1. Chapter 1 Accounting and Business Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 1-2 What are the Basic Functions of Business? MarketingMarketing  Products, pricing, promotion, distribution Human resourcesHuman resources  Jobs, people, salaries, benefits Production and operationsProduction and operations  Planning, directing, controlling, evaluating FinanceFinance  Capital maintenance Accounting and information systemsAccounting and information systems  Information infrastructure

3. 1-3 How do the Functions Use Accounting Information? MarketingMarketing  Pricing, distribution costs Human resourcesHuman resources  Pay and fringe benefits, hiring costs Production and operationsProduction and operations  Production costs—actual and budgeted FinanceFinance  Cost of borrowing, benefits expected

4. 1-4 How has Business Evolved? Sole proprietorshipSole proprietorship  One owner PartnershipPartnership  Two or more owners CorporationCorporation  Many owners MerchandisingMerchandising  Buy and sell products ServiceService  Provide service ManufacturingManufacturing  Make and sell products

5. 1-5 How has Accounting Evolved? Determination of wealthDetermination of wealth  What am I worth today Determination of incomeDetermination of income  How has my wealth changed On-going successOn-going success  How is the business doing

6. 1-6 What are the Characteristics of Business Today? Customer-focused operationsCustomer-focused operations Global marketsGlobal markets  Products, labor, and capital Advanced manufacturing and communicationsAdvanced manufacturing and communications eBusinesseBusiness  B2B and B2C Hybrid organizational structuresHybrid organizational structures

7. 1-7 What are the Basic Concepts of Accounting? Business entityBusiness entity  Keep business and personal records separate Monetary unitMonetary unit  Maintain business records in currency Going concernGoing concern  Business will continue past the current period PeriodicityPeriodicity  Profits/losses must be determined periodically

8. 1-8 What are the 5 Basic Elements of Accounting? AssetAsset  Right to use resources with future benefit LiabilityLiability  Obligation to transfer resources in the future to suppliers of goods and services Owners’ equityOwners’ equity  Net assets belong to owners Revenues (accrual basis)Revenues (accrual basis)  Amounts earned from providing goods and services Expenses (accrual basis)Expenses (accrual basis)  Amounts incurred in an attempt to generate revenues

9. 1-9 What is GAAP and the IFRS? Generally Accepted Accounting PrinciplesGenerally Accepted Accounting Principles International Financial Reporting standardsInternational Financial Reporting standards Financial Accounting Standards BoardFinancial Accounting Standards Board  Current rule-making body in U.S. International Accounting Standards BoardInternational Accounting Standards Board  Current rule-making body internationally

10. 1-10 What are the Concepts Statements? Concepts Statement #1Concepts Statement #1  Useful information for decision making Concepts Statement #2Concepts Statement #2  Characteristics of accounting information Concepts Statement #3 (superceded)Concepts Statement #3 (superceded) Concepts Statement #4Concepts Statement #4  Objectives for nonbusiness organizations Concepts Statement #5Concepts Statement #5  Financial statements Concepts Statement #6Concepts Statement #6  Elements of financial statements Concepts Statement #7Concepts Statement #7  Estimating value of future cash flows

11. 1-11 What Makes Information Useful? RelevanceRelevance  Capable of making a difference ReliabilityReliability  Dependable Benefits > CostsBenefits > Costs  Benefits derived must be greater than cost MaterialityMateriality  Large enough to have an impact on a decision

12. 1-12 What are the 4 Basic Financial Statements and Auditors’ Report? Income statementIncome statement  Indicates revenues less expenses = net income for a period of time Statement of cash flowsStatement of cash flows  Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time Statement of owners’ equityStatement of owners’ equity  Indicates changes in owners’ equity for a period of time

13. 1-13 Financial Statements Continued Balance sheetBalance sheet  Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time Auditor’s reportAuditor’s report  Indicates whether the company followed GAAP when preparing its financial statements

14. 1-14 What are the Purposes of the Ratios? Current ratioCurrent ratio  Relationship between current assets and current liabilities Debt to equity ratioDebt to equity ratio  Relationship between liabilities and owners’ equity Return on salesReturn on sales  Relationship between net income and sales