1. Chapter 1 Accounting and Business Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. What is Business? The exchange of goods or servicesThe exchange of goods or services Mutually benefitting both partiesMutually benefitting both parties Rewards > RisksRewards > Risks

3. 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 1-3

4. 1-4 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

5. Business Today Customer FocusedCustomer Focused JIT – stipulates that products should be received by customers just as they are needed AND in the quantities they needJIT – stipulates that products should be received by customers just as they are needed AND in the quantities they need Get the customers what they want, when they want it, at a price they are willing to pay.Get the customers what they want, when they want it, at a price they are willing to pay.

6. Business Today Global MarketsGlobal Markets NAFTANAFTA

7. Business Today Manufacturing and Communication AdvancesManufacturing and Communication Advances Changes in technology allow for dramatically different processes.Changes in technology allow for dramatically different processes. Product Life CycleProduct Life Cycle

8. Business Today E-BusinessE-Business Exchanging business information and conducting transactions in an electronic, paperless formExchanging business information and conducting transactions in an electronic, paperless form Increased sales opportunities are created through internet sales instead of brick-and-mortar salesIncreased sales opportunities are created through internet sales instead of brick-and-mortar sales RISKS- spawned the growth of identity theftRISKS- spawned the growth of identity theft Warehousing and DistributionWarehousing and Distribution

9. 1-9 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

10. 1-10 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

11. 1-11 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

13. 1-13 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

14. 1-14 5 Basic Elements Continued 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

15. Example A company provides $120,000 of services during the year of which $100,000 were received in cash. The company’s employees earned $70,000 in wages, but due to the way payroll is determined, they were only paid $55,000 during the period.A company provides $120,000 of services during the year of which $100,000 were received in cash. The company’s employees earned $70,000 in wages, but due to the way payroll is determined, they were only paid $55,000 during the period. What is the accrual-based income?What is the accrual-based income? What is the cash-based income?What is the cash-based income? 1-15

16. Answers Accrual-based income: Revenues earned$120,000 Less expenses incurred 70,000 = Income$ 50,000 Cash-based income: Revenues received$100,000 Less expenses paid 55,000 = Income$ 45,000 1-16

17. 1-17 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

18. 1-18 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

19. 1-19 Concepts Continued 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

20. 1-20 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

21. 1-21 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

22. 1-22 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

23. 1-23 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

24. Example Use the following information to calculate the ratios: Accounts payable, $136 Accounts receivable, $876 Cash, $2,211 Common stock, $3,827 Cost of goods sold, $8,192 Inventory, $908 Long-term bank loan, $716 Miscellaneous payables, $529 Operating expenses, $5,436 Retained earnings, $373 Sales, $13,353 1-24

25. Answers Current ratio = ($876 + $908 + $2,211) / ($136 + $529) = 6.01 to 1 Debt to equity ratio = ($136 + $716 + $529) / ($3,827 + $373) = 0.33 to 1 Return on sales ratio = $275 / $13,353 = 2.06% ($13,353 - $8,192 - $5,436 = $275) 1-25