1. ACCOUNTING: The Language of Business
Lecture 1

2. Learning Objectives (LO)
After studying this chapter, you should be able to
Explain how accounting information assists in making decisions
Describe the components of the balance sheet
Analyze business transactions and relate them to changes in the balance sheet
Prepare a balance sheet from transactional data
Compare the features of sole proprietorships, partnerships, and corporations

3. Learning Objectives (LO)
After studying this chapter, you should be able to
Identify how the owners’ equity section in a corporate balance sheet differs from that in a sole proprietorship or partnership
Explain the regulation of financial reporting including differences between U.S. GAAP an IFRS
Describe auditing and how it enhances the value of financial information
9. Evaluate the role of ethics in the accounting profession
3 of 35

4. LO 1 - Accounting and Decision-Making
Accounting – the process of identifying, recording, summarizing, and reporting economic information to decision makers
Types of Accounting:
Tax – primarily used by the government
Non-Profit (donors, governments)
Managerial – insiders (budgets, planning, costing, pricing, managing product mix, etc.)
Financial – outsiders (owners, creditors, suppliers, regulators, unions, others)

5. LO 1 - Accounting and Decision-Making
Principal Components of Annual Financial Reports
A letter from corporate management
Management’s discussion and analysis of past and possible future transactions, events, circumstances
Financial statements
Footnotes explaining many elements of the financial statements in more detail
Independent auditor’s report
A statement of management’s responsibility for preparation of the financial statements
Other corporate information

6. LO 1 - Accounting and Decision-Making
Sequence of Events Leading to Financial Statements Found in Those Reports
Measurable economic event occurs
Private (work for the reporting entity) bookkeepers/accountants analyze event to determine what elements/accounts are affected, then record the event into records
Records are summarized into financial statements
Financial reports that include the statements are provided to users who make decisions

7. LO 1 - Accounting and Decision-Making
Characteristics of Financial Reports
Prepared by management
Provided to outsiders quarterly and annually
Primarily about past transactions and events
Tell very little about future transactions, events, or circumstances
Financial Statements (part of those reports)
Balance Sheet
Income Statement
Statement of Cash Flows
Statement of Stockholders’ Equity

8. LO 1 - Accounting and Decision-Making
Accessing Financial Reports and Statements
Available to all via the Internet from company’s website
Formally sent or made available to owners by preparer
Formally filed with the U.S. Government (Securities and Exchange Commission) (10-Q, 10-K, and numerous other forms) and subsequently accessible from the SEC’s EDGAR system

9. LO 2 - The Balance Sheet Assets = Liabilities + Owners’ equity
The balance sheet (also called the statement of financial position) shows the financial status of a company at a particular instant in time
Reflects the basic accounting equation, which is
Resources = Claims against those resources
Assets = Liabilities + Owners’ equity

10. LO 2 - The Balance Sheet
Assets – economic resources that the company owns or controls from past transactions/events that it expects to help generate future benefits
Accounts – subdivision of the element Assets
Cash and cash equivalents
Accounts Receivable (Customer bought it on credit)
Inventories (Merchandise, Supplies, Parts)
Prepaid Expenses (taxes, utilities, insurance)
Property
Plant
Equipment
Current
Assets
Long-term
Assets

11. LO 2 - The Balance Sheet
Liabilities – economic obligations of the organization to outsiders from past transactions /events that it expects to pay in the future
Accounts – subdivision of the element Liabilities
Accounts Payable (We bought it on credit)
Notes Payable
Long-term debt

12. LO 2 - The Balance Sheet
Owners’ equity is the owners’ claim on the organization’s assets, i.e., assets minus liabilities
Accounts – subdivision of the element Equity
Sole Proprietorships - XX Capital
– Partnerships YY Capital
Corporations - Capital (Common) Stock
- Paid in Capital in excess of par/stated value (See LO 6)

13. LO 3 - Balance Sheet Transactions
Every transaction of a company or entity affects the balance sheet equation
An entity is an organization that stands apart from other organizations and individuals as a separate economic unit for which the balance sheet is being prepared
A transaction is any event that affects the financial position of that entity and that can be reliably recorded in money terms
At least two accounts will be affected for every entry recorded (compound entry = > 2 accounts)

14. LO 3 - Balance Sheet Transactions
Transaction 1: Initial Investment of $400,000
Assets = Liabilities Owners’ Equity
Cash Lopez, Capital
(1) $400, = $400,000
(Owner Investment)

15. LO 3 - Balance Sheet Transactions
Transaction 2: Loan of $100,000 from Bank
Assets = Liabilities Owners’ Equity
Cash Note payable Lopez, Capital
(1) $400, = $400,000
(2) $100, = $100,000
Bal $500, = $100, $400,000
$500, $500,000

16. LO 3 - Balance Sheet Transactions
Transaction 3: Acquire Store Equipment
for Cash, $15,000
Assets = Liabilities Owners’ Equity
Cash Store Equipment Note payable Lopez, Capital
Bal. $500, = $100, $400,000
(3) –15, , =
Bal , , = , ,000
$500, $500,000

17. LO 3 - Balance Sheet Transactions

18. LO 4 – Preparing the Balance Sheet

19. LO 5 – Comparative Ownership Features
Sole proprietorship – a single owner
Partnership – two or more co-owners
Corporation – created under (U.S.) state laws
Publicly owned – Owned by the public through the sale of shares; potentially thousands of owners
Privately owned – Owned by families or a small group of shareholders; shares are not sold or traded

20. LO 5 – Comparative Ownership Features
Advantages of a Corporation
Limited liability (claims against corporate assets only – not personal assets of managers)
Easy transfer of ownership
Ability to raise capital from thousands
Continuity of existence
Prestige
Disadvantages of a Corporation
Unfavorable tax laws (double taxation on distributed earnings)
Regulation