1. What is Accounting?
Accounting is a process that involves collecting information, recording it, summarizing it and then reporting it to various decision makers.
Process – buy something
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2. Users of Accounting Information
Internal
Owners
Managers
External
Bankers and other creditors
Investors and potential investors
External auditors
Government
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3. Questions asked by internal users
What are the manufacturing expenses per unit of product?
What is the most profitable mix of services?
How much do we have to sell to break even?
How much profit did we earn last month?
Are we keeping our expenses under control?
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4. Questions asked by external users
Can the company repay current loans?
Is the purchaser able to pay for goods purchased?
Do revenues include only those for the current period?
Have all expenses been recorded?
Is net income large enough to support a request for increased pay?
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Financial Accouning
Focuses on the needs of external decision makers
Government
Shareholders
Banks
Suppliers
Shareholders – those who own the company
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6. Management accounting
Focuses on the needs of internal decision makers
Top executives
Management
Administrators
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Nature of Accounting
Accountants analyze, record, quantify, accumulate, summarize, report and interpret economic events
Report – financial statements
How we do this is called accounting system.
Value is in what the information tells us.
Decision makers use this information to answer questions concerning investment alternatives, product development, employee evaluations, loan levels, and cash needs.
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Decision Making
Accounting information is useful to anyone who must make decision that have economic consequences.
Shows where and when money has been spent.
Helps predict future effects of decisions
Helps direct attention to current problems
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Decision Making
Event
Accountant’s analysis and recording
Financial statements
users
All financial accounting courses cover analysis and recording and preparing financial statements. We pay more attention to the underlying process and ot the way in which the financial reports help decision makers to take action.
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10. What do decision makers want to know
What is the financial position on a given day?
How well did it do over a period of time?
How much cash do we have today?
How much income did we get last month?
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11. How do they get the answers
Financial statements
Balance sheet
Income statement
Statement of cash flows
Balance sheet answers – what is picture on any given point of time
Rest of statements answer how well did it do
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Annual Report
The annual report is usually the source management uses to present these statements as well as other financial information.
It is prepared by management to inform investors about the company's past performance and future prospects.
Most companies distribute their annual reports to shareholders. Also can be found online.
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Annual Report
Financial Statements
 Statement of management’s responsibility for preparation of the financial statements
Discussion and analysis by management of recent economic events
 Footnotes that explain in more detail many elements of the financial statements
 Independent auditor's report
Other corporate information
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Types of Ownership
Sole proprietorship
Partnership
Corporation
Sole proprietorship – single owner – separate entity from the owner
Partnerships – two or more owners – separate entity from the owner accounting is the same
Corporations – created by law – limited liability – no claim against assets of persons – privately or publicly owned (shares sold to public)
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15. Sole Proprietorships One owner Separate entity for accounting purposes
Not a separate legal entity from the owner
Unlimited liability
Limited life
Owner taxed on profits
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16. Partnerships Two or more owners
Separate entity for accounting purposes
Not a separate legal entity from the owners
Unlimited liability
Limited life
Owners taxed on profits
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17. Corporations One or more owners
Separate entity for accounting purposes
Separate legal entity from the owner(s)
Limited liability
Unlimited life
Corporation taxed on profits
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18. Advantages and Disadvantages of Corporation
Limited liability
Easy transfer of ownership
Ease in raising ownership capital
Continuity of existence
Disadvantages
Taxes
Corp sell stock certificates –
Continuity – life is indefinite
Corp taxed as separate entity and shareholders also taxed when receive dividends
Prop and partnerships – taxed as owners
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Net Worth
What do I own
What do I owe
What is left over
Show example of net worth
Change this to a business
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Balance Sheet
Assets
Liabilities
Owner’s equity (shareholder’s equity)
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Terminology
Entity
Transaction
Inventory
account
Entity – An organization that is separate as an economic unit
Transaction – any event that affects the financial position of an entity and can be recorded in money terms
Inventory – goods held for resale
Account – place or location where increases and decreases are recorded
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22. How do we acquire assets
Equity
Debt
Exchange for another asset
Paid in capital – total capital investment by its owner’s , both at the start and thereafter, is called paid-in capital.
Two parts – capital stock at par and paid-in capital in excess of par value
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Transaction analysis
What accounts are affected
Increase or decrease
Still in balance
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24. Balance Sheet The balance sheet reports the:
Assets
Liabilities
Owner’s equity
of an organization at a point in time.
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25. Transactions and the Accounting Equation
Liabilities
Equity
Assets = +
The accounting equation must remain in balance after each transaction.
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26. Transaction Analysis We need to determine:
Which accounts are being affected.
If the accounts are increasing or decreasing.
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27. Transaction Analysis
(1) Carol Finlay invests $10,000 cash in the business.
Analysis: Cash increases by $10,000.
Owner’s capital increases by $10,000.
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28. Transaction Analysis (2) Purchased supplies for $2,500 cash.
Analysis: Supplies increase by $2,500.
Cash decreases by $2,500.
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29. Transaction Analysis (3a) Purchased $1,100 of supplies on credit.
Analysis: Supplies increase by $1,100.
Accounts Payable increases by $1,100
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30. Transaction Analysis
(3b) Purchased $6,000 of furniture on credit A promissory note was signed.
Analysis: Furniture increases by $6,000.
Notes payable increases by $6,000.
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Par value
The nominal dollar value printed on the stock.
Also called stated value
How is par value determined – board of directors
Usually stock sold at price higher than par.
Difference between par and what it is sold for is called paid in capital
Example – co issued 100 shares at $100 par value
Sold 20 shares at $200
Total paid in capital = capital stock at par + paid in capital in excess of par
Par value = 2000 (20 x 100)
Paid in capital in excess of par= 2000
Total paid in capital
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32. Stockholders and the Board of Directors
In corporations, the ultimate responsibility for management is delegated by the stockholders to the board of directors.
The corporate form of organization separates ownership and management.
The board's duty is to ensure that managers act in the interests of shareholders. The board is elected by the shareholders.
Stockholders elect Baord of Directors. The Board of Directors appoint managers.Interests of both shareholders and management are usually represented. Usually CEO or top financial person will sit on the Board.
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Auditing
The credibility of financial statements is the ultimate responsibility of the managers who are entrusted with the resources of the entity under their command.
An auditor examines the information that managers use to prepare the financial statements and provides assurances about the credibility of those statements
An audit is an in-depth examination of transactions and financial statements
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34. End of Chapter
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35. Photograph Credits Slide Credit 5 SW Productions/Getty Images 6
Comstock/Picture Quest 7
Ryan Mc Vay /Getty Images 8
Dynamic Graphics / Jupiter Images
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