© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Fundamental Accounting Principles Wild/Larson/Chiappetta 18th Edition

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Chapter 1 Accounting in Business

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Conceptual Chapter Objectives C1: Explain the purpose and importance of accounting in the information age C2: Identify users and uses of accounting C3: Identify opportunities in accounting and related fields C4: Explain why ethics are crucial in accounting C5: Explain the meaning of GAAP, and define and apply several key accounting principles C6: Appendix 1B: Identify and describe the three major activities in organizations

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Analytical Chapter Objectives A1: Define and interpret the accounting equation and each of its components A2: Analyze business transactions using the accounting equation A3: Compute and interpret return on assets A4: Appendix 1A: Explain the relation between return and risk

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Procedural Chapter Objectives P1: Identify and prepare basic financial statements and explain how they interrelate

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Identifies Records Communicates Relevant Reliable Comparable Importance of Accounting Accounting is a system that information that is to help users make better decisions. C1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin  Identifying Business Activities  Recording Business Activities  Communicating Business Activities Accounting Activities C 1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers/Directors Internal Auditors Sales Staff Budget Officers Controllers C 2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Users of Accounting Information External Users Financial accounting provides external users with financial statements. Internal Users Managerial accounting provides information needs for internal decision makers. C 2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Opportunities in Accounting Financial Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Preparation Analysis Auditing Regulatory Consulting Planning Criminal investigation Managerial General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy General accounting Cost accounting Budgeting Internal auditing Consulting Controller Treasurer Strategy Taxation Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate plans Accounting- related Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers Lenders Consultants Analysts Traders Directors Underwriters Planners Appraisers FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs FBI investigators Market researchers Systems designers Merger services Business valuation Human services Litigation support Entrepreneurs C 3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Accounting Jobs by Area C 3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics Ethics—A Key Concept C 4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin  Identify ethical concerns  Analyze options  Make ethical decision Use personal ethics to recognize ethical concern. Consider all good and bad consequences. Choose best option after weighing all consequences. Guidelines for Ethical Decisions C 4

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Financial accounting practice is governed by concepts and rules known as generally accepted accounting principles (GAAP). Generally Accepted Accounting Principles Relevant Information Affects the decision of its users. Reliable Information Is trusted by users. Comparable Information Is helpful in contrasting organizations. C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The Securities and Exchange Commission is the government group that establishes reporting requirements for companies that issue stock to the public. Setting Accounting Principles Financial Accounting Standards Board is the private group that sets both broad and specific principles. C 5 The International Accounting Standards Board (IASB) issues International Financial Reporting Standards that identify preferred accounting practices.

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Principles of Accounting Now Future Going-Concern Principle Reflects assumption that the business will continue operating instead of being closed or sold. Cost Principle Accounting information is based on actual cost. Objectivity Principle Accounting information is supported by independent, unbiased evidence. C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Principles of Accounting Revenue Recognition Principle 1.Recognize revenue when it is earned. 2.Proceeds need not be in cash. 3.Measure revenue by cash received plus cash value of items received. Monetary Unit Principle Express transactions and events in monetary, or money, units. Business Entity Principle A business is accounted for separately from other business entities, including its owner. C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Business Entity Forms Sole Proprietorship Partnership Corporation C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin * Proprietorships and partnerships that are set up as LLCs provide limited liability. Characteristics of Businesses * * C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it capital stock. Corporation C 5

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Accounting Equation A1 Assets = Liabilities + Equity EQUITY

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Sarbanes-Oxley Act Also known as SOX Passed by Congress to help curb financial abuses at companies that sell stock to the public Requires accounting oversight and stringent internal controls Penalties include stock market delisting and criminal prosecution

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets A1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors’ claims on assets Liabilities A1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin CAPITAL Owner Investments Equity A1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Liabilities Equity Assets =+ Expanded Accounting Equation Revenues Expenses Owner Capital Owner Withdrawals __ ++ __ Owner's Equity Liabilities Equity Assets =+ A1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Equation The accounting equation MUST remain in balance after each transaction. Liabilities Equity Assets =+ A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Owner Capital (equity) J. Scott invests $20,000 cash to start the business. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis J. Scott invests $20,000 cash to start the business. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Purchased supplies paying $1,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Purchased equipment for $15,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Supplies (asset) (2) Equipment (asset) (3) Accounts Payable (liability) Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Borrowed $4,000 from 1st American Bank. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Borrowed $4,000 from 1st American Bank. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Now, let’s look at transactions involving revenue, expenses and withdrawals. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Provided consulting services receiving $3,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Provided consulting services receiving $3,000 cash. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Salaries expense (equity) Transaction Analysis Paid salaries of $800 to employees. Remember that the balance in the salaries expense account actually increases. But, equity decreases because expenses reduce equity. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Remember that expenses decrease equity. Paid salaries of $800 to employees. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Withdrawals (equity) Transaction Analysis A withdrawal of $500 is made by the owner. Remember that the withdrawal account actually increases. But, total equity decreases because the withdrawal reduces equity. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Transaction Analysis Remember that withdrawals decrease equity. A withdrawal of $500 is made by the owner. A2

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Financial Statements Let’s prepare the Financial Statements reflecting the transactions we have recorded. 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows 1.Income Statement 2.Statement of Owner’s Equity 3.Balance Sheet 4.Statement of Cash Flows P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Net income is the difference between Revenues and Expenses. The 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. Income Statement P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The net income of $2,200 increases Owner's Equity by $2,200. Statement of Owner’s Equity P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin The Balance Sheet describes a company’s financial position at a point in time. Balance Sheet P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin Statement of Cash Flows P1

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin ROA is viewed as an indicator of operating efficiency. Return on Assets (ROA) Net income Average total assets Return on assets = A3

© The McGraw-Hill Companies, Inc., 2007 McGraw-Hill/Irwin End of Chapter 1