Chapter 1

Introduction to Accounting
and Business
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess

Objectives
Objectives
1. Describe the nature of a business.
2. Describe the role
of accounting
business.
After
studying
After
studyinginthis
this

3. Describe the importance

of
business
chapter,
should
chapter, you
you
shouldethics and the
basic principles of proper
ethical
be
to:
be able
able
to:conduct.

be able to:

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.

Objectives
Objectives
7. Explain how business transactions can be
stated in terms of the resulting change in the
basic elements of the accounting equation.
8. Describe the financial statements of a
corporation and explain how they interrelate.
9. Use the ratio of liabilities to stockholders
equity to analyze the ability of a business to
withstand poor business conditions.

Types of Businesses
Manufacturing
Manufacturing Business
Business
Product
Product

General
General Motors
Motors
Intel
Intel
Boeing
Boeing
Nike
Nike
Coca-Cola
Coca-Cola
Sony
Sony

Cars,
Cars, trucks,
trucks, vans
vans
Computer
Computer chips
chips
Jet
Jet aircraft
aircraft
Athletic
Athletic shoes
shoes and
and apparel
apparel
Beverages
Beverages
Stereos
Stereos and
and television
television

Types of Businesses
Merchandising
Merchandising Business
Business
Product
Product

Wal-Mart
Wal-Mart
Toys
Toys R
R Us
Us
Circuit
Circuit City
City
Lands
LandsEnd
End
Amazon.com
Amazon.com

General
General merchandise
merchandise
Toys
Toys
Consumer
Consumer electronics
electronics
Apparel
Apparel
Internet
Internet books,
books, music,
music, video
video
retailer
retailer

Types of Businesses
Service
Service Business
Business
Product
Product

Disney
Disney
Delta
DeltaAir
Air Lines
Lines
Marriott
Marriott Hotels
Hotels
Merrill
Merrill Lynch
Lynch
Sprint
Sprint

Entertainment
Entertainment
Transportation
Transportation
Hospitality
Hospitality and
and lodging
lodging
Financial
Financial advice
advice
Telecommunication
Telecommunication

There
There are
are three
three types
types of
of
business
business organizations
organizations
Proprietorship
Partnership
Corporation

A
Aproprietorship
proprietorship
isis owned
owned by
by one
one
individual.
individual.

Joes

Advantages
Ease in organizing
Low cost of
organizing
Disadvantage
Limited source of
financial resources
Unlimited liability

A
Apartnership
partnership isis
owned
owned by
by two
two or
or
more
more individuals.
individuals.

Joe and Martys

Advantages
More financial
resources than a
proprietorship.
Additional
management skills.
Disadvantage
Unlimited liability.

A
Acorporation
corporation isis
organized
Advantage
organized under
under state
state
or
or federal
federal statutes
statutes as
as aa The ability to obtain
separate
separate legal
legal entity.
entity.
large amounts of
resources by issuing
stocks.
J & M, Inc.

Disadvantage
Double taxation.

Business
Business Strategies
Strategies
A business strategy is an integrated
set of plans and actions designed to
enable the business to gain an
advantage over its competitors, and
in doing so, to maximize its profits.

Business
Business Strategies
Strategies
Under a low-cost strategy, a business
designs and produces products or
services of acceptable quality at a cost
lower than that of its competitors.
Under a differential strategy, a business
designs and produces products or services
that possess unique attributes or
characteristics which customers are willing
to pay a premium price.

Business
Business Stakeholders
Stakeholders
A business stakeholder is a person or
entity having an interest in the
economic performance of the business.

The
The Process
Process of
of Providing
Providing
Information
Information

Identify
stakeholders.

STAKEHOLDERS
External:
Internal:
Customers,
Owners,
creditors,
managers,
government
employees

Assess
stakeholders
informational
needs.

The
The Process
Process of
of Providing
Providing
Information
Information

Record
economic
data about
business
activities
and events.

Accounting
Information
System

Design the
accounting
information
system to meet
stakeholders
needs.

The
The Process
Process of
of Providing
Providing
Information
Information
STAKEHOLDERS

Internal:
Owners,
managers,
employees

Prepare
accounting
reports for
stakeholders.

Accounting
Information
System

External:
Customers,
creditors,
government

Profession
Profession of
of Accounting
Accounting
Accountants
Accountants employed
employed by
by aa business
business firm
firm or
or
aa not-for-profit
not-for-profit organization
organization are
are said
said to
to be
be
engaged
engaged in
in private
private accounting.
accounting.
Accountants
Accountants and
and their
their staff
staff who
who provide
provide
services
services on
on aa fee
fee basis
basis are
are said
said to
to be
be
employed
employed in
in public
public accounting.
accounting.

Generally
Generally Accepted
Accepted
Accounting
Accounting
Principles
Principles (GAAP)
(GAAP)

The
The business
business entity
entity concept
concept
limits
limits the
the economic
economic data
data in
in
the
the accounting
accounting system
system to
to
data
data related
related directly
directly to
to the
the
activities
activities of
of the
the business.
business.
The
The cost
cost concept
concept isis the
the
basis
basis for
for entering
entering the
the
exchange
exchange price,
price, or
or cost
cost
of
of an
an acquisition
acquisition in
in the
the
accounting
accounting records.
records.

The
The objectivity
objectivity concept
concept
requires
requires that
that the
the accounting
accounting
records
records and
and reports
reports be
be based
based
upon
upon objective
objective evidence.
evidence.
The
The unit-of-measure
unit-of-measure
concept
concept requires
requires that
that
economic
economic data
data be
be
recorded
recorded in
in dollars.
dollars.

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The resources
owned by a
business

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The rights of the
creditors, which
represent debts
of the business

The
The Accounting
Accounting Equation
Equation
Assets = Liabilities + Owners Equity
The rights of the
owners

What is a business
transaction?

A business transaction is an economic event or

condition that directly changes an entitys financial
condition or directly affects its results of operations.

On November 1,
2005, Chris
Clark organized
a corporation
that will be
known as
NetSolutions.

a. Chris
Chris Clark
Clark deposits
deposits $25,000
$25,000 in
in aa bank
bank
a.
account in
in the
the name
name of
of NetSolutions
NetSolutions in
in
account
return for
for shares
shares of
of stock
stock in
in the
the
return
corporation.
corporation.

a.

Assets

Cash
25,000

Owners Equity
Capital Stock
25,000 Investment by
stockholder

b. NetSolutions
NetSolutions exchanged
exchanged $20,000
$20,000 for
for land.
land.
b.
Assets
Cash + Land
Bal. 25,000
b. 20,000
+20,000
Bal. 5,000
20,000

=
=

Owners Equity
Capital Stock
25,000
25,000

c. During
During the
the month,
month, NetSolutions
NetSolutions purchased
purchased
c.
supplies for
for $1,350
$1,350 and
and agreed
agreed to
to pay
pay the
the
supplies
supplier in
in the
the near
near future
future ((on
on account
account).).
supplier
Assets

Cash + Supplies + Land

Bal. 5,000
c.
Bal. 5,000

20,000
+ 1,350
1,350

20,000

Owners
Liabilities + Equity
Accounts
Capital
Payable
Stock

25,000
+ 1,350
1,350

25,000

d. NetSolutions
NetSolutions provided
provided services
services to
to
d.
customers, earning
earning fees
fees of
of $7,500
$7,500 and
and
customers,
received the
the amount
amount in
in cash.
cash.
received
Assets

Cash + Supplies + Land

Bal. 5,000
1,350
20,000
d. + 7,500
Bal. 12,500

1,350

20,000

Owners
Liab . + Equity
Accounts Capital Retained
Payable + Stock + Earnings
1,350 25,000
+ 7,500
1,350

25,000

7,500
Fees
earned

e. NetSolutions
NetSolutions paid
paid the
the following
following
e.
expenses: wages,
wages, $2,125;
$2,125; rent,
rent, $800;
$800;
expenses:
utilities, $450;
$450; and
and miscellaneous,
miscellaneous, $275.
$275.
utilities,
Assets
Cash + Supplies + Land
Bal. 12,500
1,350
20,000
e. 3,650

Bal. 8,850

1,350

20,000

Owners
=
Liab . + Equity
Accounts Capital Retained
Payable + Stock + Earnings
1,350 25,000
7,500
2,125
=
800
Expenses
450
275
1,350 25,000
3,850

NetSolutions paid
paid $950
$950 to
to
f.f. NetSolutions
creditors during
during the
the month.
month.
creditors
Assets
Cash + Supplies + Land
Bal. 8,850
1,350
20,000
f.
950
Bal. 7,900
1,350
20,000

Owners
Liab . + Equity
Accounts Capital Retained
Payable + Stock + Earnings
1,350 25,000
3,850
950
400 25,000
3,850

g. At
At the
the end
end of
of the
the month,
month, the
the cost
cost
g.
of supplies
supplies on
on hand
hand isis $550,
$550, so
so
of
$800 of
of supplies
supplies were
were used.
used.
$800
Assets
Cash + Supplies + Land
Bal. 7,900
1,350
20,000
g.
800
Bal. 7,900
550
20,000

Owners
Liab . + Equity
Accounts Capital Retained
Payable + Stock + Earnings
400 25,000
3,850
Supplies
800
Expense
400 25,000
3,050

h. At
At the
the end
end of
of the
the month,
month, NetSolutions
NetSolutions
h.
pays $2,000
$2,000 to
to stockholders.
stockholders.
pays
Assets
Cash + Supplies + Land
Bal. 7,900
550
20,000
h. 2,000
Bal. 5,900
550
20,000

Owners
Liab . + Equity
Accounts Capital Retained
Payable + Stock + Earnings
400 25,000
3,050
2,000
Dividends
400 25,000
1,050

Effects
Effects of
of Transactions
Transactions on
on Owners
OwnersEquity
Equity
Capital Stock
Increased by

Stockholders
investments

Effects
Effects of
of Transactions
Transactions on
on Owners
OwnersEquity
Equity
Retained Earnings
Decreased by

Decreased by

Revenues

Expenses

Dividends

Increased by

Accounting
Accounting reports,
reports, called
called
financial
financial statements,
statements,
provide
provide summarized
summarized
information
information to
to the
the users.
users.

Financial
Financial Statements
Statements
Income statementA summary of the
revenue and expenses for a specific period
of time.
Retained earnings statementA summary of
the earnings retained in the corporation for a
specific period of time.
Balance sheetA list of the assets, liabilities,
and stockholders equity as of a specific date.
Statement of cash flowsA summary of the
cash receipts and disbursements for a
specific period of time.

NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned
Operating expenses:
Wages expense

$7 500 00
$2 125 00
800 00
800 00
450 00

Rent expense
Supplies expense
Utilities expense
Miscellaneous expense
275 00
Total operating expenses Transfer
Transfer this
this
Net income

amount
amount to
to the
the
retained
retained earnings
earnings
statement.
statement.

4 450 00
$3 050 00

NetSolutions
Retained Earnings Statement
For the Month Ended November 30, 2005

From
the
income
From
the
income
Net income for November
statement
statement
Less dividends
Transferred
to
the
Transferred
to
the
Retained earnings, November 30, 2005
balance
balance sheet
sheet

$3 050 00
2 000 00
$1 050 00

NetSolutions
Balance Sheet
November 30, 2005

Assets
Cash
Supplies
Land

From
Fromthe
the
Liabilities
retained
retained earnings
earnings
$ 5 900 00 Accounts Payable
statement
statement$ 400 00
550 00 Stockholders Equity

20 000 00 Capital Stock $25,000

Ret. Earnings

l,050

26 050 00

Total liabilities and

Total assets

$26 450 00

stockholders equity

This balance sheet presented

using the account form

$26 450 00

NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
Cash flows from operating activities:
Cash received from customers
$ 7 500 00
Deduct cash payments for expenses
and payments to creditors
4 600 00
Net cash flow from operating activities
2 900 00
Cash flows from investing activities:
Cash payment for acquisition of land
(20 000 00 )
Cash flows from financing activities:
Cash received as owners investment
$25 000 00
Deduct cash withdrawal by owner
2 000 00
Net cash flow from financing activities
23 000 00
Net cashShould
flow and
Nov.
30, 2005
bal. sheet
$ 5 900 00
match
Cash
on
balance
Should
match
Cash
onthe
thecash
balance
sheet

Statement
Statement of
of Cash
Cash Flows
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
section reports the cash transactions related to cash
investments by the owner, borrowings, and cash
withdrawals by the owner.