Accounting and the Business Environment Chapter 1 1-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Why Is Accounting Important? Accounting is the information system that measures business activities, processes the information into reports, and communicates the results to decision makers. 1-2 Financial Accounting Managerial Accounting Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Users of Accounting Info (Decision Makers ©2014 Pearson Education, Inc. Publishing as Prentice Hall1-3

Users of Financial Information 1-4Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-5

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall1-6

The Organizations That Govern Accounting FASB Financial Accounting Standards Board Privately funded Creates the rules and standards that govern financial accounting SEC Securities and Exchange Commission Oversees the US financial markets 1-7Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Generally Accepted Accounting Principles (GAAP) Issued by the FASB. Establishes the rules for recording transactions and preparing financial statements. Published online as part of the Accounting Standards Codification. usefulRequires that information be useful. 1-8 Relevant = The info allows users to make a decision.. Faithfully Representative = The info is complete, neutral, and free from material error. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Accounting Assumptions 1-9 Economic Entity Assumption Cost Principle Going Concern Assumption Monetary Unit Assumption Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Types Of Entities ©2014 Pearson Education, Inc. Publishing as Prentice Hall1-10

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall1-11

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall1-12

The Accounting Equation 1-13 LiabilitiesLiabilitiesAssetsAssets =+ Rule: The Balance Sheet Equation must ALWAYS be in balance. EquityEquity Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall

The Accounting Equation 1-14 LiabilitiesLiabilitiesEquityEquityAssetsAssets =+ Assets are economic resources that are expected to benefit the business in the future. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

The Accounting Equation 1-15 LiabilitiesLiabilitiesAssetsAssets =+ Liabilities are debts that are owed to creditors. EquityEquity Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

The Accounting Equation 1-16 LiabilitiesLiabilitiesAssetsAssets =+ Equity is the owner’s residual claim against the assets of the company. EquityEquity Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-17 LiabilitiesLiabilitiesAssetsAssets =+ EquityEquity Common Stock – Dividends + Revenues - Expenses The Accounting Equation The owner’s claim on the resources increase and decrease as the company engages in earnings activities. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-18 LiabilitiesLiabilitiesAssetsAssets =+ EquityEquity The Accounting Equation Revenues are economic resources that have been earned by delivering products or services to customers. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Common Stock – Dividends + Revenues - Expenses

1-19 LiabilitiesLiabilitiesAssetsAssets =+ EquityEquity The Accounting Equation Expenses are the costs associated with selling goods or services. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Common Stock – Dividends + Revenues - Expenses

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall1-20

Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall1-21

How Do You Analyze A Transaction? Think of a transaction as a very special kind of historical event. 1.It involves the exchange of economic resources. 2.We must be able to measure the economic impact in monetary units Is it a transaction? Buying a copying machine for the office for $4,000 cash. x Meeting with a potential customer. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Smart Touch Example(transactions) Smart Touch Learning received $30,000 cash and issued common stock to Sheena Bright, stockholder. Paid $20,000 cash for land. Bought $500 of office supplies on account. Received $5,500 cash from clients for service revenue earned. Performed services for clients on account, $3,000. Paid cash expenses: office rent, $2,000; employee salaries, $1,200. Paid $300 on the accounts payable created in transaction 3. Collected $2,000 on the accounts receivable created in transaction 5. Paid cash dividends of $5,000 to stockholder, Sheena Bright. ©2014 Pearson Education, Inc. Publishing as Prentice Hall1-23

How Do You Analyze A Transaction? Smart Touch Learning starts a new business. The company sells $30,000 of Common Stock. How does this impact the Accounting Equation? 1-24 Note: You can make the analysis easier if the first question you ask is whether cash exchanged hands. Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall

How Do You Analyze A Transaction? Next, Smart Touch purchases land for $20,000 cash In this transaction, all the change occurred on the left side of the equation. One asset was converted into a different asset. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #3, Smart Touch buys $500 of office supplies, offering to pay in 30 days Remember, in business it is quite common for a business to purchase something now, and pay for it later. Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #4, Smart Touch provides training services to customers for $5,500 cash. 1-27Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #5, Smart Touch performs $3,000 of services for a customer who will pay in one month. 1-28Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #6, Smart Touch pays $3,200 in cash expenses; $2,000 for office rent and $1,200 for employee salaries. 1-29Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #7, Smart Touch pays $300 to the store from which it purchased office supplies in Transaction # Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

How Do You Analyze A Transaction? In Transaction #8, Smart Touch collects $2,000 from the client for which Smart Touch performed services in Transaction # Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

LO4: How Do You Analyze A Transaction? 1-32Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Income Statement Balance Sheet These same four basic financial statements are used by all companies as the primary means of communicating to stakeholders. How Do You Prepare Financial Statements? 1-33 Statement of Retained Earnings Statement of Cash Flows Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Income Statement Balance Sheet How Do You Prepare Financial Statements? 1-34 Reports the success or failure of the company’s operations for a period of time. Revenues Minus Expenses Reports the success or failure of the company’s operations for a period of time. Revenues Minus Expenses Statement of Retained Earnings Statement of Cash Flows Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-35Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall How Do You Prepare Financial Statements?

1-36Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Income Statement Balance Sheet How Do You Prepare Financial Statements? 1-37 Shows amounts and causes of changes in Retained Earnings during the period. Statement of Retained Earnings Statement of Cash Flows Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-38Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall How Do You Prepare Financial Statements?

The ending balance in Retained Earnings will also appear in the Stockholders’ Equity section of the Balance Sheet. How Do You Prepare Financial Statements? 1-39Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall From the Income Statement To be reported on Balance Sheet

Income Statement Balance Sheet How Do You Prepare Financial Statements? 1-40 Reports assets and claims to those assets at a specific point in time. Statement of Retained Earnings Statement of Cash Flows Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

1-41Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall How Do You Prepare Financial Statements?

Accounting Equation Note that the Balance Sheet follows the Accounting Equation Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows How Do You Prepare Financial Statements? 1-43 Answers the question of whether the business generates enough cash to pay its bills. Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall

1-44Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall How Do You Prepare Financial Statements?

1-45Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Transactions 4 & 8 Transactions 6 & 7 Transaction 2 Transactions 1 & 9

How Do You Use Financial Statements to Evaluate Performance? 1-46Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall