C1--1 Learning Objectives 1.Nature of a Business 2.The Role of Accounting in Business 3.Profession of Accounting 4.Generally Accepted Accounting Principles 5.Assets, Liabilities, and Owner’s Equity 6.Business Transactions 7.Financial Statements 8.Financial Analysis and Interpretation Ch 01 Introduction to accounting and business

C Nature of a Business In general, a business is an organization in which basic resources(inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers.

C The objective of a business The objective of most businesses is to maximize profits. Revenue – expense = profit

C The types of a business  Manufacturing business  Merchandising business  Service business

C1--5 three types : 1. a proprietorship (not a legal entity) 2. a partnership (not a legal entity) 3. a corporation (a legal entity) Example: The Coca-Cola Company has 3.5 billion shares of stock owned by stockholders. 4.The types of business organizations

C1--6 ProprietorshipsProprietorships What are some advantages? –total undivided authority –no restrictions on type of business – must be legal What are some disadvantages? –unlimited liability –limitation on size – fund raising power

C1--7 Partnerships What are some advantages? –better credit standing – possibly –more brain power, but consultation with partners required What are some disadvantages? –unlimited personal liability for general partners –need for written partnership agreement

C1--8 Corporations What are some advantages? –separate legal existence –limited liability of stockholders –transferability of ownership relatively easy What are some disadvantages? –taxes – possible double taxation –extensive governmental regulation

C The role of accounting in business Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business.

C1--10 Identification of Users User Information Needs Accounting System Accounting — An Information Process Accounting — An Information Process

C1--11 Identification of Users User Information Needs Accounting System Economic Data and Activities Accounting — An Information Process Accounting — An Information Process

C1--12 Identification of Users User Information Needs Accounting System Economic Data and Activities Reports Accounting — An Information Process Accounting — An Information Process

C1--13 Identification of Users User Information Needs Accounting System Reports Economic Data and Activities User Decisions Accounting — An Information Process Accounting — An Information Process

C1--14 EXTERNAL USERS Financial Accounting investors creditors regulators customers competitors owners managers employees INTERNAL USERS Managerial Accounting 6. Users of Accounting Information

C1--15 Industry Vice President Finance CPA Firms Chief Accountant Staff Accountant Controller Partner Manager Senior Accountant Junior Accountant College Graduates 7. The Accounting Profession Private Accounting Public Accounting and

C1--16 Private Sector (FASB) Private Sector (FASB) Private Sector (AICPA) (IMA) Private Sector (AICPA) (IMA) GAAP 8. The GAAP

C1--17 The entity concept The activities of a business are recorded separately from the activities of the stakeholders.

C1--18 The Cost Principle Assets and services acquired should be recorded at their actual cost.

C1--19 Resources The Accounting Equation What are an organization’s resources called?

C1--20 Assets Resources = Sources The Accounting Equation What are the sources of the assets? Cost of resources used in the business

C1--21 Assets Liabilities Owner’s Equity Resources = Sources Cost of resources used in the business Resources supplied by creditors and owners The Accounting Equation

C1--22 a.On November , Chris Clark deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY LIABILITIES

C1--23 a.Chris Clark deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY Cash25,000 LIABILITIES

C1--24 a.Chris Clark deposits $25,000 in a bank account for NetSolutions. ASSETS = Business Transactions OWNER’S EQUITY Cash25,000 LIABILITIES Chris Clark, Capital 25,000

C1--25 Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES

C1--26 Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES Cash(20,000)

C1--27 Business Transactions b.NetSolutions buys land for $20,000. ASSETS = OWNER’S EQUITY LIABILITIES Cash(20,000) Land20,000

C1--28 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

C1--29 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies1,350 c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future.

C1--30 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES c.NetSolutions buys supplies for $1,350, agreeing to pay the supplier in the near future. Accounts Payable 1,350 Supplies1,350

C1--31 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES d.NetSolutions earns fees of $7,500, receiving cash.

C1--32 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash7,500 d.NetSolutions earns fees of $7,500, receiving cash.

C1--33 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash7,500 Fees Earned 7,500 d.NetSolutions earns fees of $7,500, receiving cash.

C1--34 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES e.NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

C1--35 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(3,650) e.NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

C1--36 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(3,650) Expenses(3,650) e.NetSolutions paid: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.

C1--37 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES f.NetSolutions pays $950 to creditors on account.

C1--38 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(950) f.NetSolutions pays $950 to creditors on account.

C1--39 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(950) Accounts Payable (950) f.NetSolutions pays $950 to creditors on account.

C1--40 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES g.At the end of the month, the cost of supplies on hand is $550.

C1--41 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies(800) g.At the end of the month, the cost of supplies on hand is $550.

C1--42 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Supplies(800) Supplies Expense (800) g.At the end of the month, the cost of supplies on hand is $550.

C1--43 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES h.Chris Clark withdraws $2,000 in cash.

C1--44 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(2,000) h.Chris Clark withdraws $2,000 in cash.

C1--45 Business Transactions ASSETS = OWNER’S EQUITY LIABILITIES Cash(2,000) Chris Clark, Drawing (2,000) h.Chris Clark withdraws $2,000 in cash.

C1--46 Questions: 1.Does the business get the profit or loss? How much? 2.What the total assets of the business? 3.How much cash flow in and out? 4.What is balance of the cash? 5.How to do the financial reports?

C1--47 Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000

C1--48 Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000 Accts. Payable400

C1--49 Transaction Summary ASSETS = OWNER’S EQUITY LIABILITIES Cash5,900 Supplies550 Land20,000 26,450 26,450 Accts. Payable400 C. Clark, Capital25,000 C. Clark, Drawing(2,000) Fees Earned7,500 Wages Expense(2,125) Rent Expense(800) Supplies Expense(800) Utilities Expense(450) Misc. Expense(275) 26,050

C1--50 OWNER’S EQUITY Effects of Transactions on Owner’s Equity

C1--51 OWNER’S EQUITY Effects of Transactions on Owner’s Equity decreased by

C1--52 OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses decreased by

C1--53 OWNER’S EQUITY Effects of Transactions on Owner’s Equity increased by

C1--54 OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s investments Revenues increased by

C1--55 OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses Owner’s investments Revenues decreased by increased by

C1--56 OWNER’S EQUITY Effects of Transactions on Owner’s Equity Owner’s withdrawals Expenses Owner’s investments Revenues decreased by increased by NET INCOME

C Financial Statements NetSolutions Income Statement For the Month Ended November 30, 2002 Fees earned$7,500 Operating expenses: Wages expense$2,125 Rent expense800 Supplies expense800 Utilities expense450 Miscellaneous expense275 Total operating expenses4,450 Net income$3,050

C1--58 Financial Statements NetSolutions Income Statement For the Month Ended November 30, 2002 Fees earned$7,500 Operating expenses: Wages expense$2,125 Rent expense800 Supplies expense800 Utilities expense450 Miscellaneous expense275 Total operating expenses4,450 Net income$3,050

C1--59 Financial Statements NetSolutions Income Statement For the Month Ended November 30, 2002 Fees earned$7,500 Operating expenses: Wages expense$2,125 Rent expense800 Supplies expense800 Utilities expense450 Miscellaneous expense275 Total operating expenses4,450 Net income$3,050

C1--60 Financial Statements NetSolutions Income Statement For the Month Ended November 30, 2002 Fees earned$7,500 Operating expenses: Wages expense$2,125 Rent expense800 Supplies expense800 Utilities expense450 Miscellaneous expense275 Total operating expenses4,450 Net income$3,050

C1--61 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2002 Financial Statements Chris Clark, capital, November 1, 2002$ 0 Investment on November 1, 2002$25,000 Net income for November 3,050 $28,050 Less withdrawals2,000 Increase in owner’s equity26,050 Chris Clark, capital, November 30, 2002$26,050

C1--62 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2002 Financial Statements Chris Clark, capital, November 1, 2002$ 0 Investment on November 1, 2002$25,000 Net income for November3,050 $28,050 Less withdrawals2,000 Increase in owner’s equity26,050 Chris Clark, capital, November 30, 2002$26,050

C1--63 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2002 Financial Statements Chris Clark, capital, November 1, 2002$ 0 Investment on November 1, 2002$25,000 Net income for November3,050 $28,050 Less withdrawals2,000 Increase in owner’s equity26,050 Chris Clark, capital, November 30, 2002$26,050

C1--64 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2002 Financial Statements Chris Clark, capital, November 1, 2002$ 0 Investment on November 1, 2002$25,000 Net income for November3,050 $28,050 Less withdrawals2,000 Increase in owner’s equity26,050 Chris Clark, capital, November 30, 2002$26,050

C1--65 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2002 Financial Statements Chris Clark, capital, November 1, 2002$ 0 Investment on November 1, 2002$25,000 Net income for November3,050 $28,050 Less withdrawals2,000 Increase in owner’s equity26,050 Chris Clark, capital, November 30, 2002$26,050

C1--66 NetSolutions Balance Sheet November 30, 2002 Assets Cash$5,900 Supplies550 Land20,000 Total assets$26,450 Liabilities Accounts payable$ 400 Owner’s Equity Chris Clark, capital26,050 Total liabilities and owner’s equity$26,450 Financial Statements

C1--67 NetSolutions Balance Sheet November 30, 2002 Financial Statements Assets Cash$5,900 Supplies550 Land20,000 Total assets$26,450 Liabilities Accounts payable$ 400 Owner’s Equity Chris Clark, capital26,050 Total liabilities and owner’s equity$26,450

C1--68 NetSolutions Balance Sheet November 30, 2002 Financial Statements Assets Cash$5,900 Supplies550 Land20,000 Total assets$26,450 Liabilities Accounts payable$ 400 Owner’s Equity Chris Clark, capital26,050 Total liabilities and owner’s equity$26,450

C1--69 NetSolutions Balance Sheet November 30, 2002 Financial Statements Assets Cash$5,900 Supplies550 Land20,000 Total assets $26,450 Liabilities Accounts payable$ 400 Owner’s Equity Chris Clark, capital26,050 Total liabilities and owner’s equity$26,450

C1--70 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2002 Cash flows from operating activities: Cash received from customers$ 7,500 Deduct cash payments for expenses and payments to creditors4,600 Net cash flow from operating activities$ 2,900 Cash flows from investing activities: Cash payments for acquisition of land(20,000) Cash flows from financing activities: Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and Nov. 30, 2002 cash balance$5,900 Financial Statements

C1--71 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2002 ) Financial Statements Cash flows from operating activities: Cash received from customers$ 7,500 Deduct cash payments for expenses and payments to creditors4,600 Net cash flow from operating activities$ 2,900 Cash flows from investing activities: Cash payments for acquisition of land(20,000 Cash flows from financing activities: Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and Nov. 30, 2002 cash balance$5,900

C1--72 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2002 ) Financial Statements Cash flows from operating activities: Cash received from customers$ 7,500 Deduct cash payments for expenses and payments to creditors4,600 Net cash flow from operating activities$ 2,900 Cash flows from investing activities: Cash payments for acquisition of land(20,000) Cash flows from financing activities: Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and Nov. 30, 2002 cash balance$5,900

C1--73 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2002 Financial Statements Cash flows from operating activities: Cash received from customers$ 7,500 Deduct cash payments for expenses and payments to creditors4,600 Net cash flow from operating activities$ 2,900 Cash flows from investing activities: Cash payments for acquisition of land(20,000 Cash flows from financing activities: Cash received as owner’s investment$25,000 Deduct cash withdrawal by owner2,000 Net cash flow from financing activities23,000 Net cash flow and Nov. 30, 2002 cash balance$5,900 )

C Ratio of Liabilities to Owner’s Equity Ratio of liabilities to owner’s equity = Formula Objective: Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions and to pay its creditors. Total liabilities Total owner’s equity NetSolutions = Example $400 $26, or 1.5% The lower the ratio of liabilities to owner’s equity, The better the financial position of the business.

C1--75 HOME WORK READING: 1.Illustrative problem 2.Self- examination questions 3.Multiple choice Writing: 1.Exercise Problem 1-2A 3.Problem 1-5A Discussion: 1.Activity 1-3 Forty-Love

C1--76 The end of Chapter 1.