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ACCOUNTING
THE LANGUAGE OF
BUSINESS
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OBJECTIVES
1. Define accounting, identify business goals and activities, anddescribe the role of accounting in making informed decisions.
2. Identify the many users of accounting information in society.
3. Explain the importance of business transactions, money
measure, and separate entity to accounting measurement.
4. Describe the corporate form of business organization.
5. Define financial position, state the accounting equation, andshow how they are affected by simple transactions.
6. Identify the four financial statements.
7. State the relationship of generally accepted accounting principles(GAAP) to financial statements and the independent CPAs
report.
8. Define ethics and describe the ethical responsibilities ofaccountants.
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ACCOUNTING AS ANINFORMATION SYSTEM
OBJECTIVE 1
Define accounting, identify businessgoals and activities, and describe therole of accounting in making informeddecisions.
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Accounting Defined
Accountingprovides a vital service bysupplying the information decision makersneed to make reasoned choices amongalternative uses of scarce resources in the
conduct of business and economic activities.
Accounting - a process of identifying,
recording, summarizing, and reportingeconomic information to decision makers inthe form offinancial statements to permit
informed decisions and judgments.
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Accounting and Decisions
Accounting is a link betweenbusiness activities and decision
makers.Accounting measures businessactivities by recording data aboutthem for future use.
The data are stored until needed
and then processed to become
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Business Goals
1. Profitability.-
A business must take in enough moneyto pay all the costs of doing business,with enough left over as profit for theowners to want to stay in business.
2. Liquidity.-
A business must have enough cashavailable to pay debts when they aredue.
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Business Goals and Activities
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1. Financing Activities.
Obtaining capital from owners andcreditors.
Repaying creditors and a return to owners.
2. Investing Activities.
Spending the capital it receives in waysthat are productive and will help thebusiness achieve its objectives.
Buying and selling assets to be used in thebusiness.
Three Business Activities
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Business Activities (continued)
3. Operating Activities.
Selling of goods and services tocustomers.
Employing managers and workers,buying and producing goods andservices, and paying taxes.
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Specializations- Financial andManagement Accounting
Accountings role of assisting decision makers by
measuring, processing, and communicating
information is usually divided into two categories:1. Management accounting.2. Financial accounting.
The two may be distinguished by the principalusers of their information.
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Is oriented toward the needs of internaldecision makers.
Provides managers and employees withinformation regarding how they have done inthe past and what they can expect in the
future.
Management Accounting
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Is oriented toward the needs of external decisionmakers.
Provides information in the form of financial
statements so that external decision makers canevaluate how well the business has achieved itsgoals.
Financial statements report directly on the goals ofprofitability and liquidity.
Financial statements are used extensively both insideand outside a business to evaluate the businesss
success.
Financial Accounting
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Processing AccountingInformation
Bookkeepingis the mechanical and repetitiveprocess of recording financial transactions and
keeping financial records.
Bookkeepingis a small part of accounting.
Accountingincludes the design of an information
system that meets users needs.Accountinggoals are the analysis, interpretation,
and use of information.
Accounting versus bookkeeping
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Accounting versus bookkeepingcont
Computers are used extensively in accountingas a tool for the accountant.
A businesss many information needs are
organized into a Management InformationSystem (MIS).
An MIS consists of various interconnected
subsystems.The Accounting Information System (AIS) is
the most important subsystem.
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DECISION MAKERS: THE
USERS OF ACCOUNTINGINFORMATION
OBJECTIVE 2Identify the users of accounting informationin society.
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The Users of Accounting Information
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Requires financial information to carry outits basic functions.
1. Financing the business.
2. Investing the resources of the business.
3. Producing goods and services.
4. Marketing goods and services.
5. Managing employees.
6. Providing information to decisionmakers.
Management
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Investors
Creditors
Outside Users with a Direct FinancialInterest
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Tax Authorities.
Regulatory
Agencies.
Labor Unions.
Customers.Economic Planners.
People, Organizations, and Agencies with anIndirect Financial Interest
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20ACCOUNTINGMEASUREMENT
OBJECTIVE 3
Explain the importance of business transactions,money measure, and separate entity to accountingmeasurement.
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Business transactions as the object ofmeasurement.
Business transactions are economic events thateffect the financial position of a business entity.
Transactions are the raw material of accounting
reports.
Transactions must relate directly to a business entity.
What Is Measured?
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Accounting Measurementcont
Money Measure.
Money is the only factor common to all businesstransactions.
The monetary unit a business uses depends onthe country in which the business resides.
Exchange rates translate one currency to another.
The Concept of Separate Entity.
A business is a separate entity, distinct from itscreditors and customers and from its owner orowners.
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THE CORPORATION AS A
SEPARATE ENTITY
OBJECTIVE 4
Describe the corporate form ofbusiness organization.
T f B i
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Types of BusinessOrganization
SoleProprietorship.
Partnership.
Corporation.
e orpora e orm o
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e orpora e orm oBusiness
Formation of a Corporation.
Organization of a Corporation.
Stockholders.Board of Directors.
Management.
THE
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26THEACCOUNTING EQUATION
OBJECTIVE 5Define financial position,
state the accounting equation, andshow how they are affected by
simple transactions.
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Assets are economic resourcesowned by a business that areexpected to benefit future operations.
Monetary items.
Nonmonetary physical things.
Assets
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Liabilities
Liabilities are the presentobligations of a business to pay
cash, transfer assets, or provideservices to other entities in thefuture.
O ners Eq it
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Owners equity represents the claims by the
owners of a business to the assets of thebusiness.
Owners equity is the residual equity that
remains after deducting liabilities from assets.
OE = Assets - Liabilities.
Assets = Liabilities + SE.
SE = Contributed Capital + Retained Earnings.
- Accumulated losses
Owners Equity
(OE)
Three Types of Transactions That
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Three Types of Transactions ThatAffect Retained Earnings
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Some IllustrativeTransactions
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T1. Owners Investments of$50,000
ASSETS SE
Cash C/S
Assets = $50,000; L+SE = $50,000
Beg. Bal.T1.
End. Bal.
$ 050,000
$50,000
$ 050,000
$50,000
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. , 10,000 and Bldg, $ 25,000) withCash.
Assets = $50,000; L+SE = $50,000
ASSETS
Cash Land Bldg.
Beg. Bal. $50,000 $ 0 $ 0T2. -35,000 +10,000 +25,000
End. Bal. $15,000 $10,000 $25,000
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.(supplies) by Incurring aLiability of $ 500
Assets = $50,500; L+SE= $50,500
ASSETS LIABILITIES
Supplies Acc/Payable
Beg. Bal. $ 0 $ 0
T3. +500 +500
End. Bal. $500 $500
T4 Payment of a Liability of $ 200
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T4. Payment of a Liability of$ 200with Cash
Assets = $50,300; L+SE = $50,300
ASSETS LIABILITIES
Cash Acc/Payable
$15,000
- 200
$14,800
Beg. Bal.
T4.
End. Bal.
$500
-200
$300
omm ss on evenues
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. omm ss on evenuesEarned That Was Paid in Cash
worth $ 1,500
Assets = $51,800; L+SE = $51,800
ASSETS SE
Cash R/E
Beg. Bal $14,800 $ 0T5. + 1,500 +1,500
End. Bal. $16,300 $1,500
v u
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. v uCommission with Deferred
Receipt of$ 2,000
Assets = $53,800; L+SE = $53,800
ASSETS SE
Acc/Receivable R/E
Beg. Bal $ 0 $1,500T6. +2,000 +2,000
End. Bal. $2,000 $3,500
T7 C ll t d A t
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T7. Collected an AccountsReceivable of$ 1,000
Assets = $53,800; L+SE = $53,800
ASSETS
Cash A/R
Beg. Bal. $16,300 $2,000T7. + 1,000 - 1,000
End. Bal. $17,300 $1,000
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T8. Paid Equipment Rental Expense $1000T9. Paid Wages Expense $ 400 with Cash
Assets = $52,400; L+SE = $52,400
ASSETS SE
Cash R/E
Beg. Bal $ 17,300 $3,500T8. - 1,000 -1,000
T9. - 400 - 400
End. Bal. $15,900 $2,100
T10 R i d tilit bill (E ) f $
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T10. Received a utility bill (Expense) of$300 thus Incurring a Liability
Assets = $52,400; L+SE = $52,400
SE
A/P R/EBeg. Bal. $300 $2,100
T10. +300 - 300
End. Bal. $600 $1,800
T11 Paid Dividends of $ 600 with
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T11. Paid Dividends of$ 600 withCash
Assets = $51,800; L+SE = $51,800
ASSETS SE
Cash R/EBeg. Bal $15,900 $1,800
T11. - 600 - 600
End. Bal. $15,300 $1,200
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COMMUNICATION THROUGHFINANCIAL STATEMENTS
OBJECTIVE 6Identify the four financial statements.
The Importance of Financial
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The Importance of FinancialStatements
Financial statements are the primary means ofcommunicating important accounting informationto users.
Financial statements represent models of thebusiness enterprise because they show thebusiness in financial terms.
Financial statements are not perfect pictures ofthe real thing.
The Statement of Income
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The Statement of Income
Summarizes revenues earned andexpenses incurred over a period of time.
Is considered by many to be the mostimportant financial report because it showswhether or not a business achieved itsprofitability goal of earning an acceptable
income.
n y , .I St t t
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y ,[Title] Income Statement[Period] For the Month Ended December 31,2012
Trace to Statement of
Retained Earnings
Revenues
Commissions Earned $3,500
Expenses
Equipment Rental $1,000Wages 400
Utilities 300
Total Expenses $1,700
Net Income $1,800
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The Statement of RetainedEarnings
Shows the changes in retained
earnings over a period of time.
Shannon Realty Company
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Shannon Realty, Company.Statement of Retained EarningsFor the Month Ended December 31, 2012
Retained Earnings, 12/1/2012 $ 0
Net Income for the Month 1,800
Subtotal $ 1,800Less Dividends 600Retained Earnings,12/31/2012 $ 1,200
Trace to Owners Equity
Section of Statement of
Financial Position
The Statement of Financial
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The Statement of FinancialPosition (Balance Sheet)
Shows financial position at a pointin time.
Presents a view of the business asthe holder of resources, or assets,that are equal to the claims against
those assets.
Shannon Realty, Company.
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Shannon Realty, Company.Statement of Financial Position
As of December 31, 2012
ASSETS
Cash $15,300
Accounts Receivable 1,000
Supplies 500
Land 10,000
Building 25,000
Total Assets $51,800
St t t f Fi i l P iti
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Statement of Financial Positioncont
LIABILITIES
Accounts Payable $600
STOCKHOLDERS EQUITY
Common Stock$50,000
Retained Earnings $1,200
Total SE $51,200Total Liabilities and SE $51,800
The Statement of Cash
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The Statement of CashFlows
Focuses on a companys liquidity goal.
Shows cash produced by operating abusiness as well as important financing
and investing transactions that take placeduring an accounting period.
Is derived from the income statement and
statement of financial position. Is directly related to the other three
statements.
Shannon Realty, Company.
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y, p yStatement of Cash FlowsFor the Month Ended December 31, 2012
Cash Flows from Operating Activities
Net Income $1,800
Noncash Expenses and RevenuesIncluded in Income
Increase in A/R $(1,000)
Increase in Supplies (500)
Increase in A/P 600
(900)
Net Cash Flows from
Operating Activities $900
Shannon Realty Company
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Shannon Realty, Company.Statement of Cash FlowsFor the Month Ended December 31, 2012
Purchase of Land ($10,000)
Purchase of Building (25,000)
Net Cash Flows from InvestinActivities 35 000
Cash Flows from Investing Activities
Shannon Realty, Company.
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y, p yStatement of Cash FlowsFor the Month Ended December 31, 2012
Investments by Stockholders $50,000
Dividends (600)
Net Cash Flows from
Financing Activities 49,400
Net Increase Decrease in Cash $15,300
Cash at Beginning of Month 0Cash at End of Month $15,300
Cash Flows from Financing Activities
Traced to the statement of financial position
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GENERALLY ACCEPTED
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GENERALLY ACCEPTEDACCOUNTING PRINCIPLES
OBJECTIVE 7
State the relationship of generallyaccepted accounting principles(GAAP) to financial statements andthe independent CPAs report
Generally Accepted
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Focus on understandability of financialstatements.
Encompass the conventions, rules, andprocedures necessary to define acceptedaccounting practice at a particular time.
They include assumptions (Separate entity,Going concern, Periodicity & Stable
monetary unit), Principles (Historical cost,Revenue recognition, Matching & Fulldisclosure) as well as constraints (Materiality,cost benefit, Prudence & Industrial
peculiarity)
Generally AcceptedAccounting Principles (GAAP)
Financial Statements GAAP and
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Financial statements are prepared bymanagement and may be biased.
Financial statements are auditedby independent
CPAs.
An audit ascertains that the financial statementshave been prepared in accordance with GAAP.
GAAP ensure that the financial statements willbe relevant, reliable, comparable andunderstandable to their users.
Financial Statements, GAAP, andthe Independent CPAs Report
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AND THE ACCOUNTING
PROFESSION
OBJECTIVE 8Define ethics and describe the ethical
responsibilities of accountants.
What Are Professional
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What Are ProfessionalEthics?A code of conduct that applies to the
practice of a profession.
Code of conduct adopted by the CPA
and each country. They includeResponsibility to the public.
Integrity.
Objectivity. Independence.
Due care.
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Code of Professional Conduct
Competency.
Confidentiality.
Integrity.
Avoidance of conflicts ofinterest.
Communication ofinformationobjectivelyand without bias.
Role Professional Ethics
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Professional ethics forms a code ofconduct that applies to the practice of a
profession.As members of a profession, accountants
have a responsibility, not only to their
employers and clients but also to societyas a whole, to uphold the highest ethicalstandards.
Role Professional Ethics
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The End Thank You
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