1 Dr. Amelia Baldwin ACC 211 University of Alabama in Huntsville © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN 1 Role of Accounting in Business

2 LEARNING GOALS When you finish this chapter, you should be able to

3 1.Describe types, forms of business; business stakeholders 2.Describe 3 business activities 3.Define accounting, its role 4.Describe, illustrate basic financial statements LEARNING GOALS Continued

4 LEARNING GOALS 5. Describe 8 accounting concepts 6. Describe, illustrate horizontal analysis

5 HERSHEY FOODS CORP. Hershey Foods Corporation  Began in early 1900  A leading candy manufacturer  Produces more than 1 billion pounds of candy each year

6 LEARNING GOALS 1 Describe types, forms of business; business stakeholders.

7 What forms do businesses take and how do they differ? LG 1

8 3 forms of business are Sole proprietor Partnership Corporation Limited liability corporation LG 1 3 FORMS OF BUSINESS

9 5 differences are Ease of formation Legal liability Taxation Limited life Capital access 5 DIFFERENCES LG 1

10 DIFFERENCES IN FORMS OF BUSINESS FormEase Legal Liability Taxation Limited Life Capital Access ProprietorshipSimpleNo limitNon-taxableYesLimited PartnershipSimpleNo limitNon-taxableYesAverage CorporationComplexLimitedTaxableNoExtensive Limited Liability Co. ModerateLimitedNon-taxableYesAverage LG 1

11 HOW DO BUSINESSES MAKE MONEY? Businesses –Provide goods and services Businesses maximize profits –Must gain advantage over competitors to maximize profits LG 1

12 PROFITS - = LG 1 REVENUES COSTSPROFITS

13 EXERCISE 1-2a Press “Enter” or click left mouse button for answer. Identify companies with a low-cost emphasis. 1.BMW 2.Charles Schwab 3.Circuit City 4.Coca-Cola 5.Dollar General 6.Goldman Sachs 7.Home Depot 8.Maytag 9.Nike 10.Office Depot 11.Sara Lee 12.Southwest Air LG 1 Click the button to skip this exercise

14 EXERCISE 1-2b Press “Enter” or click left mouse button for answer. Identify companies with a premium-price strategy. 1.BMW 2.Charles Schwab 3.Circuit City 4.Coca-Cola 5.Dollar General 6.Goldman Sachs 7.Home Depot 8.Maytag 9.Nike 10.Office Depot 11.Sara Lee 12.Southwest Air LG 1 Click the button to skip this exercise

15 Who are stakeholders and how are they related to the corporation? LG 1

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

17 STAKEHOLDERS Stakeholders are Employees/Managers Customers Suppliers Bank, owners Government LG 1 Continued

18 Business StakeholderInterestExamples Capital markets stakeholder Provides financingBanks, owners, stockholders Product/service market stakeholders Buyers of products, services and vendors Customers, suppliers Government stakeholders Collects taxes, fees from business, employees Federal, state, city government Internal stakeholdersPeople employed by business Employees, managers LG 1 EXHIBIT 2

19 LEARNING GOALS 2 Describe 3 business activities.

20 BUSINESS ACTIVITIES LG 2

21 FINANCING ACTIVITIES LG 2 Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock

22 INVESTING ACTIVITIES Investing activities Obtaining assets to operate business Investing activities Obtaining assets to operate business LG 2

23 OPERATING ACTIVITIES Operating activities Offer product, service Operating activities Offer product, service LG 2

24 LEARNING GOALS 3 Define accounting, its role LG 3

25 ROLE OF ACCOUNTING LG 3 Accounting is “an information system that provides reports to stakeholders about the economic activities and condition of a business.”

26 LG 3 EXHIBIT 3

27 LEARNING GOALS 4 Describe, illustrate basic financial statements LG 4

28 Can you name the four financial statements and their objectives? LG 4

29 4 financial statements are Income statement Retained earnings Balance sheet Statement cash flows 4 financial statements are Income statement Retained earnings Balance sheet Statement cash flows 4 FINANCIAL STATEMENTS LG 4

30 FINANCIAL STATEMENTS Financial StatementReporting Objective Income statementChange in financial condition Retained earningsChange in financial condition Balance sheetFinancial condition Cash flowsChange in financial condition LG 4

31 INCOME STATEMENT (Slide 1 of 3) Reports change in financial condition due to operations Revenues and expenses for a period of time Month, quarter, year LG 4

32 INCOME STATEMENT (Slide 2 of 3) The income statement uses the Matching Concept Expenses for period are Matched against revenues for same period Revenue – Expenses = Net Income LG 4

33 LG 4 EXHIBIT 4

34 RETAINED EARNINGS (Slide 1 of 2) Reports changes in financial condition due to changes in retained earnings during a period. Retained earnings is the portion of net income retained by the business. LG 4

35 LG 4 EXHIBIT 5

36 BALANCE SHEET (Slide 1 of 2) Reports financial condition as of a point in time Accounting equation Assets = Liabilities + Stockholders’ Equity LG 4

37 LG 4 EXHIBIT 6

38 STATEMENT OF CASH FLOWS (Slide 1 of 2) Reports change in financial condition from changes in cash during a period that occur due to a)Cash flows from operating activities b)Cash flows from investing activities c)Cash flows from financing activities LG 4

39 LG 4 EXHIBIT 7

40 EXERCISE 1-5a Press “Enter” or click left mouse button for answer. X = $96,500 Assets =Liabilities +Equity X =$25,000 +$71,500 LG 4 Click the button to skip this exercise

41 EXERCISE 1-5b Press “Enter” or click left mouse button for answer. X = $67,750 Assets =Liabilities +Equity $82,750 = X +$15,000 LG 4 Click the button to skip this exercise

42 EXERCISE 1-5c Press “Enter” or click left mouse button for answer. X = $19,500 Assets =Liabilities +Equity $37,000 =$17,500 +X LG 4 Click the button to skip this exercise

43 Statement of cash flows linked to cash on balance sheet Net income from income statement linked to retained earnings statement Retained earnings linked to balance sheet in stockholders’ equity INTEGRATED FINANCIAL STATEMENTS LG 4

44 Hershey Foods Corp Balance Sheet12/31/2004 Assets (Cash 55) = Liabilities + Equity (RE 3,469) $3,797=$2,708+$1,089 CASH FLOWS Operations $797 Investing Financing Decrease Cash 1/1 115 Cash 12/31 55 INCOME STATEMENT Revenues $4, 429 Expenses 3,838 Net Income $ 591 RETAINED EARNINGS 1/1 $3,469 +NI 591 -Div /31 $3,469 LG 4 EXHIBIT 8

45 LEARNING GOALS 5 Describe 8 accounting concepts

46 ACCOUNTING CONCEPTS Generally accepted accounting principles (GAAP) LG 5 Business Entity Concept Cost Concept Going Concern Matching Concept Objectivity Concept Unit of Measure Concept Adequate Disclosure Concept Accounting Period Concept

47 Applies accounting to a specific entity –Hershey For profit corporation Separate from accounting for other entities LG 5 BUSINESS ENTITY CONCEPT

48 COST CONCEPT Amount initially entered into accounting records for purchases –Cost of Hershey’s land LG 5

49 GOING CONCERN CONCEPT Business expects to continue in operations for an indefinite period of time –Hershey plans to build on land in future LG 5

50 MATCHING CONCEPT Expenses for a period are matched with revenue they generate –Hershey subtracts expenses from revenues on income statement LG 5

51 OBJECTIVITY CONCEPT Entries into accounting records based on objective evidence –Hershey’s bank statements support entries in cash account LG 5

52 UNIT OF MEASURE CONCEPT All economic data recorded in dollars –Hershey presents financial statements in dollars LG 5

53 ADEQUATE DISCLOSURE CONCEPT Financial statements include all relevant data needed to understand financial condition and performance –Hershey provides other disclosures in footnotes LG 5

54 ACCOUNTING PERIOD CONCEPT Economic data collected for a period of time in preparation of –Hershey’s income statement –Hershey’s retained earnings –Hershey’s cash flow statement LG 5

55 RESPONSIBLE REPORTING Reliability of financial reporting important –To economy –For ability of business to raise money from investors Stockholders creditors

56 LEARNING GOALS 6 Describe, illustrate horizontal analysis.

57 HORIZONTAL ANALYSIS Uses comparative financial statements to Compute percentage increases & decreases Examine trends year to year LG 6

58 HERSHEY FOODS HORIZONTAL ANALYSIS AMOUNT % SALES$4,429$4,173$2566.1% CGS2,6792, GP1,7501, S & A EXP OP INCOME BEFORE TAX $ % LG 6

59 ANALYSIS Hershey’s operating income increased twice as much as its sales revenue Gross profit increased more than cost of merchandise Hershey’s operating income increased twice as much as its sales revenue Gross profit increased more than cost of merchandise

60 THE END CHAPTER 1