Introduction to Accounting and Business 1 Introduction to Accounting and Business

Service Business Service 1-1 Types of Businesses Service Business Service The Walt Disney Company Entertainment Delta Air Lines Transportation Marriott International Hotels Hospitality and lodging Bank of America Corporation Financial services XM Satellite Radio Satellite radio

Merchandising Business Product 1-1 Types of Businesses Merchandising Business Product Wal-Mart General merchandise GameStop Corporation Video games and accessories Best Buy Consumer electronics Gap Inc. Apparel Amazon.com Internet books, music, video

Manufacturing Business Product 1-1 Types of Businesses Manufacturing Business Product General Motors Corp. Cars, trucks, vans Samsung Cell phones Dell Inc. Personal computers Nike Athletic shoes and apparel The Coca-Cola Company Beverages Sony Corporation Stereos and televisions

Limited liability company 1-1 Common Forms of Business Organizations Proprietorship Partnership Corporation Limited liability company

A proprietorship is owned by one individual and— 1-1 A proprietorship is owned by one individual and— Comprises 70% of business organizations in the United States. Requires low cost of organizing. Is limited to financial resources of the owner. Is used by small businesses.

Comprises 10% of business organizations in the United States. 1-1 A partnership is similar to a proprietorship except that it is owned by two or more individuals and— Comprises 10% of business organizations in the United States. Combines the skills and resources of more than one person.

Generates 90% of the total dollars of business receipts received. 1-1 A corporation is organized under state or federal statues as a separate legal taxable entity and— Generates 90% of the total dollars of business receipts received. Comprises 20% of the businesses. Continued

Is able to obtain large amounts of resources by issuing stock. 1-1 Includes ownership divided into shares of stock, sold to shareholders (stockholders). Is able to obtain large amounts of resources by issuing stock. Is used by large businesses.

Is a popular alternative to a partnership. 1-1 A limited liability company (LLC) combines attributes of a partnership and a corporation in that it is organized as a corporation. However, a limited liability corporation can elect to be taxed as a partnership and— Is a popular alternative to a partnership. Has tax and liability advantages to the owners.

1-1 A business stakeholder is a person or entity having an interest in the economic performance and well-being of a business.

1-1 Capital market stakeholders provide the major financing for the business in order for the business to begin and continue its operations.

1-1 Product or service market stakeholders include customers who purchase the business’s products or services as well as the vendors who supply inputs to the business.

1-1 Government stakeholders have an interest in the economic performance of a business. City, county, state, and federal governments collect taxes from businesses within their jurisdiction.

1-1 Internal stakeholders include individuals employed by the business. Managers have an incentive to maximize the economic value of the business. Employees have an interest because their jobs depend on it.

1-1 The moral principles that guide the conduct of individuals are called ethics.

1-1 Accounting can be defined as an information system that provides reports to stakeholders about the economic activities and condition of a business.

Identify stakeholders. Assess stakeholders’ information needs. 1-1 The process by which accounting provides information to business stakeholders is as follows: Identify stakeholders. Assess stakeholders’ information needs. Design the accounting information system to meet stakeholders’ needs. Record economic data about business activities and events. Prepare accounting reports for stakeholders.

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1-1 Financial accounting is primarily concerned with the recording and reporting of economic data and activities for a business. Managerial accounting uses both financial accounting and estimated data to aid management in running day-to-day operations and in planning future operations.

1-1 Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.

1-2 The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business.

1-2 The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

1-2 The objectivity concept requires that the accounting records and reports be based upon objective evidence.

1-2 The unit of measure concept requires that economic data be recorded in dollars.

Assets = Liabilities + Owner’s Equity 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The resources owned by a business

Assets = Liabilities + Owner’s Equity 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the creditors, which represent debts of the business

Assets = Liabilities + Owner’s Equity 1-3 The Accounting Equation Assets = Liabilities + Owner’s Equity The rights of the owners

1-3 Example Exercise 1-2 Follow My Example 1-2 1-3 Example Exercise 1-2 John Joos is the owner and operator of You’re A Star, a motivational consulting business. At the end of its accounting period, December 31, 2007, You’re A Star has assets of $800,000 and liabilities of $350,000. Using the accounting equation, determine the following amounts: The following accounts appear in the adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability, (d) long-term liability; or (e) owner’s equity section of the December 31, 2007, balance sheet of Hindsight Consulting. Owner’s equity, as of December 31, 2007. b. Owner’s equity, as of December 31, 2008, assuming that assets increased by $130,000 and liabilities decreased by $25,000 during 2008. Follow My Example 1-2 A = L + OE $800,000 = $350,000 + OE OE = $450,000 A = L + OE $130,000 = –$25,000 + OE OE = $155,000 OE on Dec. 31, 2008: $605,000 ($450,000 + $155,000) 36

1-4 A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

Owner’s Equity Increased by Decreased by 1-4 Owner’s investments 1-4 Owner’s Equity Increased by Owner’s investments Revenues Owner’s withdrawals Expenses Decreased by 55

1-5 Accounting reports, called financial statements, provide summarized information to the owner.

1-5 The income statement is a summary of the revenue and expenses for a specific period of time, such as a month or a year.

Net income is carried to the statement of owner’s equity Income Statement 1-5 Net income is carried to the statement of owner’s equity 62

1-5 A statement of owner’s equity is a summary of the changes in the owner’s equity that have occurred during a specific period of time.

From the income statement Statement of Owner’s Equity 1-5 From the income statement To the balance sheet 64

1-5 A balance sheet is a list of the assets, liabilities, and owner’s equity as of a specific date.

From the statement of owner’s equity Balance Sheet 1-5 This amount is compared to the net cash flow on the statement of cash flows From the statement of owner’s equity 66

1-5 A statement of cash flows is a summary of the cash receipts and payments for a specific period of time.

This amount should match Cash on the balance sheet. Statement of Cash Flows 1-5 This amount should match Cash on the balance sheet. 68

Income Statement 1-5 The income statement reports the revenues and expenses for a period of time based on the matching concept. This concept is applied by matching the expenses with the revenue generated during a period by those expenses.

1-5 The excess of revenue over the expenses is called net income or net profit. If the expenses exceed the revenue, the excess is a net loss.

1-5 Example Exercise 1-4 The assets and liabilities of Chickadee Travel Service at April 30, 2008, the end of the current year, and its revenue and expenses for the year are listed below. The capital of the owner, Adam Cellini, was $80,000 at May 1, 2007, the beginning of the current year. Accounts payable $ 12,200 Miscellaneous expense $ 12,950 Accounts receivable 31,350 Office expense 63,000 Cash 53,050 Supplies 3,350 Fees earned 263,200 Wages expense 131,700 Land 80,000 Prepare an income statement for the current year ended April 30, 2008. 71

CHICKADEE TRAVEL SERVICE 1-5 Follow My Example 1-4 CHICKADEE TRAVEL SERVICE INCOME STATEMENT For the Year Ended April 30, 2008 Fees earned $263,200 Expenses: Wages expense $131,700 Office expense 63,000 Miscellaneous expense 12,950 Total expenses 207,650 Net income $ 55,550 72 For practice: PE 1-4A, PE 1-4B

Statement of Owner’s Equity 1-5 The statement of owner’s equity reports the changes in the owner’s equity for a period of time. It is prepared after the income statement.

1-5 Example Exercise 1-5 Using the data for Chickadee Travel Service shown in Example Exercise 1-4, prepare a statement of owner’s equity for the current year ended April 30, 2008. Adam Cellini invested an additional $50,000 in the business during the year and withdrew cash of $30,000 for personal use. 74

CHICKADEE TRAVEL SERVICE 1-5 Follow My Example 1-5 CHICKADEE TRAVEL SERVICE STATEMENT OF OWNER’S EQUITY For the Year Ended April 30, 2008 Adam Cellini, capital, May 1, 2007 $ 80,000 Additional investment by owner during year $ 50,000 Net income for the year 55,550 $105,550 Less withdrawals 30,000 Increase in owner’s equity 75,550 Adam Cellini, capital, April 30, 2008 $155,550 75 For Practice: PE 1-5A, PE 1-5B

Balance Sheet 1-5 The balance sheet reports the amounts of a firm’s assets, liabilities, and owner’s equity at the end of a specific period.

1-5 The account form of balance sheet lists the assets on the left and the liabilities and owner’s equity on the right—similar to design of an account.

1-5 The report form of balance sheet presents the liabilities and owner’s equity sections below the assets section.

CHICKADEE TRAVEL SERVICE 1-5 Example Exercise 1-6 Using the data for Chickadee Travel Service shown in Example Exercise 1-4 and 1-5, prepare the balance sheet as of April 30, 2008. Follow My Example 1-6 CHICKADEE TRAVEL SERVICE BALANCE SHEET April 30, 2008 Assets Liabilities Cash $ 53,050 Accounts payable $12,200 Accounts receivable 31,350 Supplies 3,350 Owner’s Equity Land 80,000 Adam Cellini, capital 155,550 Total assets $167,750 Total liab. & owner’s eq. $167,750 For Practice: PE 1-6A, PE 1-6B 79

The statement of cash flows consists of three sections: Statement of Cash Flows 1-5 The statement of cash flows consists of three sections: Operating activities Investing activities Financing activities

1-5 The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations.

1-5 The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.

1-5 The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.

The cash balance as of May 1, 2007, was $72,050. 1-5 Example Exercise 1-7 A summary of cash flows for Chickadee Travel Service for the year ended April 30, 2008, is shown below. Cash receipts: Cash received from customers $251,000 Cash received from additional investment of owner 50,000 Cash payments: Cash paid for expenses 210,000 Cash paid for land 80,000 Cash paid to owner for personal use 30,000 The cash balance as of May 1, 2007, was $72,050. Prepare a statement of cash flows for Chickadee Travel Service for the year ended April 30. 2008. 84

CHICKADEE TRAVEL SERVICE 1-5 Follow My Example 1-7 CHICKADEE TRAVEL SERVICE STATEMENT OF CASH FLOWS For the Year Ended April 30, 2008 Cash flows from operating activities: Cash received from customers $251,000 Deduct cash payments for expenses 210,000 Net cash flows from operating activities $ 41,000 Cash flows from investing activities: Cash payments for purchase of land (80,000) Cash flows from financing activities: Cash received from owner as investment $ 50,000 Deduct cash withdrawals by owner 30,000 Net cash flows from financing activities 20,000 Net decrease in cash during year $(19,000) Cash as of May 1, 2007 72,050 Cash as of April 30, 2008 $ 53,050 85 For Practice: PE 1-7A, PE 1-7B