© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin ACCOUNTING: Information for Decision Making Chapter 1

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Primary Objectives To develop your ability to understand and use accounting information To do this, you need to understand the following The nature of economic activities that accounting information describes. The assumptions & measurement techniques involved in developing accounting information The information that is most relevant for making various types of decision

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Accounting information The accounting process Decision makers Economic activities Actions (decisions) Accounting “links” decision makers with economic activities  and with the results of their decisions.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Manufacturing Business Product Product General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television Types of Businesses

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Merchandising Business Product Product Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Types of Businesses

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Service Business Product Product DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication Types of Businesses

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin There are three types of business organizations Proprietorship Partnership Corporation

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability Joe’s

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A partnership is owned by two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Joe and Marty’s

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A corporation is organized under state or federal statutes as a separate legal entity. Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation. J & M, Inc.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Business Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Business Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Wal-Mart Southwest Airlines

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Business Strategies Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Value Chain of a Business A value chain is the way a business adds value for its customers by processing inputs into product or service. Inputs Business Processes Business Processes Products or Services Products or Services Customer Value Customer Value

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin A business stakeholder is a person or entity having an interest in the economic performance of the business. Business Stakeholders

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 2 Assess stakeholders’ informational needs. The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Accounting Information System Design the accounting information system to meet stakeholders’ needs. 3 4 Record economic data about business activities and events. The Process of Providing Information

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 5 Prepare accounting reports for stakeholders. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Accounting Information System The Process of Providing Information

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Types of Accounting Information Financial Managerial Tax

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulatory agencies -SEC -IRS Information Users  Investors  Creditors  Managers  Owners  Customers  Employees  Regulatory agencies -SEC -IRS Decision Support  CVP analysis  Performance evaluation  Incremental analysis  Budgeting  Capital allocation  Earnings per share  Ratio analysis Decision Support  CVP analysis  Performance evaluation  Incremental analysis  Budgeting  Capital allocation  Earnings per share  Ratio analysis Information System Cost & Revenue Determination  Job costing  Process costing  Sales Assets & Liabilities  Plant and equipment  Loans & equity  Receivables, payables & cash Cash Flows  From operations  From financing  From investing Cost & Revenue Determination  Job costing  Process costing  Sales Assets & Liabilities  Plant and equipment  Loans & equity  Receivables, payables & cash Cash Flows  From operations  From financing  From investing

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Basic Functions of an Accounting System  Interpret and record business transactions. Payment Car

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Basic Functions of an Accounting System  Summarize and communicate information to decision makers.  Classify similar transactions into useful reports.  Interpret and record business transactions.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Objectives of External Financial Reporting The primary external users of financial information are investors and creditors.

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Information about economic resources, claims to resources, and changes in resources and claims. Information useful in assessing amount, timing and uncertainty of future cash flows. Information useful in making investment and credit decisions. (Specific) (General) Objectives of Financial Reporting

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Objectives of External Financial Reporting The primary financial statements. Income Statement Balance Sheet Statement of Cash Flows

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Financial Reporting Financial Statements Financial Statements: A Lens to View Business Financial Statements: A Lens to View Business

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Characteristics of Externally Reported Information A Means to an End Broader than Financial Statements Historical in Nature Results from Inexact and Approximate Measures Based on General Purpose Assumption Usefulness Enhanced via Explanation

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Accounting is Important Why does accounting matter? – Accounting is the language of business – Global economic systems depend on reliable and accurate financial reporting

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Users and Uses of Accounting Accounting identifies and records the economic events of an organization and communicates to interested users There are two broad categories of users – Internal users – External users

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Users of Financial Information Internal users – Managers plan, organize, and run a business

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Users of Financial Information External users – Investors – Creditors – Others Tax authorities Regulatory agencies Customers Labour unions Economic planners

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Internal Users of Accounting Information Board of Directors Chief Executive Officer Chief Financial Officer Vice Presidents Business Unit Managers Plant Managers Store Managers Line Supervisors

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance. Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources. Information useful to help the enterprise achieve its goal, objectives and mission. Objectives of Managerial Reporting

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Characteristics of Management Accounting Information Timeliness Identify Decision- Making Authority Oriented Toward Future Measures of Efficiency and Effectiveness A Means to an End

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Integrity of Accounting Information Institutional Features  Generally Accepted Accounting Principles (GAAP)  Financial Accounting Standards Board  Securities and Exchange Commission  Internal Control Structure  Audits

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Integrity of Accounting Information Professional Organizations  American Institute of Certified Public Accountants  Institute of Management Accountants  Institute of Internal Auditors  American Accounting Association

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Integrity of Accounting Information Competence, Judgment and Ethical Behavior  Certified Public Accountants (CPAs)  Certificate in Management Accounting (CMA)  Certificate in Internal Auditing (CIA)  Code of Professional Conduct CPA

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 3 Types of Business Activities Financing Investing Operating

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Financing Activities Obtaining (and repaying) funds to finance the operations of the business Examples – Borrowing money or repaying loans (debt) – Selling or repurchasing shares (equity)

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Investing Activities Obtaining the resources or assets needed to operate the business for the long term Examples – Purchase or sale of investments – Purchase or sale of long-lived assets such as property, plant and equipment and intangible assets

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Operating Activities Operating activities are the main day-to-day activities of the business Examples – Revenues – Expenses – Related accounts

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Financial Statements Statement of earnings (also called income statement) – Reports the results of operations for a specific period of time Statement of retained earnings – Reports the changes in retained earnings for a specific period of time

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Financial Statements Balance sheet – Reports the assets, liabilities, and shareholders’ equity as at a specific point in time Cash flow statement – Reports the cash receipts and payments for a specific period of time

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Statement of Earnings Revenues – Arise from the sale of a product or service – Result in an inflow of assets Expenses – Costs of assets consumed or services used to generate revenues Net earnings (loss) – Revenues - expenses

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin CSU CORPORATION Statement of Earnings Year Ended December 31, 2009 First: Statement of Earnings Name of company Name of statement Period of time covered

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin CSU CORPORATION Statement of Earnings Year Ended December 31, 2009 [List revenues] Revenues Service revenue $22,200

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin CSU CORPORATION Statement of Earnings Year Ended December 31, 2009 [List and total the expenses. Note that income tax is shown separately from other expenses.] Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense ,200 Earnings before income tax 12,000 Income tax expense 5,200

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin CSU CORPORATION Statement of Earnings Year Ended December 31, 2009 [Subtract expenses from revenues to obtain net earnings (loss).] Revenues Service revenue $22,200 Expenses Rent expense $9,000 Insurance expense 1,000 Supplies expense ,200 Earnings before income tax 12,000 Income tax expense 5,200 Net earnings $ 6,800

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Statement of Retained Earnings Shows the cumulative earnings that have been retained in the corporation less dividends distributed to shareholders

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin CSU CORPORATION Statement of Retained Earnings Year Ended December 31, 2009 Second: Statement of Retained Earnings - Name of company - Name of statement - Period of time covered (same period as statement of earnings)

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 52 CSU CORPORATION Statement of Retained Earnings Year Ended December 31, 2009 [Start with beginning retained earnings (same as ending retained earnings of prior period)] Retained earnings, January 1$ 0

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 53 CSU CORPORATION Statement of Retained Earnings Year Ended December 31, 2009 [Add net earnings (subtract loss) from the current year (see Statement of Earnings) and subtotal] Retained earnings, January 1$ 0 Add: Net earnings 6,800 6,800

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 54 CSU CORPORATION Statement of Retained Earnings Year Ended December 31, 2009 Check: Ending retained earnings should agree with amount reported on balance sheet [Subtract current year’s dividends (if any) and total] Retained earnings, January 1 $ 0 Add: Net earnings 6,800 6,800 Less: Dividends 600 Retained earnings, December 31 $6,200

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Balance Sheet Assets – Resources owned by a business Liabilities – Obligations of the business Shareholders’ equity – Share capital Represents the primary ownership interest in a corporation – Retained earnings Accumulated earnings of the corporation that have not been distributed to shareholders 55

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 56 CSU CORPORATION Balance Sheet December 31, 2009 Third: Balance Sheet - Name of company - Name of statement - Date (as at a specific point in time)

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 57 CSU CORPORATION Balance Sheet December 31, 2009 [List the assets and total] Assets Cash $ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 58 CSU CORPORATION Balance Sheet December 31, 2009 [List the liabilities and subtotal] Assets Cash $ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 59 CSU CORPORATION Balance Sheet December 31, 2009 [List shareholders’ equity; subtotal and total] Assets Cash $ 1,400 Accounts receivable 4,000 Supplies 1,800 Equipment 16,000 Total assets $23,200 Liabilities and Shareholders’ Equity Liabilities Accounts payable $ 2,000 Notes payable 5,000 Total liabilities 7,000 Shareholders’ equity Common shares 10,000 Retained earnings 6,200 Total shareholders’ equity 16,200 Total liabilities and shareholders’ equity $23,200

© The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin END OF CHAPTER 1