2. 1-1 A CCOUNTING A ND I TS U SE I N B USINESS D ECISIONS CHAPTER 1 [After listening to the lecture comments for this slide, click anywhere on the slide to continue.]

3. 1-2 The Body of Accounting Knowledge [For all slides, click anywhere on the slide to continue.] Inverted Pyramid

4. 1-3 Inverted Pyramid The Body of Accounting Knowledge Chapter 1

5. 1-4 entity For accounting purposes, each business organization, or entity, has an existence separate from its owner(s). The Business Entity Concept

6. 1-5 Forms of Businesses Single Proprietorship PartnershipCorporation

7. 1-6 Single Proprietorships l One owner - the simplest possible form of business

8. 1-7 Single Proprietorships l One owner - the simplest possible form of business l Is not considered a separate legal entity.

9. 1-8 Single Proprietorships l One owner - the simplest possible form of business l Is not considered a separate legal entity. l Many other textbooks start with this form and then move on to corporations.

10. 1-9Partnerships l Two or more owners l Also not considered a separate legal entity. l Are not covered in this course. u Advanced accounting

11. 1-10Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. Owners

12. 1-11Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. board of directors u The owners’ interests are represented by the board of directors. Owners Board of Directors

13. 1-12Corporations l Usually there are many owners. l Usually the owners do not exercise direct control over the company. board of directors u The owners’ interests are represented by the board of directors. l Reason used throughout this text. Owners Board of Directors

14. 1-13 l A corporation is considered a separate legal entity. u pays taxes, can sue and be sued, and is subject to legal penalties. u More on this in Chapter 12. l Stockholders get dividends from the corporation. l What are dividends?  Distributions of profits to owners Corporations Owners

15. 1-14 Three Types of Businesses Service Businesses (Chapters 1-4) Merchandising Businesses (Chapters 16-17) Manufacturing Businesses (Last 2/3 of 2nd semester) Examples of each?

16. 1-15Terminology l Profitability: The ability to generate income. l Solvency: The ability to pay debts as they become due. l Why are they important? Ostensibly, they are the primary objectives of every business l Profitability: The ability to generate income. l Solvency: The ability to pay debts as they become due. l Why are they important? Ostensibly, they are the primary objectives of every business

17. 1-16 The Four Basic Financial Statements Which two are the most important? Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows

18. 1-17 Why are Income Statement and Balance Sheet most important? l Because they communicate the profitability and solvency. l Which does which?   Income Statement - Profitability   Balance Sheet - Solvency l Can each be represented with an equation? l Because they communicate the profitability and solvency. l Which does which?   Income Statement - Profitability   Balance Sheet - Solvency l Can each be represented with an equation?

19. 1-18 Inflows of assets resulting from the sale of products or services. Income Statement Model Net Income = Revenues - Expenses

20. 1-19 Costs incurred to produce revenues or, Assets used up in the process of earning revenues. Costs incurred to produce revenues or, Assets used up in the process of earning revenues. Income Statement Model Net Income = Revenues - Expenses

21. 1-20 NET INCOME results when Revenues exceed Expenses for a given period. Income Statement Model Net Income = Revenues - Expenses Caution! Must use the correct accounting definitions! Not yours, not Webster’s and not one from Economics class.

22. 1-21 NET LOSS results when Expenses exceed Revenues for a given period. Income Statement Model Net Loss = Revenues - Expenses

23. 1-22 Balance Sheet Model LiabilitiesLiabilities Stockholders’ Equity AssetsAssets

24. 1-23 Balance Sheet Model Assets = Liabilities + Stockholders’ Equity Things of value owned by the business. Debts owed by the business. (i.e., the creditors’ claims against the assets) Debts owed by the business. (i.e., the creditors’ claims against the assets) Owners’ interest in the business. (i.e., the owners’ claims against the assets) Owners’ interest in the business. (i.e., the owners’ claims against the assets)

25. 1-24 Components of Stockholders’ Equity  Capital stock u Amount the owners have invested in the corporation.  Retained earnings u Net income earned since the beginning of the company, less any dividends paid.  Capital stock u Amount the owners have invested in the corporation.  Retained earnings u Net income earned since the beginning of the company, less any dividends paid.

26. 1-25 Balance Sheet Model Assets = Liabilities + Stockholders’ Equity Retained Earnings Capital Stock Dividends Net Income - +

27. 1-26 Balance Sheet Model _____Sources of assets_____ Why is it called a “Balance Sheet”? Basic algebra Assets = Liabilities + Stockholders’ Equity

28. 1-27 Balance Sheet Model Equities (Claims against the assets) Note, however, that you cannot “tag a dollar”! Assets = Liabilities + Stockholders’ Equity

29. 1-28 Timing of Balance Sheet and Income Statement 1-112-31 1998 Income Statement: For the year ended 12-31 Balance Sheet: At 12-31

30. 1-29 Financial Statements Covered This Semester l Income Statement l Statement of Retained Earnings u Simple example l Balance Sheet u Two types Horizontal and vertical l Income Statement l Statement of Retained Earnings u Simple example l Balance Sheet u Two types Horizontal and vertical 19

31. 1-30 Statement of Retained Earnings l Links the Income Statement with the Balance Sheet l Summarizes changes in Retained Earnings (R/E) for the period l Links the Income Statement with the Balance Sheet l Summarizes changes in Retained Earnings (R/E) for the period

32. 1-31 Statement of Retained Earnings: More Complex Example (p. 20) HEADING R/E - Beginning of Period$ $$$ Add: Net Income for for the Period$$$ Subtract: Dividends for the Period$$$ R/E - End of Period$ $$$

33. 1-32 Retained Earnings Model B/R/E + NI - Dividends = E/R/E

34. 1-33 This assumes that the company in fact has net income. B/R/E + NI - Dividends = E/R/E Retained Earnings Model

35. 1-34 If the company does not have net income, subtract the net loss. B/R/E - NL - Dividends = E/R/E Retained Earnings Model

36. 1-35 B/R/E + NI - Dividends = E/R/E A dividend is a distribution of income to the owners of the corporation. Retained Earnings Model

37. 1-36 The Financial Statement NOT Studied This Semester l Statement of Cash Flows l At this point, simply know that it tells where cash came from and where it went. u “Where got, where gone” l Statement of Cash Flows l At this point, simply know that it tells where cash came from and where it went. u “Where got, where gone”

38. 1-37 Balance Sheet Comparison Corporation vs. Proprietorship (See Appendix, pp. 33-34) CORPORATION PROPRIETORSHIP Stockholders' Equity: Owner's Equity: Capital stock $ 100,000 Smith, Capital $150,000 Retained earnings 50,000 ______ Total equity $150,000 Total equity $ 150,000

39. 1-38 ROLL ‘EM ! Video #2Video #1

40. 1-39 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l P. 23 “Underlying Assumptions” u Only know business entity concept for now

41. 1-40 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-30 Transactions? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-30 Transactions?

42. 1-41 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course

43. 1-42 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...?

44. 1-43 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue? l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue?

45. 1-44 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue? l P. 30 - One more transaction l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue? l P. 30 - One more transaction

46. 1-45 Final Points l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue? l P. 30 - One more transaction l P. 31 - Analyzing and Using Fin. Results l P. 23 “Underlying Assumptions” u Only know business entity concept for now l Don’t read the chapters!    Questions on pp. 23-28 Transactions? l P. 26 - Subsequent use of Summary of Transactions in this course l P. 27 - Transaction 1b - Why...? l P. 27 - Transaction 2b - Revenue? l P. 30 - One more transaction l P. 31 - Analyzing and Using Fin. Results

47. 1-46Caution! One final caution, especially for those who have had some prior accounting u High School One course Two courses u College Took it and dropped the course Took it and failed the course One final caution, especially for those who have had some prior accounting u High School One course Two courses u College Took it and dropped the course Took it and failed the course

48. 1-47 That’s the end of the topic, Bub! Did you get all that?