2. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 1 Chapter 1 Introduction to Business in the United States

3. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 2 Learning Objective 1 Describe the four factors of production.

4. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 3 Factors of Production Production Natural Resources CapitalLabor Entrepreneurship

5. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 4 Learning Objective 2 Explain the basic concepts of capitalism and how they relate to the profit motive.

6. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 5 Economic Systems Planned economy Communism Market economy Capitalism

7. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 6 The Profit Motive The profit motive stimulates a person to do something when the benefit derived from doing it is greater than the sacrifice required to do it.

8. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 7 The Profit Motive Steve wants to buy a pair of pants. Tanner’s price is $50.00. Chelsea’s price is $45.00. Tanner’s cost is $30.00. Invisible hand ?

9. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 8 Learning Objective 3 Distinguish between gross and net income. Be able to calculate each.

10. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 9 Gross Profit At a selling price of $50.00, what is Tanner’s gross profit or gross margin?

11. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 10 Who is a Stakeholder? A stakeholder is anyone to whom a company owes a responsibility; anyone who has a stake in the way a company is run.

12. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 11 Learning Objective 4 Distinguish among the three basic forms of business organizations and describe the advantages and disadvantages of each.

13. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 12 Proprietorships Partnerships Corporations Forms of Business Organizations

14. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 13 Proprietorships What are some advantages? easy and inexpensive to establish total control What are some disadvantages? unlimited liability limited access to capital

15. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 14 Partnerships What are some advantages? easy to establish access to more capital What are some disadvantages? unlimited liability sharing of profits

16. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 15 Corporations What are some advantages? limited liability greater access to capital What are some disadvantages? greater tax burden greater government regulations easy transferability of ownership

17. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 16 Learning Objective 5 Distinguish among the three major types of business activities and define hybrid type businesses.

18. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 17 Types of Business Activities Manufacturing Merchandising Service Hybrid

19. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 18 Learning Objective 6 Explain the basic need for international business trade and the complications involved in this activity.

20. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 19 Global Nature of Business in the 21 st Century Imports Products brought into a country Exports Products produced in a country but sold outside that country

21. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 20 Global Nature of Business in the 21 st Century Economic complications Political complications QuotasTariffs

22. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 21 Business and Accounting Business is about making decisions. Accounting information plays a significant role in decision making.

23. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 22 Learning Objective 7 Describe what is shown in each of the four financial statements.

24. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 23 Financial accounting Management accounting Introduction to Financial Accounting Reports

25. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 24 The Balance Sheet Assets Owners’ Equity Owners’ Equity Liabilities

26. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 25 The Balance Sheet Microsoft Balance Sheet June 30, 2001 (in millions) Assets$59,257Liabilities Stockholders’ equity$11,968 Total liabilities and 47,289 stockholders’ equity$59,257 stockholders’ equity$59,257

27. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 26 The Income Statement Microsoft Income Statement For the year ended June 30, 2001 (in millions) Revenue$25,296 Expenses–17,950 Net income$ 7,346

28. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 27 The Statement of Owners’ Equity

29. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 28 The Statement of Cash Flows Microsoft Statement of Cash Flows For the year ended June 30, 2001 (in millions) Cash from operating activities$13,422 Cash used for investing activities – 8,734 Cash used for financing activities – 5,612 Net change in cash – 942 Cash, beginning of year 4,846 Cash, end of year$ 3,922

30. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 29 Learning Objective 8 Discuss the SEC’s and FASB’s authority over accounting reporting standards and describe the current standard-setting process in the United States.

31. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 30 Authority over Accounting Reports A federal agency with oversight powers Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Establishes and improves reporting standards (private sector agency)

32. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 31 Learning Objective 9 Describe the basic objectives of financial reporting.

33. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 32 The Conceptual Framework of Accounting Objectives: To provide information 1. Useful in investment and credit decisions 2. Useful in assessing future cash flows 3. About enterprise resources, claims to resources, and changes in them.

34. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 33 The Conceptual Framework of Accounting Qualitative Characteristics 1. Primary qualities A. Relevance (1) Predictive value (2) Feedback value (3) Timeliness B. Reliability (1) Representational faithfulness (2) Verifiability (3) Neutrality 2. Secondary qualities A. Comparability B. Consistency

35. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 34 The Conceptual Framework of Accounting Elements 1. Assets 1. Assets 2. Liabilities 2. Liabilities 3. Equity 3. Equity 4. Investment by owners 4. Investment by owners 5. Distributions to owners 5. Distributions to owners 6. Comprehensive income 6. Comprehensive income 7. Revenues 7. Revenues 8. Expenses 8. Expenses 9. Gains 9. Gains 10. Losses

36. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 35 The Conceptual Framework of Accounting Assumptions Assumptions 1. Economic entity 2. Going concern 3. Monetary unit 4. Periodicity Constraints Constraints 1. Cost/benefit 2. Materiality 3. Industry practice 4. Conservatism Principles Principles 1. Historical cost 2. Revenue recognition 3. Expense recognition 4. Full disclosure

37. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 36 The Standards-Setting Process 1. Identifying issues 2. Setting an agenda 3. Appointing a task force 4. Creating a discussion memorandum 5. Holding public hearings

38. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 37 The Standards-Setting Process 6. Inviting comment letters 7. Deliberating 8. Writing an exposure draft 9. Issuing a Statement of Financial Accounting Standards Financial Accounting Standards 10. Conducting a post-enactment review

39. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 38 Learning Objective 10 Explain the purpose of an independent financial audit and describe the four basic types of audit opinions.

40. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 39 Outside Assurance on Financial Statements The auditor examines the client’s financial statements and supporting documentation to determine whether the statements present a fair picture of the client’s financial condition and results of its operations. Auditors also evaluate the policies and procedures that are in place to safeguard company assets.

41. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 40 Outside Assurance on Financial Statements In the United States, only licensed certified public accountants (CPAs) are permitted to perform independent audits. Not all CPAs are auditors.

42. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 41 Four Possible Audit Opinions Audit Option UnqualifiedOpinionDisclaimer of Opinion QualifiedOpinionAdverseOpinion

43. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 42 Learning Objective 11 Gather information about a company and obtain an annual report.

44. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 43 Corporate Reporting and the Annual Report The annual report includes a variety of information including financial statements. The form 10-K is required by the SEC.

45. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 44 Learning Objective 12 Describe the information found in a typical annual report and Form 10-K.

46. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 45 Outline of the Contents of Form 10-K Annual Report Part I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders of Security Holders Part II Item 5. Market for the Company’s Common Equity and Related Stockholder Matters Equity and Related Stockholder Matters Item 6. Selected Financial Data

47. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 46 Outline of the Contents of Form 10-K Annual Report Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Accountants on Accounting and Financial Disclosure Financial Disclosure Part III Item 10. Directors and Executive Officers Item 10. Directors and Executive Officers of the Company of the Company

48. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 47 Outline of the Contents of Form 10-K Annual Report Item 11. Executive Compensation Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Owners and Management Item 13. Certain Relationships and Related Transactions Transactions Part IV Item 14. Exhibits, Financial Statements and Schedules, and Reports on Form 8-K Schedules, and Reports on Form 8-K

49. ©2004 Prentice Hall Business Publishing Introduction to Financial Accounting, 3e by Werner/Jones1 - 48 End of Chapter 1