Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 1 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Define accounting vocabulary Define the users of financial information Describe the accounting profession and the organizations that govern it Identify the different types of business organizations Delineate the distinguishing characteristics and organization of a proprietorship 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Apply accounting concepts and principles Describe the accounting equation, and define assets, liabilities, and equity Use the accounting equation to analyze transactions Prepare financial statements Use financial statements to evaluate business performance 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Define accounting vocabulary 4 1 1

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accounting is “the language of business.” The information system that: Measures business activity Processes the data into reports Communicates the results to decision makers Presents information in monetary terms 5

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Define the users of financial information 6 2

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 7 IndividualsBusinesses CreditorsInvestors Taxing Authorities

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Financial Accounting Provides information for external decision makers Managerial Accounting Focuses on information for internal decision makers 8

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S1-2: USERS OF FINANCIAL INFORMATION Suppose you are the manager of Greg’s Tunes. The company needs a bank loan in order to purchase music equipment. In evaluating the loan request, the banker asks about the assets and liabilities of the business. In particular, the banker wants to know the amount of the business’s stockholders’ equity. Requirements: 1.Is the banker considered an internal or external user of financial information? 2.Which financial statement would provide the best information to answer the banker’s questions? 9

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Describe the accounting profession and the organizations that govern it 10 3

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Lucrative career with many opportunities Certified Public Accountants (CPAs) Pass qualifying exam Meet education and/or experience requirements 11 Certified Public Accountants, or CPAs Certified Management Accountants, or CMAs

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 12 FASBSECAICPAGAAPIASB

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 13 Investors and creditors want reliable financial information Companies want to attract investors Conflict of Interest

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. SEC requires companies to have financial statements examined by independent accountants Recent accounting scandals hurt investor confidence 14

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 15 AICPAIMA

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Identify the different types of business organizations 16 4

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 17 ProprietorshipPartnership CorporationLLC and LLP Not-for-profit

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 18 ProprietorshipPartnersCorporationLLC, LLP Not-for- Profit Owners Life of Organization Liability of owners for business debts

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Delineate the distinguishing characteristics and organization of a corporation 19 5

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 20 Separate Legal Entity No Continuous Life/Transferability of Ownership Unlimited Liability of Owner

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 21 Unification of Ownership and Management Business TaxationGovernment Regulation

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Incorporators obtain charter from the state Charter authorizes corporation to: Issue stock Conduct business in accordance with state law Incorporators agreed to a set of bylaws Corporations begins to exist when stock is issued 22

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 23

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. S1-4: TYPES OF BUSINESS ORGANIZATION Chloe Michaels plans on opening Chloe Michaels’ Floral Designs. She is considering the various types of business organizations and wishes to organize her business with unlimited life and limited liability features. Additionally, Chloe wants the option to raise additional equity easily in the future. Which type of business organization will meet Chloe’s needs best? 24

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Apply accounting concepts and principles 25 6

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Generally Accepted Accounting Principles Guidelines that govern accounting Based on a conceptual framework 26

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 27 Entity Concept Faithful Representation Principle Cost Principle Going- Concern Concept Stable Monetary Unit Concept

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 28 Entity ConceptFaithful Representation PrincipleCost Principle

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 29 Going-ConcernStable Monetary Unit Concept

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Describe the accounting equation, and define assets, liabilities, and equity 30 7

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 31 ASSETSLIABILITIESEQUITY Economic Resources Claims to Economic Resources

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Economic resources Benefit the business in the future 32

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 33 Assets Liabilities Owner’s Equity AssetsLiabilitiesEquity

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 34 Capital + Net income (loss) - Drawing + Revenues - Expenses

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Amounts earned by delivering goods or services to customers 35

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Outflows of assets or increasing liabilities in the course of delivering goods or services to customers 36

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. E1-16: CHARACTERISTICS OF A CORPORATION, ACCOUNTING CONCEPTS, AND USING THE ACCOUNTING EQUATION Select financial information for three corporations follows: Requirements: 1. Compute the missing amount in the accounting equation for each entity. 37 AssetsLiabilitiesEquity New Rock Gas $24,000$50,000 DJ Video Rentals $75,000$32,000 Corner Grocery $100,000$53,000 $ ?

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. E1-16: CONTINUED 2. List the five main characteristics of a corporation. 3. Which accounting concept tells us that the previous three companies will cease to exist if the owners die? 38

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use the accounting equation to analyze transactions 39 8

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. An event that affects the financial position of the business Can be measured reliably Every transaction impacts at least two items The accounting equation balances before and after each transaction 40

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 41 Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D. experienced the following events: 1.Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D. AssetsLiabilitiesOwner’s Equity DateCash Medical supplies Land Accounts payable Smith, capital Jul 6 Bal 9

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42 AssetsLiabilitiesOwner’s Equity DateCash Medical supplies Land Accounts payable Smith, capital Jul 12 Bal 15 Bal Bal 29

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43 AssetsLiabilitiesStockholders’ Equity DateCash Medical supplies Land Accounts payable Common stock Retained earnings Bal 30 Bal 31 Bal

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare financial statements 44 9

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 45 Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 46

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 47

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 48

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The statement of cash flows reports the cash coming in (positive amounts) and the cash going out (negative amounts) during a period. Business activities result in a net cash inflow or a net cash outflow. The statement of cash flows reports the net increase or decrease in cash during the period and the ending cash balance 49

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 50 Studio Photography works weddings and prom-type parties. The balance of Ansel, capital was $16,000 at December 31, At December 31, 2012, the business’s accounting records show these balances: Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012: a. Income statement b. Statement of owner’s equity c. Balance sheet Insurance expenseAccounts receivable CashNote payable Accounts payableAnsel, capital, Dec 31, 2012 Advertising expenseSalary expense Service revenueEquipment Ansel, drawingOwner’s investment, 2012

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 51 Studio Photography Income Statement Year Ended December 31, 2012 Revenue: Service revenue Expenses: Salary expense Insurance expense Advertising expense Total expenses Net income

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 52 Studio Photography Statement of Owner’s Equity Year Ended December 31, 2012 Ansel, capital, December 31, 2011 Owner investment Net income Subtotal Less: Drawings Ansel, capital, December 31, 2012

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 53 Studio Photography, Inc. Balance Sheet December 31, 2012 AssetsLiabilities CashAccounts payable Accounts receivableNote payable EquipmentTotal liabilities Owner’s Equity Ansel, capital Total assets Total liabilities and owner’s equity 76,000

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use financial statements to evaluate business performance 54 10

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 55 Income Statement Statement of Owner’s Equity Balance Sheet

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 56

Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 57 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.