Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter 1 Business Decisions and Financial Accounting PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Fred Phillips, Ph.D., CA

Organizational Forms Partnership Business organization owned by two or more people. Each partner is personally liable for all debts of the business. Corporation A separate entity from both a legal and accounting perspective. Owners of corporations (stockholders) are not personally responsible for debts of the corporation. Sole Proprietorship Business organization owned by one person. The owner is personally liable for all debts of the business. 1-3

The Accounting System Business and Financing Activities Accounting System Accounting Reports FinancialManagerial External users (creditors, investors, etc.) Internal users (managers, etc.) Accounting is a system of analyzing, recording, summarizing and reporting the results of a business’s activities. 1-4

The Basic Accounting Equation Resources Owned... by the company Resources Owed... to creditors to stockholders Separate Entity Assumption Requires that a business’s financial reports include only the activities of the business and not those of its stockholders. Assets = Liabilities + Stockholders’ Equity 1-5

Assets Resources controlled by the company that have measurable value and are expected to provide future benefits to the company. Cash SuppliesFurniture Equipment 1-6

Liabilities Amounts owed by the business to creditors. Notes Payable Accounts Payable 1-7

Stockholders’ Equity Owners’ claim to the business resources. Stock Certificate Contributed Capital Retained Earnings 1-8

Revenues, Expenses and Net Income Revenues Sales of goods or services to customers. They are measured at the amount the business charges the customer. Expenses The costs of business necessary to earn revenues, including wages to employees, advertising, insurance, and utilities. Revenues – Expenses = Net Income 1-9

Dividends Distributions of a company’s earnings to its stockholders as a return on their investment. Dividends are not an expense. 1-10

Financial Statements Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows Financial statements are typically prepared in this order. 1-11

The Income Statement Reports the amount of revenues less expenses for a period of time. The unit of measure assumption states that results of business activities should be reported in an appropriate monetary unit. 1-12

The Statement of Retained Earnings Reports the way that net income and the distribution of dividends affected the financial position of the company during the period. 1-13

The Balance Sheet Reports at a point in time: 1.What a business owns (assets). 2.What it owes to creditors (liabilities). 3.What is left over for the owners of the company’s stock (stockholders’ equity). BASIC ACCOUNTING EQUATION Assets = Liabilities + Stockholders’ Equity 1-14

The Statement of Cash Flows Summarizes how a business’s operating, investing, and financing activities caused its cash balance to change over a particular period of time. 1-15

Relationships Among the Financial Statements Net income flows from the Income Statement to the Statement of Retained Earnings

Relationships Among the Financial Statements Ending Retained Earnings flows from the Statement of Retained Earnings to the Balance Sheet

Relationships Among the Financial Statements Cash on the Balance Sheet and Cash at End of Year on the Statement of Cash Flows agree

End of Chapter 1