1 Accounting and the Business Environment Chapter 1
2 Objective 1 Use accounting vocabulary
Copyright © 2007 Prentice-Hall. All rights reserved 3 AccountingAccounting Measures Processes Communicates….. Financial information to decision makers
Copyright © 2007 Prentice-Hall. All rights reserved 4 Decision Makers Individuals Businesses Investors Creditors Taxing Authorities
Copyright © 2007 Prentice-Hall. All rights reserved 5 Financial vs. Managerial Accounting Financial Accounting – Information for people outside of the company Managerial Accounting – Information for internal decision makers
Copyright © 2007 Prentice-Hall. All rights reserved 6 Governing Organizations FASB – Financial Accounting Standards Board SEC – Securities and Exchange Commission AICPA – American Institute of Certified Public Accountants IMA – Institute of Management Accountants
Copyright © 2007 Prentice-Hall. All rights reserved 7 EthicsEthics Audit –Examination of company’s financial situation –Performed by independent accountants Sarbanes-Oxley Act –Criminal offense to falsify financial statements Public Companies Accounting Oversight Board –Monitors work of accountants
Copyright © 2007 Prentice-Hall. All rights reserved 8 Standards of Professional Conduct AICPA – Code of Professional Conduct for Accountants IMA – Standards of Ethical Conduct
Copyright © 2007 Prentice-Hall. All rights reserved 9 Types of Business Organizations Proprietorships Partnerships Corporations
10 Objective 2 Apply accounting concepts and principles
Copyright © 2007 Prentice-Hall. All rights reserved 11 GAAP GAAP Generally Accepted Accounting Principles –Accounting guidelines that govern how accountants measure, process, and communicate financial information –Formulated by Financial Accounting Standards Board (FASB)
Copyright © 2007 Prentice-Hall. All rights reserved 12 GAAPGAAP Primary objective of financial accounting – provide information that is useful for making investment and lending decisions
Copyright © 2007 Prentice-Hall. All rights reserved 13 Entity Concept Accounting Entity – organization that stands apart as a separate economic unit
Copyright © 2007 Prentice-Hall. All rights reserved 14 Accounting information is based on the most reliable data available –Verifiable –Free from bias –Individuals would arrive at similar conclusions using same data Reliability (Objectivity) Principle
Copyright © 2007 Prentice-Hall. All rights reserved 15 Cost Principle Acquired assets and services should be recorded at their actual cost (historical cost)
Copyright © 2007 Prentice-Hall. All rights reserved 16 Going Concern Concept Assumes that the entity will remain in operation for the foreseeable future
Copyright © 2007 Prentice-Hall. All rights reserved 17 Stable-Monetary-Unit Concept Assumes that the dollar’s purchasing power is stable
18 Objective 3 Use the accounting equation
Copyright © 2007 Prentice-Hall. All rights reserved 19 AssetsAssets Economic resources, expected to benefit the business in the future –Cash –Accounts receivable –Merchandise inventory –Furniture –Land
Copyright © 2007 Prentice-Hall. All rights reserved 20 Claims to the Assets Liabilities – economic obligations payable to an individual or organization outside the business –Accounts payable –Notes payable –Salary payable
Copyright © 2007 Prentice-Hall. All rights reserved 21 Claims to the Assets Owner’s Equity (capital) – claim of business owner to the assets of the business
Copyright © 2007 Prentice-Hall. All rights reserved 22 Economic Resources Claims to Economic Resources The Accounting Equation Assets = Liabilities + Owner’s Equity
Copyright © 2007 Prentice-Hall. All rights reserved 23 Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments Revenues Expenses Owner Withdrawals Owner’s Equity
Copyright © 2007 Prentice-Hall. All rights reserved 24 RevenuesRevenues Amounts earned by delivering goods or services to customers –Sales revenue –Service revenue –Interest revenue –Dividend revenue
Copyright © 2007 Prentice-Hall. All rights reserved 25 ExpensesExpenses Decrease in owner’s equity that occurs from using assets or increasing liabilities in the course of delivering goods or services to customers –Salary expense –Rent expense –Utilities expense –Interest expense
Copyright © 2007 Prentice-Hall. All rights reserved 26 Exercise 1-18 AssetsLiabilitiesOwner’s Equity Pep Boys$ ?$60,000$21,000 Eddie Bauer?40,000 Benbrook Exxon 100,00079,000? $81,000 32,000 21,000 $72,000
27 Objective 4 Analyze business transactions
Copyright © 2007 Prentice-Hall. All rights reserved 28 TransactionTransaction An event that affects the financial position of a particular entity and can be recorded reliably
Copyright © 2007 Prentice-Hall. All rights reserved 29 Exercise 1-17 a.Increased assets (cash) b.No effect on total assets c.Decreased assets (cash) d.Increased assets (equipment)
Copyright © 2007 Prentice-Hall. All rights reserved 30 Exercise 1-17 e.Increased assets (accounts receivable) f.Decreased assets (cash) g.No effect on total assets h.Increased assets (cash)
Copyright © 2007 Prentice-Hall. All rights reserved 31 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise ,000Investment Assets = $45,000 Liabilities & Owner’s Equity = $45,000 45,0006
Copyright © 2007 Prentice-Hall. All rights reserved 32 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise ,000Investment 35,000 Assets = $45,000 Liabilities & Owner’s Equity = $45,000 45, , ,00035,00010,000Bal
Copyright © 2007 Prentice-Hall. All rights reserved 33 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise ,000 Assets = $47,000 Liabilities & Owner’s Equity = $47,000 2, ,00035,00010,000Bal 45,00035,00010,000Bal2,000
Copyright © 2007 Prentice-Hall. All rights reserved 34 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise 1-22 Assets = $54,000 Liabilities & Owner’s Equity = $54,000 7, ,000 Revenue 52,00035,00017,000Bal2,000 45,00035,00010,000Bal2,000
Copyright © 2007 Prentice-Hall. All rights reserved 35 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise 1-22 Assets = $51,000 Liabilities & Owner’s Equity = $51,000 52,00035,00017,000Bal2,000 -1, ,700 Salaries Exp -1,000 Rent Exp - 1, Utilities Exp ,00035,00014,000Bal2,000
Copyright © 2007 Prentice-Hall. All rights reserved 36 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise 1-22 Assets = $51,000 Liabilities & Owner’s Equity = $51, ,00035,00014,500Bal2,0001,500 49,00035,00014,000Bal2,000
Copyright © 2007 Prentice-Hall. All rights reserved 37 DateAssetsLiabilitiesOwner’s Equity JulyCashMedical Supplies LandAccounts Payable M.Lange, Capital Type of Transaction Exercise 1-22 Assets = $49,500 Liabilities & Owner’s Equity = $49,500 -1, ,500 49,00035,00014,500Bal2,0001,500 49,00035,00013,000Bal 5001,500
38 Objective 5 Prepare financial statements Evaluate business performance Objective 6
Copyright © 2007 Prentice-Hall. All rights reserved 39 Financial Statements Income statement Statement of owner’s equity Balance sheet Statement of cash flows
Copyright © 2007 Prentice-Hall. All rights reserved 40 Income Statement Summary of an entity’s revenues, expenses, and net income or net loss for a specific period Revenues - Expenses Net Income: Revenues > Expenses Net Loss: Expenses > Revenues
Copyright © 2007 Prentice-Hall. All rights reserved 41 Statement of Owner’s Equity Summary of changes in an entity’s owner’s equity during a specific period Beginning owner’s equity + Owner’s investments + Net income - Net loss - Owner’s withdrawals Ending owner’s equity
Copyright © 2007 Prentice-Hall. All rights reserved 42 Balance Sheet Reports the entity’s assets, liabilities, and owner’s equity as of a specific date Assets = Liabilities + Owner’s Equity
Copyright © 2007 Prentice-Hall. All rights reserved 43 Statement of Cash Flows Reports cash receipts and cash payments during a period (covered in Chapter 17)
Copyright © 2007 Prentice-Hall. All rights reserved 44 Maria Lange, M.D. Income Statement For the Month Ended July 31, 2006 Revenue: Fees earned$7,000 Expenses: Salary expense $1,700 Rent expense1,000 Utilities expense300 Total Expenses3,000 Net income$4,000
Copyright © 2007 Prentice-Hall. All rights reserved 45 Maria Lange, capital, July 1, 2006$ 0 Add: Investment by owner45,000 Net income for the month4,000 Subtotal$49,000 Less: Withdrawals by owner 0 Maria Lange, capital, July 31, 2006$49,000 Maria Lange, M.D. Statement of Owner’s Equity For the Month Ended July 31, 2006
Copyright © 2007 Prentice-Hall. All rights reserved 46 Maria Lange, M.D. Balance Sheet July 31, 2006 Assets Cash$13,000 Medical supplies1,500 Land 35,000 Total assets$ 49,500 Liabilities Accounts payable$500 Owner’s equity, M. Lange, capital 49,000 Total liabilities and owner’s equity$ 49,500
Copyright © 2007 Prentice-Hall. All rights reserved 47 Cash$2,000 Accounts receivable6,000 Supplies500 Equipment15,500 Total Assets$24,000 Allen Samuel Road Service Balance Sheet November 30, 2009 Liabilities Accounts payable$3,500 Note payable5,000 Total liabilities$8,500 Owner’s Equity A. Samuel, capital15,500 Total liabilities and owner’s equity$24,000 Assets Exercise 1-24
Copyright © 2007 Prentice-Hall. All rights reserved 48 Exercise 1-26 Ciliotta Design Studio Income Statement Year Ended December 31, 2006 Service revenue$158,100 Expenses: Salary expense$60,000 Rent expense24,000 Utilities expense6,800 Supplies expense4,000 Property tax expense1,200 Total expenses96,000 Net income$62,100
Copyright © 2007 Prentice-Hall. All rights reserved 49 Exercise Owner’s withdrawals: Ciliottas, capital, beginning of year $ 0 Add: Net income62,100 Investment by owner15,000 Subtotal$77,100 Less: Owner withdrawal? Ciliotta, capital, end of year$27,100 50,000
50 End of Chapter 1