1. COPYRIGHT © 2010 South-Western/Cengage Learning
PowerPoint Author: Catherine Lumbattis
COPYRIGHT © 2011 South-Western/Cengage Learning
COPYRIGHT © 2010 South-Western/Cengage Learning

2. What is Business Activities to provide members of an economic system
with goods and services
Activities
LO1

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

4. What is Accounting? Identifying Economic to Information various
users
Measuring
Communicating
LO4

5. 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

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

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

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

9. 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

10. Relationship among Financial Statements Top of the World Example
Income Statement for Year ended June 30, 2010
Revenues $ 8,000
Less: Expenses ( 6,000)
Net income $ 2,000
Statement of Retained Earnings for Year ended June 30, 2010
Beginning balance, retained earnings $
Add: Net income ,000
Deduct: Cash dividends (800)
Ending balance, retained earnings $ 1,200
Balance Sheets
June 30, July 1, 2009
Total assets $7, $
Liabilities ,
Capital stock ,
Retained earnings ,
Total liabilities and stockholders’ equity $7, $

11. The Conceptual Framework: Foundation for Financial Statements
Aids accountants in their role as interpreters and communicators of relevant information
Purpose is to act as a foundation for the specific principles and standards needed by the profession
LO6 21 21

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

13. 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

14. 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

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

16. 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

17. Generally Accepted Accounting Principles
The various methods, rules, practices and other procedures that have evolved over time that regulates the preparation of financial statements 25 25

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

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

20. 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

21. 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

22. End of Chapter 1