ACCOUNTING IN BUSINESS Chapter 1 Chapter 1: Accounting in business.

Importance of Accounting Identifying Select transactions and events Recording Input, measure and classify Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable information about an organization’s business activities. Identifying business activities requires selecting transactions and events relevant to an organization. Recording business activities requires keeping a chronological log of transactions and events measured in dollars and classified and summarized in a useful format. Communicating business activities requires preparing accounting reports such as financial statements. It also requires analyzing and interpreting such reports. Communicating Prepare, analyze and interpret

Users of Accounting Information会计信息的使用者 Internal Users External Users Accountants prepare reports for both external and internal users. External users of accounting information are not directly involved in running the organization. Examples of external users are shareholders (investors), lenders, governments, consumer groups, and the external auditors. Internal users of accounting information are those directly involved in managing and operating an organization. They use the information to help improve the efficiency and effectiveness of an organization. Examples of internal users are managers, officers/directors, internal auditors, sales staff, budget officers and controllers. Lenders Shareholders Governments Consumer Groups External Auditors Customers Managers Officers/Directors Internal Auditors Sales Staff Budget Officers Controllers

Users of Accounting Information Internal Users External Users Financial accounting is the area of accounting aimed at serving external users by providing them with financial statements. Managerial accounting is the area of accounting that serves the decision-making needs of internal users. Financial accounting provides external users with financial statements. 财务会计 Managerial accounting provides information needs for internal decision makers. 管理会计

Ethics - A Key Concept 道德 Make ethical decision Identify ethical concerns Analyze options You have faced ethical situations in school and will face similar situations at work. We should be capable of identifying ethical concerns and analyzing our options, that is, what is the right or wrong thing to do. Making an ethical decision means we choose the best option available under the circumstances. Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences.

Generally Accepted Accounting Principles公认会计准则 Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Relevant Information 相关 Affects the decision of its users. Reliable Information 可靠 Is trusted by users. Financial accounting is governed by a set of rules we call Generally Accepted Accounting Principles, or GAAP for short. Generally accepted accounting principles identify three major characteristics of information. First, the information must be relevant. Relevant information impacts the decision of the informed user for financial information. Second, the information must be reliable. Finally, the information must be comparable. Comparability helps us compare financial information from one period with that of the next period. Comparable Information 可比较 Is helpful in contrasting organizations.

Setting Accounting Principles 制定会计准则 Financial Accounting Standards Board is the private group that sets both broad and specific principles. 财务会计准则委员会 The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. 证券交易委员会 The Financial Accounting Standards Board is recognized as the group in the private sector that makes specific accounting principles. If an accountant departs from the principles established by the FASB, proper disclosure of the departure must be made. In the public sector, the Securities and Exchange Commission has the authority to establish accounting principles for companies reporting to the agency. Currently, the Securities and Exchange Commission has accepted all pronouncements of the FASB for use by reporting companies. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices to create harmony among accounting practices of different countries. The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices to create harmony among accounting practices of different countries. 国际会计准则委员会

Principles and Assumptions of Accounting会计假设和原则 Revenue Recognition Principle 收入确认 Recognize revenue when it is earned. Proceeds need not be in cash. Measure revenue by cash received plus cash value of items received. Cost Principle 成本 Accounting information is based on actual cost. Actual cost is considered objective. Matching Principle 配比 A company must record its expenses incurred to generate the revenue reported. Full Disclosure Principle 充分揭示 A company is required to report the details behind financial statements that would impact users’ decisions. Listed on your screen are four fundamental principles of accounting. The revenue recognition principle states that revenue is to recognized when it is earned, that the revenue need not be in for form of cash and that we measure revenue by the cash received plus cash value of other items received. The cost principle tell us that accounting information is based upon actual cost incurred. We refer to this cost as historical cost. The matching principle dictates that expenses incurred by a company must be matched against revenue generated as a result of those expenses. The full disclosure principle states that a company is required to report the details behind the financial statements if the details so disclosed would impact the users’ decision making process. Most of the details are reported in the notes to the financial statements.

Principles and Assumptions of Accounting Now Future Going-Concern Assumption 持续经营 Reflects assumption that the business will continue operating instead of being closed or sold. Monetary Unit Assumption 货币单位 Express transactions and events in monetary, or money, units. Business Entity Assumption 会计主体 A business is accounted for separately from other business entities, including its owner. Time Period Assumption 会计分期 Presumes that the life of a company can be divided into time periods, such as months and years. Now we will look at four fundamental assumptions of accounting. The going-concern assumption states that, in the absence of information to the contrary, the business entity is assumed to continue operations into the foreseeable future. The monetary unit principle tells us that we will only record accounting information that can be expressed in monetary units, usually dollars in the United States. The business entity assumption tells us that we must separate out the transaction of individual owners of a business from those of the business. Finally, the time period assumption presumes that the life of a company can be divided into time periods such as months and years, and that useful reports can be prepared for those periods.

Forms of Business Entities 企业形式 Sole Proprietorship Partnership Corporation There are three general forms of business operations. A sole proprietorship is a business owned by just one individual. A partnership is owned by two or more individuals. Some partnerships have several thousand partners. A corporation is owned by individuals who normally are not active in the day-to-day operations of that business. For example, you may become an owner of IBM by purchasing shares of stock on the New York Stock Exchange. While you are a part owner, you do not necessarily work for IBM nor are active in the operations of the company.

Characteristics of Businesses * Here is a key summary of some of the various aspects of our three general type of businesses. Notice that a corporation is a separate legal entity. That means it can sue and be sued in court. If you wish to sue a partnership, you must sue all the individual partners. You should also be aware that a corporation is a separate taxable entity. The income or loss from proprietorships and partnerships are taxed as income or loss to the individuals involved. A corporation has a special tax return and tax schedule. A proprietorship or partnership may be set up as a limited liability corporation, or L L C. This form of business helps protect the assets of individual owners of the business entity. * Proprietorships and partnerships that are set up as LLCs provide limited liability.

Alleged Accounting Abuses Sarbanes-Oxley (SOX) Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that issue their stock to the public. Management must issue a report stating that internal control are effective. Auditors must verify the effectiveness of internal controls. Company Alleged Accounting Abuses Enron Inflating income, hid debt, and bribed officials WorldCom Understated expenses to inflate income and hid debt Fannie Mae Inflated income Adelphia Communications AOL Time Warner Inflated revenues and income Xerox Bristol-Myers Squibb Nortel Networds Understated expenses to inflate income Congress passed the Sarbanes-Oxley Act to help curb financial abuses at companies that issue their stock to the public. Management must issue a report stating that internal control are effective. Auditors must verify the effectiveness of internal controls. Here is a list of companies and the alleged accounting abuses. Many of these company actions lead directly to the passing of the Sarbanes-Oxley Act.

Expanded Accounting Equation会计等式 Liabilities Equity Assets = + Liabilities Equity Assets = + Revenues Expenses Owner Capital Owner Withdrawals _ + Equity for a noncorporate entity, commonly called owner’s equity, increases with owner investments and revenues and decreases with owner withdrawals and expenses. Here is a breakdown of the equity section of the accounting equation to show the mathematical signs we will be using to keep track of investments, withdrawals, revenues and expenses. Owner's Equity

Financial Statements财务报表 P1 Let’s prepare the Financial Statements reflecting the transactions we have recorded. Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows There are four fundamental financial statements used in accounting. 1. Income statement—describes a company’s revenues and expenses along with the resulting net income or loss over a period of time due to earnings activities. 2. Statement of owner’s equity—explains changes in equity from net income (or loss) and from any owner investments and withdrawals over a period of time. 3. Balance sheet—describes a company’s financial position (types and amounts of assets, liabilities, and equity) at a point in time. 4. Statement of cash flows—identifies cash inflows (receipts) and cash outflows (payments) over a period of time. The first financial statement that we prepare is the income statement. Let’s get started. 34

END OF CHAPTER 1 End of chapter 1.