1. Chapter 1 Uses of Accounting Information and the Financial Statements Skyline College

2. 1–21–2 Copyright © Houghton Mifflin Company. All rights reserved. CVS: How Is Success Measured? Learn more about the company at CVS.com CVS.com More than 5,400 stores Quality products Holds #1 or #2 market share in 73% of the top 100 markets in which it serves Large selection Good service Strong management © Royalty Free Digital Vision/ Getty Images

3. 1–31–3 Copyright © Houghton Mifflin Company. All rights reserved. What Is Accounting? Accounting is an information system that measures, processes, and communicates financial information about an economic entity Supplies information for reasoned choices among alternative uses of scarce resources in business and economic activities © Royalty-Free/Corbis

4. 1–41–4 Copyright © Houghton Mifflin Company. All rights reserved. Economic Entity: Business  Economic unit that aims to sell goods and services to customers  Provides adequate return to owners  Examples: Wal-Mart, Best Buy, Wendy’s © Royalty-Free/Corbis

5. 1–51–5 Copyright © Houghton Mifflin Company. All rights reserved. Meeting Business Goals Profitability Is the business earning enough income to attract and hold investment capital? Liquidity Does the business have enough cash to pay debts when they are due? © Royalty Free C Squared Studios/ Getty Images

6. 1–61–6 Copyright © Houghton Mifflin Company. All rights reserved. Conducting Business Activities Operating Activities Investing Activities Financing Activities Purchasing resources to operate the business Selling these resources when no longer needed Obtaining capital from creditors owners Repaying creditors Paying dividends Selling to customers Wages Buying goods and services Paying taxes

7. 1–71–7 Copyright © Houghton Mifflin Company. All rights reserved. Performance Measures  managers achieve business goals  business activities are well managed  Must motivate managers to act in the best interests of the owners of the business! © Royalty Free PhotoDisc Collection/ Getty Images

8. 1–81–8 Copyright © Houghton Mifflin Company. All rights reserved. Performance Measures: Ratios Used to compare a company’s financial performance from one year to the next Helpful when making comparisons among companies Return on Assets = how much is earned on each dollar invested in assets

9. 1–91–9 Copyright © Houghton Mifflin Company. All rights reserved. Who Needs Accounting Information? Internal UsersExternal Users Management Accounting Information about past performance and what can be expected in the future Financial Accounting Financial statements report on profitability and liquidity to evaluate the success of a business  Employees  Managers  Stockholders  Creditors  Government regulators

10. 1–10 Copyright © Houghton Mifflin Company. All rights reserved. Components of Accounting Accounting Record Transactions: Bookkeeping System Design Analyze & Interpret Information Communicate Information Processing can be done: Manually, By computer, or Using a management information system © Royalty Free C Squared Studios/ Getty Images

11. 1–11 Copyright © Houghton Mifflin Company. All rights reserved. Importance of Ethics in Financial Reporting Users of reports depend on the good faith of those who prepared the reports, rely on the accuracy of the reports, and the disclosure of all relevant facts we make decisions based on the reports © Royalty Free C Squared Studios/ Getty Images

12. 1–12 Copyright © Houghton Mifflin Company. All rights reserved. Sarbanes-Oxley Act  Chief executives (CEO) and chief financial officers (CFO) of all publicly traded U.S. companies must attest to the accuracy and completeness of their quarterly and annual reports filed with the SEC On the Web  Violations can result in criminal penalties Want to learn more about the legislation? Sarbanes-Oxley.com

13. 1–13 Copyright © Houghton Mifflin Company. All rights reserved. Management Responsibility  What assurance does management give that a company’s reports are not false or misleading? Research: Find the current year’s annual report for CVS on the company’s website and locate the “Management’s Report.” What language is used? CVS’s SEC Filings We are responsible for establishing and maintaining effective internal control over financial reporting.... the unauthorized acquisition, use or disposition of assets are prevented or timely detected and that transactions are authorized, recorded and reported properly to permit the preparation of financial statements in accordance with GAAP and receipt and expenditures are duly authorized. On the Web

14. 1–14 Copyright © Houghton Mifflin Company. All rights reserved. Who Uses Accounting Information? Direct Financial Interests Management Those With Indirect Financial Interests Finance Investment Operations & Production Marketing Human Relations Accounting Tax Authorities Regulators Labor Unions Customers Economic Planners Investors Creditors Banks © Royalty Free C Squared Studios/ Getty Images

15. 1–15 Copyright © Houghton Mifflin Company. All rights reserved. If You Were a Manager… Making good financial decisions requires reliable accounting information. Does my company have enough cash? Which products are most profitable? Is the rate of return to owners adequate? What is the cost of manufacturing each product or service? © Royalty Free C Squared Studios/ Getty Images

16. 1–16 Copyright © Houghton Mifflin Company. All rights reserved. Users with Direct Financial Interests  Investors analyze the past success and potential earnings of a business  Creditors assess whether a company will have the cash to repay debt © Royalty Free PhotoDisc Collection/ Getty Images

17. 1–17 Copyright © Houghton Mifflin Company. All rights reserved. Users with Indirect Financial Interests  Labor Unions, Consumer Groups, Customers, etc  Regulatory Agencies  Tax Authorities © Royalty-Free/Corbis

18. 1–18 Copyright © Houghton Mifflin Company. All rights reserved. Making an Accounting Measurement What is measured? Business transactions Economic events that affect the financial position of a business Sale of goods Purchases Collection of loan Borrow money

19. 1–19 Copyright © Houghton Mifflin Company. All rights reserved. Concept of Money Measure  All business transactions are recorded in money.  The monetary unit is the US Dollar  An exchange rate is used to translate into US Dollars for international transactions.

20. 1–20 Copyright © Houghton Mifflin Company. All rights reserved. Concept of Separate Entity A business is considered distinct from its creditors and customers as well as its owners Business reports & accounts Personal reports & accounts

21. 1–21 Copyright © Houghton Mifflin Company. All rights reserved. Forms of Business Sole ProprietorshipPartnership Corporation One owner Owner takes all profits and losses Owner is liable for all business obligations Two or more owners Partners share in profits and losses One partner can obligate the business to another party Must be dissolved if ownership changes Business unit chartered by the state with articles of incorporation; legally separate from owners (stockholders) Stockholders enjoy limited liability Life of corporation is unlimited © Royalty Free C Squared Studios/ Getty Images

22. 1–22 Copyright © Houghton Mifflin Company. All rights reserved. Organization of a Corporation Stockholders Elect a board of directors and own shares of stock Board of Directors Determines corporate policy, declares dividends, and appoints corporate officers Management Carries out corporate policies and manages the business

23. 1–23 Copyright © Houghton Mifflin Company. All rights reserved. Corporate Governance In the News: In a recent survey, 78% of boards of directors established ethical standards for their companies Oversight of a corporation’s management and ethics by the board of directors Companies with codes of ethics tend to have higher stock prices than those without codes Use of audit committees helps ensure that adequate systems are in place to safeguard resources

24. 1–24 Copyright © Houghton Mifflin Company. All rights reserved. Financial Position Economic resources (cash, inventory, buildings) and the claims against those resources at a particular point in time Economic Resources = Creditors + Stockholders’ Equity © Royalty Free PhotoDisc Collection/ Getty Images

25. 1–25 Copyright © Houghton Mifflin Company. All rights reserved. Building the Accounting Equation Economic Resources = Creditors’ Equities + Stockholders’ Equity In accounting terms… Assets = Liabilities + Stockholders’ Equity The two sides of the equation must always be in balance.

26. 1–26 Copyright © Houghton Mifflin Company. All rights reserved. Assets  Economic resources expected to benefit the company’s future operations  Patents, trademarks, copyrights (nonphysical)  Inventory, land, equipment, buildings (physical items)  Cash, accounts receivable (monetary items) © Royalty-Free/Corbis

27. 1–27 Copyright © Houghton Mifflin Company. All rights reserved. Liabilities  Obligations to pay cash, transfer assets, or provide services to other entities in the future  Examples: accounts payable, taxes payable, loans, or wages owed to employees  Liabilities are claims recognized by law © Royalty Free C Squared Studios/ Getty Images

28. 1–28 Copyright © Houghton Mifflin Company. All rights reserved. Stockholders’ Equity Claims of the owners of a corporation to the assets of the business Stockholders’ Equity Contributed CapitalRetained Earnings (RE) Amount that stockholders invested in the business Profits generated by business that haven’t been paid out to stockholders Add’l paid-in capital Revenues increase RE Expenses and dividends decrease RE Capital Stock

29. 1–29 Copyright © Houghton Mifflin Company. All rights reserved. Income Statement Summarizes revenues and expenses over an accounting period Shows whether the goal of profitability was achieved

30. 1–30 Copyright © Houghton Mifflin Company. All rights reserved. Statement of Retained Earnings Shows changes in retained earnings over an accounting period Net income figure from income statement Use this figure to prepare the balance sheet

31. 1–31 Copyright © Houghton Mifflin Company. All rights reserved. Balance Sheet Shows financial position on a certain date Ending balance of retained earnings from statement of retained earnings

32. 1–32 Copyright © Houghton Mifflin Company. All rights reserved. Statement of Cash Flows Shows cash inflows and outflows for an accounting period Net income from income statement Matches cash account on balance sheet

33. 1–33 Copyright © Houghton Mifflin Company. All rights reserved. What Are GAAP? Generally accepted accounting principles (GAAP) encompass the conventions, rules, and procedures for accepted accounting practices GAAP are constantly growing, changing, and improving © Royalty Free C Squared Studios/ Getty Images

34. 1–34 Copyright © Houghton Mifflin Company. All rights reserved. GAAP and the Audit  by independent CPAs  The CPA renders an opinion about whether the statements present fairly or conform in all material respects to GAAP  Audits are performed to determine that financial statements have been prepared in accordance with GAAP

35. 1–35 Copyright © Houghton Mifflin Company. All rights reserved. Organizations That Influence GAAP GAAP Public Company Accounting Oversight Board (PCAOB) Financial Accounting Standards Board (FASB) American Institute of Certified Public Accountants (AICPA) Securities and Exchange Commission (SEC) Governmental Accounting Standards Board (GASB) International Accounting Standards Board (IASB) Primary source of GAAP

36. 1–36 Copyright © Houghton Mifflin Company. All rights reserved. Professional Ethics  Key to the accountant’s reputation for independence and competence  The AICPA’s code of professional ethics governs conduct of CPAs Is the accountant honest and candid? Does he or she put aside personal gain in service of the public trust? Is the accountant impartial and intellectually honest? Does the accountant avoid all relationships that impair or appear to impair his or her objectivity? Integrity Objectivity Independence