Chapter One An Introduction to Accounting © 2015 McGraw-Hill Education.

Collecting and Organizing Information Accounting is an information system that reports on the economic activities and financial condition of a business or other organization. Business 1-2

LO Explain the role of accounting in society. LO 1

Role of Accounting in Society 1-4 Accounting provides information that is useful in answering questions about resource allocation. Should I invest money in IBM or General Motors?

Market-Based Allocations 1-5 A market is a group of people or entities organized to exchange items of value.

1-6

Market-Based Allocations 1-7 Common terms for the added value created in the transformation process: ProfitIncomeEarnings

Financial Resources 1-8 Conversion agents need financial resources (money) to establish and operate their businesses. InvestorsCreditors

Physical Resources 1-9 In their most primitive form, physical resources are called natural resources. Owners of physical resources seek to sell those resources to profitable businesses which are able to pay higher prices and make repeat purchases.

Labor Resources 1-10 Labor resources include both intellectual and physical labor. Workers seek relationships with businesses that have high earnings potential because these businesses are better able to pay high wages.

Types of Accounting Information 1-11 Financial Accounting Focused on the needs of external users Managerial Accounting Focused on the needs of internal users

Non-business Resource Allocation 1-12 Not all entities allocate resources based on profitability. Organizations that are not motivated by profit are called not-for-profit entities. Government, foundations, religious groups, the Peace Corps, and various benevolent organizations allocate resources based on humanitarian concerns.

1-13

Careers in Accounting 1-14 Private Accounting Certified Management Accountant Certified Internal Auditor Public Accounting Certified Public Accountant Audit services Tax services Consulting services

Measurement Rules 1-15 Accountants establish measurement and reporting rules that businesses use to facilitate communication. Generally Accepted Accounting Principles FASB

Reporting Entities 1-16 Financial accounting reports disclose the financial activities of particular individuals or organizations described as reporting entities. Each entity is treated as a separate reporting unit. Business Owner Bank

LO Construct an accounting equation and show how business events affect the equation. LO 2

Elements of Financial Statements 1-18 The elements represent broad categories. 1.Assets 2.Liabilities 3.Equity 4.Contributed Capital 5.Revenue 6.Expenses 7.Distributions 8.Net Income 9.Gains 10.Losses

Elements of Financial Statements Assets—Cash, Equipment, Buildings, Land 2.Liabilities 3.Equity 4.Contributed Capital 5.Revenue 6.Expenses 7.Distributions 8.Net Income 9.Gains 10.Losses Subclassifications of the elements are frequently called accounts. Accounts are reported in the financial statements.

Accounting Equation 1-20 Claims on the assets are from two sources: 1.Creditors (liabilities) 2.Investors or owners (equity).

Accounting Equation 1-21

Accounting Equation 1-22 Common Stock + Retained Earnings

1-23 Event 1: Rustic Camp Sites (RCS) was formed on January 1, 2014, when it acquired $120,000 cash from issuing common stock. 1.RCS increases assets (cash). 2.RCS increases stockholders’ equity (common stock). Asset Source Transaction Double-Entry Bookkeeping Recorded Twice

1-24 Event 2: RCS acquired an additional $400,000 of cash by borrowing from a creditor. 1.RCS increases assets (cash). 2.RCS increases liabilities (notes payable). Asset Source Transaction

1-25 Event 3: RCS paid $500,000 cash to purchase land. 1.RCS decreases assets (cash). 2.RCS increases assets (land). Asset Exchange Transaction

1-26 Event 4: RCS obtained $85,000 cash by leasing campsites to customers. 1.RCS increases assets (cash). 2.RCS increases stockholders’ equity (retained earnings). Asset Source Transaction revenues

1-27 Event 5: RCS paid $50,000 cash for operating expenses such as salaries, rent, and interest. 1.RCS decreases assets (cash). 2.RCS decreases stockholders’ equity (retained earnings). Asset Use Transaction expenses

1-28 Event 6: RCS paid $4,000 in cash dividends to its owners. 1.RCS decreases assets (cash). 2.RCS decreases stockholders’ equity (retained earnings). Asset Use Transaction dividends

1-29 Event 7: The land that RCS paid $500,000 to purchase had an appraised market value of $525,000 on December 31, Historical Cost Concept Requires that most assets be reported at the amount paid for them (their historical cost) regardless of increases in market value. Reliability Concept Information is reliable if it can be independently verified. Appraised values are opinions and will vary from appraiser to appraiser.

Recap: Types of Transactions 1-30 The described transactions have been classified into one of three categories: Asset Source Asset Exchange Asset Use Increase total assets, increase total claims Increase one asset, decrease another asset Decrease total assets, decrease total claims

Summary of Accounting Events 31

1-32 LO 5 Interpret information shown in an accounting equation. LO 3

The Right Side of the Accounting Equation 1-33 The right side of the accounting equation identifies the sources of the company’s assets, NOT their composition. The right side of the equation is NOT related to the amount of actual cash a company has on hand. View One

Two Views of the The Right Side of the Accounting Equation 1-34 Sources of the company’s assets. Stewardship means to protect and use assets for the benefit of the owners. Obligations of the company to return creditor assets. Commitments of the company to investor- provided assets. View Two View One

Retained Earnings and Cash 1-35 Retained Earnings does not represent Cash. So, Cash and Retained Earnings are needed to pay cash dividends. Retained Earnings limits the amount of cash dividends. Dividends are distributions of assets generated through earnings

Distributions in Business Liquidations 1-36 Creditors have Priority. If there are any assets left over, they are distributed to investors Going Concern Assumes that a business is able to continue operations into the foreseeable future.

1-37 LO 7 Classify business events as asset source, use, or exchange transactions. LO 4

Recap: Types of Transactions 1-38 The described transactions have been classified into one of three categories: Asset Source Asset Exchange Asset Use Increase total assets, increase total claims Increase one asset, decrease another asset Decrease total assets, decrease total claims

1-39 LO 8 Use general ledger account information to prepare four financial statements. LO 5

Preparing Financial Statements 1-40 Net Loss Accounting Period Matching Concept results when expenses exceed revenues. Revenues exceeded expenses. Income is measured for a span of time called the { Revenues are matched to expenses.

1-41 Preparing Financial Statements

1-42 Preparing Financial Statements equal Assets are displayed in order of liquidity.

1-43 Operating Investing Financing Preparing Financial Statements

1-44 LO 9 Explain the closing process. LO 6

The Closing Process 1-45 Transfers net income (or loss) and dividends to Retained Earnings. Establishes zero balances in all revenue, expense, and dividend accounts.

Temporary and Permanent Accounts 1-46 Temporary accounts track financial results for a limited period of time. Revenues Expenses Dividends Temporary Accounts Permanent Accounts Assets Liabilities Equity Permanent accounts track financial results from year to year.

1-47 LO 9 Record business events using a horizontal financial statements model. LO 7

Horizontal Financial Statements Model 1-48

Real World Financial Reports 1-49 Service Businesses Merchandising Businesses Manufacturing Businesses

Annual Reports 1-50 (1)Financial Statements (2)Notes (3)Auditor’s Report –Chapter 6 (4)Management’s Discussion and Analysis (MD&A) Traditionally, large companies have distributed expensive annual reports with many color photographs. Increasingly, however, companies are issuing more modest annual reports or are simply distributing their 10-K reports.

Special Terms in Real-World Reports 1-51 The financial statements of real-world companies include numerous items relating to advanced topics that are not covered in introductory accounting textbooks. However, we encourage you to look for annual reports in the library, from your employer, or on the Internet. The best way to learn accounting is to use it.

End of Chapter One 1-52