What is Accounting? Accounting is a process that involves collecting information, recording it, summarizing it and then reporting it to various decision makers. Process – buy something © 2007 McGraw-Hill Ryerson Ltd.

Users of Accounting Information Internal Owners Managers External Bankers and other creditors Investors and potential investors External auditors Government © 2007 McGraw-Hill Ryerson Ltd.

Questions asked by internal users What are the manufacturing expenses per unit of product? What is the most profitable mix of services? How much do we have to sell to break even? How much profit did we earn last month? Are we keeping our expenses under control? © 2007 McGraw-Hill Ryerson Ltd.

Questions asked by external users Can the company repay current loans? Is the purchaser able to pay for goods purchased? Do revenues include only those for the current period? Have all expenses been recorded? Is net income large enough to support a request for increased pay? © 2007 McGraw-Hill Ryerson Ltd.

© 2005 McGraw-Hill Ryerson Limited. Financial Accouning Focuses on the needs of external decision makers Government Shareholders Banks Suppliers Shareholders – those who own the company © 2005 McGraw-Hill Ryerson Limited.

Management accounting Focuses on the needs of internal decision makers Top executives Management Administrators © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Nature of Accounting Accountants analyze, record, quantify, accumulate, summarize, report and interpret economic events Report – financial statements How we do this is called accounting system. Value is in what the information tells us. Decision makers use this information to answer questions concerning investment alternatives, product development, employee evaluations, loan levels, and cash needs. © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Decision Making Accounting information is useful to anyone who must make decision that have economic consequences. Shows where and when money has been spent. Helps predict future effects of decisions Helps direct attention to current problems © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Decision Making Event Accountant’s analysis and recording Financial statements users All financial accounting courses cover analysis and recording and preparing financial statements. We pay more attention to the underlying process and ot the way in which the financial reports help decision makers to take action. © 2005 McGraw-Hill Ryerson Limited.

What do decision makers want to know What is the financial position on a given day? How well did it do over a period of time? How much cash do we have today? How much income did we get last month? © 2005 McGraw-Hill Ryerson Limited.

How do they get the answers Financial statements Balance sheet Income statement Statement of cash flows Balance sheet answers – what is picture on any given point of time Rest of statements answer how well did it do © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Annual Report The annual report is usually the source management uses to present these statements as well as other financial information. It is prepared by management to inform investors about the company's past performance and future prospects. Most companies distribute their annual reports to shareholders. Also can be found online. © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Annual Report Financial Statements  Statement of management’s responsibility for preparation of the financial statements Discussion and analysis by management of recent economic events  Footnotes that explain in more detail many elements of the financial statements  Independent auditor's report Other corporate information © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Types of Ownership Sole proprietorship Partnership Corporation Sole proprietorship – single owner – separate entity from the owner Partnerships – two or more owners – separate entity from the owner accounting is the same Corporations – created by law – limited liability – no claim against assets of persons – privately or publicly owned (shares sold to public) © 2005 McGraw-Hill Ryerson Limited.

Sole Proprietorships One owner Separate entity for accounting purposes Not a separate legal entity from the owner Unlimited liability Limited life Owner taxed on profits © 2007 McGraw-Hill Ryerson Ltd.

Partnerships Two or more owners Separate entity for accounting purposes Not a separate legal entity from the owners Unlimited liability Limited life Owners taxed on profits © 2007 McGraw-Hill Ryerson Ltd.

Corporations One or more owners Separate entity for accounting purposes Separate legal entity from the owner(s) Limited liability Unlimited life Corporation taxed on profits © 2007 McGraw-Hill Ryerson Ltd.

Advantages and Disadvantages of Corporation Limited liability Easy transfer of ownership Ease in raising ownership capital Continuity of existence Disadvantages Taxes Corp sell stock certificates – Continuity – life is indefinite Corp taxed as separate entity and shareholders also taxed when receive dividends Prop and partnerships – taxed as owners © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Net Worth What do I own What do I owe What is left over Show example of net worth Change this to a business © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Balance Sheet Assets Liabilities Owner’s equity (shareholder’s equity) © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Terminology Entity Transaction Inventory account Entity – An organization that is separate as an economic unit Transaction – any event that affects the financial position of an entity and can be recorded in money terms Inventory – goods held for resale Account – place or location where increases and decreases are recorded © 2005 McGraw-Hill Ryerson Limited.

How do we acquire assets Equity Debt Exchange for another asset Paid in capital – total capital investment by its owner’s , both at the start and thereafter, is called paid-in capital. Two parts – capital stock at par and paid-in capital in excess of par value © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Transaction analysis What accounts are affected Increase or decrease Still in balance © 2005 McGraw-Hill Ryerson Limited.

Balance Sheet The balance sheet reports the: Assets Liabilities Owner’s equity of an organization at a point in time. © 2007 McGraw-Hill Ryerson Ltd.

Transactions and the Accounting Equation Liabilities Equity Assets = + The accounting equation must remain in balance after each transaction. © 2007 McGraw-Hill Ryerson Ltd.

Transaction Analysis We need to determine: Which accounts are being affected. If the accounts are increasing or decreasing. © 2007 McGraw-Hill Ryerson Ltd.

Transaction Analysis (1) Carol Finlay invests $10,000 cash in the business. Analysis: Cash increases by $10,000. Owner’s capital increases by $10,000. © 2007 McGraw-Hill Ryerson Ltd.

Transaction Analysis (2) Purchased supplies for $2,500 cash. Analysis: Supplies increase by $2,500. Cash decreases by $2,500. © 2007 McGraw-Hill Ryerson Ltd.

Transaction Analysis (3a) Purchased $1,100 of supplies on credit. Analysis: Supplies increase by $1,100. Accounts Payable increases by $1,100 © 2007 McGraw-Hill Ryerson Ltd.

Transaction Analysis (3b) Purchased $6,000 of furniture on credit. A promissory note was signed. Analysis: Furniture increases by $6,000. Notes payable increases by $6,000. © 2007 McGraw-Hill Ryerson Ltd.

© 2005 McGraw-Hill Ryerson Limited. Par value The nominal dollar value printed on the stock. Also called stated value How is par value determined – board of directors Usually stock sold at price higher than par. Difference between par and what it is sold for is called paid in capital Example – co issued 100 shares at $100 par value Sold 20 shares at $200 Total paid in capital = capital stock at par + paid in capital in excess of par Par value = 2000 (20 x 100) Paid in capital in excess of par= 2000 Total paid in capital - 4000 © 2005 McGraw-Hill Ryerson Limited.

Stockholders and the Board of Directors In corporations, the ultimate responsibility for management is delegated by the stockholders to the board of directors. The corporate form of organization separates ownership and management. The board's duty is to ensure that managers act in the interests of shareholders. The board is elected by the shareholders. Stockholders elect Baord of Directors. The Board of Directors appoint managers.Interests of both shareholders and management are usually represented. Usually CEO or top financial person will sit on the Board. © 2005 McGraw-Hill Ryerson Limited.

© 2005 McGraw-Hill Ryerson Limited. Auditing The credibility of financial statements is the ultimate responsibility of the managers who are entrusted with the resources of the entity under their command. An auditor examines the information that managers use to prepare the financial statements and provides assurances about the credibility of those statements An audit is an in-depth examination of transactions and financial statements © 2005 McGraw-Hill Ryerson Limited.

End of Chapter © 2007 McGraw-Hill Ryerson Ltd.

Photograph Credits Slide Credit 5 SW Productions/Getty Images 6 Comstock/Picture Quest 7 Ryan Mc Vay /Getty Images 8 Dynamic Graphics / Jupiter Images © 2007 McGraw-Hill Ryerson Ltd.