© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Fundamental Accounting Principles 17 th Edition Larson Wild Chiappetta

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting in Business Chapter 1 1

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin  Identifying Business Activities  Recording Business Activities  Communicating Business Activities Accounting Activities

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Users of Accounting Information External Users Lenders Shareholders Governments Consumer Groups External Auditors Customers Internal Users Managers Officers Internal Auditors Sales Staff Budget Officers Controllers

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 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 planning Preparation Planning Regulatory Investigations Consulting Enforcement Legal services Estate planning 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

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Accounting Jobs by Area

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Beliefs that distinguish right from wrong Accepted standards of good and bad behavior Ethics Ethics—A Key Concept

© The McGraw-Hill Companies, Inc., 2005 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 Decision Making

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Business Entity Forms Proprietorship Partnership Corporation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin * * Proprietorships and partnerships that are set up as LLC’s provide limited liability. Characteristics of Businesses Exh. 1.8 *

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Owners of a corporation are called shareholders (or stockholders). When a corporation issues only one class of stock, we call it common stock (or capital stock). Corporation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Assets Liabilities & Equity Accounting Equation Liabilities Equity Assets =+

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Land Equipment Buildings Cash Vehicles Store Supplies Notes Receivable Accounts Receivable Resources owned or controlled by a company Assets

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Taxes Payable Wages Payable Notes Payable Accounts Payable Creditors’ claims on assets Liabilities

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Owner’s claims on assets Owner’s claims on assets Revenues Owner Investments Owner Withdrawals Expenses Equity

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Liabilities Equity Assets =+ Expanded Accounting Equation Revenues Expenses Owner Capital Owner Withdrawals _ + _

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounting equation must remain in balance after each transaction. Liabilities Equity Assets =+ Transaction Analysis Equation

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) J. Scott, Capital (equity) J. Scott, the owner, contributed $20,000 cash to start the business. Transaction Analysis

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis J. Scott, the owner, contributed $20,000 cash to start the business.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Supplies (asset) Transaction Analysis Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Purchased supplies paying $1,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Equipment (asset) Transaction Analysis Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Purchased equipment for $15,000 cash.

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Purchased Supplies of $200 and Equipment of $1,000 on account.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Notes payable (liability) Transaction Analysis Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Borrowed $4,000 from 1st American Bank.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis The balances so far appear below. Note that the Balance Sheet Equation is still in balance. Now let’s look at transactions involving revenue, expenses and withdrawals.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) Revenues (equity) Transaction Analysis Rendered consulting services receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Rendered consulting services receiving $3,000 cash.

© The McGraw-Hill Companies, Inc., 2005 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 actually decreases because expenses reduce equity.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Remember that expenses decrease equity. Paid salaries of $800 to employees.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The accounts involved are: (1) Cash (asset) (2) J. Scott, Withdrawals (equity) Transaction Analysis J. Scott withdrew $500 from the business for personal use. Remember that the balance in the J. Scott, Withdrawals account actually increases. But, equity actually decreases because withdrawals reduce equity.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Transaction Analysis Remember that withdrawals decrease equity. J. Scott withdrew $500 from the business for personal use.

© The McGraw-Hill Companies, Inc., 2005 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

© The McGraw-Hill Companies, Inc., 2005 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.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The net income of $2,200 increases Scott’s capital by $2,200. The Statement of Owner’s Equity explains changes in equity from net income (or net loss) and from owner investments and withdrawals for a period of time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The Balance Sheet describes a company’s financial position at a point in time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin The Statement of Cash Flows identifies cash inflows and cash outflows over a period of time.

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin Net income ÷ Average total assets ROA is viewed as an indicator of operating efficiency. Return on Assets (ROA)

© The McGraw-Hill Companies, Inc., 2005 McGraw-Hill/Irwin End of Chapter 1