c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction to Accounting and Business Chapter 1

Learning Objectives 1. Describe the nature of a business and the role of accounting and ethics in business. 2. Summarize the development of accounting principles and relate them to practice.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Describe the nature of a business, the role of accounting, and ethics in business. 1

Nature of Business and Accounting o A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

Nature of Business and Accounting o The objective of most businesses is to earn a profit. o Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

Types of Businesses Service BusinessesService Delta Air LinesTransportation services The Walt Disney CompanyEntertainment services Merchandising BusinessesProduct WalMartGeneral merchandise Amazon.comInternet books, music, videos Manufacturing BusinessesProduct Ford Motor CompanyCars, trucks, vans Dell Inc.Personal computers

The Role of Accounting in Business o Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.

The Role of Accounting in Business o The process by which accounting provides information to users is as follows:  Identify users.  Assess users’ information needs.  Design the accounting information system to meet users’ needs.  Record economic data about business activities and events.  Prepare accounting reports for users.

T HE R OLE OF A CCOUNTING IN B USINESS

Managerial Accounting o The area of accounting that provides internal users with information is called managerial accounting or management accounting. o Managerial accountants employed by a business are employed in private accounting.

Financial Accounting o The area of accounting that provides external users with information is called financial accounting. o The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business. o General-purpose financial statements are one type of financial accounting report that is distributed to external users.

Role of Ethics in Accounting and Business o The objective of accounting is to provide relevant, timely information for user decision making. o Accountants must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making. o Ethics are moral principles that guide the conduct of individuals.

Role of Ethics in Accounting and Business

The answer to … “What went wrong for these companies?” … involves one or both of these factors. (Exhibit 2)  Failure of individual character  Firm culture of greed and ethical indifference Role of Ethics in Accounting and Business

Opportunities for Accountants o Accountants and their staff who provide services on a fee basis are said to be employed in public accounting. o Accountants employed by a business firm, government, or a not-for-profit organization are said to be employed in private accounting. o Public accountants who have met a state’s education, experience, and examination requirements may become Certified Public Accountants (CPAs).

Opportunities for Accountants

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Objective Summarize the development of accounting principles and relate them to practice. 2

Generally Accepted Accounting Principles o Financial accountants follow generally accepted accounting principles (GAAP) in preparing reports. o Within the U.S., the Financial Accounting Standards Board (FASB) has the primary responsibility for developing accounting principles.

Generally Accepted Accounting Principles o The Securities and Exchange Commission (SEC), an agency of the U.S. government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public. o Many countries outside the United States use generally accepted accounting principles adopted by the International Accounting Standards Board (IASB).

Financial accounting practice is governed by concepts and rules known as Generally Accepted Accounting Principles (GAAP). G ENERALLY A CCEPTED A CCOUNTING P RINCIPLES Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations.

Professional Accounting Bodies and Standard Setting in Malaysia o Malaysian Institute of Accountant (MIA) o Malaysian Institute of Certified Public Accountant (MICPA) o Malaysian Accounting Standards Board (MASB) o Financial Reporting Foundation (FRF)

Malaysian Institute of Accountant (MIA) o established under the Accountants Act 1967 o regulating the accounting profession. o play a significant role in the development and advancement of accounting profession globally. o Its membership in such bodies include the: Asean Federation of Accountants (AFA)Asean Federation of Accountants (AFA) Confederation of Asian and Pacific Accountants (CAPA)Confederation of Asian and Pacific Accountants (CAPA) International Federation of Accountants (IFAC)International Federation of Accountants (IFAC) Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)Intergovernmental Working Group of Experts on International Standards of Accounting and Reporting (ISAR)

Malaysian Institute of Accountant (MIA)  Objectives:  To promote and regulate professional and ethical standards  To enhance competency through continuous education and training to meet the challenges of the global economy  To enhance the status of members  To lead research and development for the enhancement of the profession  To inculcate a high sense of social responsibility

Malaysian Institute of Certified Public Accountant (MICPA)  Objectives:  To advance the theory and practice of accountancy in all its aspects.  To recruit, educate, train and assess by means of examination or otherwise a body of members skilled in these areas.  To preserve at all times the professional independence of accountants in whatever capacities they may be serving.  To maintain high standards of practice and professional conduct by all its members.  To do all such things as may advance the profession of accountancy in relation to public practice, industry, commerce, education and the public service.

Malaysian Accounting Standards Board (MASB) o Established under the Financial Reporting Act 1997 (the Act) as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. o Working with FRF to make up the new framework for financial reporting in Malaysia, with representation from all relevant parties in the standard-setting process, including preparers, users, regulators and the accountancy profession.

Financial Reporting Federation (FRF)  Established under the Financial Reporting Act 1997 (Act), comprises representation from all relevant parties in the standard setting process, including preparers, users, regulators and accountancy profession.  Oversight the MASB's performance, financial and funding arrangements, and as an initial source of views for the MASB on proposed standards and pronouncements. It has no direct responsibility with regard to standard setting. This responsibility rests solely with the MASB.

Business Entity Concept o Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses.

P ROPRIETORSHIP A proprietorship is owned by one individual.  70% of business entities in the U.S. are proprietorships.  They are easy and cheap to organize.  Resources are limited to those of the owner.  Used by small businesses.

P ARTNERSHIP A partnership is similar to a proprietorship except that it is owned by two or more individuals.  10% of business organizations in the U.S. (combined with limited liability companies) are partnerships.  Combines the skills and resources of more than one person.

C ORPORATION A corporation is organized under state or federal statutes as a separate legal taxable entity.  Generates 90% of business revenues.  20% of the business organizations in the U.S.  Ownership is divided into shares, called stock.  Can obtain large amounts of resources by issuing stock.  Used by large businesses.

L IMITED L IABILITY C OMPANY (LLC) A limited liability company (LLC) combines the attributes of a partnership and a corporation.  10% of business organizations in the U.S. (combined with partnerships).  Often used as an alternative to a partnership.  Has tax and legal liability advantages for owners.

Cost Concept o Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price.

Cost Concept o Aaron Publishers purchased a building on February 20, 2012, for $150,000. Other amounts related to this purchased are shown on the next slide.

Cost Concept   Price listed by seller on Jan. 1, 2012$160,000   Aaron Publishers’ initial offer to buy on Jan. 31, ,000   Purchase price on Feb. 20, ,000   Estimated selling price on Dec. 31, ,000   Assessed value for property taxes, Dec. 31, ,000 Under the cost concept, Aaron Publishers records the purchase of the building on February 20, 2012, at the purchase price of $150,000. The other amounts listed above have no effect on the accounting records.

Objectivity Concept o The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence. o Only the final agreed-upon amount is objective enough to be recorded in the accounting records.

Unit of Measure Concept o The unit of measure concept requires that economic data be recorded in dollars.

c Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part. Introduction to Accounting and Business The End