CONDUCT of individuals.


Opportunities for Accountants

o Accountants and their staffs who provide

services on a FEE BASIS are said to be

employed in PUBLIC accounting.

o Accountants employed by a BUSINESS FIRM,

or a NOT-FOR-PROFIT ORGANIZATION

are said to be employed in PRIVATE

accounting.

o Public accountants who have met a STATES’S

EDUCATION, EXPERIENCE and EXAMINATION

requirements may become CERTIFIED PUBLIC

ACCOUNTANTS (CPA’S)


Generally Accepted Accounting Principles

o Financial accountants follow GENERALLY

ACCEPTED ACCOUNTING PRINCIPLES

(GAAP) in preparing reports.

o Within the U.S., the FINANCIAL

ACCOUNTING STANDARDS BOARD (FASB)

has the PRIMARY responsibility for

DEVELOPING accounting principles.


Generally Accepted Accounting

Principles o The SECURITY AND EXCHANGE

COMMISSION(SEC), an AGENCY of the U.S.

government, has authority over the accounting

and financial DISCLOSURES for companies

whose SHARES of OWNERSHIP (STOCK) are

TRADED and sold to the PUBLIC.

o Many countries OUTSIDE the United States

use generally accepted accounting principles

adopted by the INTERNATIONAL

ACCOUNTING STANDARDS BOARD (IASB).


Business ENTITY Concept

o Under the BUSINESS ENTITY concept, the

ACTIVITIES of a business are recorded

SEPARATELY from the activities of its

OWNERS, CREDITORS, or OTHER

BUSINESSES.

A PROPRIETORSHIP

is owned by ONE

individual.

70% of business

entities in the U.S. are

proprietorships.

They are easy and

cheap to organize.

Resources are limited

to those of the owner.

Used by small

businesses.

A PARTNERSHIP is

similar to a

PROPRIETORSHIP

except that it is

owned by TWO or

MORE individuals.

10% of business

organizations in the

U.S. (combined

with limited

liability

companies) are

partnerships.

Combines the skills

and resources of

more than one

person.

A CORPORATION

is organized under

STATE or FEDERAL

statutes as a

separate LEGAL

TAXABLE entity.

Generates 90% of business revenues.

20% of the business organizations in the U.S.

Ownership is divided into shares, called stock.

Can obtain large amounts of resources by issuing stock.

Used by large businesses.

A LIMITED

LIABILITY

COMPANY (LLC)

combines the

attributes of a

PARTNERSHIP and

a CORPORATION.

10% of business

organizations in the

U.S. (combined

with partnerships).

Often used as an

alternative to a

partnership.

Has tax and legal

liability advantages

for owners.


COST Concept

o Under the COST concept, amounts are

INITIALLY recorded in the accounting

records at their COST or PURCHASE PRICE.


o Aaron Publishers purchased a building on February 20, 2012, for $150,000. Other amounts related to this purchased are shown.

• Price listed by seller on Jan. 1, 2012 $160,000

• Aaron Publishers’ initial offer to buy on Jan. 31, 2012 140,000

• Purchase price on Feb. 20, 2012 150,000

• Estimated selling price on Dec. 31, 2014 220,000

• Assessed value for property taxes, Dec. 31, 2014 190,000

• At what price will this be recorded on the books of Aaron Publishers using the Cost Concept?

• $150,000


o The OBJECTIVITY concept requires that the

amounts recorded in the accounting records

be based on OBJECTIVE evidence.

o Only the FINAL AGREED-UPON amount is

OBJECTIVE enough to be recorded in the

accounting records.

The UNIT OF MEASURE concept requires that

ECONOMIC DATA be recorded in DOLLARS.


The ACCOUNTING EQUATION

o The resources owned by a business are its

ASSETS.

o The rights of CREDITORS are the DEBTS of the

business and are called LIABILITIES.

o The rights of the OWNERS are called

STOCKHOLDER’S equity for a corporation and

OWNER’S equity for a proprietorship,

partnership, or limited liability company.

o The equation ASSETS = LIABILITIES +

OWNER’S EQUITY is called the ACCOUNTING

EQUATION.


o A BUSINESS transaction is an ECONOMIC

event or CONDITION that DIRECTLY

changes an entity’s FINANCIAL condition or

its results of OPERATIONS.

o The liability created by a purchase on

ACCOUNT is called an ACCOUNTS

PAYABLE.

o Items such as supplies that will be used in the

business in the FUTURE are called PREPAID

EXPENSES, which are assets.


o REVENUE from providing services is recorded

as FEES EARNED.

o Revenue from the SALE of merchandise is

recorded as SALES.

o Other examples of revenue include rent, which

is recorded as RENT revenue, and INTEREST,

which is recorded as interest revenue.

o An account RECEIVABLE is a claim against a

CUSTOMER, which is an ASSET.


You Should Note the Following:

o The effect of every transactions is an

INCREASE OR A DECREASE IN ONE OR

MOR OF THE ACCOUNTING EQUATION

ELEMENTS.

o The two sides of the accounting equations are

ALWAYS EQUAL.

o The stockholders’ equity (owner’s equity) is

INCREASED BY AMOUNTS INVESTED by

STOCKHOLDERS (CAPITAL STOCK).


You Should Note the Following:

o The stockholders’ equity (owner’s equity) is INCREASED BY REVENUE AND DECREASED BY EXPENSES.

o The stockholders’ equity (OWNER’S EQUITY) is decreased BY DIVIDENDS PAID to stockholders.

o RETAINED EARNINGS is the STOCKHOLDERS’ EQUITY created from business operations through revenue and EXPENSE transactions.


FINANCIAL Statements

o After transactions have been RECORDED and

SUMMARIZED, reports are prepared for

users. The accounting REPORTS providing this

information are called FINANCIAL

STATEMENTS.


Income Statement

o The INCOME STATEMENT reports the revenues and EXPENSES for a PERIOD of time, based on the MATCHING concept.

o The MATCHING concept is applied by “MATCHING” the EXPENSES incurred during a period with the REVENUE that those EXPENSES generated.

o The excess of the REVENUE over the EXPENSES is called NET income, NET PROFIT, or EARNINGS. If EXPENSES exceed REVENUE, the EXCESS is a NET loss.


Retained Earnings Statement

o The RETAINED EARNINGS STATEMENT

reports the changes in the RETAINED

EARNINGS for a period of time.

o It is prepared AFTER the income statement

because the NET INCOME or NET LOSS for

the PERIOD must be reported in this

statement.


BALANCE SHEET

o A balance sheet is a list of the ASSETS,

LIABILITIES, and STOCKHOLDERS’

EQUITY as of a SPECIFIC DATE.

o The ACCOUNT form of a BALANCE SHEET

lists the assets on the LEFT and the

LIABILITIES and STOCKHOLDERS’

EQUITY on the right. It resembles the basic

format of the ACCOUNTING EQUATION.


STATGEMENT of Cash FLOWS

o A STATEMENT OF CASH FLOWS is a

summary of the cash RECEIPTS and cash

PAYMENTS for a SPECIFIC PERIOD of time.

It consists of three sections:

(1) OPERATING ACTIVITIES

(2) INVESTING ACTIVITIES

(3) FINANCING ACTIVITIES


o The cash flows from OPERATING

ACTIVITIES section reports a summary of

cash RECEIPTS and cash PAYMENTS from

operations. o The cash flows from INVESTING

ACTIVITIES section reports the cash

transactions for the ACQUISITION and SALE

of relatively permanent assets.

o The cash flows from FINANCING

ACTIVITIES section reports the cash

TRANSACTIONS related to cash

INVESTMENTS by the OWNER,

BORROWINGS, and cash dividends

This amount should match CASH

on the BALANCE SHEET.

RATIO OF

LIABILITIES TO

STOCKHOLDERS’

EQUITY

= TOTAL LIABILITIES

Total STOCKHOLDERS’ Equity

Ratio of _________

to _________

Equity

= $

$ = _______

oChapter 1: INTRODUCTION TO ACCOUNTING AND BUSINESS...accounting and ethics in business. 2....

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Transcript of oChapter 1: INTRODUCTION TO ACCOUNTING AND BUSINESS...accounting and ethics in business. 2....