1. PowerPointPresentation by PowerPoint Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. CARL S. WARREN SURVEY OF ACCOUNTING Chapter 1

2. 2 LEARNING OBJECTIVES When you finish this chapter, you should be able to

3. 3 1.Describe the types & forms of businesses, how businesses make money, & business stakeholders. 2.Describe the 3 business activities of financing, investing, & operating. 3.Define accounting & describe its role in business. LEARNING OBJECTIVES Continued

4. 4 LEARNING OBJECTIVES 4.Describe & illustrate the basic financial statements & how they interrelate. 5. Describe 8 accounting concepts underlying financial reporting.

5. 5 LEARNING OBJECTIVE 1 Describe the types & forms of businesses, how businesses make money, & business stakeholders.

6. 6 What forms do businesses take and how do they differ? LO 1

7. 7 Sole proprietor Partnership Corporation Limited liability corporation LO 1 3 FORMS OF BUSINESS

8. 8  Ease of formation  Legal liability  Taxation  Limited life  Capital access 5 DIFFERENCES LO 1

9. 9 DIFFERENCES IN FORMS OF BUSINESS FormEase Legal Liability Taxation Limited Life Capital Access ProprietorshipSimpleNo limitNon-taxableYesLimited PartnershipSimpleNo limitNon-taxableYesAverage CorporationComplexLimitedTaxableNoExtensive Limited Liability Co. ModerateLimitedNon-taxableYesAverage LO 1

10. 10 HOW DO BUSINESSES MAKE MONEY?  Businesses  Provide goods and services  Businesses maximize profits  Must gain advantage over competitors to maximize profits LO1

11. 11 PROFITS - = LO 1 REVENUES COSTSPROFITS

12. 12 Who are stakeholders and how are they related to the corporation? LO 1

13. 13 A business stakeholder is a person or entity that has an interest in the economic performance and well-being of a business. LO 1

14. 14 STAKEHOLDERS Employees/Managers Customers Suppliers Bank, owners Government LO 1 Continued

15. 15 Business Stakeholder Interest Examples Capital markets stakeholder Provides financingBanks, owners, stockholders Product/service market stakeholders Buyers of products, services and vendors Customers, suppliers Government stakeholders Collects taxes, fees from business, employees Federal, state, city government Internal stakeholdersPeople employed by business Employees, managers LO 1 EXHIBIT 2

16. 16 LEARNING OBJECTIVE 2 Describe the 3 business activities of financing, investing, & operating.

17. 17 BUSINESS ACTIVITIES LO 2

18. 18 FINANCING ACTIVITIES LO 2 Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock Financing activities Borrowing creates a liability Issuing ownership shares creates capital stock

19. 19 INVESTING ACTIVITIES Investing activities Obtaining assets to operate business Investing activities Obtaining assets to operate business LO 2

20. 20 OPERATING ACTIVITIES Operating activities Offer product, service Operating activities Offer product, service LO 2

21. 21 LEARNING OBJECTIVE 3 Define accounting & describe its role in business.

22. 22 ROLE OF ACCOUNTING LO 3 Accounting is “an information system that provides reports to stakeholders about the economic activities and condition of a business.”

23. 23 LO 3 EXHIBIT 3

24. 24 LEARNING OBJECTIVE 4 Describe & illustrate the basic financial statements & how they interrelate.

25. 25 Can you name the four financial statements and their objectives? LO 4

26. 26  Income statement  Retained earnings  Balance sheet  Statement cash flows  Income statement  Retained earnings  Balance sheet  Statement cash flows 4 FINANCIAL STATEMENTS LO 4

27. 27 FINANCIAL STATEMENTS Financial StatementReporting Objective Income statementChange in financial condition Retained earningsChange in financial condition Balance sheetFinancial condition Cash flowsChange in financial condition LO 4

28. 28 INCOME STATEMENT (Slide 1 of 3) Reports change in financial condition due to operations Revenues and expenses for a period of time Month, quarter, year LO 4

29. 29 INCOME STATEMENT (Slide 2 of 3) The income statement uses the Matching Concept Expenses for period are Matched against Revenues for same period Revenue – Expenses = Net Income LO 4

30. 30 LO 4 EXHIBIT 4

31. 31 RETAINED EARNINGS (Slide 1 of 2) Reports changes in financial condition due to changes in retained earnings during a period. Retained earnings is the portion of net income retained by the business. LO 4

32. 32 LO 4 EXHIBIT 5

33. 33 BALANCE SHEET (Slide 1 of 2) Reports financial condition as of a point in time Accounting equation Assets = Liabilities + Stockholders’ Equity LO 4

34. 34 LO 4 EXHIBIT 6

35. 35 STATEMENT OF CASH FLOWS (Slide 1 of 2) Reports change in financial condition from changes in cash during a period that occur due to a)Cash flows from operating activities b)Cash flows from investing activities c)Cash flows from financing activities LO 4

36. 36 LO 4 EXHIBIT 7

37. 37  Statement of cash flows linked to cash on balance sheet  Net income from income statement linked to retained earnings statement  Retained earnings linked to balance sheet in stockholders’ equity INTEGRATED FINANCIAL STATEMENTS LO 4

38. 38 Hershey Foods Corp Balance Sheet12/31/2004 Assets (Cash 55) = Liabilities + Equity (RE 3,469) $3,797=$2,708+$1,089 CASH FLOWS Operations $797 Investing Financing Decrease Cash 1/1 115 Cash 12/31 55 INCOME STATEMENT Revenues $4, 429 Expenses 3,838 Net Income $ 591 RETAINED EARNINGS 1/1 $3,469 +NI 591 -Div 386 12/31 $3,469 LO 4 EXHIBIT 8

39. 39 LEARNING OBJECTIVE 5 Describe 8 accounting concepts underlying financial reporting.

40. 40 ACCOUNTING CONCEPTS  Generally accepted accounting principles (GAAP) LO 5 Business Entity Concept Cost Concept Going Concern Matching Concept Objectivity Concept Unit of Measure Concept Adequate Disclosure Concept Accounting Period Concept

41. 41  Applies accounting to a specific entity  Hershey  For profit corporation  Separate from accounting for other entities LO 5 BUSINESS ENTITY CONCEPT

42. 42 COST CONCEPT  Amount initially entered into accounting records for purchases  Cost of Hershey’s land LO 5

43. 43 GOING CONCERN CONCEPT  Business expects to continue in operations for an indefinite period of time  Hershey plans to build on land in future LO 5

44. 44 MATCHING CONCEPT  Expenses for a period are matched with revenue they generate  Hershey subtracts expenses from revenues on income statement LO 5

45. 45 OBJECTIVITY CONCEPT  Entries into accounting records based on objective evidence  Hershey’s bank statements support entries in cash account LO 5

46. 46 UNIT OF MEASURE CONCEPT  All economic data recorded in dollars  Hershey presents financial statements in dollars LO 5

47. 47 ADEQUATE DISCLOSURE CONCEPT  Financial statements include all relevant data needed to understand financial condition and performance  Hershey provides other disclosures in footnotes LO 5

48. 48 ACCOUNTING PERIOD CONCEPT  Economic data collected for a period of time in preparation of  Hershey’s income statement  Hershey’s retained earnings  Hershey’s cash flow statement LO 5

49. 49 RESPONSIBLE REPORTING  Reliability of financial reporting important  To economy  For ability of business to raise money from investors  Stockholders  Creditors LO 5

50. 50 THE END CHAPTER 1