Chapter 01

ACCOUNTING IN BUSINESS

PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

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IMPORTANCE OF ACCOUNTING
Accounting
Identifying Select transactions and events Recording Input, measure and classify

Communicating Prepare, analyze and interpret

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USERS OF ACCOUNTING INFORMATION

External Users Internal Users

Lenders Consumer Groups Shareholders External Auditors Governments Customers

Managers Sales Staff Officers/Directors Budget Officers Internal Auditors Controllers

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USERS OF ACCOUNTING INFORMATION

External Users Internal Users

Financial accounting provides external users with financial statements.

Managerial accounting provides information needs for internal decision-makers.

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OPPORTUNITIES IN ACCOUNTING

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ACCOUNTING JOBS BY AREA

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ETHICS - A KEY CONCEPT

Ethics
Beliefs that distinguish right from wrong Accepted standards of good and bad behavior

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ETHICS - A KEY CONCEPT

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GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP).
Relevant Information Affects the decision of its users.

Reliable Information

Is trusted by users.

Comparable Information

Is helpful in contrasting organizations.

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SETTING ACCOUNTING PRINCIPLES

Financial Accounting Standards Board is the private group that sets both broad and specific principles. The Securities and Exchange Commission is the government agency that establishes reporting requirements for companies that issue stock to the public.

The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices to create harmony among accounting practices of different countries.

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INTERNATIONAL STANDARDS
The International Accounting Standards Board (IASB), an independent group (consisting of 16 individuals from many countries), issues International Financial Reporting Standards (IFRS) that identify preferred accounting practices.

IASB

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INTERNATIONAL STANDARDS

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PRINCIPLES AND ASSUMPTIONS OF ACCOUNTING

Revenue Recognition Principle

1. Recognize revenue when it is earned. 2. Proceeds need not be in cash. 3. Measure revenue by cash received plus cash value of items received.

Cost Principle
Accounting information is based on actual cost. Actual cost is considered objective.

Matching Principle
A company must record its expenses incurred to generate the revenue reported.

Full Disclosure Principle

A company is required to report the details behind financial statements that would impact users decisions.

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ACCOUNTING ASSUMPTIONS
Now Future

Going-Concern Assumption
Reflects assumption that the business will continue operating instead of being closed or sold.

Monetary Unit Assumption

Express transactions and events in monetary, or money, units.

Business Entity Assumption

A business is accounted for separately from other business entities, including its owner.

Time Period Assumption

Presumes that the life of a company can be divided into time periods, such as months and years.

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FORMS OF BUSINESS ENTITIES

Sole Proprietorship

Partnership

Corporation

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CHARACTERISTICS OF BUSINESSES
Characteristic Proprietorship Partnership Corporation Business entity yes yes yes Legal entity no no yes Limited liability no* no* yes Unlimited life no no yes Business taxed no no yes One owner allowed yes no yes

* Proprietorships and partnerships that are set up as LLCs provide limited liability.

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CORPORATION

Owners of a corporation are called shareholders (or stockholders). Shareholders are not personally liable for corporate acts. When a corporation issues only one class of stock, we call it common stock (or capital stock).

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SARBANES-OXLEY (SOX)
Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that issue their stock to the public. Management must issue a report stating that its internal controls are effective. Auditors must verify the effectiveness of internal controls.

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A1

TRANSACTION ANALYSIS AND THE ACCOUNTING EQUATION

Accounting Equation

Assets

= Liabilities + Equity

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ASSETS
Cash Accounts Receivable Notes Receivable

Vehicles

Resources owned or controlled by a company

Land

Store Supplies

Buildings
Equipment

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LIABILITIES
Accounts Payable Notes Payable

Creditors claims on assets

Taxes Payable Wages Payable

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EQUITY
Owners Claims on Assets

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TRANSACTION ANALYSIS EQUATION

The accounting equation MUST remain in balance after each transaction.

Assets

Liabilities

Equity

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TRANSACTION 1: INVESTMENT BY OWNERS

On December 1, Chas Taylor invests $30,000 cash to start a consulting business.
The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity)

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TRANSACTION 2: PURCHASE SUPPLIES FOR CASH

Chas Taylors company, FastForward purchases supplies paying $2,500 cash.
The accounts involved are: (1) Cash (asset) (2) Supplies (asset)

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TRANSACTION 3: PURCHASE EQUIPMENT FOR CASH

FastForward purchases equipment for $26,000 cash.
The accounts involved are: (1) Cash (asset) (2) Equipment (asset)

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TRANSACTION 4: PURCHASE SUPPLIES ON CREDIT

FastForward purchases Supplies of $7,100 on account.

The accounts involved are: (1) Supplies (asset) (2) Accounts Payable (liability)

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TRANSACTION 5: PROVIDE SERVICES FOR CASH

The company provides consulting services receiving $4,200 cash.
The accounts involved are: (1) Cash (asset) (2) Revenues (equity)

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TRANSACTION 6 AND 7: PAYMENT OF EXPENSES IN CASH

The company pays $1,000 rent and $700 in salary to the companys only employee.
The accounts involved are: (1) Cash (asset) (2) Expenses (equity)

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SUMMARY OF TRANSACTIONS
Other transactions were executed during December and the summary of all transactions is shown below:

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FINANCIAL STATEMENTS
Lets prepare the financial statements reflecting the transactions we have recorded.

1.Income Statement 2.Statement of Owners Equity 3.Balance Sheet 4.Statement of Cash Flows

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INCOME STATEMENT

The income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities.

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STATEMENT OF OWNERS EQUITY

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BALANCE SHEET
The Balance Sheet describes a companys financial position at a point in time.

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STATEMENT OF CASH FLOWS

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DECISION ANALYSIS
Return on assets (ROA) is stated in ratio form as income divided by assets invested.
Net income Average total assets

Return on assets =

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1A RETURN AND RISK ANALYSIS

Many different returns may be reported. Risk is the uncertainty about the return we will earn. The lower the risk, the lower our expected return. ROA Interest return on savings accounts. Interest return on corporate bonds.

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1B - BUSINESS ACTIVITIES AND THE ACCOUNTING EQUATION

There are three major types of activities in any organization: 1. Financing Activities Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry out plans. 2. Investing Activities - Are the acquiring and disposing of resources (assets) that an organization uses to acquire and sell its products or services. 3. Operating Activities Involve using resources to research, develop, and purchase, produce, distribute, and market products and services.

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END OF CHAPTER 01