Chapter 1

Define accounting vocabulary

1. Measures business activity 2. Processes data into reports 3. Communicates results to decision makers 3Copyright (c) 2009 Prentice Hall. All rights reserved.

 End product of accounting process  Report on business in monetary terms 4Copyright (c) 2009 Prentice Hall. All rights reserved.

Define the users of financial information

IndividualsBusinessesInvestors Creditors Taxing Authorities 6Copyright (c) 2009 Prentice Hall. All rights reserved.

Financial Accounting  Provides information for external decision makers ◦ Investors ◦ Creditors ◦ Taxing authorities Managerial Accounting  Provides information for internal decision makers ◦ Managers ◦ Individual business owners 7Copyright (c) 2009 Prentice Hall. All rights reserved.

Describe the accounting profession and the organizations that govern it

 Lucrative career with many opportunities  Certified Public Accountants (CPAs) ◦ Pass qualifying exam ◦ Meet education and/or experience requirements 9 Public Accounting – CPA Firms Private Accounting – Business & Other Organizations Copyright (c) 2009 Prentice Hall. All rights reserved.

Financial Accounting Standards Board Private organization that makes accounting standards FASB Securities & Exchange Commission Government agency that regulates the stock markets SEC American Institute of CPAs Private organization of public accountants AICPA Institute of Management Accountants Organization of private accountants IMA 10Copyright (c) 2009 Prentice Hall. All rights reserved.

Investors & creditors want reliable financial information Companies want to attract investors 11Copyright (c) 2009 Prentice Hall. All rights reserved.

 SEC requires companies to have financial statements examined by CPAs ◦ Auditors will provide an opinion on financial statements, if possible  Recent accounting scandals hurt investor confidence ◦ U.S. Government passed the Sarbanes-Oxley Act (SOX)  Criminal offense to falsify financial statements ◦ Also created the Public Companies Accounting Oversight Board  Watchdog of accounting profession 12Copyright (c) 2009 Prentice Hall. All rights reserved.

Code of Professional Conduct Guides CPAS in their work AICPA Standards of Ethical Conduct Sets standards for private accountants IMA 13Copyright (c) 2009 Prentice Hall. All rights reserved.

Identify the different types of business organizations

ProprietorshipsPartnerships Corporations Limited Liability Companies 15Copyright (c) 2009 Prentice Hall. All rights reserved.

ProprietorshipPartnershipCorporationLLC OwnersOneTwo or moreStockholders – usually many Members Life of Organization Limited by owner’s choice or death Indefinite Liability of owners for business debts Owner is personally liable Partners are personally liable Stockholders not personally liable Members are not personally liable 16Copyright (c) 2009 Prentice Hall. All rights reserved.

Delineate the distinguishing characteristics and organization of a proprietorship

Distinct from owners Separate Legal Entity The life of business is limited by the owner’s choice or the owner’s death No Continuous Life Owner has unlimited liability for the business’s debts Unlimited Liability of Owner 18Copyright (c) 2009 Prentice Hall. All rights reserved.

Owners not responsible for corporate debts Unification of Ownership and Management Not a separate taxable entity Income flows directly to the sole owner’s tax return, where he or she pays self- employment and income tax Business Taxation Minimal regulation is an advantage Government Regulation 19Copyright (c) 2009 Prentice Hall. All rights reserved.

 Incorporators obtain charter from the state  Charter authorizes corporation to: ◦ Issue stock ◦ Conduct business in accordance with state law and the corporation’s bylaws  Corporations begins to exist when stock is issued ◦ Stockholders vote on who will serve on Board of Directors 20Copyright (c) 2009 Prentice Hall. All rights reserved.

Stockholders elect Board of Directors who hire Officers of the corporation 21Copyright (c) 2009 Prentice Hall. All rights reserved.

Apply accounting concepts and principles

 Generally Accepted Accounting Principles ◦ Rules that govern accounting ◦ Based on a conceptual framework  Goal: ◦ To provide useful information to those making investment and lending decisions 23Copyright (c) 2009 Prentice Hall. All rights reserved.

Entity Concept ReliabilityCost Going Concern Monetary Unit 24Copyright (c) 2009 Prentice Hall. All rights reserved.

Entity Concept A business is separate from its owners Reliability Accounting information is accurate and free from bias Cost Assets are recorded at purchase price 25Copyright (c) 2009 Prentice Hall. All rights reserved.

Going concern Assumption that business will continue indefinitely Monetary Unit In the U.S. amounts are recorded in dollars The dollar is considered a stable unit of measure 26Copyright (c) 2009 Prentice Hall. All rights reserved.

Define and use the accounting equation

28 Economic Resources Claims to Economic Resources Assets = Liabilities + Owner’s equity Copyright (c) 2009 Prentice Hall. All rights reserved.

 Economic resources that have a future benefit  Examples: ◦ Cash ◦ Accounts receivable ◦ Merchandise inventory ◦ Furniture ◦ Land 29Copyright (c) 2009 Prentice Hall. All rights reserved.

 Liabilities ◦ Debts payable to outsiders ◦ Examples:  Accounts payable  Bank loans  Owners’ equity ◦ Owners’ claims to the assets of the business ◦ In a proprietorship owner’s equity 30Copyright (c) 2009 Prentice Hall. All rights reserved.

31 Assets = Liabilities + Owner’s equity Copyright (c) 2009 Prentice Hall. All rights reserved.

32 Capital + Net income - Withdrawals Revenues - Expenses Copyright (c) 2009 Prentice Hall. All rights reserved.

 Amounts earned by delivering goods or services to customers ◦ Sales revenue ◦ Service revenue ◦ Interest revenue ◦ Dividend revenue 33Copyright (c) 2009 Prentice Hall. All rights reserved.

 Outflows of assets or increasing liabilities in the course of delivering goods or services to customers ◦ Salary expense ◦ Rent expense ◦ Utilities expense ◦ Interest expense 34Copyright (c) 2009 Prentice Hall. All rights reserved.

AssetsLiabilitiesOwner’s equity Nice Cuts$ ?$25,000$43,000 Love Dry Cleaners 85,000?54,000 Hudson Gift and Cards 102,00049,000? 35 ? ? ?

AssetsLiabilitiesOwner’s equity Nice Cuts$ ?$25,000$43,000 Love Dry Cleaners 85,000?54,000 Hudson Gift and Cards 102,00049,000? 36 $68,000 31,000 53,000

Depict accounting for business transactions

 An event that affects the financial position of a particular entity  Can be recorded reliably  Every transaction impacts at least two items  The accounting equation balances before and after each transaction 38Copyright (c) 2009 Prentice Hall. All rights reserved.

39 AssetsLiabilitiesOwner’s Equity DateCash Accounts receivableSuppliesLand Accounts payable Marilyn Mansion, Capital Bal 2,500 1, ,000 4,00013,000 Assets = $17,000 Liabilities & Equity = $17,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

40 AssetsLiabilitiesOwner’s Equity DateCash Accounts receivableSuppliesLand Accounts payable Marilyn Mansion, Capital Bal 2,500 1, ,000 4,00013,000 (a) 10,000 Bal 12,500 1, ,000 4,00023,000 Assets = $27,000 Liabilities & Equity = $27,000 Copyright (c) 2009 Prentice Hall. All rights reserved.

41 AssetsLiabilitiesOwner‘s Equity DateCash Accounts receivableSuppliesLand Accounts payable Marilyn Mansion, Capital Bal 12,500 1, ,000 4,00023,000 (b) 1,100 Bal 13,600 1, ,000 4,000 24,100 Assets = $28,100 Liabilities & Equity = $28,100 Copyright (c) 2009 Prentice Hall. All rights reserved.

42 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 13,600 1, ,000 4,00024,100 (c) (4,000) Bal 9,600 1, , ,100 Assets = $24,100 Liabilities & Equity = $24,100 Copyright (c) 2009 Prentice Hall. All rights reserved.

43 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 9,600 1, ,000 24,100 (d) 700 Bal9,600 1, , ,100 Assets = $24,800 Liabilities & Equity = $24,800 Copyright (c) 2009 Prentice Hall. All rights reserved.

44 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 9,600 1, , ,100 (e) 600 (600) Bal 10, , ,100 Assets = $24,800 Liabilities & Equity = $24,800 Copyright (c) 2009 Prentice Hall. All rights reserved.

45 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 10, , ,100 (f) 1,700 Bal 11, , ,800 Assets = $26,500 Liabilities & Equity = $26,500 Copyright (c) 2009 Prentice Hall. All rights reserved.

46 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 11, , ,800 (g) 4,300 Bal 11,900 5, , ,100 Assets = $30,800 Liabilities & Equity = $30,800 Copyright (c) 2009 Prentice Hall. All rights reserved.

47 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 11,900 5, , ,100 (h) (1,000) (300) Bal 10,600 5, , ,800 Assets = $29,500 Liabilities & Equity = $29,500 Copyright (c) 2009 Prentice Hall. All rights reserved.

48 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 10,600 5, , ,800 (i) 100 (100) Bal 10,700 5, , ,800 Assets = $29,500 Liabilities & Equity = $29,500 Copyright (c) 2009 Prentice Hall. All rights reserved.

49 Date Cash Accounts receivable Supplies Land Accounts payable Marilyn Mansion, Capital Bal 10,700 5, , ,800 (j) (2,200) Bal 8,500 5, , ,600 Assets = $27,300 Liabilities & Equity = $27,300 Copyright (c) 2009 Prentice Hall. All rights reserved.

Explain and prepare financial statements

Income Statement Balance Sheet Statement of Owner’s Equity Statement of Cash Flows 51Copyright (c) 2009 Prentice Hall. All rights reserved.

 Reports on profitability of business 52 Revenues minus Expenses Net income equals If expenses > revenue = net loss Copyright (c) 2009 Prentice Hall. All rights reserved.

 Summary of changes in owner’s capital during a specific period 53 Beginning Capital Plus: Net income (or minus net loss) Less: Withdrawals Equals: Ending Capital Copyright (c) 2009 Prentice Hall. All rights reserved.

 Reports the entity’s assets, liabilities, and owner’s equity as of a specific date 54 BalanceSheet Equity Liabilities Assets Copyright (c) 2009 Prentice Hall. All rights reserved.

 Reports cash receipts and cash payments during a period 55Copyright (c) 2009 Prentice Hall. All rights reserved.

56 Goth Inc. Income Statement Month ended September 30, 2011 Revenue: Service revenue $5,400 Expenses: Rent expense $1,000 Advertising expense300 Total expenses 1,300 Net income $4,100 Copyright (c) 2009 Prentice Hall. All rights reserved.

57

58 Goth Inc. Balance Sheet September 30, 2011 Assets Liabilities Cash $8,500 Accounts payable $ 700 Accounts receivable 5,200 Supplies 600 Owner’s Equity Land 13,000 Marilyn Mansion, Capital26,600 Total assets 27,300 Total liabilities & owner’s equity 27,300 Copyright (c) 2009 Prentice Hall. All rights reserved.

Use financial statements to evaluate business performance

Balance Sheet Assets =Liabilities + Equity Statement of Owner’s Equity Increased by Net IncomeDecreased by Withdrawals Income Statement Revenues - Expenses= Net Income 60Copyright (c) 2009 Prentice Hall. All rights reserved.

Income Statement Demonstrates profitability Statement of Owner’s Equity Shows changes in Capital Balance Sheet Displays financial position 61Copyright (c) 2009 Prentice Hall. All rights reserved.