1 CHAPTER 1 INTRODUCTION TO BUSINESS AND ACCOUNTING

2 Chapter Overview  Why is it necessary to have an understanding of business before trying to learn about accounting?  What is the role of accounting information within the business environment?  What is private enterprise, and what forms does it take?  What types of regulations do companies face?

3 Chapter Overview  What activities contribute to the operations of a company?  Are there any guidelines for reporting to company managers?  Are there any guidelines in the United States for reporting to people outside of a company?  What role does ethics play in the business environment?

4 Reflection What will I do when I graduate from college? Will I be sufficiently informed to make good business decisions, both in my personal life and at work? Will I understand the role of accounting in business so that I have gained financial literacy to achieve my goals?

5 Private Enterprise and Capitalism  Businesses in the United States and most other countries operate in an economic system called private enterprise.  In this system, individuals (people like you and me) own companies (businesses) that produce and sell services and or goods for a profit.  These companies generally fall into three categories: service, merchandising, and manufacturing.

6  Service companies perform services or activities that benefit individuals or business customers.  Companies like A Great Cut, Midas Muffler Shops, Merry Maids, UPS, and many professional practices such as accounting, law, architecture, and medicine, are all service companies. Service Companies

7  Merchandising companies purchase goods (sometimes referred to as merchandise or products) for resale to their customers.  Some merchandising companies are wholesalers, meaning they sell their goods to retailers or other commercial users. Examples include plumbing supply stores, electrical suppliers, or beverage distributors. Merchandising Companies

8  Some merchandising companies are retailers, meaning they sell their goods directly to consumers like you and me.  Most of the businesses you come in contact with are probably retailers, such as JC Penney, Toys ’R’ Us, amazon.com, and Circuit City. Merchandising Companies

9  Manufacturing companies make their products and then sell these products to their customers.  Unlike merchandisers who purchase ready- to-sell merchandise, a manufacturer has no goods to sell until they are manufactured.  Examples of manufacturing companies include General Motors, Black & Decker, and Dell Corporation. Manufacturing Companies

10 Entrepreneurship  Entrepreneurship is a combination of three factors:  A company owner’s idea for a business.  The willingness of the company’s owner to take a risk in starting a business.  Abilities of the company’s owners and employees to use capital and to produce and sell goods or services.

11 Sources of Capital  Entrepreneurs can raise capital in two ways:  Investing his/her own money into the business for a greater future return or finding other investors to do the same.  Borrowing money from a bank or other lending sources (creditors). Since borrowings have specific repayment schedules, they creates more risk for the business.

12  Business organizations or companies are a significant aspect of the U.S. and world economies.  A company may be organized as a sole proprietorship, partnership, or a corporation.  Each of these business forms has its advantages and disadvantages. Business Organizations

13 Business Organizations Exhibit 1-3

14 Regulatory Environment  Many different laws and authorities regulate the business environment, covering issues from consumer protection, environmental protection, employee safety, hiring practices, and taxes.  Companies must comply with different sets of regulations depending on the nature of their business.

15 Integrated Accounting System  An integrated accounting system is a means by which accounting information about a company’s activities is identified, measured, recorded, and summarized so that it can be communicated to users.  External users include the many diverse groups of people outside the company.  Internal users include the managers and employees within the company.

16 Managerial Accounting Information  Management accounting information helps managers plan, operate, and evaluate a company’s activities.  This information has an internal focus and is free from the restrictions of regulatory bodies interested in how companies report to external users.

17 Financial Accounting Information  Financial accounting information is organized for the use of interested people outside of the company.  This information has an external focus and must follow the guidelines of generally accepted accounting principles, standards for preparing financial accounting information.

18  Budgets: A financial plan that quantifies managers’ plans and the impact on the company’s operating activities and financial position.  Cost Analysis: The process of determining and evaluating costs of specific products or activities.  Manufacturing Cost Reports: Cost reports that help monitor and evaluate a company's operations to determine if its plans are being achieved. Basic Management Accounting Reports

19  Accepted principles, procedures, and practices that companies use for financial accounting and reporting in the United States.  These principles, or “rules” must be followed in the external reports of companies that sell stock to the public in the United States and by many other companies as well.  GAAP covers a wide range of issues from how to account for inventory, buildings, income taxes, as well as specialized industry guidelines. Generally Accepted Accounting Principles (GAAP)

20  Financial statements are accounting reports used to summarize and communicate financial information about a company.  A company’s integrated accounting system produces three major statements: the income statement, the balance sheet, and the cash flow statement, as well as a supporting statement called the changes in owners’ equity.  Each financial statement summarizes specific information and serves specific purposes. Basic Financial Statements

21 Income Statement

22 Balance Sheet

23 Cash Flow Statement

24 Ethics in Business and Accounting  A company’s financial statements are meant to convey information about the company to internal and external users in order to facilitate decision- making.  If the information in the financial statements does not convey a realistic picture, the decisions based on this information can have disastrous consequences. ENRON

25 Code of Ethics  The American Institute of Certified Public Accountants (AICPA) has a professional code of ethics that guides the professional work of CPAs.  The Institute of Management Accountants (IMA) and the International Federation of Accountants (IFAC) have a code similar to the AICPA.  Many companies have codes or statements of company and business ethics to guide the actions and behaviors of their employees.