1. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version Introduction to Accounting and Business Chapter 1

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. BOOKKEEPING VS. ACCOUNTING

3. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Prepare source documents for all transactions, operations, and other activities and developments that should be recorded Design source documents that specify which approvals and sign- offs are required and the detailed information that should be recorded

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Enter in source documents the financial effects(and other relevant details that may apply) of transactions and other events Establish specific rules and methods for measuring financial effects of transactions and other events

5. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Make original entries of financial effects into journals and specific accounts, file source documents, and build accounting database Establish formal chart of accounts and classification scheme for the accounts

6. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Perform end-of period procedures, including adjusting entries and correcting errors Perform oversight, review, and approval of adjustments and error corrections

7. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Compile the adjusted trial balance, which is a complete listing of accounts with up- to-date and accurate balances at the end of the period Prepare and distribute: Internal accounting reports to managers of business Tax returns to government agencies External financial statements reported outside the business to its investors and creditors

8. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Bookkeeping Close the accounts for the period just ended, and prepare the accounts for the next period (especially important at the end of the fiscal year) Sign off and give final approval to closing the books, and prepare for the next period if any changes need to be made

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 1 1.Describe the nature of a business, the role of accounting, and ethics in business.

10. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Nature of Business and Accounting  A business is an organization in which basic resources (inputs), such as materials and labor, are assembled and processed to provide goods or services (outputs) to customers. LO 1

11. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

13. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

14. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 1 Nature of Business and Accounting  The objective of most businesses is to earn a profit.  Profit is the difference between the amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services.

15. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. There are three types of business organizations Proprietorship Partnership Corporation

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Proprietorship  A proprietorship is owned by one individual.  They are easy and cheap to organize.  Resources are limited to those of the owner.  Used by small businesses. LO 1

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Advantages Ease in organizing Low cost of organizing Disadvantage Limited source of financial resources Unlimited liability Joe’s Proprietorship

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Partnership  A partnership is similar to a proprietorship except that it is owned by two or more individuals.  Combines the skills and resources of more than one person. LO 1

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Joe and Marty’s Advantages More financial resources than a proprietorship. Additional management skills. Disadvantage Unlimited liability. Partnership

20. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Corporation  A corporation is organized under state or federal statutes as a separate legal taxable entity.  Corporations generate 90% of business revenues.  Ownership is divided into shares, called stock.  Issues stock.  Used by large firms. LO 1

21. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Advantage The ability to obtain large amounts of resources by issuing stocks. Disadvantage Double taxation. J & M, Inc. Corporation

22. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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.

23. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

24. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

25. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. A business stakeholder is a person or entity having an interest in the economic performance of the business. Business Stakeholders

26. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

27. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Role of Accounting in Business  Accounting can be defined as an information system that provides reports to users about the economic activities and condition of a business.  a service activity. Its function is to provide quantitative information primarily financial in nature about economic activities that is intended to be useful in making economic decision. LO 1

28. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 Assess stakeholders’ informational needs. The Process of Providing Information STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government 1 Identify stake- holders.

29. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

30. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Prepare accounting reports for stakeholders. STAKEHOLDERS Internal: Owners, managers, employees External: Customers, creditors, government Accounting Information System The Process of Providing Information

31. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Profession of Accounting  The area of accounting that provides internal users with information is called managerial accounting or management accounting.  Managerial accountants employed by a business are employed in private accounting. LO 1

32. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Accounting  The area of accounting that provides external users with information is called financial accounting.  The objective of financial accounting is to provide relevant and timely information for the decision-making needs of users outside of the business.  General-purpose financial statements are one type of financial accounting report that is distributed to external users. LO 1

33. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Role of Ethics in Accounting and Business  The objective of accounting is to provide relevant, timely information for user decision making.  Accountants must behave in an ethical manner so that the information they provide users will be trustworthy and, thus, useful for decision making.  Ethics are moral principles that guide the conduct of individuals. LO 1

34. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Opportunities for Accountants  Accountants and their staff who provide services on a fee basis are said to be employed in public accounting.  Accountants employed by a business firm or a not-for-profit organization are said to be employed in private accounting.  Public accountants who have met a state’s education, experience, and examination requirements may become Certified Public Accountants (CPAs). LO 1

35. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 2 1.Describe the nature of a business, the role of accounting, and ethics in business. 2.Summarize the development of accounting principles and relate them to practice.

36. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Generally Accepted Accounting Principles  Financial accountants follow generally accepted accounting principles (GAAP) in preparing reports.  Within the Philippines, the Financial Reporting Standards Board (FRSB) has the primary responsibility for developing accounting principles. LO 2

37. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Generally Accepted Accounting Principles  The Securities and Exchange Commission (SEC), an agency of the Philippine government, has authority over the accounting and financial disclosures for companies whose shares of ownership (stock) are traded and sold to the public.  Philippine Accounting Standards (PAS) are adopted from International Accounting Standards (IAS). LO 2

38. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Business Entity Concept  Under the business entity concept, the activities of a business are recorded separately from the activities of its owners, creditors, or other businesses. LO 2

39. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Concept  Under the cost concept, amounts are initially recorded in the accounting records at their cost or purchase price. LO 2

40. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Concepts  The objectivity concept requires that the amounts recorded in the accounting records be based on objective evidence.  Only the final agreed-upon amount is objective enough to be recorded in the accounting records. LO 2  The unit of measure concept requires that economic data be recorded in dollars.

41. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 3 1.Describe the nature of a business, the role of accounting, and ethics in business. 2.Summarize the development of accounting principles and relate them to practice. 3.State the accounting equation and define each element of the equation.

42. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The Accounting Equation  The resources owned by a business are its assets.  The rights of creditors are the debts of the business and are called liabilities.  The rights of the owners are called owner’s equity.  The equation Assets = Liabilities + Owner’s Equity is called the accounting equation. LO 3

43. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The resources owned by a business Assets = Liabilities + Owner’s Equity The Accounting Equation LO 3 The rights of creditors are the debts of the business The rights of the owners

44. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 4 1.Describe the nature of a business, the role of accounting, and ethics in business. 2.Summarize the development of accounting principles and relate them to practice. 3.State the accounting equation and define each element of the equation. 4.Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation.

45. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Business Transaction  A business transaction is an economic event or condition that directly changes an entity’s financial condition or its results of operations. LO 4

46. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 1, 2011, Chris Clark begins a business that will be known as NetSolutions.

47. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 1, 2011, Chris Clark deposited P25,000 in a bank account in the name of NetSolutions. Transaction A LO 4

48. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 5, 2011, NetSolutions paid P20,000 for the purchase of land as a future building site. LO 4 Transaction B

49. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 10, 2011, NetSolutions purchased supplies for P1,350 and agreed to pay the supplier in the near future. LO 4 Transaction C

50. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Transaction C  The liability created by a purchase on account is called an account payable.  Items such as supplies that will be used in the business in the future are called prepaid expenses, which are assets. LO 4

51. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Transaction D LO 4 On November 18, 2011, NetSolutions received cash of P7,500 for providing services to customers. A business earns money by selling goods or services to its customers. This amount is called revenue.

52. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.  Revenue from providing services is recorded as fees earned.  Revenue from the sale of merchandise is record as sales.  Other examples of revenue include rent, which is recorded as rent revenue, and interest, which is recorded as interest revenue.  An account receivable is a claim against a customer, which is an asset. Transaction D LO 4

53. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 30, 2011, NetSolutions paid the following expenses: wages, P2,125; rent, P800; utilities, P450; and miscellaneous, P275. Transaction E LO 4

54. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. LO 4 Transaction E During the month, NetSolutions spent cash or used up other assets in earning revenue. Assets used in this process of earning revenue are called expenses.

55. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 30, 2011, NetSolutions paid creditors on account, P950. Transaction F LO 4

56. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 30, 2011, Chris Clark determined that the cost of supplies on hand at the end of the period was P550. Transaction G LO 4

57. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. On November 30, 2011, Chris Clark withdrew P2,000 from NetSolutions for personal use. Transaction H LO 4

58. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Owner’s withdrawals Expenses Decreased by Owner’s Equity Effects of Transactions on Owner’s Equity Increased by Owner’s investments Revenues Net income

59. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 5 1.Describe the nature of a business, the role of accounting, and ethics in business. 2.Summarize the development of accounting principles and relate them to practice. 3.State the accounting equation and define each element of the equation. 4.Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 5.Describe the financial statements of a proprietorship and explain how they interrelate.

60. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial Statements LO 5  After transactions have been recorded and summarized, reports are prepared for users. The accounting reports providing this information are called financial statements.

61. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Income Statement (Statement of Comprehensive Income)  The income statement reports the revenues and expenses for a period of time, based on the matching concept.  The matching concept is applied by “matching” the expenses incurred during a period with the revenue that those expenses generated.  The excess of the revenue over the expenses is called net income, net profit, or earnings. If expenses exceed revenue, the excess is a net loss. LO 5

62. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Statement of Owner’s Equity and the Balance Sheet  The statement of owner’s equity reports the changes in the owner’s equity for a period of time.  It is prepared after the income statement because the net income or net loss for the period must be reported in this statement. LO 5  A balance sheet (Statement of Financial Position) is a list of the assets, liabilities, and owner’s equity as of a specific date.

63. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Statement of Cash Flows  A statement of cash flows is a summary of the cash receipts and cash payments for a specific period of time.  It consists of three sections: (1) operating activities (2) investing activities (3) financing activities LO 5

64. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fees earnedP7 500 00 Operating expenses: Rent expense P 2 125 00 Wages expense 800 00 Supplies expense 450 00 Utilities expense 275 00 Miscellaneous expense Total operating expenses P 1 135 00 NetSolutions Income Statement For the Month Ended November 30, 2011 800 00 Net incomeP3 050 00 To the statement of owner’s equity

65. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chris Clark, capital, November 1, 2011p 0 NetSolutions Statement of Owner’s Equity For the Month Ended November 30, 2011 Investment on November 1P25 000 00 Net income for November3 050 00 P28 050 00 Less withdrawals 2 000 00 Increase in owner’s equity26 050 00 Chris Clark, capital, November 30, 2011P26 050 00 From the income statement To the balance sheet

66. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Assets Liabilities NetSolutions Balance Sheet November 30, 2011 CashP 5 900 00Accounts PayableP 400 00 Supplies550 00 Owner’s Equity Land20 000 00Chris Clark, cap.26 050 00 Total liabilities and Total assetsP26 450 00 owner’s equityP26 450 00 From the statement of owner’s equity This balance sheet presented using the account form

67. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. When the balance sheet displays the liabilities and owner’s equity below the assets, the report form is being used.

68. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cash flows from operating activities: Cash received from customersP 7 500 00 Deduct cash payments for expenses and payments to creditors4 600 00 Net cash flow from operating activities2 900 00 Cash flows from investing activities: Cash payment for acquisition of land(20 000 00 Cash flows from financing activities: Cash received as owner’s investmentP25 000 00 Deduct cash withdrawal by owner2 000 00 Net cash flow from financing activities23 000 00 Net cash flow and Nov. 30, 2011 cash bal.P 5 900 00 NetSolutions Statement of Cash Flows For the Month Ended November 30, 2011 Should match Cash on the balance sheet )

69. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cash Flows  The cash flows from operating activities section reports a summary of cash receipts and cash payments from operations. LO 5  The cash flows from investing activities section reports the cash transactions for the acquisition and sale of relatively permanent assets.  The cash flows from financing activities section reports the cash transactions related to cash investments by the owner, borrowings, and withdrawals by the owner.

70. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objective 6 1.Describe the nature of a business, the role of accounting, and ethics in business. 2.Summarize the development of accounting principles and relate them to practice. 3.State the accounting equation and define each element of the equation. 4.Describe and illustrate how business transactions can be recorded in terms of the resulting change in the elements of the accounting equation. 5.Describe the financial statements of a proprietorship and explain how they interrelate. 6.Describe and illustrate the use of the ratio of liabilities to owner’s equity in evaluating a company’s financial condition.

71. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The ratio of liabilities to owner’s equity allows owners like Chris Clark to analyze the firm’s ability to withstand poor business conditions. Tools for Financial Analysis and Interpretation

72. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ratio of Liabilities to Owner’s Equity LO 6 Ratio of Liabilities to Owner’s Equity = Total Liabilities Total Owner’s Equity (or Total Stockholders’ Equity) Ratio of Liabilities to Owner’s Equity = $400 $26,050 = 0.015

73. Prepared by: C. Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Student Version Introduction to Accounting and Business The End