© 2007 Pearson Education Canada 1.1 Accounting and the Business Environment Chapter 1

© 2007 Pearson Education Canada 1.2 Define accounting, and describe the users of accounting information. Objective 1

© 2007 Pearson Education Canada 1.3 is an information system that... measures business activities, processes information, and communicates financial information. Accounting...

© 2007 Pearson Education Canada 1.4 is called the language of business. Accounting... € £ $¥

© 2007 Pearson Education Canada 1.5 Business Decisions... Is my business making a profit? Should I hire assistants? Am I earning enough money to expand my business?

© 2007 Pearson Education Canada 1.6 Users of Accounting Information Other Individuals Investors Creditors Businesses Government Regulatory & Taxing Agencies Non-profit Organizations Accounting Information

© 2007 Pearson Education Canada 1.7 Management Accounting Financial Accounting Fields of Accounting Provides information to people outside the company Provides information for internal decision makers

© 2007 Pearson Education Canada 1.8 Explain why ethics and rules of conduct are crucial in accounting and business. Objective 2

© 2007 Pearson Education Canada 1.9 Ethical Consideration in Accounting and Business Users need relevant and reliable information Companies want to look as good as possible to attract investors Potential for Conflict Potential for Conflict

© 2007 Pearson Education Canada 1.10 Chartered Accountants (CA) Chartered Accountants (CA) Certified Management Accountants (CMA) Certified Management Accountants (CMA) Certified General Accountants (CGA) Certified General Accountants (CGA) Professional Accounting Bodies and Standards of Professional Conduct Standards of Ethical Conduct for each of the professional organizations Standards of Ethical Conduct for each of the professional organizations

© 2007 Pearson Education Canada 1.11 Describe and discuss the forms of business organizations. Objective 3

© 2007 Pearson Education Canada 1.12 Proprietorships Partnerships Corporations Types of Business Organizations

© 2007 Pearson Education Canada 1.13 Proprietorships l What are some advantages? – one owner – business is separate from owner l What are some disadvantages? – limited life of organization – unlimited personal liability – limited credit standing

© 2007 Pearson Education Canada 1.14 Partnerships l What are some advantages? – better credit standing – possibly – more brain power, but consultation with partners required l What are some disadvantages? – unlimited personal liability for general partners – need for written partnership agreement

© 2007 Pearson Education Canada 1.15 Corporations l What are some advantages? – separate legal existence – limited liability of shareholders – transferability of ownership relatively easy – indefinite life of organization l What are some disadvantages? – more costly to operate – extensive governmental regulation

© 2007 Pearson Education Canada 1.16 Explain the development of accounting standards, and describe the concepts and principles. Objective 4

© 2007 Pearson Education Canada 1.17 Development of Accounting Standards Accounting Standards Board (AcSB) of the Canadian Institute of Chartered Accountants (CICA) Generally Accepted Accounting Principles (GAAP)

© 2007 Pearson Education Canada 1.18 Conceptual Framework Objective of financial reporting Level 1 Qualitative characteristics of accounting information Level 2 Elements of Financial Statements Level 3 Recognition and measurement criteria Level 4

© 2007 Pearson Education Canada 1.19 Level 1: Objective of Financial Reporting l To provide information useful for making investment and lending decisions. l To assess management’s stewardship.

© 2007 Pearson Education Canada 1.20 Level 2: Qualitative Characteristics of Accounting Information l To be useful, information must be: – understandable; – relevant; – reliable; – comparable; and – consistent.

© 2007 Pearson Education Canada 1.21 Level 3: Elements of Financial Statements l Assets l Liabilities l Equity l Revenues l Gains l Expenses l Losses

© 2007 Pearson Education Canada 1.22 Level 4: Recognition and Measurement Criteria Assumptions Going Concern Monetary Unit Economic Entitty Time Period Assumptions Going Concern Monetary Unit Economic Entitty Time Period Principles Revenue Recognition Matching Full Disclosure Cost Principles Revenue Recognition Matching Full Disclosure Cost Constraints Cost/Benefit Materiality Constraints Cost/Benefit Materiality

© 2007 Pearson Education Canada 1.23 The Economic Entity Assumption l Transactions of each entity are accounted for separately from the transactions of all other organizations and persons. l Example: Keep business transactions separate from the personal transactions of the owner.

© 2007 Pearson Education Canada 1.24 Information must be accurate and verifiable. Information must be accurate and verifiable. Information must be free from bias. Information must be free from bias. Information must report what actually happened. Individuals would arrive at similar conclusions using same data. Individuals would arrive at similar conclusions using same data. The Reliability Characteristic

© 2007 Pearson Education Canada 1.25 Assets and services acquired should be recorded at their actual cost. Assets and services acquired should be recorded at their actual cost. The Cost Principle

© 2007 Pearson Education Canada 1.26 The entity will remain in operation in the foreseeable future. The entity will remain in operation in the foreseeable future. The Going-Concern Assumption

© 2007 Pearson Education Canada 1.27 The dollar’s purchasing power is relatively stable. The dollar’s purchasing power is relatively stable. The Stable-Monetary-Unit Assumption

© 2007 Pearson Education Canada 1.28 Describe and use the accounting equation to analyze business transactions. Objective 5

© 2007 Pearson Education Canada 1.29 Economic Resources Claims to Economic Resources The Accounting Equation Assets = Liabilities + Owner’s Equity

© 2007 Pearson Education Canada 1.30 Asset l What is an asset? l It is a resource owned that has future benefit. – cash, office supplies, merchandise – furniture, land, buildings

© 2007 Pearson Education Canada 1.31 Liability l What is a liability? l It is something a company owes. – money – service – legal retainers – product – magazines

© 2007 Pearson Education Canada 1.32 Owner’s Equity l What is owner’s equity? l It is what remains after liabilities have been subtracted from assets. – the same as net assets – the owner’s claim on the entity’s assets

© 2007 Pearson Education Canada 1.33 Transactions that Affect Owner’s Equity INCREASESDECREASES Owner Investments in the Business Revenues Expenses Owner Withdrawals from the Business Owner’s Equity

© 2007 Pearson Education Canada 1.34 Revenues l What are revenues? l They are amounts earned by delivering goods or services to customers. – sales – performance of services – rent earned – interest earned

© 2007 Pearson Education Canada 1.35 Expenses l What are expenses? l They are amounts that have been paid or will be paid later for costs that have been incurred to earn revenue. – rent – salaries and wages – utilities – supplies used

© 2007 Pearson Education Canada 1.36 Accounting for Business Transactions l What is a transaction? l It is an event that must always satisfy two conditions: – it affects the financial position of the business; – it can be reliably recorded.

© 2007 Pearson Education Canada 1.37 Accounting for Business Transactions: An Example 1 John Lapp invests $ to begin SuperTravel. 2 SuperTravel purchases land for an office location, paying $ in cash. 3 SuperTravel buys office supplies, agreeing to pay $1 000 in 30 days. 4 SuperTravel earns and collects service revenue of $5 000.

© 2007 Pearson Education Canada 1.38 Accounting for Business Transactions 5 SuperTravel performs services, and the client agrees to pay $6 000 within one month. 6 During the month, SuperTravel pays $5 200 for expenses incurred. 7 SuperTravel pays $800 to the store from which it purchased $1 000 worth of supplies. l What is the effect of these transactions on the accounting equation?

© 2007 Pearson Education Canada 1.39 Owner’s Assets = Liabilities + Equity 1)Cash+ $ $ )Cash– Land ) Supplies )Cash )Receivable )Cash– 5 200– )Cash– 800– 800 Totals+ $ $ Accounting for Business Transactions

© 2007 Pearson Education Canada 1.40 Accounting for Business Transactions l Notice that the equation always stays in balance. l Each transaction affects at least two accounts, sometimes more. l Some transactions affect only one side of the equation; some affect both sides.

© 2007 Pearson Education Canada 1.41 Accounting for Business Transactions Other transactions that took place were as follows: 8. Remodelled John Lapp’s personal residence. 9. The business collected $2 000 from the client. 10. SuperTravel sold some land at cost for $ John Lapp withdrew $2 000 from the business. l What is the effect of these additional transactions on the accounting equation?

© 2007 Pearson Education Canada 1.42 Prepare and evaluate the financial statements. Objective 6

© 2007 Pearson Education Canada are the formal reports of an entity’s financial information.... are the formal reports of an entity’s financial information.... show how the business is performing and where it stands.... show how the business is performing and where it stands. Financial Statements...

© 2007 Pearson Education Canada 1.44 Financial Statements 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Cash Flow Statement Let’s look at the relationships among the financial statements

© 2007 Pearson Education Canada 1.45 SuperTravel Income Statement for the Month Ended April 30, 2007 Revenue: Service revenue$ Expenses: Rent expense$2 200 Salary expense Utilities expense 600 Total expenses Net income $5 800

© 2007 Pearson Education Canada 1.46 John Lapp, Capital, April 1, 2007$ 0 Investment by owner Net income for the month Withdrawalsby owner( 2 000) John Lapp, Capital, April 30, 2007 $ SuperTravel Statement of Owner’s Equity for the Month Ended April 30, 2007

© 2007 Pearson Education Canada 1.47 SuperTravel Balance Sheet April 30, 2007 Assets Cash$ Accounts receivable Office supplies Land Total assets $ Liabilities Accounts payable$ 200 Owner’s Equity J. Lapp, Capital Total liabilities and owner’s equity $

© 2007 Pearson Education Canada 1.48 SuperTravel Cash Flow Statement for the Month Ended April 30, 2007 Cash flows from operating activities: Cash collections from customers $7 000 Cash payments to suppliers( 3 600) Cash payments to employees( 2 400) Net cash inflow from operating activities$ Cash flows from investing activities Acquisition of land ($40 000) Proceeds from sale of land Net cash outflow from investing activities ($ )

© 2007 Pearson Education Canada 1.49 Cash flows from financing activities: Investment by owner $ Withdrawal by owner ( 2 000) Net cash inflow from financing activities $ Net increase in cash $ Cash balance, April 1, Cash balance, April 30, 2007 $ SuperTravel Cash Flow Statement for the Month Ended April 30, 2007 (continued)

© 2007 Pearson Education Canada 1.50 Analysis of the Financial Statements Using the financial statements answer the following questions: l Did the business generate net income or a net loss? l What was the business’s largest expense? l How much cash does the company have at the end of April? l How much does the company owe outsiders at April 30?

© 2007 Pearson Education Canada 1.51 End of Chapter 1