Presentation on theme: "Chapter 1 Introduction to Accounting and Business Financial and Managerial Accounting 8th Edition Warren Reeve Fess PowerPoint Presentation by Douglas."— Presentation transcript:
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1.Describe the nature of a business. 2.Describe the role of accounting in business. 3.Describe the importance of business ethics and the basic principles of proper ethical conduct. 4.Describe the profession of accounting. 5.Summarize the development of accounting principles and relate them to practice. 6.State the accounting equation and define each element of the equation. ObjectivesObjectives After studying this chapter, you should be able to:
7.Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation. ObjectivesObjectives 8.Describe the financial statements of a corporation and explain how they interrelate. 9.Use the ratio of liabilities to stockholders’ equity to analyze the ability of a business to withstand poor business conditions.
Manufacturing Business Product Product General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television General MotorsCars, trucks, vans IntelComputer chips BoeingJet aircraft NikeAthletic shoes and apparel Coca-ColaBeverages SonyStereos and television Types of Businesses
Merchandising Business Product Product Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Wal-MartGeneral merchandise Toys “R” UsToys Circuit CityConsumer electronics Lands’ EndApparel Amazon.comInternet books, music, video retailer Types of Businesses
Service Business Product Product DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication DisneyEntertainment Delta Air LinesTransportation Marriott HotelsHospitality and lodging Merrill LynchFinancial advice SprintTelecommunication Types of Businesses
There are three types of business organizations Proprietorship Partnership Corporation
A proprietorship is owned by one individual. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability Joe’s
A partnership is owned by two or more individuals. Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Joe and Marty’s
A corporation is organized under state or federal statutes as a separate legal entity. Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation. J & M, Inc.
Business Strategies A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors, and in doing so, to maximize its profits.
Business Strategies Under a low-cost strategy, a business designs and produces products or services of acceptable quality at a cost lower than that of its competitors. Wal-Mart Southwest Airlines
Business Strategies Under a differential strategy, a business designs and produces products or services that possess unique attributes or characteristics which customers are willing to pay a premium price. Maytag Tommy Hilfiger
Value Chain of a Business A value chain is the way a business adds value for its customers by processing inputs into product or service. Inputs Business Processes Business Processes Products or Services Products or Services Customer Value Customer Value
A business stakeholder is a person or entity having an interest in the economic performance of the business. Business Stakeholders
2 Assess stakeholders’ informational needs. The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.
Accounting Information System Design the accounting information system to meet stakeholders’ needs. 3 4 Record economic data about business activities and events. The Process of Providing Information
5 Prepare accounting reports for stakeholders. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Accounting Information System The Process of Providing Information
Business Ethics 1.Avoid small ethical lapses. 2.Focus on your long-term reputation. 3.You may expect to suffer adverse personal consequences for holding to an ethical position. Sound Principles that form the foundation for ethical behavior
Profession of Accounting Accountants employed by a business firm or a not-for-profit organization are said to be engaged in private accounting. Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.
Generally Accepted Accounting Principles (GAAP)
The business entity concept limits the economic data in the accounting system to data related directly to the activities of the business. The cost concept is the basis for entering the exchange price, or cost of an acquisition in the accounting records.
The objectivity concept requires that the accounting records and reports be based upon objective evidence. The unit-of-measure concept requires that economic data be recorded in dollars.
The Accounting Equation Assets = Liabilities + Owners’ Equity The resources owned by a business
The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the creditors, which represent debts of the business
The Accounting Equation Assets = Liabilities + Owners’ Equity The rights of the owners
What is a business transaction? A business transaction is an economic event or condition that directly changes an entity’s financial condition or directly affects its results of operations.
On November 1, 2005, Chris Clark organized a corporation that will be known as NetSolutions.
a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions in return for shares of stock in the corporation. Capital Stock 25,000 Investment by stockholder Cash 25,000 a. Assets Owners’ Equity = =
b. NetSolutions exchanged $20,000 for land. Capital Stock 25,000 Cash + Land 25,000 Bal. Assets Owners’ Equity = = b. –20,000+20,000 Bal. 5,00020,00025,000
Accounts Capital Cash + Supplies + Land Payable Stock Assets c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account). Owners’ Liabilities + Equity = Bal.5,00020,00025,000 c. + 1,350+ 1,350 Bal.5,0001,35020,0001,35025,000 =
d. + 7,500+ 7,500 Assets d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash. Owners’ Liab. + Equity = Bal.5,0001,35020,0001,35025,000= Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal.12,5001,35020,0001,35025,0007,500 Fees earned
e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275. Bal.12,5001,35020,0001,35025,0007,500 Assets Owners’ Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings e. – 3,650–2,125 – 800 – 450 – 275 = Bal.8,8501,35020,0001,35025,0003,850 = Expenses
f. NetSolutions paid $950 to creditors during the month. Assets Owners’ Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings Bal.8,8501,35020,0001,35025,0003,850 = = f. – 950– 950 Bal.7,9001,35020, ,0003,850
g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used. Assets Owners’ Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings = =Bal.7,9001,35020, ,0003,850 g. – 800– 800 Bal.7, , ,0003,050 Supplies Expense
h. At the end of the month, NetSolutions pays $2,000 to stockholders. Assets Owners’ Liab. + Equity Accounts Capital Retained Cash + Supplies + Land Payable + Stock + Earnings =Bal.7, , ,0003,050 h. –2,000–2,000 Bal.5, , ,0001,050 = = Dividends
Increased by Capital Stock Effects of Transactions on Owners’ Equity Stockholders’ investments +
Decreased by Increased by Retained Earnings Effects of Transactions on Owners’ Equity Revenues + Expenses – Decreased by Dividends –
Accounting reports, called financial statements, provide summarized information to the users.
Financial Statements Income statement—A summary of the revenue and expenses for a specific period of time. Retained earnings statement—A summary of the earnings retained in the corporation for a specific period of time. Balance sheet—A list of the assets, liabilities, and stockholders’ equity as of a specific date. Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.
Fees earned$ Operating expenses: Rent expense $ Wages expense Supplies expense Utilities expense Miscellaneous expense Total operating expenses NetSolutions Income Statement For the Month Ended November 30, Net income$ Transfer this amount to the retained earnings statement.
NetSolutions Retained Earnings Statement For the Month Ended November 30, 2005 Less dividends Retained earnings, November 30, 2005$ Net income for November$ From the income statement Transferred to the balance sheet
Assets Liabilities NetSolutions Balance Sheet November 30, 2005 Cash$ Accounts Payable$ Supplies Stockholders’ Equity Land Capital Stock$25,000 Ret. Earnings l, Total liabilities and Total assets$ stockholder’s equity$ From the retained earnings statement This balance sheet presented using the account form
When the balance sheet displays the liabilities and stockholders’ equity below the assets, the report form is being used.
Cash flows from operating activities: Cash received from customers$ Deduct cash payments for expenses and payments to creditors Net cash flow from operating activities Cash flows from investing activities: Cash payment for acquisition of land( Cash flows from financing activities: Cash received as owner’s investment$ Deduct cash withdrawal by owner Net cash flow from financing activities Net cash flow and Nov. 30, 2005 cash bal.$ NetSolutions Statement of Cash Flows For the Month Ended November 30, 2005 Should match Cash on the balance sheet )
Statement of Cash Flows Cash Flows from Operating Activities—This section reports a summary of cash receipts and cash payments from operations. Cash Flows from Investing Activities—This section reports the cash transactions for the acquisition and sale of relatively permanent assets. Cash Flows from Financing Activities—This section reports the cash transactions related to cash investments by the owner, borrowings, and cash withdrawals by the owner.
Ratio of liabilities to stockholders’ equity = Total Liabilities Total stockholders’ equity The ratio of liabilities to stockholders’ equity allows bankers, creditors, and other stakeholders a means of analyzing the corporation’s ability to withstand poor business conditions. Financial Analysis and Interpretation
Ratio of liabilities to stockholders’ equity = $400 $26,050 = Ratio of liabilities to stockholders’ equity Financial Analysis and Interpretation