Chapter 1 Accounting and Business

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-2 What are the Basic Functions of Business?  Marketing  Human resources  Production and operations  Finance  Accounting and information systems

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-3 How do the Functions Use Accounting Information?  Marketing –Pricing, distribution costs  Human resources –Pay and fringe benefits, hiring costs  Production and operations –Production costs—actual and budgeted  Finance –Cost of borrowing, benefits expected

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-4 How has Business Evolved?  Sole proprietorship –One owner  Partnership –Two or more owners  Corporation –Many owners  Merchandising –Buy and sell products  Service –Provide service  Manufacturing –Make and sell products

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-5 How has Accounting Evolved?  Determination of wealth –What am I worth today  Determination of income –How has my wealth changed  On-going success –How is the business doing

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-6 What are the Characteristics of Business Today?  Customer-focused operations  Global markets  Advanced manufacturing and communications  eBusiness  Hybrid organizational structures

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-7 What are the Basic Concepts of Accounting?  Business entity –Keep business and personal records separate  Monetary unit –Maintain business records in currency  Going concern –Business will continue past the current period  Periodicity –Profits/losses must be determined periodically

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved. 1-8 What are the 5 Basic Elements of Accounting?  Asset –Right to use resources with future benefit  Liability –Obligation to transfer resources in the future to suppliers of goods and services  Owners’ equity –Net assets belong to owners

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Basic Elements Continued  Revenues (accrual basis) –Amounts earned from providing goods and services  Expenses (accrual basis) –Amounts incurred in an attempt to generate revenues

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What is GAAP?  Generally accepted accounting principles  Financial Accounting Standards Board –Current rule-making body –Standards –Concepts

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the Concepts Statements?  Concepts Statement #1 –Useful information for decision making  Concepts Statement #2 –Characteristics of accounting information  Concepts Statement #3 (superceded)  Concepts Statement #4 –Objectives for nonbusiness organizations

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Concepts Continued  Concepts Statement #5 –Financial statements  Concepts Statement #6 –Elements of financial statements  Concepts Statement #7 –Estimating value of future cash flows

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What Makes Information Useful?  Relevance –Capable of making a difference  Reliability –Dependable  Benefits > Costs –Benefits derived must be greater than cost  Materiality –Large enough to have an impact on a decision

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the 4 Basic Financial Statements and Auditors’ Report?  Income statement –Indicates revenues less expenses = net income for a period of time  Statement of cash flows –Indicates cash inflows and outflows from operating, investing, and financing activities for a period of time  Statement of owners’ equity –Indicates changes in owners’ equity for a period of time

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved Financial Statements Continued  Balance sheet –Indicates the ending balances of assets, liabilities, and owners’ equity at a point in time  Auditor’s report –Indicates whether the company followed GAAP when preparing its financial statements

McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved What are the Purposes of the Ratios?  Current ratio –Relationship between current assets and current liabilities  Debt to equity ratio –Relationship between liabilities and owners’ equity  Return on sales –Relationship between net income and sales