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Chapter 1 Accounting and Business Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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1-2 What are the Basic Functions of Business? MarketingMarketing Products, pricing, promotion, distribution Human resourcesHuman resources Jobs, people, salaries, benefits Production and operationsProduction and operations Planning, directing, controlling, evaluating FinanceFinance Capital maintenance Accounting and information systemsAccounting and information systems Information infrastructure
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1-3 How do the Functions Use Accounting Information? MarketingMarketing Pricing, distribution costs Human resourcesHuman resources Pay and fringe benefits, hiring costs Production and operationsProduction and operations Production costs—actual and budgeted FinanceFinance Cost of borrowing, benefits expected
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1-4 How has Business Evolved? Sole proprietorshipSole proprietorship One owner PartnershipPartnership Two or more owners CorporationCorporation Many owners MerchandisingMerchandising Buy and sell products ServiceService Provide service ManufacturingManufacturing Make and sell products
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1-5 How has Accounting Evolved? Determination of wealthDetermination of wealth What am I worth today Determination of incomeDetermination of income How has my wealth changed On-going successOn-going success How is the business doing
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1-6 What are the Characteristics of Business Today? Customer-focused operationsCustomer-focused operations Global marketsGlobal markets Products, labor, and capital Advanced manufacturing and communicationsAdvanced manufacturing and communications eBusinesseBusiness B2B and B2C Hybrid organizational structuresHybrid organizational structures
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1-7 What are the Basic Concepts of Accounting? Business entityBusiness entity Keep business and personal records separate Monetary unitMonetary unit Maintain business records in currency Going concernGoing concern Business will continue past the current period PeriodicityPeriodicity Profits/losses must be determined periodically
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1-8 What are the 5 Basic Elements of Accounting? AssetAsset Right to use resources with future benefit LiabilityLiability Obligation to transfer resources in the future to suppliers of goods and services Owners’ equityOwners’ equity Net assets belong to owners Revenues (accrual basis)Revenues (accrual basis) Amounts earned from providing goods and services Expenses (accrual basis)Expenses (accrual basis) Amounts incurred in an attempt to generate revenues
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1-9 What is GAAP and the IFRS? Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles International Financial Reporting standardsInternational Financial Reporting standards Financial Accounting Standards BoardFinancial Accounting Standards Board Current rule-making body in U.S. International Accounting Standards BoardInternational Accounting Standards Board Current rule-making body internationally
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1-10 What are the Concepts Statements? Concepts Statement #1Concepts Statement #1 Useful information for decision making Concepts Statement #2Concepts Statement #2 Characteristics of accounting information Concepts Statement #3 (superceded)Concepts Statement #3 (superceded) Concepts Statement #4Concepts Statement #4 Objectives for nonbusiness organizations Concepts Statement #5Concepts Statement #5 Financial statements Concepts Statement #6Concepts Statement #6 Elements of financial statements Concepts Statement #7Concepts Statement #7 Estimating value of future cash flows
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1-11 What Makes Information Useful? RelevanceRelevance Capable of making a difference ReliabilityReliability Dependable Benefits > CostsBenefits > Costs Benefits derived must be greater than cost MaterialityMateriality Large enough to have an impact on a decision
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1-12 What are the 4 Basic Financial Statements and Auditors’ Report? Income statementIncome statement Indicates revenues less expenses = net income for a period of time Statement of cash flowsStatement of cash flows Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time Statement of owners’ equityStatement of owners’ equity Indicates changes in owners’ equity for a period of time
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1-13 Financial Statements Continued Balance sheetBalance sheet Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time Auditor’s reportAuditor’s report Indicates whether the company followed GAAP when preparing its financial statements
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1-14 What are the Purposes of the Ratios? Current ratioCurrent ratio Relationship between current assets and current liabilities Debt to equity ratioDebt to equity ratio Relationship between liabilities and owners’ equity Return on salesReturn on sales Relationship between net income and sales
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