1. PowerPoint Presentation by Douglas Cloud Professor of Accounting Pepperdine University
© Copyright 2004 South-Western. All rights reserved.
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2. ACCOUNTING AND ORGANIZATIONS
Chapter F1
ACCOUNTING AND ORGANIZATIONS

3. Once you have completed this chapter, you should be able to:
Objectives
1. Identify how accounting information helps decision makers.
2. Compare major types of organizations and explain their purpose.
3. Describe how businesses create value.
4. Explain how accounting helps investors and other decision makers understand businesses.
Once you have completed this chapter, you should be able to:
Continued

4. Objectives
5. Identify business ownership structures and their advantages and disadvantages.
6. Identify uses of accounting information for making decisions about corporations.
7. Explain the purpose and importance of accounting regulations.
8. Explain why ethics are important for businesses and accounting.

5. Objective 1
Identify how accounting information helps decision makers.

6. Accounting information helps decision makers determine where they are, where they have been, and where they are going.

7. Maria and Stan decide to start a business selling cookies to local grocery stores. They determine they can sell $12,000 of merchandise (cookies) each month.

8. They calculate their monthly cost.
Merchandise $ 8,000
Wages 1,000
Rent 600
Supplies 300
Utilities
Total $10,100

9. Expected Monthly Earnings for Mom’s Cookie Company
Exhibit 2
Merchandise sold $ 8,000
Wages 1,000
Rent 600
Supplies 300
Utilities
Total $10,100
Costs
Sales of merchandise $12,000
Sales
Profit $1,900

10. Risk is uncertainty about an outcome, such as the amount of profit a business will earn.

11. Accounting can help with these decisions by providing information about the results that owners and other decision makers should expect will occur.

12. The purpose of accounting is to help people make decisions about economic activities.

13. Stakeholders include those who have an economic interest in an organization and those who are affected by its activities.

14. An organization is a group of people who work together to develop, produce, and or distribute goods or services.

15. Objective 2
Compare major types of organizations and explain their purpose.

16. Types of Organizations
Exhibit 3
Types of Organizations

17. Transformation of Resources into Goods and Services
Exhibit 4
Transformation of Resources into Goods and Services

18. The transformation, if it meets a need of society, creates value because people are better off after the transformation than before.

19. Objective 3
Describe how businesses create value.

20. Creating Value
A market is any location or process that permits resources to be bought and sold.

21. Creating Value
Accounting measures the increase in value created by a transformation as the difference between the total price of goods and service sold and the total costs of resources consumed in developing, producing, and selling the goods and services.

22. Sales Price of Box of Cookies
Value Added by Transforming Resources
Exhibit 5
Sales Price of Box of Cookies
Total Cost of Resources Consumed to Produce and Make a Box of Cookies Available
Value Added
$3.50
$3.00
$0.50 – =

23. Profit is the difference between the price a seller receives for goods or services and the total cost to the seller of all resources consumed in developing, producing, and selling these goods or services during a particular period.

24. Mom’s Cookie Company
Profit Earned
for January
Resources created from selling cookies $11,400
Resources consumed:
Cost of merchandise sold $7,600
Wages 1,000
Rent 600
Supplies 300
Utilities
Total cost of resources consumed ,700
Profit earned $ 1,700

25. Objective 4
Explain how accounting helps investors and other decision makers understand businesses.

26. The Role of Accounting in Business Organizations
An effective business is one that is successful in providing goods and services demanded by customers.
Owners invest in a business to receive a return on their investments from profits earned by that business.
ROI =
Profit
Amount Invested

27. The Role of Accounting in Business Organizations
If Maria and Stan invested $10,000 to start Mom’s Cookie Company and earned a $1,700 profit, what would be the return on investment?
$1,700
ROI =
Profit
Amount Invested
17% =
$10,000

28. The Role of Accounting in Business Organizations
An effective business is one that is successful in providing goods and services demanded by customers.

29. The Role of Accounting in Business Organizations
An efficient business is one that keeps the cost of resources consumed in providing good and services low relative to the selling prices of these goods and services.

30. Objective 5
Identify business ownership structures and their advantages and disadvantages.

31. Business Ownership
A corporation is a legal entity with the right to enter into contracts; the right to own, buy, and sell property; and the right to sell stock.

32. Business Ownership
A proprietorship is a single-owner business organization that does not have a legal identity distinct from its owner.

33. Business Ownership
A partnership is a business organization that does not have legal identities distinct from its multiple owners.

34. Data source: U.S. Census Bureau Web site (http://www.census.gov)
Total Companies
Data source: U.S. Census Bureau Web site (
Business Ownership 6%
73%
21%
Proprietorship
Corporation
Partnership

35. Data source: U.S. Census Bureau Web site (http://www.census.gov)
Total Sales
Data source: U.S. Census Bureau Web site (
Business Ownership 4% 5%
91%
Proprietorship
Corporation
Partnership

36. Corporate Management Functions
Exhibit 7
Corporate Management Functions
Board of Directors, Chief Executive Officer, President, Other Top Management
The Company
Continued

37. Corporate Management Functions
Exhibit 7
Corporate Management Functions
Continued
Research
Design
Financing
Legal
Services
Information
Systems
Accounting
Human
Resources
Purchasing
The Company
Support Functions

38. Corporate Management Functions
Exhibit 7
Corporate Management Functions
Primary Functions
Production
Distribution
Marketing
Servicing
The Company

39. Advantages of Corporations
Corporations have continuous lives apart from those of their owners.
Shareholders normally are not personally liable for the debts of a corporation (limited liability).
Shareholders of most corporations do not manage the company. Instead, professional managers are hired to run the company.
Shareholders cannot enter into contracts or agreements that are binding on a corporation unless they are managers or directors (mutual agency).

40. LEARNING NOTE
A partnership can be organized as a limited liability partnership (LLP). The LLP restricts the personal liability of each partner for obligations created by the company.

41. Disadvantages of Corporations
Most corporations must pay taxes on their income.
Corporations are regulated by various state and federal government agencies.
Compliance with disclosure regulations is costly.
Some of the required disclosures may be helpful to competitors.
The size of larger corporations make them difficult to manage.
Owners of corporations usually do not have access to information about the company’s day-to-day activities.

42. Disadvantages of Corporations
Moral hazard is the condition that exists when agents have superior information to principals and are able to make decisions that favor their own interests over those of the principals.

43. A creditor is someone who loans financial resources to an organization.

44. Sources of Financing for Selected Corporations
Exhibit 8 20 40 60 80
100
Ford
Microsoft
Pepsi
Wal-Mart
Creditors
Owners

45. + Obtaining Financial Resources Owners Creditors Financial Resources
Exhibit 9
Owners +
Financial
Institutions
Individuals
Creditors
Proprietorship or
Partnership
Corporation
Financial Resources

46. Objective 6
Identify uses of accounting information for making decisions about corporations.

47. Contracts are legal agreements for the exchange of resources and services.

48. Contract terms establish the rights and responsibilities of the contracting parties.

49. Example of Exchanges Requiring Information
Exhibit 10
Investors
Managers & Employees
Suppliers
Customers
Government Agencies
Money
Products
The Organization
Obtain Money
Acquire Resources
Produce and Sell Goods and Services
Continued

50. Example of Exchanges Requiring Information
Exhibit 10
Investors
Managers & Employees
Suppliers
Customers
Government Agencies
Money
Services
Materials
The Organization
Obtain Money
Acquire Resources
Produce and Sell Goods and Services

51. Investors and Creditors
Accounting information helps investors evaluate the risk and return they can expect from their investments.
It also helps to determine whether management of companies they invest in are meeting the terms of their contracts.

52. Managers
Accounting information also provides a means for owners and managers to determine the amount of compensation mangers will receive.

53. Accounting information helps managers assess employee performance
Employees
Accounting information helps managers assess employee performance
Accounting information helps employees assess the risk and return of their employment contracts.

54. Suppliers
Accounting information helps companies evaluate the abilities of their suppliers to meet their resource needs.
Suppliers often use accounting information about their customers to evaluate the risk of a buyer not being able to pay for goods and services acquired.

55. Customers
Accounting information is used to assess the risks of buying from specific companies and selling to specific customers.

56. Government Agencies
Amounts to be collected for fees and taxes are determined by required information provided by organizations.
Government agencies use accounting information to make taxation and regulatory decisions.

57. Objective 7
Explain the purpose and importance of accounting regulations.

58. Financial accounting is the process of preparing, reporting, and interpreting accounting information that is provided to external decision makers.

59. GAAP are standards developed by professional accounting organizations to identify appropriate accounting and reporting procedures.

60. Managerial accounting is the process of preparing, reporting, and interpreting accounting information that is provided to internal decision makers.

61. An audit is a detailed examination of an organization’s financial reports.

62. The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP are certified public accountants.

63. The Securities and Exchange Commission is a governmental agency that examines corporate financial reports to verify their conformance with GAAP and SEC requirements.

64. Objective 8
Explain why ethics are important for business and accounting.

65. Ethical behavior is particularly important for accounting because the reliability of accounting information depends on the honesty of those who prepare, report, and audit this information.

66. CHAPTER F1
THE END