McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 1 Accounting and Business

Duties Log on  Y5741d  Go to notifications and fill in and text message. Assignments and handouts  Chapter 1 on my Web site. The first assignment under assignments and handouts. Take a piece of paper

1-3 Bell Ringer……… What are the Basic Functions of Business? What do these functions do? Write down your ideas or thoughts on a piece of paper.

1-4 Essential Questions 1.Accounting, Who needs it? Explain. 2.How has business evolved? 3.How has accounting evolved?

1-5 Enduring Understandings 1.Everyone uses accounting in everyday life. 2.Accounting and business are not static. 1.Business organization structures and business types have evolved throughout history. 2.Accounting has existed and evolved as long as business has existed and evolved.

1-6 Students will be able to: 1.Define the 5 basic functions of a business and describe the relationship of that function to accounting. 2.Describe the development of business and accounting.

1-7 What are the Basic Functions of Business? Marketing Human resources Production and operations Finance Accounting and information systems

1-8 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 from using the money

1-9 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

1-10 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

1-11 What are the Characteristics of Business Today? Customer-focused operations  Intel Corporation 386SX. Global markets  Chevrolet’s Nova Advanced manufacturing and communications  eBusiness Hybrid organizational structures  S-Corp, LLP, LLC, LP (pg. 16)

In-closing Using your index card---  List the five functions And tell me one thing about one of them. Remember just one Turn it in

HOMEWORK……. Finish 1 st section of skeletal outline pages 1 – 3. First fifteen vocabulary words.  Vocabulary quiz on Friday. THANK YOU!!!!!!

1-14 Bell Ringer……… 1 - What would happen if everyone used a different set of rules when driving? Write down your thoughts on a piece of paper………… Write down the formula for Net Income and the Accounting Equation. 3 - Take out your skeletal outline.

1-15 Essential Questions 1.What are the basic elements of accounting and how do they relate to the business? 2.What is GAAP? Why is it necessary?

1-16 Students will be able to: Identify and explain the classifications within assets, liabilities, equity, revenue, expense and net income. Explain how and why the conceptual framework of accounting and generally accepted accounting principles provide guidance and structure for preparing financial statements.

1-17 What are the 5 Basic Elements of Accounting? Asset – “Own” - Ownership  Right to use resources with future benefit  Examples: Cash, Accounts Receivable, Inventory, Property, Plant and Equipment. Liability – “Owe”  Obligation to transfer resources in the future to suppliers of cash, or goods and services at a definite time period.  Examples: Loans, Accounts Payable, Payroll

1-18 Example of Asset and Liability Partnership - Each partner contributes assets to the business and has personal wealth at risk. Partner A contributes a boat for shipping goods to other lands. Asset = boat Partner B contributes the goods to be traded. Asset = goods They need more money, capital to start the business and obtain a loan. Liability = loan

1-19 Example of Asset and Liability Partner A and B have an obligation to repay the bank money borrowed plus interest. If business fails, both A and B are mutually responsible. Unlimited Liability - If assets of the business are exhausted, the personal assets of the owners can be used to satisfy the liabilities of the business.

1-20 What are the 5 Basic Elements of Accounting? Owners’ equity  After the payment of all liabilities, any remaining assets, “Net Assets” belong to owners.  Claims on the business to transfer the residual to the owners.  For a partnership, it would be defined in Partnership Agreement the amount that is the claim for each partner.  Example: Boat + Goods + Cash – Loan = Owner’s Equity

1-21 What are the 5 Basic Elements of Accounting?  The Accounting Equation  Assets = Liabilities + Owner’s Equity  Boat + goods + cash = Loan + Owner’s Equity  Boat + goods + cash – Loan = Owner’s Equity

Basic Elements Continued – Accrual Basis Accounting Revenues (accrual basis)  Amounts earned from providing goods and services regardless of when cash is received.  Sale is earned when seller transferred the resources or providing the services to customers  Example: Company provided $ 60,000 of services to its customers but received only $50,000 in cash from them.  Accrual basis revenue = $ 60,000

Basic Elements Continued – Accrual Basis Accounting Expenses (accrual basis)  Amounts incurred in an attempt to generate revenues regardless of when cash is paid.  Expense is incurred when the buyer has received/ used resources or services.  Example: Company used $45,000 services from its vendors but paid only $40,000 for them in this time period.  Accrual basis expense = $45,000

Basic Elements Continued – Cash Basis Accounting Revenues (cash basis)  Cash received from customers.  Example: Company provided $ 60,000 of services to its customers but received only $50,000 in cash from them.  Cash basis revenue = $ 50,000

Basic Elements Continued – Cash Basis Accounting Expenses (cash basis)  Cash paid to employees or suppliers of goods and services.  Example: Company used $45,000 services from its vendors but paid only $40,000 for them in this time period.  Cash basis expense = $40,000

5 Basic Elements Continued – Accrual Basis Vs. Cash Basis Accrual Basis Difference between Revenues (earned) – Expenses (incurred) = Net Income Cash Basis Difference between Revenues (cash received from customers) – Expenses (cash paid to employees and other suppliers of goods and services) = Net Income 1-26

Lecture Examples 1.A company provided $120,000 of services during the year. They received $100,000 from customers. The company’s employees earned $70,000 in wages, but due to the way payroll is determined (monthly), the employees were only paid $55,000. What is the cash-basis income? What is the accrual-basis income? Answer: Cash basis income: Accrual basis income:

1-28 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

1-29 What is GAAP? Generally accepted accounting principles  “Rule Book” for acceptable accounting practices. Financial Accounting Standards Board  Current rule-making body  Pronouncements – Statements of Financial Accounting Standards  Statements of Financial Accounting Concepts

1-30 What are the Concepts Statements? Concepts Statement #1  Useful information for decision making Concepts Statement #2  Characteristics of accounting information (benefits>costs; materiality, understandability, usefulness) Concepts Statement #3 (superseded) Concepts Statement #4  Objectives for non-business organizations

1-31 Concepts Continued Concepts Statement #5  What information should be presented in financial statements and when that information should be presented Concepts Statement #6  Elements of financial statements Concepts Statement #7  Estimating value of future cash flows

1-32 What Makes This Information Useful? Relevance  Capable of making a difference in a decision Reliability  Dependable Benefits > Costs  Benefits derived must be greater than cost Materiality  Large enough to have an impact on a decision

HOMEWORK……. Finish 2nd section of skeletal outline pages Complete E1.5, 1.6, 1.8 & 1.12 THANK YOU!!!!!!

1-34 Bell Ringer……… 1.Take out your skeletal outline. 2.Begin working on P 1.10 and 1.11.

1-35 Essential Questions 1.What makes information useful? 2.Why do financial statements exist?

1-36 Students will be able to: Identify and describe the purpose of the information provided in each financial statement. Explain how the statements articulate with each other. Classify basic elements of accounting with the respective financial statement. Explain the role of management and the auditor in preparing and issuing an annual report.

1-37 What Makes Information Useful? Relevance  Capable of making a difference in a decision Reliability  Dependable Benefits > Costs  Benefits derived must be greater than cost Materiality  Large enough to have an impact on a decision

1-38 What is the purpose of financial statements? Stakeholders -  People or other business entities who have invested in companies  Use financial statements to determine if they should invest in the companies.

1-39 What are the 4 Basic Financial Statements and Auditors’ Report? Income statement – “P&L”  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 (Cash basis). Statement of owners’ equity  Indicates changes in owners’ equity for a period of time

1-40 Financial Statements Continued Balance sheet  Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time  The Accounting Equation: ASSETS = LIABILITIES + OWNER’S EQUITY  Assets and Liabilities are separated in 2 categories : Current and Non-Current

Financial Statements Continued – Balance Sheet - Assets Current – Those that benefit < less than 1 year. Examples: Cash, Accounts Receivable, Inventory Non – Current – Those with value or benefits > greater than 1 year. Examples: Property, Plant and Equipment, Goodwill, Intangibles 1-41

Financial Statements Continued – Balance Sheet - Liabilities Current – Obligations paid or released within < one year. Examples: Accounts Payable, Accrued Expenses, Notes Payable < 1 year. Non – Current – Obligations paid or released > more than one year. Examples: Notes Payable due > 1 year. 1-42

Lecture Examples 2.Describe each of the following items and determine which financial statement it appears on. Accounts payable, $136Building, $809 Accounts receivable, $876Patent, $2 Cash received from customers, $13,074Long-term bank loan, $716 Cash paid for inventory, $8,338Common stock, $3,827 Cash paid to employees, $1,724Retained earnings, $373 Cost of goods sold, $8,192Cash balance, $2,211 Inventory, $908Miscellaneous payables, $529 Miscellaneous operating expenses, $3,686 Sales, $13,353 Wage expense, $1,750

1-44 Financial Statements Continued Auditor’s report  Indicates whether the company followed GAAP when preparing its financial statements 1.Independence of auditor 2.Opinion on financial statements 3.Responsibilities of Management.