COPYRIGHT © 2010 South-Western/Cengage Learning PowerPoint Author: Catherine Lumbattis COPYRIGHT © 2011 South-Western/Cengage Learning COPYRIGHT © 2010 South-Western/Cengage Learning

What is Business Activities to provide members of an economic system with goods and services Activities LO1

Forms of Organization two or more owners one owner Sole Proprietorship one owner Partnership two or more owners entity organized under laws of a particular state Corporation LO2

What is Accounting? Identifying Economic to Information various users Measuring Communicating LO4

Internal and External Users of Accounting Information Creditors Current and Potential Owners Government Agencies Suppliers Trade Associations Financial Analysts Bankers Internal Users – Management 12 12

The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders’ Equity) Creditors’ claims to assets Owners’ Economic resources = + Examples: Cash Accounts receivable Land Accounts payable Notes payable Capital stock Retained earnings LO5 14 14

Balance Sheet (snapshot of financial position) Assets Liabilities = + Owners’ Equity (or Stockholders’ Equity) 15 15

Income Statement (for a period of time) Revenues $$ Less: Expenses ($$) Net income $$ 16 16

Statement of Retained Earnings (for a period of time) Beginning retained earnings $$$ Add: Net income for the period $$$ Deduct: Dividends for the period ($$$) Ending retained earnings $$$ 17 17

Relationship among Financial Statements Top of the World Example Income Statement for Year ended June 30, 2010 Revenues $ 8,000 Less: Expenses ( 6,000) Net income $ 2,000 Statement of Retained Earnings for Year ended June 30, 2010 Beginning balance, retained earnings $ 0 Add: Net income 2,000 Deduct: Cash dividends (800) Ending balance, retained earnings $ 1,200 Balance Sheets June 30, 2010 July 1, 2009 Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0

The Conceptual Framework: Foundation for Financial Statements Aids accountants in their role as interpreters and communicators of relevant information Purpose is to act as a foundation for the specific principles and standards needed by the profession LO6 21 21

Financial Statement Assumptions Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption 20 20

Economic Entity Concept Each entity has its own books, records, and financial statements that are separate from owners No intermingling of personal and business assets and liabilities or income and expenses 21 21

Cost Principle Record assets at cost paid to acquire them Continue to value assets at historical cost until sold More objective than market value 22 22

Going Concern Assume business will continue indefinitely into the future Justifies use of historical cost 23 23

Monetary Unit How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

Generally Accepted Accounting Principles The various methods, rules, practices and other procedures that have evolved over time that regulates the preparation of financial statements 25 25

The Rules of the Game The rules The rule makers The rule enforcers The CPA regulators GAAP FASB SEC AICPA LO7 26 26

Ethics in Accounting 1. Identification of ethical dilemma 2. Analysis of key elements 3. Determine the alternatives 4. Resolve by selecting ethical alternative LO8

The Changing Face of the Accounting Profession A “financial reporting crisis” caused by: Enron: the omission of entities from the financial statements WorldCom: treating costs as assets rather than expenses causing higher net income

Sarbanes-Oxley Act Provisions of the act: Established the Public Company Accounting Oversight Board Required external auditors to report directly to the company’s audit committee Prohibits external auditors from providing other services compromising independence

End of Chapter 1