1. Introduction to Accounting and Business
Chapter 1
Introduction to Accounting and Business
Accounting, 21st Edition
Warren Reeve Fess
© Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved.
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PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University

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3. After studying this chapter, you should be able to:
Objectives
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.
After studying this chapter, you should be able to:

4. Objectives
7. Explain how business transactions can be stated in terms of the resulting change in the basic elements of the accounting equation.
8. Describe the financial statements of a proprietorship and explain how they interrelate.
9. Use the ratio of liabilities to owner’s equity to analyze the ability of a business to withstand poor business conditions.

5. Manufacturing Business
Types of Businesses
Manufacturing Business
Product
General Motors Cars, trucks, vans
Intel Computer chips
Boeing Jet aircraft
Nike Athletic shoes and apparel
Coca-Cola Beverages
Sony Stereos and television

6. Merchandising Business
Types of Businesses
Merchandising Business
Product
Wal-Mart General merchandise
Toys “R” Us Toys
Circuit City Consumer electronics
Lands’ End Apparel
Amazon.com Internet books, music, video retailer

7. Types of Businesses Service Business Disney Entertainment
Product
Disney Entertainment
Delta Air Lines Transportation
Marriott Hotels Hospitality and lodging
Merrill Lynch Financial advice
Sprint Telecommunication

8. There are three types of business organizations
Proprietorship
Partnership
Corporation

9. 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

10. A partnership is owned by two or more individuals.
Advantages
More financial resources than a proprietorship.
Additional management skills.
A partnership is owned by two or more individuals.
Disadvantage
Unlimited liability.
Joe and Marty’s

11. The ability to obtain large amounts of resources by issuing stocks.
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.

12. 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.

13. 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

14. 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

15. 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
Products or Services
Customer Value

16. Business Stakeholders
A business stakeholder is a person or entity having an interest in the economic performance of the business.

17. The Process of Providing Information
STAKEHOLDERS
Internal:
Owners, managers, employees
External: Customers, creditors, government 1
Identify stake-holders. 2
Assess stakeholders’ informational needs.

18. The Process of Providing Information
Design the accounting information system to meet stakeholders’ needs. 3
Accounting Information System 4
Record economic data about business activities and events.

19. 5 The Process of Providing Information STAKEHOLDERS Internal:
Owners, managers, employees
External: Customers, creditors, government 5
Prepare accounting reports for stakeholders.
Accounting Information System

20. Sound Principles that form the foundation for ethical behavior
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

21. 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.

22. Generally Accepted Accounting Principles (GAAP)

23. 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.

24. 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.

25. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The resources owned by a business

26. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the creditors, which represent debts of the business

27. The Accounting Equation
Assets = Liabilities + Owner’s Equity
The rights of the owners

28. 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.

29. On November 1, 2005, Chris Clark begins a business that will be known as NetSolutions.

30. a. Chris Clark deposits $25,000 in a bank account in the name of NetSolutions.
Chris Clark, Capital
25,000 Investment by Chris Clark
Cash
25,000 a.
Assets
Owner’s Equity =

31. b. NetSolutions exchanged $20,000 for land.
Assets =
Owner’s Equity
Cash Land
25,000
Chris Clark, Capital
25,000
Bal. =
b. –20, ,000
Bal. 5,000 20,000 25,000

32. c. During the month, NetSolutions purchased supplies for $1,350 and agreed to pay the supplier in the near future (on account).
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital =
Bal. 5, , ,000
c , ,350
Bal. 5,000 1,350 20,000 1,350 25,000

33. d. NetSolutions provided services to customers, earning fees of $7,500 and received the amount in cash.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 5,000 1,350 20,000 1,350 25,000 =
Fees earned
d , ,500
Bal. 12,500 1,350 20,000 1,350 32,500

34. e. NetSolutions paid the following expenses: wages, $2,125; rent, $800; utilities, $450; and miscellaneous, $275.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 12,500 1,350 20,000 1,350 32,500
e. – 3,650 –2,125
– 800
– 450 –
Wages
Rent
Util.
Misc. =
Bal. 8,850 1,350 20,000 1,350 28,850

35. f. NetSolutions paid $950 to creditors during the month.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 8,850 1,350 20,000 1,350 28,850 =
f. – 950 – 950
Bal. 7,900 1,350 20, ,850

36. g. At the end of the month, the cost of supplies on hand is $550, so $800 of supplies were used.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7,900 1,350 20, ,850 =
Supplies expense
g. – 800 – 800
Bal. 7, , ,050

37. h. At the end of the month, Chris withdrew $2,000 in cash from the business for personal use.
Owner’s
Liabilities Equity
Assets =
Accounts Chris Clark,
Cash Supplies + Land Payable Capital
Bal. 7, , ,050 =
With-drawal
h. –2,000 –2,000
Bal. 5, , ,050

38. Effects of Transactions on Owner’s Equity
Owner’s withdrawals
Expenses
Decreased by
Increased by
Owner’s investments
Revenues
Net income

39. Accounting reports, called financial statements, provide summarized information to the owner.

40. Financial Statements
Income statement—A summary of the revenue and expenses for a specific period of time.
Statement of owner’s equity—A summary of the changes in the owner’s equity that have occurred during a specific period of time.
Balance sheet—A list of the assets, liabilities, and owner’s equity as of a specific date.
Statement of cash flows—A summary of the cash receipts and disbursements for a specific period of time.

41. For the Month Ended November 30, 2005
NetSolutions
Income Statement
For the Month Ended November 30, 2005
Fees earned $
Operating expenses:
Wages expense $
Rent expense
800 00
Supplies expense
800 00
Utilities expense
450 00
Miscellaneous expense
275 00
Total operating expenses
To the statement of owner’s equity
Net income $

42. Statement of Owner’s Equity For the Month Ended November 30, 2005
NetSolutions
Statement of Owner’s Equity
For the Month Ended November 30, 2005
Chris Clark, capital, November 1, 2005 $
Investment on November 1 $
Net income for November $
From the income statement
Less withdrawals
Increase in owner’s equity
Chris Clark, capital, November 30, $
To the balance sheet

43. This balance sheet presented using the account form
NetSolutions
Balance Sheet
November 30, 2005
From the statement of owner’s equity
Assets Liabilities
Cash $ Accounts Payable $
Supplies Owner’s Equity
Land Chris Clark, cap
Total liabilities and
Total assets $ owner’s equity $
This balance sheet presented using the account form

44. When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.

45. Statement of Cash Flows For the Month Ended November 30, 2005
NetSolutions
Statement of Cash Flows
For the Month Ended November 30, 2005
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. $ )
Should match Cash on the balance sheet

46. 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.

47. Tools for Financial Analysis and Interpretation
The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions.
Ratio of liabilities to owner’s equity =
Total Liabilities
Total owner’s equity (or total stockholders’ equity)

48. Tools for Financial Analysis and Interpretation
Ratio of liabilities to owner’s equity =
$400
$26,050 =
0.015
Ratio of liabilities to owner’s equity

49. Chapter 1
The End