©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 1 Chapter 1 Introduction to Business in the United States

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 2 Learning Objective 1 Describe the four factors of production.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 3 Factors of Production Production Natural Resources CapitalLabor Entrepreneurship

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 4 Learning Objective 2 Explain the basic concepts of capitalism and how they relate to the profit motive.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 5 Economic Systems Planned economy Communism Market economy Capitalism

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 6 The Profit Motive The profit motive stimulates a person to do something when the benefit derived from doing it is greater than the sacrifice required to do it.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 7 The Profit Motive Steve wants to buy a pair of pants. Tanner’s price is $ Chelsea’s price is $ Tanner’s cost is $ Invisible hand ?

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 8 Learning Objective 3 Distinguish between gross and net income. Be able to calculate each.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 9 Gross Profit At a selling price of $50.00, what is Tanner’s gross profit or gross margin?

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Who is a Stakeholder? A stakeholder is anyone to whom a company owes a responsibility; anyone who has a stake in the way a company is run.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 4 Distinguish among the three basic forms of business organizations and describe the advantages and disadvantages of each.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Proprietorships Partnerships Corporations Forms of Business Organizations

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Proprietorships What are some advantages? easy and inexpensive to establish total control What are some disadvantages? unlimited liability limited access to capital

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Partnerships What are some advantages? easy to establish access to more capital What are some disadvantages? unlimited liability sharing of profits

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Corporations What are some advantages? limited liability greater access to capital What are some disadvantages? greater tax burden greater government regulations easy transferability of ownership

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 5 Distinguish among the three major types of business activities and define hybrid type businesses.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Types of Business Activities Manufacturing Merchandising Service Hybrid

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 6 Explain the basic need for international business trade and the complications involved in this activity.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Global Nature of Business in the 21 st Century Imports Products brought into a country Exports Products produced in a country but sold outside that country

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Global Nature of Business in the 21 st Century Economic complications Political complications QuotasTariffs

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Business and Accounting Business is about making decisions. Accounting information plays a significant role in decision making.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 7 Describe what is shown in each of the four financial statements.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Financial accounting Management accounting Introduction to Financial Accounting Reports

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Balance Sheet Assets Owners’ Equity Owners’ Equity Liabilities

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Balance Sheet Microsoft Balance Sheet June 30, 2001 (in millions) Assets$59,257Liabilities Stockholders’ equity$11,968 Total liabilities and 47,289 stockholders’ equity$59,257 stockholders’ equity$59,257

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Income Statement Microsoft Income Statement For the year ended June 30, 2001 (in millions) Revenue$25,296 Expenses–17,950 Net income$ 7,346

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Statement of Owners’ Equity

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Statement of Cash Flows Microsoft Statement of Cash Flows For the year ended June 30, 2001 (in millions) Cash from operating activities$13,422 Cash used for investing activities – 8,734 Cash used for financing activities – 5,612 Net change in cash – 942 Cash, beginning of year 4,846 Cash, end of year$ 3,922

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 8 Discuss the SEC’s and FASB’s authority over accounting reporting standards and describe the current standard-setting process in the United States.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Authority over Accounting Reports A federal agency with oversight powers Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Establishes and improves reporting standards (private sector agency)

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 9 Describe the basic objectives of financial reporting.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Conceptual Framework of Accounting Objectives: To provide information 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Conceptual Framework of Accounting Qualitative Characteristics 1. Primary qualities A. Relevance (1) Predictive value (2) Feedback value (3) Timeliness B. Reliability (1) Representational faithfulness (2) Verifiability (3) Neutrality 2. Secondary qualities A. Comparability B. Consistency

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Conceptual Framework of Accounting Elements 1. Assets 1. Assets 2. Liabilities 2. Liabilities 3. Equity 3. Equity 4. Investment by owners 4. Investment by owners 5. Distributions to owners 5. Distributions to owners 6. Comprehensive income 6. Comprehensive income 7. Revenues 7. Revenues 8. Expenses 8. Expenses 9. Gains 9. Gains 10. Losses

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Conceptual Framework of Accounting Assumptions Assumptions 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity Constraints Constraints 1. Cost/benefit 2. Materiality 3. Industry practice 4. Conservatism Principles Principles 1. Historical cost 2. Revenue recognition 3. Expense recognition 4. Full disclosure

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Standards-Setting Process 1. Identifying issues 2. Setting an agenda 3. Appointing a task force 4. Creating a discussion memorandum 5. Holding public hearings

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones The Standards-Setting Process 6. Inviting comment letters 7. Deliberating 8. Writing an exposure draft 9. Issuing a Statement of Financial Accounting Standards Financial Accounting Standards 10. Conducting a post-enactment review

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 10 Explain the purpose of an independent financial audit and describe the four basic types of audit opinions.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Outside Assurance on Financial Statements The auditor examines the client’s financial statements and supporting documentation to determine whether the statements present a fair picture of the client’s financial condition and results of its operations. Auditors also evaluate the policies and procedures that are in place to safeguard company assets.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Outside Assurance on Financial Statements In the United States, only licensed certified public accountants (CPAs) are permitted to perform independent audits. Not all CPAs are auditors.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Four Possible Audit Opinions Audit Option UnqualifiedOpinionDisclaimer of Opinion QualifiedOpinionAdverseOpinion

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 11 Gather information about a company and obtain an annual report.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Corporate Reporting and the Annual Report The annual report includes a variety of information including financial statements. The form 10-K is required by the SEC.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Learning Objective 12 Describe the information found in a typical annual report and Form 10-K.

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Outline of the Contents of Form 10-K Annual Report Part I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders of Security Holders Part II Item 5. Market for the Company’s Common Equity and Related Stockholder Matters Equity and Related Stockholder Matters Item 6. Selected Financial Data

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Outline of the Contents of Form 10-K Annual Report Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Accountants on Accounting and Financial Disclosure Financial Disclosure Part III Item 10. Directors and Executive Officers Item 10. Directors and Executive Officers of the Company of the Company

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones Outline of the Contents of Form 10-K Annual Report Item 11. Executive Compensation Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Owners and Management Item 13. Certain Relationships and Related Transactions Transactions Part IV Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K Schedules, and Reports on Form 8-K

©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones End of Chapter 1