1. AC113 Unit 2 Seminar

2. Chapter 1: The Role of Accounting in Business Objectives: 1. Describe the types and forms of businesses, how businesses make money, and business stakeholders. 2. Describe the three business activities of financing, investing, and operating.

3. Objectives (continued) 3. Define accounting and describe its role in business. 4. Describe and illustrate the basic financial statements and how they interrelate. 5. Describe the eight accounting concepts underlying financial reporting.

4. Types of Businesses Manufacturing Merchandising Service What are the primary differences between the types?

5. Forms of Businesses Proprietorship Partnership Corporation Limited Liability Company (LLC)

6. Proprietorship Ease and low cost of formation (70% of businesses) Limited life Limited ability to raise funds Unlimited liability

7. Partnership Ease of formation (10% of businesses) Two or more owners Limited life Unlimited liability Mutual agency

8. Corporation Legal entity under state law (90% of sales) Ability to raise capital through stock Unlimited life Limited liability

9. Limited Liability Company (LLC) Highbred organization Treated as corporation but is a proprietorship or partnership Limited liability

10. How do businesses make money? Revenues – Expenses = Profits What are revenues? Can you think of an example of an expense?

11. Stakeholders Who are the stakeholders of a company? What is the difference between a stakeholder and a stockholder?

12. Stakeholders Person or entity that has an interest in the economic interest and well being of a business

13. Examples of Stakeholders Stockholders and creditors Customers and suppliers Federal, state, and city governments Employees and managers

14. Business Activities Operating Activities Implement its business emphasis Investing Activities Investing in assets to start and operate a business Financing Activities Ability of obtaining funds to begin and operate a business

15. What is the role of accounting? Provides information for managers to use in operating the business. Provides information to other stakeholders to use in assessing the economic performance and condition of the business.

16. Financial Statements What are the four basic financial statements?

17. Financial Statements Income Statement Retained Earnings Statement Balance Sheet Statement of Cash Flows

18. Income Statement What does the income statement tell us?

19. Income Statement Revenues – Expenses = Net Income

20. Retained Earnings Statement Beginning Retained Earnings + Net Income (or – Net Loss) -Dividends Ending Retained Earnings

21. Balance Sheet Assets = Liabilities + Stockholders’ Equity This is the accounting equation.

22. Statement of Cash Flows Operating Activities Investing Activities Financing Activities

23. Accounting Concepts In your textbook, they talk about “Accounting Concepts.” One of those is the matching concept. What does that mean?

24. Accounting Concepts Business entity concept Cost concept Going concern concept Matching concept Objectivity concept Unit of measure concept Adequate disclosure concept Accounting period concept

25. Exercise 1-5, page 30 Assets = Liabilities + Stockholders’ Equity a.X = $70,000 + $120,000 Solve for X. When you have your answer, type it in.

26. Answer $70,000 + $120,000 = $190,000 Assets = $190,000

27. Exercise 1-5, page 30 Assets = Liabilities + Stockholders’ Equity b.$45,000 = X + $10,000 Solve for X. When you have your answer, type it in.

28. Answer $45,000 - $10,000 = $35,000 Liabilities = $35,000

29. Exercise 1-5, page 30 Assets = Liabilities + Stockholders’ Equity c.$320,000 = $115,000 + X Solve for X. When you have your answer, type it in.

30. Answer $320,000 - $115,000 = $205,000 Stockholders’ Equity = $205,000

31. Exercise 1-21, page 34 For each of the following situations, indicate which financial statement would be the likely focus for the stakeholder. Choose either the income statement, balance sheet, or the statement of cash flows. Note: Multiple answers could be correct. We will explore your thoughts, and then discuss the textbook answers. Situation One: Assume that you are considering investing in eBay (stock) Which financial statement might you focus on?

32. Answer Situation One: The statement of cash flows would be a primary focus to determine whether eBay is generating positive cash flows from operations. Because eBay is a relatively new company using an innovative business emphasis, it has generated losses on its income statement. Thus, the income statement doesn’t provide as much useful information as the statement of cash flows. In the long run, eBay must generate positive cash flows from its operations to survive and succeed.

33. Exercise 1-21, page 34 Situation Two: Assume that you are considering purchasing a personal computer from Dell. Which financial statement might you focus on?

34. Answer Situation Two: The income statement of Dell would provide the most useful information on whether the company’s business emphasis is working and, thus, whether the company will be around to provide warranty and other support services for your personal computer.

35. Exercise 1-21, page 34 Situation Three: Assume that you are a banker for Citigroup considering whether to grant a major credit line (loan) to Wal-Mart. Which financial statement might you focus on?

36. Answer Situation Three: The statement of cash flows would be a primary focus to determine whether the annual cash flows from operating activities is sufficient to pay the interest on a continuing basis. Most large companies like Wal-Mart will use credit lines to cover cash shortages throughout the year because of the seasonality of the retail industry.

37. Exercise 1-21, page 34 Situation Four: Assume that you are employed by Sara Lee Corporation and are considering whether to extend credit for a 60-day period to a new grocery store chain that has recently opened throughout the Midwest. Which financial statement might you focus on?

38. Answer Situation Four: A current balance sheet would be a primary focus to determine whether the grocery store chain has sufficient cash or other assets such as receivables that will enable the chain to repay the credit within 60 days. The balance sheet would also report any other liabilities of the chain.

39. Exercise 1-21, page 34 Situation Five: Assume that you are considering taking a job with either Sears of JC Penney. Which financial statement might you focus on?

40. Answer Situation Five: The income statements of Sears and JC Penney would provide the most useful information on which company’s business emphasis is working best and, thus, generating profits. Both Sears and JC Penney are under considerable pressure from low-cost retailers such as Wal-Mart.

41. Questions???