What Is Business? Activities to provide members of an economic system with goods and services LO1

Forms of Organization Sole Proprietorship Partnership Corporation one owner two or more owners entity organized under laws of a particular state LO2

What is Accounting? Identifying Measuring Communicating Economic Information to various users LO4

Internal and External Users of Accounting Information Internal Users – Management Creditors Current and Potential Owners Government Agencies Suppliers Trade Associations Financial Analysts Bankers

The Accounting Equation Assets = Liabilities + Owners’ Equity (or Stockholders’ Equity) Creditors’ claims to assets Owners’ claims to assets Economic resources = + Examples: Cash Accounts receivable Land Accounts payable Notes payable Capital stock Retained earnings LO5

Balance Sheet (snapshot of financial position) Assets Liabilities Owners’ Equity (or Stockholders’ Equity) = +

Income Statement (for a period of time) Revenues $$ Less: Expenses ($$) Net income $$

Statement of Retained Earnings (for a period of time) Beginning retained earnings $$$ Add: Net income for the period $$$ Deduct: Dividends for the period ($$$) Ending retained earnings $$$

Income Statement for Year ended June 30, 2012 Revenues $ 8,000 Less: Expenses ( 6,000) Net income $ 2,000 Statement of Retained Earnings for Year ended June 30, 2012 Beginning balance, retained earnings $ 0 Add: Net income 2,000 Deduct: Cash dividends (800) Ending balance, retained earnings $ 1,200 Relationship among Financial Statements Top of the World Example Balance Sheets June 30, 2012 July 1, 2011 Total assets $7,300 $ 0 Liabilities 4,100 0 Capital stock 2,000 0 Retained earnings 1,200 0 Total liabilities and stockholders’ equity $7,300 $ 0

The Conceptual Framework : Foundation for Financial Statements  Aids accountants in their role as interpreters and communicators of relevant information  Acts as a foundation for the specific principles and standards needed by the profession LO6

Financial Statement Assumptions Economic Entity Concept Cost Principle Going Concern Monetary Unit Time Period Assumption

Economic Entity Concept  Each entity has its own books, records, and financial statements that are separate from owners  No intermingling of personal and business assets and liabilities or income and expenses

Cost Principle  Record assets at cost paid to acquire them  Continue to value assets at historical cost until sold  More objective than market value

Going Concern  Assume business will continue indefinitely into the future  Justifies use of historical cost

Monetary Unit  How we measure amounts in the financial statements (e.g., U.S. dollar, Japanese yen, Mexican peso, etc.)  Assumes economic measure is relatively stable; no adjustment for inflation made in financial statements

Generally Accepted Accounting Principles  The various methods, rules, practices and other procedures that have evolved over time that regulates the preparation of financial statements

The Rules of the Game  GAAP  FASB  SEC  AICPA  The rules  The rule makers  The rule enforcers  The CPA regulators LO7

Ethics in Accounting 1. Identify the ethical dilemma 2. Analyze key elements 3. Determine the alternatives 4. Resolve by selecting ethical alternative LO8

The Changing Face of the Accounting Profession A “financial reporting crisis” caused by:  Enron: the omission of entities from the financial statements  WorldCom: treating costs as assets rather than expenses causing higher net income

Sarbanes-Oxley Act Provisions of the act:  Established the Public Company Accounting Oversight Board  Required external auditors to report directly to the company’s audit committee  Prohibits external auditors from providing other services compromising independence

End of Chapter 1