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© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-1 Financial Accounting John J. Wild 4th Edition John J. Wild 4th Edition Information for Decisions.

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Presentation on theme: "© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-1 Financial Accounting John J. Wild 4th Edition John J. Wild 4th Edition Information for Decisions."— Presentation transcript:

1 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-1 Financial Accounting John J. Wild 4th Edition John J. Wild 4th Edition Information for Decisions

2 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Chapter 1 Introducing Accounting in Business

3 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-3 Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting C3: Identify opportunities in accounting and related fields C4: Explain why ethics are crucial in accounting C5: Explain the meaning of GAAP, and define and apply several key accounting principles C6: Appendix 1B: Identify and describe the three major activities in organizations

4 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-4 Analytical Chapter Objectives A1: Define and interpret the accounting equation and each of its components A2: Analyze business transactions using the accounting equation A3: Compute and interpret return on assets A4: Appendix 1A: Explain the relationship between return and risk

5 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-5 Procedural Chapter Objectives P1: Identify and prepare basic financial statements and explain how they interrelate

6 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-6 Identifies Records Communicates Relevant Reliable Comparable Importance of Accounting Accounting is a system that information that is to help users make better decisions. C1

7 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-7 Identifying Business Activities Recording Business Activities Communicating Business Activities Accounting Activities C 1

8 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-8 Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers/Directors Internal Auditors Sales Staff Budget Officers Controllers C 2

9 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-9 Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers. C 2

10 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-10 Opportunities in Accounting Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Accounting- related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs C 3

11 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-11 Accounting Jobs by Area C 3

12 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-12 Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics EthicsA Key Concept C 4

13 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-13 Identify ethical concerns Analyze options Make ethical decision Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences. Guidelines for Ethical Decisions C 4

14 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-14 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Generally Accepted Accounting Principles Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. C 5 Comparable Information Used in comparisons across years & companies.

15 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-15 The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. C 5 The International Accounting Standards Board (IASB) issues inter- national standards that identify preferred accounting practices in other countries. The IASB does not have authority to impose its standards on companies.

16 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-16 Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence. C 5

17 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-17 Principles of Accounting Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. C 5

18 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-18 Business Entity Forms Sole Proprietorship Partnership Corporation C 5

19 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-19 * Proprietorships and partnerships that are set up as LLCs provide limited liability. Characteristics of Businesses * * C 5

20 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-20 Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation C 5

21 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-21 Assets Liabilities & Equity Accounting Equation Liabilities Equity Assets =+ A1

22 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-22 Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets A1

23 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-23 Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors claims on assets Liabilities A1

24 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-24 Owners claim on assets Owners claim on assets Dividends Contributed Capital Retained Earnings Equity A1

25 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-25 Liabilities Equity Assets =+ Expanded Accounting Equation Revenues Expenses Common Stock Dividends __ ++ __ Retained Earnings Liabilities Equity Assets =+ A1

26 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-26 Transaction Analysis Equation The accounting equation MUST remain in balance after each transaction. Liabilities Equity Assets =+ A2

27 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-27 Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Common Stock (equity) J. Scott invests $20,000 cash to start the business in exchange for stock. A2

28 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-28 Transaction Analysis J. Scott invests $20,000 cash to start the business in return for stock. A2

29 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-29 The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash. A2

30 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-30 Transaction Analysis Purchased supplies paying $1,000 cash. A2

31 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-31 The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash. A2

32 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-32 Transaction Analysis Purchased equipment for $15,000 cash. A2

33 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-33 The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. A2

34 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-34 Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. A2

35 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-35 Transaction Analysis Borrowed $4,000 from 1st American Bank. A2

36 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-36 Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. A2

37 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-37 Transaction Analysis Now, lets look at transactions involving revenue, expenses and dividends. A2

38 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-38 The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Provided consulting services receiving $3,000 cash. A2

39 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-39 Transaction Analysis Provided consulting services receiving $3,000 cash. A2

40 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-40 The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction Analysis Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity. A2

41 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-41 Transaction Analysis Remember that expenses decrease equity. Paid salaries of $800 to employees. A2

42 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-42 The accounts involved are: (1) Cash (asset) (2) Dividends (equity) Transaction Analysis Dividends of $500 are paid to shareholders. Remember that the Dividend account actually increases. But, equity decreases because dividends reduce equity. A2

43 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-43 Transaction Analysis Remember that dividends decrease equity. Dividends of $500 are paid to shareholders. A2

44 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-44 Financial Statements Lets prepare the Financial Statements reflecting the transactions we have recorded. 1.Income Statement 2.Statement of Retained Earnings 3.Balance Sheet 4.Statement of Cash Flows 1.Income Statement 2.Statement of Retained Earnings 3.Balance Sheet 4.Statement of Cash Flows P1

45 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-45 Net income is the difference between Revenues and Expenses. The income statement describes a companys revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. Income Statement P1

46 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-46 The net income of $2,200 increases Retained Earnings by $2,200. Statement of Retained Earnings P1

47 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-47 The Balance Sheet describes a companys financial position at a point in time. Balance Sheet P1

48 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-48 Statement of Cash Flows P1

49 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-49 ROA is viewed as an indicator of operating efficiency. Return on Assets (ROA) Net income Average total assets Return on assets = P1

50 © The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin 1-50 End of Chapter 1


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