1 ACCT 201 FINANCIAL ACCOUNTING LECTURE 1 Asst. Prof. Özlem OLGU Room: 202 Tel No:

2 ACCOUNTING AND THE BUSINESS ENVIRONMENT Chapter 1

3 Chapter Objectives 1. Use accounting vocabulary 2. Apply accounting principles and concepts 3. Use the accounting equation 4. Analyse business transactions 5. Prepare financial statements 6. Evaluate business performance 7. Revision questions

4 is an information system that... measures business activities, processes information, and... communicates financial information. O1:Use accounting vocabulary Accounting... is called the language of business.

5 External users make decisions about the entity. Internal users make decisions for the entity. Users of Accounting Information Financial AcctManagerial Acct İnvestors, creditors, govt agencies Managers, partnerts etc.

6 Public Sector (SEC) Private Sector (FASB) Private Sector (AICPA) (IMA) GAAP The Authority Underlying Accounting

7 AICPA’s Code of Professional Conduct Standards of Ethical Conduct of the Institute of Management Accountants Standards of Professional Conduct

8 1. Proprietorships 2. Partnerships 3. Corporations Types of Business Organizations

9 1. Proprietorships: single owner 4 What are some advantages? – total undivided authority – no restrictions on type of business – must be legal 4 What are some disadvantages? – unlimited liability – limitation on size – fund raising power

10 2. Partnerships: more than 1 owner 4 What are some advantages? - better credit standing – possibly – more brain power, but consultation with partners required 4 What are some disadvantages? – unlimited personal liability for general partners – need for written partnership agreement

11 3. Corporations: more than 2 owners or shareholders 4 What are some advantages? – separate legal existence – limited liability of stockholders – transferability of ownership relatively easy 4 What are some disadvantages? – taxes – possible double taxation – extensive governmental regulation

12 O 2: Apply Accounting Concepts and Principles 1.GAAP 2.Entity concept 3.Reliability concept 4.Cost principle 5.Going concern principle 6.Stable monetary unit concept

13 To provide information useful for making investment and lending decisions Generally Accepted Accounting Principles (GAAP) 4 What is the primary objective of financial reporting?

14 The Entity Concept Example 4 Assume that John decides to open up a gas station and coffee shop. 4 The gas station made $250,000 in profits, while the coffee shop lost $50,000.

15 The Entity Concept Example 4 How much money did John make? 4 At a first glance, we would assume that John made $200, However, by applying the entity concept we realize that the gas station made $250,000 while the coffee shop lost $50,000.

16 Information must be reasonably accurate. Information must be free from bias. Information must report what actually happened. Individuals would arrive at similar conclusions using same data. The Reliability (Objectivity) Principle

17 Assets and services acquired should be recorded at their actual cost. The Cost Principle

18 The entity will continue to operate in the future. The Going Concern Concept

19 The dollar’s purchasing power is relatively stable. Stable-Monetary-Unit Concept

20 Economic Resources Claims to Economic Resources IMPORTNAT!!! O 3: Use the Accounting Equation Assets = Liabilities + Owner’s Equity

21 What is an asset? 4 It is something a company owns which has future economic value. – land – building – equipment – goodwill

22 What is a liability? 4 It is something a company owes. – money – service – legal retainers – product – magazines

23 What is owner’s equity? 4 It is what’s left of the assets after liabilities have been deducted. – the same as net assets – the owner’s claim on the entity’s assets

24 Transactions that Affect Owner’s Equity OWNER’S EQUITY INCREASES OWNER’S EQUITY DECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity

25 Revenues 4 What are revenues? 4 They are amounts received or to be received from customers for sales of products or services. – sales – performance of services – rent – interest

26 Expenses 4 What are expenses? 4 They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. – salaries and wages – utilities – supplies used – advertising

27 O 4: Analyze Business Transactions 4 What is a transaction? 4 It is any event that both affects the financial position of the business and can be reliably recorded.

28 Accounting for Business Transactions: Example 1 Gay Gillen invests $30,000 to begin Gay Gillen eTravel. 2 Gillen purchases an office location, paying $20,000 in cash. 3 She buys office supplies, agreeing to pay $500 in 30 days. 4 She earns and collects $5,500 revenues.

29 Example Continues... 5 Gillen performs services, and the client agrees to pay $3,000 within one month. 6 During the month, she pays $3,300 for expenses incurred. 7 Gillen pays $300 to the store from which she purchased $500 worth of supplies. 4 What is the effect of these transactions on the accounting equation?

30 Owner’s Assets = Liabilities + Equity 1)Cash+ $30,000+ $30,000 2)Cash– 20,000 Land+ 20,000 3) Supplies )Cash+ 5,500+ 5,500 5)Receivable+ 3,000+ 3,000 6)Cash– 3,300– 3,300 7)Cash– 300– 300 Totals+ $35, $35,200 Accounting for Business Transactions

31 Important Points: 4 Notice that the equation always stays in balance. 4 Each transaction affects at least two accounts, sometimes more. 4 Some transactions affect only one side of the equation; some affect both sides.

32 O 5: Prepare Financial Statements Financial Statements... – are the final product of the accounting process. – tell how the business is performing and where it stands.

33 Financial Statements 1. income statement 2. statement of owner’s equity or retained earnings 3. balance sheet 4. statement of cash flows

34 O 6: Evaluate Business Performance Income Statement Revenue: Fees earned$8,500 Expenses: Salary expense $1,200 Utilities and telephone expense 400 Equipment rental expense 600 Office rent expense 1,100 3,300 Net income$5,200

35 G. Gillen, capital, April 1, 20xx$ 0 Contribution of capital 30,000 Net income$ 5,200 Cash distributions– 2,000 G. Gillen, capital, April 30, 20xx$33,200 Statement of Owner’s Equity

36 Balance Sheet Assets Cash $19,900 Accounts receivable 2,000 Supplies 500 Land 11,000 Total assets$ 33,400 Liabilities Accounts payable$ 200 Owner’s equity, G. Gillen, capital 33,200 Total liabilities and owner’s equity$33,400

37 Statement Of Cash Flows Cash flows from operating activities: Cash receipts from services rendered$6,500 Cash payments: Supplies $ 300 Operating expenses 3,300 3,600 Net cash flows from Operating activities $2,900 Cash flows from investing activities Purchase and sale of land ($11,000)

38 Cash Flows from Financing Activities: Investment by Owner $30,000 Withdrawals 2,000 Net Cash Flows from Financing Activities $28,000 Cash at Beginning of Year 0 Cash at End of the Year $19,900 Statement Of Cash Flows

39 A corporation with 2 stockholders goes bankrupt owing $10,000. How much does each stockholder owe the creditors? Revision Questions: QUESTION 1

40 Answer: $0. The stockholders of a corporation have limited liability, which means that stockholders are not responsible for the debts of the corporation.

41 Land was acquired for a future building site at a cost of $80,000. An appraiser placed its value at $85,000. Another company offered to buy the land for cash of $90,000. At what amount should land be reported in the financial statements? QUESTION 2

42 Answer: $80,000. The cost principle states that assets should be recorded at their cost.

43 The assumption that the entity will remain in operation for the foreseeable future is the: A. Reliability principle B. Entity concept C. Going concern concept D. Cost principle QUESTION 3 Answer: C

44 A basic principle of accounting that requires activities of an entity be kept separate from other organizations and individuals as a separate economic unit is the A. Reliability principle B. Entity concept C. Going concern concept D. Cost principle Answer: B QUESTION 4

45 Which of the following is a correct expression of the accounting equation? A. Assets = revenues + expenses B. Assets = revenues - expenses C. Assets = liabilities – owner ’ s equity D. Assets = liabilities + owner ’ s equity Answer: D QUESTION 5

46 If a company’s assets total $400 and owner’s equity totals $300, how much are total liabilities? QUESTION 6 4 Answer: $ The accounting equation is: 4 Assets = liabilities + owner’s equity 4 $400 = ? + $300

47 Owner's equity can be described as A. Creditors’ claims on total assets B. Owner’s claim on total assets C. Current obligations of the company D. Economic resources of the company QUESTION 7

48 Answer: B Creditors’ claims to assets Assets = Liabilities + Owner’s Equity Owner’s claims to assets

49 What is the effect on the accounting equation if a company collects $50 of an Accounts Receivable? A. increases an asset $50; decreases an asset $50 B. decreases an asset $50; decreases a liability $50 C. increases an asset $50; decreases a liability $50 D. decreases a liability $50; increases owner's equity $50 QUESTION 8

50 Answer: A When a company collects on an accounts receivable, cash is increased. Accounts receivable is decreased by the same amount since customers owe the company less.

51 What is the effect on the accounting equation if a company pays the monthly rent in cash? A. Assets decrease and liabilities increase B. Liabilities decrease and owner’s equity decreases C. Owner's equity increases and assets increase D. Assets decrease and owner’s equity decreases QUESTION 9

52 Answer: D 1. Assets decrease: Cash is paid and decreases. 2. Owner’s equity decreases: Costs incurred to earn revenues decrease the owner’s interest in the assets.

53 The balance sheet reports: A. Revenues and expenses on a specific date B. Assets, liabilities, and owner ’ s equity for a specific period C. Changes in owner ’ s equity for a specific period D. Assets, liabilities, and owner ’ s equity on a specific date QUESTION 10

54 Answer: B The balance sheet reports the amount of assets, liabilities and owner ’ s equity on a specific date.

55 An income statement reports A. Revenues and expenses on a specific date B. Revenues and expenses for a specific period of time C. Changes in owner ’ s equity for a specific period of time D. Assets, liabilities, and owner ’ s equity on a specific date QUESTION 11

56 Answer: B The income statement presents revenues and expenses of a company for a specific period of time.

57 Determine the amount of net income (loss) given the following information: Accounts payable…………….$ 700 Service revenue………………..900 Supplies expense………………300 Cash……………………………800 Salaries expense……………….400 QUESTION 12

58 Answer: Service Revenue$900 Less Expenses: Supplies expense$300 Salaries expense Net income$200

59 At the beginning of the year, owner’s equity was $100. The owner invested $200 cash to the business during the year and earned a net income of $600. The owner also withdrew $500 during the year. What was the balance in owner’s equity at the end of the year? QUESTION 13

60 Answer: Beginning owner’s equity$100 Add: Net income600 Investment by owner200 Subtotal$900 Less: Owner’s withdrawal(500) Ending owner’s equity$400

61 Presented below are balance sheet items for Alt Co. Accounts payable…………..$200 Accounts receivable……...…300 Cash……………………… Furniture……………………..500 Norris, capital……….……….300 Notes payable……………….400 Compute total assets QUESTION 14

62 Answer: Cash$100 Accounts receivable300 Furniture500 Total assets$900

63 Presented below are balance sheet items for Alt Co. Accounts payable…………..$200 Accounts receivable……...…300 Cash……………………… Furniture……………………..500 Norris, capital……….……….300 Notes payable……………….400 Compute total liabilities QUESTION 15

64 Answer: Accounts payable$200 Notes payable400 Total liabilities$600