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Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 1 1.

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Presentation on theme: "Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 1 1."— Presentation transcript:

1 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 1 1

2 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Introduction review The accounting profession and the organizations that govern it Types of business organizations Characteristics and organization of a corporation The financial report that is at heart of the entire accounting universe 2

3 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accounting concepts and principles The balance sheet: the accounting equation, assets, liabilities, and equity. Use the accounting equation to analyze transactions Prepare financial statements Use financial statements to evaluate business performance 3

4 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Introduction review 4 1 1

5 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accounting is “the language of business.” The information system that: Measures business activity Processes the data into reports Communicates the results to decision makers Presents information in monetary terms Knowing how to speak this language makes you a better decision maker, no matter what career path you choose in business. 5

6 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Revenues Amounts earned by delivering goods or services to customers Expenses Decreases in equity that occur from using assets or increasing liabilities in the course of delivering goods or services to customers 6 Net Income (Net Loss) Wealth created (consumed) by revenue and expense transactions. All numbers in thousands

7 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The accounting profession and the organizations that govern it 7 2

8 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Lucrative career with many opportunities Certified Public Accountants (CPAs) Meet education and/or experience requirements Pass qualifying exam 8 Licensed professional accountants who are approved to serve the general public Certified Public Accountants, or CPAs Certified professionals in accounting for a single company. Certified Management Accountants, or CMAs

9 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. CalCPA, Silicon Valley Chapter Career building resources Continuing education Professional networking & involvement Scholarships 9

10 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 10 Financial Accounting Standards Board A privately funded organization, formulates accounting standards FASB Securities and Exchange Commission U.S. governmental agency that oversees U.S. financial markets. SEC American Institute of Certified Public Accountants Private organization of public accountants Source for ethical standards in many areas AICPA Public Company Accounting Oversight Board Oversees auditing standards and practices PCAOB International Accounting Standards Board Publishes the International Financial Reporting Standards, the international accounting rule book IASB

11 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Why Audit: Businesses want to look good Investors want reliable financial information Help uphold the faithful representation principle SEC requires companies to have financial statements examined by independent accountants Auditors provide an opinion on financial statements U.S. Government crackdown on fraud: Created the Public Company Accounting Oversight Board (PCAOB) Passed the Sarbanes-Oxley Act (SOX)Sarbanes-Oxley Act A variety of Post-Madoff reformsPost-Madoff 11

12 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Types of business organizations 12 3

13 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 13 ProprietorshipPartnership CorporationLLC and LLP Not-for-profit

14 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Characteristics and organization of a corporation 14 4

15 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Incorporators obtain charter from the state Charter authorizes corporation to: Issue stock Conduct business in accordance with state law Incorporators agreed to a set of bylaws Bylaws are the rule book that guides the corporation. Corporations begins to exist when stock is issued Stockholders vote on who will serve on Board of Directors 15

16 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 16

17 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Limited personal liability for stockholders. Transferability of ownership. Fund-raising! Continuity of existence.

18 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Double taxation. Greater regulation. Cost of formation. Separation of ownership and management.

19 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Name two benefits of incorporating. Name two negatives of incorporating.

20 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 20 ProprietorshipPartnersCorporationLLC, LLP Not-for- Profit Owners Proprietor: One Owner Partners: Two or more Stockholders: usually many MembersNone Life of Organization Limited by owner's choice or death Limited by owners’ choice or death Indefinite Liability of owners for business debts Proprietor: Owner is personally liable Partners are personally liable Stockholders not personally liable Members are not personally liable Fiduciary liability of board members

21 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Loads of Sole props, but not so much production Few Corporations, but producing loads of sales 21

22 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. You are a doctor with your own practice You and 700 other people own a chain of craft stores You own a skateboard park You own & manage a small fruit-stand Incorporate Sole Proprietorship or Partnership

23 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accounting concepts and principles 23 5

24 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Generally Accepted Accounting Principles Guidelines that govern accounting Based on a conceptual framework Goals include: Provide useful information for investment and lending decisions Must be relevant, reliable, and comparable US GAAP vs. IFRS Rules based vs. principles based IFRS demonstrates a user bias Convergence and conversion 24

25 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 25 Entity Concept Faithful Representation Principle Cost Principle Going- Concern Concept Stable Monetary Unit Concept

26 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 26 Entity Concept A business is separate from its owners Faithful Representation Principle Accounting information is complete, neutral, and free from material error Cost Principle Assets are recorded at purchase price US GAAP reflects decreases, IFRS can reflect increases

27 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 27 Going-Concern Assumption that business will remain in operation for the foreseeable future Stable Monetary Unit Concept In the U.S. amounts are recorded in dollars The dollar is considered a stable unit of measure

28 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The Balance Sheet: the accounting equation, assets, liabilities, and equity 28 6

29 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 29 ASSETSLIABILITIESEQUITY Economic Resources Claims to Economic Resources

30 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Economic resources Benefit the business in the future Examples: Cash Accounts receivable Merchandise inventory Furniture Land 30

31 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Liabilities Debts payable to outsiders Examples: Accounts payable Salaries payable Bank loans Mortgages Unearned revenue Equity Owners’ claims to the assets of the business In a corporation, stockholders’ equity Two forms: Earned capital Eg: Retained earnings Paid-In Capital Eg: Capital stock 31

32 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use the accounting equation to analyze transactions 32 7

33 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. An event that affects the financial position of the business Can be measured reliably Every transaction impacts at least two items The accounting equation balances before and after each transaction 33

34 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Write up basic accounting equation Create initial transactions to prepare for business Record revenue & expense transactions Translate to reports If this doesn’t get too messy, we can make some simple financial statements from the data. 34

35 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 35 Caren Smith opened a medical practice. During July, the first month of operation, the business, titled Caren Smith, M.D., P.C. (Professional Corporation), experienced the following events: 1.Analyze the effects of these events on the accounting equation of the medical practice of Caren Smith, M.D., P.C. AssetsLiabilitiesStockholders’ Equity DateCash Medical supplies Land Accounts payable Common stock Retained earnings Jul 6$ 55,000 Bal$ 55,000$ 0 $ 55,000$ 0 9(46,000)46,000 Bal$9,000$ 0$46,000$ 0$55,000$ 0

36 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 36 AssetsLiabilitiesStockholders’ Equity DateCash Medical supplies Land Accounts payable Common stock Retained earnings Jul 12$1,800 Bal$9,000$1,800$46,000$1,800$55,000$0 15 Bal$9,000$1,800$46,000$1,800$55,000$ ,000 Bal$17,000$1,800$46,000$1,800$55,000$8, (1,600) (900) (100) (1,600) (900) (100)

37 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 37 AssetsLiabilitiesStockholders’ Equity DateCash Medical supplies Land Accounts payable Common stock Retained earnings Bal$14,400$1,800$46,000$1,800$55,000$5,400 30(700) Bal$14,400$1,100$46,000$1,100$55,000$5,400 31(1,100) Bal$13,300$1,100$46,000$ 0$55,000$5,400

38 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Prepare financial statements 38 9

39 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 39 Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

40 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 40

41 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 41

42 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 42

43 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 43

44 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 44 Studio Photography, Inc., works weddings and prom-type parties. The balance of retained earnings was $16,000 at December 31, At December 31, 2012, the business’s accounting records show these balances: Prepare the following financial statements for Studio Photography, Inc. for the year ended December 31, 2012: a. Income statement b. Statement of retained earnings c. Balance sheet Insurance expense$ 8,000Accounts receivable$ 8,000 Cash37,000Note payable12,000 Accounts payable7,000Retained earnings? Advertising expense3,000Salary expense25,000 Service revenue80,000Equipment50,000 Dividends31,000Common stock29,000

45 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 45 Studio Photography, Inc. Income Statement Year Ended December 31, 2012 Revenue: Service revenue$ 80,000 Expenses: Salary expense$ 25,000 Insurance expense8,000 Advertising expense3,000 Total expenses36,000 Net income$ 44,000

46 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 46 Studio Photography, Inc. Statement of Retained Earnings Year Ended December 31, 2012 Retained earnings, December 31, 2011$ 16,000 Add: Net income44,000 Subtotal$ 60,000 Less: Dividends(13,000) Retained earnings, December 31, 2011$ 47,000

47 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 47 Studio Photography, Inc. Balance Sheet December 31, 2012 AssetsLiabilities Cash$37,000Accounts payable$ 7,000 Accounts receivable8,000Note payable12,000 Equipment50,000Total liabilities19,000 Stockholders’ Equity Common stock$29,000 Retained earnings Total stockholders’ equity Total assets$95,000 Total liabilities and stockholders’ equity $95,000 47,000 76,000

48 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Use financial statements to evaluate business performance 48 10

49 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 49 Income Statement Demonstrates profitability Statement of Retained Earnings Shows changes in retained earnings Balance Sheet Demonstrates economic resources as well as debts the company owes Income statement: Earnings power Balance Sheet: Financial strength/standing

50 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Accounting is the language of business. Financial statements report a company’s activities in monetary terms. Different users—including individuals, business owners, managers, investors, creditors, and tax authorities—review a company’s financial statements for different reasons. Each user’s goal will determine which pieces of the financial statements he or she will find most useful. 50

51 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Most U.S. businesses follow generally accepted accounting principles (GAAP). If the company is publicly traded, then it must also follow SEC guidelines. If the company operates internationally, then international financial reporting standards (IFRS) will apply. The goal is that, eventually, all public U.S. companies will report using IFRS rules. There are five main forms of business organizations: proprietorships, partnerships, corporations, LLPs/LLCs, and not-for-profits. Each is unique in its formation, ownership, life, and liability exposure. 51

52 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Corporations are formed with a specific state by issuance of a charter. The stockholders own the corporation, but they have no liability for the corporation’s actions. Corporations usually raise capital more easily than other forms of business, but have the disadvantage of additional regulation and additional taxes. The accounting concepts are the underlying assumptions used when recording financial information for a business. Think of the concepts like rules of a game. You have to play by the rules. 52

53 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. The accounting equation must always equal. That is, Assets (what you own) must equal Liabilities (what you owe) + Equity (net worth). In a corporation, equity is composed of paid-in capital (by outsiders) and retained earnings (earnings kept for use by the company). The accounting equation is Assets = Liabilities + Equity. Every business transaction affects various parts of the equation, but after each transaction is recorded, the equation must ALWAYS balance (equal). 53

54 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. Financial statements are prepared from the ending balances of each account. Each financial statement shows a different view of the company’s overall results. Financial statements are prepared from the transaction analyses (summary of events) reported in each account (Exhibit 1-6) in the order shown in Exhibit 1-7. No one financial statement shows everything about a company. It is the financial statements AND the relationships the statements show that give users the overall picture for a specific company. 54

55 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 55

56 Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall. 56 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.


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