Chapter 1 Accounting and Business
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-2 What are the Basic Functions of Business? Marketing Human resources Production and operations Finance Accounting and information systems
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 How do the Functions Use Accounting Information? Marketing –Pricing, distribution costs Human resources –Pay and fringe benefits, hiring costs Production and operations –Production costs—actual and budgeted Finance –Cost of borrowing, benefits expected
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 How has Business Evolved? Sole proprietorship –One owner Partnership –Two or more owners Corporation –Many owners Merchandising –Buy and sell products Service –Provide service Manufacturing –Make and sell products
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 How has Accounting Evolved? Determination of wealth –What am I worth today Determination of income –How has my wealth changed On-going success –How is the business doing
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 What are the Characteristics of Business Today? Customer-focused operations Global markets Advanced manufacturing and communications eBusiness Hybrid organizational structures
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 What are the Basic Concepts of Accounting? Business entity –Keep business and personal records separate Monetary unit –Maintain business records in currency Going concern –Business will continue past the current period Periodicity –Profits/losses must be determined periodically
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 What are the 5 Basic Elements of Accounting? Asset –Right to use resources with future benefit Liability –Obligation to transfer resources in the future to suppliers of goods and services Owners’ equity –Net assets belong to owners
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Basic Elements Continued Revenues (accrual basis) –Amounts earned from providing goods and services Expenses (accrual basis) –Amounts incurred in an attempt to generate revenues
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What is GAAP? Generally accepted accounting principles Financial Accounting Standards Board –Current rule-making body –Standards –Concepts
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the Concepts Statements? Concepts Statement #1 –Useful information for decision making Concepts Statement #2 –Characteristics of accounting information Concepts Statement #3 (superceded) Concepts Statement #4 –Objectives for nonbusiness organizations
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Concepts Continued Concepts Statement #5 –Financial statements Concepts Statement #6 –Elements of financial statements Concepts Statement #7 –Estimating value of future cash flows
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What Makes Information Useful? Relevance –Capable of making a difference Reliability –Dependable Benefits > Costs –Benefits derived must be greater than cost Materiality –Large enough to have an impact on a decision
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the 4 Basic Financial Statements and Auditors’ Report? Income statement –Indicates revenues less expenses = net income for a period of time Statement of cash flows –Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time Statement of owners’ equity –Indicates changes in owners’ equity for a period of time
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Financial Statements Continued Balance sheet –Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time Auditor’s report –Indicates whether the company followed GAAP when preparing its financial statements
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the Purposes of the Ratios? Current ratio –Relationship between current assets and current liabilities Debt to equity ratio –Relationship between liabilities and owners’ equity Return on sales –Relationship between net income and sales