1. 1 F13 Accounting and Organizations Financial Accounting
PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University
Financial Accounting
Information for Decisions
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.
6th edition
Ingram and Albright
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

2. Once you have completed this chapter, you should be able to—
Objectives
Once you have completed this chapter, you should be able to—

3. 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.
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 have been, where they are, and where they are going.

7. Maria and Stan decide to start a business selling purchased bakery 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. They determine how much they expect to make from the business each month.
Costs
Sales
Merchandise sold $ 8,000
Wages 1,000
Rent 600
Supplies 300
Utilities
Total $10,100
Sales of merchandise $12,000
Profit $1,900

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

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

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

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

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

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

16. Types of Organizations
Exhibit 3

17. Transformation of Resources into Goods and Services
Exhibit 4

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

19. Press “Enter” or click left mouse button for answer.
Exercise 1-4
Click the button to skip this exercise.
If you experience trouble making the button work, type 23 and press “Enter.”
a. What type of organization provides goods or services without the intent of making a profit? Examples include the IRS and the United Way.
Merchandising (or retail) companies
Manufacturing companies
Service companies
Governmental and nonprofit
Press “Enter” or click left mouse button for answer.

20. Press “Enter” or click left mouse button for answer.
Exercise 1-4
b. What type of organization produces goods that are sold to consumers or to merchandising companies? Examples include Ford Motor Company and PepsiCo.
Merchandising (or retail) companies
Manufacturing companies
Service companies
Governmental and nonprofit
Press “Enter” or click left mouse button for answer.

21. Press “Enter” or click left mouse button for answer.
Exercise 1-4
c. What type of organization sells goods to consumers that are produced by other companies? Examples include Wal-Mart and Sears.
Merchandising (or retail) companies
Manufacturing companies
Service companies
Governmental and nonprofit
Press “Enter” or click left mouse button for answer.

22. Press “Enter” or click left mouse button for answer.
Exercise 1-4
d. What type of organization sells services rather than goods? Examples include H&R Block and Delta Air Lines.
Merchandising (or retail) companies
Manufacturing companies
Service companies
Governmental and nonprofit
Press “Enter” or click left mouse button for answer.

23. Objective 3
Describe how businesses create value.

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

25. 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.

26. Sales Price of Box of Cookies
Creating Value
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 – =

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

28. Favorite Cookie Company
Profit Earned
for January
Exhibit 6
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

29. Press “Enter” or click left mouse button for answer.
Exercise 1-5
Click the button to skip this exercise.
If you experience trouble making the button work, type 31 and press “Enter.”
Eduardo has started a small business making sundials. The following transactions occurred for the business during a recent period. How much profit did the company earn for the period?
Sales to customers $1,050
Rent for the period 425
Supplies used during the period 250
Wages for the period 175
Press “Enter” or click left mouse button for answer.

30. Exercise 1-5 Resources created from selling sundials $1,050
Resources consumed:
Rent $425
Supplies 250
Wages 175
Total cost of resources consumed
Profit earned $ 200

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

32. Investment by Owners
Owners invest in a business to receive a return on their investments from profits earned by that business.
ROI =
Profit
Amount Invested

33. Investment by Owners
Return on investment (ROI) is the amount of profit earned by a business that could be paid to owners.
ROI =
Profit
Amount Invested

34. Investment by Owners
If Maria and Stan invested $10,000 to start Favorite Cookie Company and earned a $1,700 profit, what would be the return on investment?
Profit
Amount Invested
$1,700
ROI =
17% =
$10,000

35. Press “Enter” or click left mouse button for answer.
Exercise 1-12
Click the button to skip this exercise.
If you experience trouble making the button work, type 39 and press “Enter.”
On January 1, 2007, Alicia invested $4,000 in a savings account. At the end of January, the account balance had increased to $4,020. The balance at the end of February was $4, The balance at the end of March was $4, The increases occurred because of interest earned on the account. What was Alicia’s return on investment, in dollars and cents, for each of the three months?
Press “Enter” or click left mouse button for answer.

36. Exercise 1-12
January ($4,020 – $4,000) $20.00
February ($4, – $4,020) 20.10
March ($4, – $4,040.10) 20.20

37. What was the total return for the three months taken together?
Exercise 1-12
What was the total return for the three months taken together?
Press “Enter” or click left mouse button for answer.

38. Exercise 1-12
January ($4,020 – $4,000) $20.00
February ($4, – $4,020) 20.10
March ($4, – $4,040.10)
Total return for three months $60.30

39. An effective business is one that is successful in providing goods and services demanded by customers.

40. An efficient business is one that keeps the cost of resources consumed in providing goods and services low relative to the selling prices of these goods and services.

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

42. 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.

43. Business Ownership
Proprietorships and partnerships are business organizations that do not have legal identities distinct from their owners. How do they differ?

44. Proprietorships have only one owner.
Business Ownership
Proprietorships have only one owner.
Partnerships have more than one owner.

45. Data source: U.S. Census Bureau Web site http://www.census.gov
Business Ownership
Total Companies
Data source: U.S. Census Bureau Web site

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

47. Management of Corporations
Board of Directors, Chief Executive Officer, President, Other Top Management
Exhibit 7
The Company

48. Management of Corporations
Support Functions
Information
Systems
Legal
Services
Exhibit 7
Financing
Accounting
Human
Resources
Design
The Company
Research
Purchasing

49. Management of Corporations
Exhibit 7
Primary Functions
The Company
Production
Servicing
Marketing
Distribution

50. Advantages of Corporations
Corporations have continuous lives apart from those of their owners.
Shareholders normally are not liable personally 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.
Continued

51. Advantages of Corporations
Shareholders cannot enter into contracts or agreements that are binding on a corporation unless they are managers or directors.
By selling shares to many investors, a corporation can obtain a large amount of financial resources.

52. 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.

53. 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 and some of the required disclosures may be helpful to competitors.
Owners of corporations usually do not have access to information about the day-to-day activities of their company.
Continued

54. Disadvantages of Corporations
Managers’ personal interests sometimes conflicts with the interest of stockholders. This problem produces a condition known as moral hazard.
The size of larger corporations make them difficult to manage.
With the exception of Subchapter S corporations, the profits of corporations are taxed separately from taxes paid by the owners of the corporation.

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

56. Sources of Financing for Selected Corporations
Exhibit 8

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

58. Press “Enter” or click the left mouse button for answer.
Exercise 1-17
Click the button to skip this exercise.
If you experience trouble making the button work, type 60 and press “Enter.”
Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN). Some items have more than one answer.
Distinct legal entity separate from its owners.
More than one owner.
Ownership by stockholders.
Controlled by a board of directors.
Legal identity changes when a company is sold. C
C, PN C C
PR, PN
Press “Enter” or click the left mouse button for answer.

59. Press “Enter” or click the left mouse button for answer.
Exercise 1-17
Identify each of the following as describing corporations (C), proprietorships (PR), and/or partnerships (PN). Some items have more than one answer.
Limited liability.
g. Mutual agency.
h. Access to large amounts of cash.
Direct taxation of profits.
j. Moral hazard usually not a major problem. C PN C C
PR, PN
Press “Enter” or click the left mouse button for answer.

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

61. Contracts are legal agreements for the exchange of resources and services.
Contract terms establish the rights and responsibilities of the contracting parties.

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

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

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

65. Managers
Accounting information is useful for identifying the types and locations of an organization’s resources.

66. 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.

67. 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.

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

69. Government Agencies
Government agencies collect information about organizations as a basis for economic forecasts and planning.
Government agencies use accounting information to make taxation and regulatory decisions.

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

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

72. Generally accepted accounting procedures (GAAP) are standards developed by professional accounting organizations to identify appropriate accounting and reporting procedures.

73. An audit is a detailed examination of an organization’s financial reports.
The independent auditors who examine the information to confirm that it is prepared in compliance with GAAP are certified public accountants.

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

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

76. 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.

77. CHAPTER F1
THE END