Introduction to Accounting and Business

After studying this chapter, you should be able to: Objectives 1. Describe the nature of a business. 2. Describe the role of accounting in business. 3. Describe the importance of business ethics and the basic principles of proper ethical conduct. 4. Describe the profession of accounting. 5. Summarize the development of accounting principles and relate them to practice. 6. State the accounting equation and define each element of the equation. After studying this chapter, you should be able to:

Objectives 7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. 8. Describe the financial statements of a corporation and explain how they interrelate. 9. Use the ratio of liabilities to stockholders’ equity to analyze the ability of a business to withstand poor business conditions.

Manufacturing Business Types of Businesses Manufacturing Business Product General Motors Cars, trucks, vans Intel Computer chips Boeing Jet aircraft Nike Athletic shoes and apparel Coca-Cola Beverages Sony Stereos and television

Merchandising Business Types of Businesses Merchandising Business Product Wal-Mart General merchandise Toys “R” Us Toys Circuit City Consumer electronics Lands’ End Apparel Amazon.com Internet books, music, video retailer

Types of Businesses Service Business Disney Entertainment Product Disney Entertainment Delta Air Lines Transportation Marriott Hotels Hospitality and lodging Merrill Lynch Financial advice Sprint Telecommunication

There are three types of business organizations Proprietorship Partnership Corporation

A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability Joe’s

A partnership is owned by two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. A partnership is owned by two or more individuals. Disadvantage Unlimited liability. Joe and Marty’s

The ability to obtain large amounts of resources by issuing stocks. A corporation is organized under state or federal statutes as a separate legal entity. Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation. J & M, Inc.

Business Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

Business Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.

Business Stakeholders A business stakeholder is a person or entity having an interest in the economic performance of the business.

The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake-holders. 2 Assess stakeholders’ informational needs.

The Process of Providing Information Design the accounting information system to meet stakeholders’ needs. 3 Accounting Information System 4 Record economic data about business activities and events.

5 The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 5 Prepare accounting reports for stakeholders. Accounting Information System

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

Generally Accepted Accounting Principles (GAAP)

The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.

The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.

The Accounting Equation Assets = Liabilities + Owners’ Equity The resources owned by a business

The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the creditors, which represent debts of the business

The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the owners

What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.

On November 1, 2009, Clark organized a corporation that will be known as Net Solutions.

a. Clark deposits 25,000 in a bank account in the name of Net Solutions in return for shares of stock in the corporation. Capital Stock 25,000 Investment by stockholder Cash 25,000 a. Assets Owners’ Equity =

b. NetSolutions exchanged 20,000 for land. Assets = Owners’ Equity Cash + Land 25,000 Capital Stock 25,000 Bal. = b. –20,000 +20,000 Bal. 5,000 20,000 25,000

c. During the month, NetSolutions purchased supplies for 1,350 and agreed to pay the supplier in the near future (on account). Owners’ Liabilities + Equity Assets = = Accounts Capital Cash + Supplies + Land Payable Stock Bal. 5,000 20,000 25,000 c. + 1,350 + 1,350 Bal. 5,000 1,350 20,000 1,350 25,000

d. NetSolutions provided services to customers, earning fees of 7,500 and received the amount in cash. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 5,000 1,350 20,000 1,350 25,000 = d. + 7,500 + 7,500 Fees earned Bal. 12,500 1,350 20,000 1,350 25,000 7,500

e. NetSolutions paid the following expenses: wages, 2,125; rent, 800; utilities, 450; and miscellaneous, 275. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 12,500 1,350 20,000 1,350 25,000 7,500 = Expenses e. – 3,650 –2,125 – 800 – 450 – 275 Bal. 8,850 1,350 20,000 1,350 25,000 3,850

f. NetSolutions paid 950 to creditors during the month. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings = Bal. 8,850 1,350 20,000 1,350 25,000 3,850 f. – 950 – 950 Bal. 7,900 1,350 20,000 400 25,000 3,850

g. At the end of the month, the cost of supplies on hand is 550, so 800 of supplies were used. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 7,900 1,350 20,000 400 25,000 3,850 = Supplies Expense g. – 800 – 800 Bal. 7,900 550 20,000 400 25,000 3,050

h. At the end of the month, NetSolutions pays 2,000 to stockholders. Owners’ Liab . + Equity Assets = Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal. 7,900 550 20,000 400 25,000 3,050 = = h. –2,000 –2,000 Dividends Bal. 5,900 550 20,000 400 25,000 1,050

Effects of Transactions on Owners’ Equity Capital Stock Increased by Stockholders’ investments +

Effects of Transactions on Owners’ Equity Retained Earnings Decreased by Decreased by Increased by Revenues + Expenses – Dividends –

Accounting reports, called financial statements, provide summarized information to the users.

Financial Statements Income statement—A summary of the revenue and expenses for a specific period of time. Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time. Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date. Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

For the Month Ended November 30, 2009 NetSolutions Income Statement For the Month Ended November 30, 2009 Fees earned $7 500 00 Operating expenses: Wages expense $2 125 00 Rent expense 800 00 Supplies expense 800 00 Utilities expense 450 00 Miscellaneous expense 275 00 Transfer this amount to the retained earnings statement. Total operating expenses 4 450 00 Net income $3 050 00

Retained Earnings Statement For the Month Ended November 30, 2009 NetSolutions Retained Earnings Statement For the Month Ended November 30, 2009 Less dividends 2 000 00 Retained earnings, November 30, 2005 $1 050 00 Net income for November $3 050 00 From the income statement Transferred to the balance sheet

This balance sheet presented using the account form NetSolutions Balance Sheet November 30, 2009 From the retained earnings statement Assets Liabilities Cash $ 5 900 00 Accounts Payable $ 400 00 Supplies 550 00 Stockholders’ Equity Land 20 000 00 Capital Stock $25,000 Ret. Earnings l,050 26 050 00 Total liabilities and Total assets $26 450 00 stockholder’s equity $26 450 00 This balance sheet presented using the account form

Statement of Cash Flows For the Month Ended November 30, 2009 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2009 Cash flows from operating activities: Cash received from customers $ 7 500 00 Deduct cash payments for expenses and payments to creditors 4 600 00 Net cash flow from operating activities 2 900 00 Cash flows from investing activities: Cash payment for acquisition of land (20 000 00 Cash flows from financing activities: Cash received as owner’s investment $25 000 00 Deduct cash withdrawal by owner 2 000 00 Net cash flow from financing activities 23 000 00 Net cash flow and Nov. 30, 2005 cash bal. $ 5 900 00 ) Should match Cash on the balance sheet

Statement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.