CHAPTER 1 Accounting—Present and Past

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 What is Accounting? Accounting is the process of: Identifying Measuring Communicating > Economic information about an entity For decisions and informed judgments

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 Users and Uses of Accounting Information

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 Financial Accounting Financial accounting generally refers to the process that results in the preparation and reporting of financial statements for an entity. Financial accounting is primarily externally oriented and concerned with the historical results of an entity’s performance.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 Managerial Accounting/Cost Accounting Managerial accounting is concerned with the use of economic and financial information to plan and control many of the activities of the entity and to support the management decision- making process. Cost accounting relates to the determination and accumulation of product, process, or service costs.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 QUESTIONS ASKED BY INTERNAL USERS Is cash sufficient to pay bills? What is the cost of manufacturing each unit of product? Can we afford to give employee pay raises this year? Which product line is the most profitable?

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 Auditing—Public Accounting Public accounting firms and individual Certified Public Accountants (CPAs) provide auditing services and issue an independent auditor’s report. An independent auditor’s report usually contains three brief paragraphs and states whether the financial statements are prepared in conformity with generally accepted accounting principles. An auditor’s report can be unqualified (a “clean” opinion) or qualified.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-9 Internal Auditing Internal auditors are professional accountants who perform functions much like those of an external auditor. However, internal auditors are employed in industry rather than public accounting.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Governmental and Not-for-Profit Accounting Governmental units (e.g., municipal, state, and federal agencies) and not- for-profit entities (e.g., universities, hospitals, and religious organizations) require the same accounting functions to be performed as do other accounting entities.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Income Tax Accounting Tax practitioners often develop specialties in the taxation of individuals, partnerships, corporations, trusts and estates, or international tax law issues.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? Mesopotamians record tax receipts on clay tablets B.C.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? Luca Pacioli published first textbook describing a comprehensive double- entry bookkeeping system B.C. 1494

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The industrial revolution of the 19 th century generated the need for large amounts of capital to finance the enterprises that supplanted individual craftsmen. This need resulted in the corporate form of organization and the need to provide investors with reports showing the financial position and the results of operations B.C ’s

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? Accounting professionals in this country organized themselves in the early 1900’s and worked hard to establish certification laws, standardized audit procedures, and other attributes of a profession B.C ’s1900’s

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The Securities Act of 1933 and the Securities Exchange Act of 1934 gave the Securities and Exchange Commission (SEC) the authority to establish accounting principles for companies whose securities had to be registered with the SEC. Between 1932 to 1934 the American Institute Accountants and the New York Stock Exchange agreed on five broad principles of accounting B.C ’s1900’s1932 to & 1934

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The Committee on Accounting Procedure of the American Institute of Accountants issued 51 Accounting Research Bulletins that dealt with accounting principles. Although the SEC has the authority to establish accounting principles, the standard-setting process has been delegated to other organizations over the years B.C ’s1900’s1932 to & to 1959

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The APB ultimately issued 39 Opinions on serious accounting issues, but it failed to develop a conceptual underpinning for accounting. In 1959, the Accounting Principles Board (APB) replaced the Committee on Accounting Procedure as the standard-setting body B.C ’s1900’s1932 to & to

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The Financial Accounting Foundation (FAF) was created and established the Financial Accounting Standards Board (FASB) as the authoritative standard-setting body within the accounting profession. The FASB has issued 145 Statements of Financial Accounting Standards that have established standards of accounting and reporting for particular issues B.C ’s1900’s1932 to & to

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved How Has Accounting Developed? The Sarbanes-Oxley Act of 2002 creates a five-member Public Company Accounting Oversight Board (PCAOB) which has the authority to set and enforce auditing, attestation, quality control, and ethics standards for public companies B.C ’s1900’s1932 to & to

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Identification Select economic events (transactions) Recording Record, classify and summarize Accounting Reports SOFTBYTE Annual Report Prepare accounting reports Analyze and interpret for users Communication THE ACCOUNTING PROCESS

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved STUDY OBJECTIVE 6 THE BASIC ACCOUNTING EQUATION STUDY OBJECTIVE 6 THE BASIC ACCOUNTING EQUATION Assets Liabilities Stockholders’ Equity Stockholders’ Equity =+ resources owned by a business claims against those assets owners’ residual claim on total assets

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved TRANSACTION IDENTIFICATION PROCESS Answer telephone Purchase computer Pay rent Is the financial position (assets, liabilities, and stockholders’ equity) of the company changed? YesNoYes Record Don’t Record Record

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved STUDY OBJECTIVE 8 BASIC FINANCIAL STATEMENTS STUDY OBJECTIVE 8 BASIC FINANCIAL STATEMENTS Balance Sheet Income Statement Statement of Cash Flows Statement of Stockholders’ Equity After all transactions for the period are recorded, financial data is summarized (Illustration 1-8), and that summary data is used to generate the basic financial statements

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved BUSINESS ENTERPRISES A business owned by one person is generally a proprietorship. A business owned by two or more persons associated as partners is a partnership. A business organized as a separate legal entity under state corporation law and having ownership divided into transferable shares of stock is a corporation.

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Ethics and the Accounting Profession Independence Integrity Objectivity Competence

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved End of Chapter 1