1-1 Visit UMT online at ACCT125© 2006 UMT ACCOUNTING FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA Voice: (703) Fax: (703) Website:

1-2 Visit UMT online at ACCT125© 2006 UMT Carl S. Warren Survey of Accounting (2 nd ed.) © 2004 South-Western

1-3 Visit UMT online at ACCT125© 2006 UMT Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

1-4 Visit UMT online at ACCT125© 2006 UMT Chapter 1 The Role of Accounting in Business

1-5 Visit UMT online at ACCT125© 2006 UMT Learning Objectives 1.Describe the types and forms of businesses, business strategies, value chains, and stakeholders. 2.Describe the three business activities of financing, investing, and operating. 3.Define accounting and explain its role in business. 4.Describe and illustrate the basic financial statements and how they interrelate. 5.Describe eight basic accounting concepts underlying financial reporting. 6.Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance. After studying this chapter, you should be able to:

1-6 Visit UMT online at ACCT125© 2006 UMT 1 Describe the types and forms of businesses, business strategies, value chains, and stakeholders. Learning Objective

1-7 Visit UMT online at ACCT125© 2006 UMT Product Product General MotorsAutomobiles, trucks, vans General MillsBreakfast cereals BoeingJet aircraft NikeAthletic shoes Coca-ColaBeverages SonyStereos, televisions, radios General MotorsAutomobiles, trucks, vans General MillsBreakfast cereals BoeingJet aircraft NikeAthletic shoes Coca-ColaBeverages SonyStereos, televisions, radios Manufacturing Business Types of Businesses

1-8 Visit UMT online at ACCT125© 2006 UMT Merchandising Business Product Product Wal-MartGeneral merchandise Toys”R”UsToys Barnes & NobleBooks Best BuyConsumer electronics Amazon. ComBooks Types of Businesses

1-9 Visit UMT online at ACCT125© 2006 UMT Service Service DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication Service Business Types of Businesses

1-10 Visit UMT online at ACCT125© 2006 UMT There are three forms of business organizations Proprietorship Partnership Corporation

1-11 Visit UMT online at ACCT125© 2006 UMT A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantages Limited source of financial resources Unlimited liability Doug’s Proprietorship

1-12 Visit UMT online at ACCT125© 2006 UMT A partnership is owned two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Doug and Max’s Partnership

1-13 Visit UMT online at ACCT125© 2006 UMT A corporation is organized under state or federal statutes as a separate legal entity. Advantage The ability to obtain large amounts of resources issuing stocks. Disadvantage Double taxation. D & M Inc. Corporation

1-14 Visit UMT online at ACCT125© 2006 UMT Total Companies Business Ownership in America

1-15 Visit UMT online at ACCT125© 2006 UMT A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and to maximize profits. Business Strategy

1-16 Visit UMT online at ACCT125© 2006 UMT Under a differentiation strategy, a business designs and produces a product or service that possess unique attributes or characteristics for which customers are willing to pay a premium price. Differentiation Strategy

1-17 Visit UMT online at ACCT125© 2006 UMT A business stakeholder is a person or entity that has an interest in the economic performance and well- being of a business. Business Stakeholders

1-18 Visit UMT online at ACCT125© 2006 UMT STAKEHOLDERS Internal: Stockholders Managers Employees External: Suppliers Customers Stockholders Business Stakeholders

1-19 Visit UMT online at ACCT125© 2006 UMT Business Stakeholders Interest in the Business Examples Capital market Providers of majorBanks, owners, stakeholderfinancing for the stockholders business Product or service Buyers of products Customers and market stakeholdersor services and vendorssuppliers to the business Government Collectors of taxes and Federal, state, and stakeholderfees from the business city governments and its employees Internal stakeholders Individuals employed Employees and by the businessmanagers Business Stakeholders

1-20 Visit UMT online at ACCT125© 2006 UMT 2 Describe the three business activities of financing, investing, and operating. Learning Objective

1-21 Visit UMT online at ACCT125© 2006 UMT Financing activities involve obtaining funds to begin and operate a business. Financing Activities

1-22 Visit UMT online at ACCT125© 2006 UMT Businesses seek financing by: borrowing issuing shares of ownership Financing Activities

1-23 Visit UMT online at ACCT125© 2006 UMT A liability is a legal obligation to repay the amount borrowed according to the terms of the borrowing agreement. Financing Activities

1-24 Visit UMT online at ACCT125© 2006 UMT Examples of Liabilities Accounts payable: When a business buys a service or product on credit. Bonds payable: When a business borrows money by issuing bonds. Interest payable: Any interest that is due on a note or a bond. Note payable: When a business issues commercial paper or borrows on a line of credit. Financing Activities

1-25 Visit UMT online at ACCT125© 2006 UMT A business may also finance its operations by issuing shares of stock. The basic type of stock is called common stock. Financing Activities

1-26 Visit UMT online at ACCT125© 2006 UMT Investing activities involve the selection and management of long-term resources that will be used to develop, produce, and sell goods and services. Investing Activities

1-27 Visit UMT online at ACCT125© 2006 UMT Assets are resources that the business owns or are otherwise under its legal control and available for use in the future. What are assets? Investing Activities

1-28 Visit UMT online at ACCT125© 2006 UMT When the business sells merchandise or services to a customer, the right to collect is an account receivable. Investing Activities

1-29 Visit UMT online at ACCT125© 2006 UMT Revenue is the increase in assets from selling products or services. Revenue is often identified according to its source, such as Rent Revenue. Revenue is the increase in assets from selling products or services. Revenue is often identified according to its source, such as Rent Revenue. What is revenue? Operating Activities

1-30 Visit UMT online at ACCT125© 2006 UMT An expense is a decrease in assets or an increase in liabilities from producing and delivering goods or providing services that constitute the primary operating activities of an organization. What is an expense? Operating Activities

1-31 Visit UMT online at ACCT125© 2006 UMT Revenues - Expenses = Net Income Revenues - Expenses = Net Income Operating Activities Net Income may be positive (profit) or negative (loss).

1-32 Visit UMT online at ACCT125© 2006 UMT Define accounting and its role in business. 3 Learning Objective

1-33 Visit UMT online at ACCT125© 2006 UMT Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business. What is accounting?

1-34 Visit UMT online at ACCT125© 2006 UMT 1.To report the financial condition of a business at a point in time. 2.To report changes in the financial condition of a business over a period of time. Major objectives of financial accounting

1-35 Visit UMT online at ACCT125© 2006 UMT Describe and illustrate the basic financial statements and how they interrelate. 4 Learning Objective

1-36 Visit UMT online at ACCT125© 2006 UMT An income statement is a summary of the revenue and the expenses for a specific period of time. Objective:Objective: Reports change in financial condition Income Statement

1-37 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Income Statement For the Year Ended December 31, 2001 (in thousands) Revenues: Sales$4,557,241 Expenses: Cost of sales$2,665,566 Selling and administrative1,269,964 Other expenses209,077 Interest69,093 Income taxes 136,385 4,350,085 Net income$ 207,156 Note that the time period for the statement is in the heading. Income Statement

1-38 Visit UMT online at ACCT125© 2006 UMT The retained earnings statement reports changes in financial condition due to changes in retained earnings. Objective:Objective: Reports change in financial condition Retained Earnings Statement

1-39 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Retained Earnings Statement For the Year Ended December 31, 2001 (in thousands) Retained earnings, January 1, 2001$2,702,927 Add net income$207,156 Less dividends 154,750 Increase in retained earnings 52,406 Retained earnings, December 31, 2001$2,755,333 From the income statement Again, note the time period Retained Earnings Statement

1-40 Visit UMT online at ACCT125© 2006 UMT The balance sheet reports the financial condition as of a point in time. Objective:Objective: Reports financial condition Balance Sheet

1-41 Visit UMT online at ACCT125© 2006 UMT Assets = (Claims) Rights to the Assets Balance Sheet

1-42 Visit UMT online at ACCT125© 2006 UMT Assets = Liabilities Stock- holders’ Equity + The rights of creditors The rights of the stockholders The Accounting Equation Balance Sheet

1-43 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Balance Sheet December 31, 2001 (in thousands) Assets Cash$ 134,147 Accounts receivable361,726 Inventories512,134 Prepaid expenses62,595 Property, plant, and equipment1,534,901 Intangibles429,128 Other assets 212,799 Total assets$3,247,430 ContinuedContinued Note that the date is a specific point in time Balance Sheet

1-44 Visit UMT online at ACCT125© 2006 UMT Liabilities Accounts payable$ 133,049 Accrued liabilities462,901 Notes and other debt1,245,939 Income taxes 258,337 Total liabilities$2,100,226 Stockholders’ Equity Capital stock$ 183,213 Retained earnings2,755,333 Repurchased stock and other equity items (1,791,342) Total stockholders’ equity$1,147,204 Total liabilities and stockholders’ equity$3,247,430 Matches total assets

1-45 Visit UMT online at ACCT125© 2006 UMT The statement of cash flows reports the changes in financial condition due to the changes in cash during a period. Objective:Objective: Reports change in financial condition Statement of Cash Flows

1-46 Visit UMT online at ACCT125© 2006 UMT Three categories on the statement of cash flow are: 1.Operating activities 2.Investing activities 3.Financing activities Statement of Cash Flows

Hershey Foods Corporation Statement of Cash Flows For the Year Ended December 31, 2001 (in thousands) Net cash flows from operating activities$ 706,405 Cash flows from investing activities: Investments in property, plant, and equipment$(187,029) Proceeds from sale of property, plant, and equipment 63,042 Net cash flows used in investing activities$(123,987) Cash flows from financing activities: Cash receipts from financing activities, including debt$ 30,589 Dividends paid to stockholders(154,750) Repurchase of stock(40,322) Other, including repayment of debt (315,757) Net cash flows used in financing activities$(480,240) Net increase in cash during 2001$ 102,178 Cash as of January 1, ,969 Cash as of December 31, 2001$ 134,147 Note the time period

1-48 Visit UMT online at ACCT125© 2006 UMT Describe eight basic accounting concepts underlying financial reporting. 5 Learning Objective

1-49 Visit UMT online at ACCT125© 2006 UMT The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept determines the amount initially entered into the accounting records for purchases. Accounting Concepts

1-50 Visit UMT online at ACCT125© 2006 UMT A business normally expects to continue operating for an indefinite period of time. This is known as the going concern concept. Under the matching concept, revenues for a period are matched with the expenses incurred in generating the revenue. The objectivity concept requires that entries in the accounting records and the data reported on financial statements be based on objective evidence. Accounting Concepts

1-51 Visit UMT online at ACCT125© 2006 UMT The unit of measure concept requires that all economic data be recorded in dollars. Financial statements should contain all relevant data a reader needs to understand the financial condition and performance of a business. This is the adequate disclosure concept. The accounting period concept is the process in which accounting data are recorded and summarized in financial statements. Accounting Concepts

1-52 Visit UMT online at ACCT125© 2006 UMT DEC Balance Sheet Dec. 31, 2003 Income statement for the year ended December 31, 2003 Next slide Financial History of a Business

1-53 Visit UMT online at ACCT125© 2006 UMT DEC Balance Sheet Dec. 31, 2004 Income statement for the year ended December 31, 2004 Next slide Financial History of a Business

1-54 Visit UMT online at ACCT125© 2006 UMT DEC Balance Sheet Dec. 31, 2005 Income statement for the year ended December 31, 2005 Financial History of a Business

1-55 Visit UMT online at ACCT125© 2006 UMT Describe and illustrate the use of horizontal analysis to analyze and evaluate a company’s performance. 6 Learning Objective

1-56 Visit UMT online at ACCT125© 2006 UMT Horizontal Analysis Horizontal analysis compares each item on the most recent financial statement with the same item on one or more earlier financial statements. When the financial statement period is one year, then the comparisons show the change year-on-year. Year-on-year percentage changes are an important indicator of how well a firm is doing. The general formula for computing the change in a value is:

1-57 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Income Statement For the Year Ended December 31, 2001 and 2000 (in thousands) Sales$4,557,241$4,220,976$336,265 Cost of sales 2,665,566 2,471, ,415 Gross profit$1,891,675$1,749,825$141,850 Selling and admin. expenses 1,269,964 1,127, ,789 Operating income before taxes$ 621,711$ 622,650$ (939) Amount Percent $336,265 $4,220, % Horizontal Analysis Increase (Decrease)

1-58 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Income Statement For the Year Ended December 31, 2001 and 2000 (in thousands) Sales$4,557,241$4,220,976$336,265 Cost of sales 2,665,566 2,471, ,415 Gross profit$1,891,675$1,749,825$141,850 Selling and admin. expenses 1,269,964 1,127, ,789 Operating income before taxes$ 621,711$ 622,650$ (939) Amount Percent $194,415 $2,471, % 7.9% Horizontal Analysis

1-59 Visit UMT online at ACCT125© 2006 UMT Hershey Foods Corporation Income Statement For the Year Ended December 31, 2001 and 2000 (in thousands) Sales$4,557,241$4,220,976$336,265 Cost of sales 2,665,566 2,471, ,415 Gross profit$1,891,675$1,749,825$141,850 Selling and admin. expenses 1,269,964 1,127, ,789 Operating income before taxes$ 621,711$ 622,650$ (939) Amount Percent 8.0% 7.9% 8.1% 12.7% (0.2)% Horizontal Analysis