COPYRIGHT © 2009 South-Western/Cengage Learning SURVEY OF ACCOUNTING CHAPTER 1 CARL S. WARREN

Learning Objective 1 Describe the types and forms of businesses, how businesses make money, and business stakeholders.

Three Types of Businesses Operated for Profit  Manufacturing Businesses  Merchandising Businesses  Service Businesses

Forms of Business  Proprietorship  Partnership  Corporation  Limited Liability Company

Considerations in Choosing a Form of Business Organization  Ease of formation  Ability to raise capital  Legal liability  Taxation  Limitation on life

FormEase Legal Liability Taxation Limited Life Capital Access ProprietorshipSimpleNo limitNontaxableYesLimited PartnershipSimpleNo limitNontaxableYesAverage CorporationComplexLimitedTaxableNoExtensive Limited Liability Co. ModerateLimitedNontaxableYesAverage Differences in Forms of Business Organization

 Provide goods or services to customers.  Which goods or services should be offered? It depends on how the business plans to gain an advantage over its competitors to make money and maximize profits. How Do Businesses Make Money?

Profits

Business Stakeholders  Who are business stakeholders and how are they related to the company? Business stakeholders are people or entities that have an interest in the economic performance and well-being of a business.

Business Stakeholders

Learning Objective 2 Describe the three business activities of financing, investing, and operating.

Business Activities

Key Accounts Balance sheet accounts: Accounts payable Accounts receivable Assets Bonds Payable Capital stock (common stock) Interest Payable Liabilities Notes Payable prepaid expenses Income statement accounts Revenues Expenses

Financing Activities  Obtaining funds to begin and operate a business by borrowing money or issuing shares of ownership.  Borrowing creates a liability. Accounts Payable; Bonds Payable; Notes Payable  Issuing ownership shares creates capital stock.

Investing Activities  Obtaining assets to start and operate a business. Tangible Assets  Includes Land, Property, and Equipment Intangible Assets  Includes Goodwill, Copyrights, and Patents

Operating Activities  Operating activities are used to implement a company’s business emphasis.  Help determine Net Income or Net Loss Revenues: sales of products Expenses: cost of sales, administrative and selling expenses

Learning Objective 3 Define accounting and describe its role in business.

Role of Accounting  Accounting is an information system that provides reports to stakeholders about the economic activities and condition of a business.  Sometimes called the “language of business.”  Summarizes financial performance of the firm for external users.

Two Major Objectives of Financial Accounting  Report the financial condition of a business at a point in time.  Report changes in the financial condition of a business over a period of time.

Learning Objective 4 Describe and illustrate the basic financial statements and how they interrelate.

Financial Statements

Income Statement  Summary of revenue and expenses for a specific period of time (e.g., month, quarter, or year).  Reports the change in financial condition due to the operations of a business.

Income Statement  Uses the Matching Concept.  Expenses for the period are matched against revenues for the same period. Revenue – Expenses = Net Income

Retained Earnings  Reports changes in financial condition due to changes in retained earnings during a period.  Retained earnings is the portion of net income retained by the business.

Balance Sheet  Reports financial condition at a point in time.  Measured by total assets and claims to those assets: Assets = Liabilities + Stockholders’ Equity

Statement of Cash Flows  Reports the change in financial condition due to the changes in cash during a period. Net change in operating cash flows Net change in investing cash flows Net change in financing cash flows

 Statement of cash flows is linked to cash on the balance sheet.  Net income from the income statement is linked to the retained earnings statement.  Retained earnings is linked to the balance sheet in stockholders’ equity. Integrated Financial Statements

Learning Objective 5 Describe eight accounting concepts underlying financial reporting.

The Accounting “Rules” Generally accepted accounting principles (GAAP)

Business Entity Concept  Applies accounting to a specific entity for which stakeholders need economic data.

Cost Concept  Determines the amount initially entered into the accounting records for purchases.

Going Concern Concept  Assumption that a business normally expects to continue operating for an indefinite period of time.

Matching Concept  Revenues for a period are matched with the expenses incurred in generating the revenues.  Revenues are normally recorded at the time of the sale of the product or service.

Objectivity Concept  Requires that entries in the accounting records and the data reported on the financial statements be based on objective evidence.

Unit of Measure Concept  In the U.S., requires that all economic data be recorded in dollars.

Adequate Disclosure Concept  Financial statements and related footnotes/disclosures should contain all relevant data a reader needs to understand the financial condition and performance of a business.

Accounting Period Concept  The process in which accounting data are recorded and summarized in financial statements is a period process. The Income Statement, Statement of Cash Flows, and Retained Earnings Statement are prepared for a period of time. The Balance Sheet is prepared at the end of a period.

Responsible Reporting  The reliability of financial reporting is important to the economy, and for businesses to raise money from investors (stockholders’ and creditors).

End of Chapter 1