Accounting as a Form of Communication Chapter 1 Accounting as a Form of Communication Using Financial Accounting Information: The Alternative to Debits and Credits, 6/e by Gary A. Porter and Curtis L. Norton Copyright © 2009 South-Western, a part of Cengage Learning.

What Is Business? Activities to provide members of an economic system with goods and services Activities LO1

Forms of Organization two or more owners one owner Sole Proprietorship two or more owners Partnership entity organized under laws of a particular state Corporation LO2

Hospitals, Universities, Nonbusiness Entities Government entities Private organizations Federal, State, and Local Governments Hospitals, Universities, Cooperatives

The Nature of Business Activity Financing Activities Investing Activities Operating Activities Examples: borrowing sale of stock purchase of assets sale of products/services costs incurred to operate business LO3

What Is Accounting? Identifying Economic to Information various users Measuring Communicating LO4

Internal and External Users of Accounting Information Creditors Current and Potential Owners Government Agencies Suppliers Trade Associations Financial Analysts Bankers Internal Users – Management 12 12

Decisions Made with Financial Information Add new product line?? Invest?? Borrow $$?? Build new plant?? Extend credit $$?? Loan $$?? Start new business?? Sell stocks or bonds?? 2 2

The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders’ Equity) Creditors’ claims to assets Owners’ Economic resources = + Accounts payable Notes payable Capital stock Retained earnings Examples: Cash Accounts receivable Land LO5 14 14

Balance Sheet (snapshot of financial position) = Liabilities Assets + Owners’ Equity (or Stockholders’ Equity) 15 15

Top of the World Balance Sheet June 30, 2008 A = L + SE A Current assets: Cash $ 200 Accounts receivable 600 Land 4,000 Lodge, lifts and equipment 2,500 Total assets $7,300

Top of the World Balance Sheet June 30, 2008 A = L + SE Top of the World Balance Sheet June 30, 2008 Liabilities and Stockholders’ Equity = L Liabilities: Accounts payable $ 700 Salaries and wages payable 400 Notes payable 3,000 Total liabilities $4,100 + SE Stockholders’ equity: Capital stock $2,000 Retained earnings 1,200 Total stockholders’ equity $3,200 Total Liabilities and Stockholders’ Equity $ 7,300

Income Statement (for a period of time) Revenues $$ Less: Expenses ($$) Net income $$ 16 16

Top of the World Income Statement For the Year Ended June 30, 2008 Revenues – Expenses = Net Income Revenues: Lift tickets $5,800 Equipment rentals 2,200 Total revenues $8,000 Expenses: Salaries and wages $2,000 Depreciation 100 Water, gas, and electricity 1,500 Insurance 1,100 Interest 300 Income taxes 1,000 Total expenses 6,000 Net income $2,000 Revenues Expenses Net Income

Statement of Retained Earnings (for a period of time) Beginning retained earnings $$$ Add: Net income for the period $$$ Deduct: Dividends for the period ($$$) Ending retained earnings $$$ 17 17

Top of the World Statement of Retained Earnings For the Year Ended June 30, 2008 Retained earnings, beginning of the year $ 0 Add: Net income for the year 2,000 Deduct: Dividends for the year (800) Retained earnings, end of the year $ 1,200

Top of the World Statement of Cash Flows For the Year Ended June 30, 2008 Cash flows from operating activities: Cash collected from customers $ 7,400 Cash payments for: Salaries and wages $ 1,000 Water, gas, and electricity 1,500 Insurance 400 Interest 300 Income taxes 1,000 Total cash payments 4,800 Net cash provided by operating activities $ 2,600

Top of the World Statement of Cash Flows For the Year ended June 30, 2008 Cash flows from investing activities: Purchase of land $(4,000) Purchase of lodge, lift and equipment (2,600) Net cash flows from investing activities $(6,000) Cash flows from financing activities: Proceeds from issuance of long term note $ 3,000 Proceeds from issuance of capital stock 2,000 Dividends declared and paid (800) Net cash flows from financing activities 4,200 Net increase in cash $ 200 Cash at beginning of year 0 Cash at the end of the year $ 200

Relationship among Financial Statements Top of the World Example Income Statement for 2008 Revenues $ 8,000 Less: Expenses ( 6,000) Net income $ 2,000 Statement of Retained Earnings for 2008 Beginning balance, retained earnings $ 0 Add: Net income 2,000 Deduct: Cash dividends (800) Ending balance, retained earnings $ 1,200 Balance Sheets 2008 2007 Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0

Financial Statement Assumptions Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption LO6 20 20

Economic Entity Concept Each entity has its own books, records, and financial statements that are separate from owners. No intermingling of personal and business assets and liabilities or income and expenses. 21 21

Cost Principle Record assets at cost paid to acquire them. Continue to value assets at historical cost until sold. More objective than market value. 22 22

Going Concern Assume business will continue indefinitely into the future Justifies use of historical cost 23 23

Monetary Unit How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.) Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements 24 24

Time Period Assumption Assumes it is possible to break up an entity’s earnings in discrete time periods (a month, quarter, year) Necessary to provide users with financial results on a timely basis Requires use of estimates 25 25

The Rules of the Game The rules The rule makers The rule enforcers The CPA regulators GAAP FASB SEC AICPA LO7 26 26

Ethics in Accounting 1. Identification of ethical dilemma 2. Analysis of key elements 3. Determine the alternatives 4. Resolve by selecting ethical alternative LO8

The Changing Face of the Accounting Profession A “financial reporting crisis” caused by: Enron: the omission of entities from the financial statements WorldCom: treating costs as assets rather than expenses causing higher net income

Sarbanes-Oxley Act Provisions of the act: Established the Public Company Accounting Oversight Board Required external auditors to report directly to the company’s audit committee Prohibits external auditors from providing other services compromising independence

End of Chapter 1